UNIT-1
CONTENT
• Meaning of Goods, Services, Individual, Resource.
• Meaning of Economics
• Economy
• Microeconomics and Macroeconomics
• Positive and Normative Economics
• Types of Economy/ Organisation of Economic Activities
• Economic problem
• Why an economic problem arise
• Central problem of economy
• Concept of Opportunity cost
KEY TERMS
• Goods: It means physical, tangible objects used to
satisfy people’s wants and needs.
• Services: It means the intangible satisfaction of
wants and needs.
• Individual: It means an individual decision making
unit, it can be a person or a group like a
household, a firm etc.
• Resource: It means those goods and services
which are used to produce other goods and
services. For instance, land, labour, tools and
machinery. Etc.
Meaning of Economics
• Economics is concerned with the study of economic
problems that arise because human wants are
unlimited and resources to satisfy those wants and
limited or scarce and these scarce resources have
alternative uses.
• Economics focuses on the rational management of
scarce resources in order to maximize economic
welfare. Hence, economics is about making choices
in the backdrop of scarcity.
Economics Functions:
A system in which people get a living to satisfy their wants
through the processes of Production, Consumption, Investment
and Exchange. It has four components:
1. Production: It is defined as ‘creation of utility’. It is process in
which inputs are transformed to goods or services.
2. Consumption: It is a process by which a good or a service is
completely used up.
Economic functions:
3. Investment: Part of production which is committed
for earning future income.
4. Exchange: It means the process by which ownership
is transferred from seller to buyer for a
consideration.
MICRO AND MACRO ECONOMICS
MICRO MACRO
What is macro from an economy’s point is micro in the context of the world.
DIFFERENCES
POSITIVE AND NORMATIVE ECONOMICS
DIFFERENCES
Interdependence of
Positive and Normative Science
• The role of an economist is not only to explain and explore (i.e., positive
aspect) but also to admire and condemn (i.e., negative aspect.)
• This role of an economist is essential for a healthy and rapid growth of an
economy.
• Examples of statements which contain both positive and normative economics
are:
(a) A rise in the price of a good leads to a fall in its quantity demanded;
therefore, Government should check rise in prices.
(b) Rent Control Act provides accommodation to the needy people; therefore,
the Act should be honestly implemented.
(c) Indian economy is a developing economy, the Government should make it
developed through correct planning.
Types or Organisation of Economy
1) Market Economy/ Capitalist/ Free Economy:
All important decisions regarding production, consumption
and exchange of G&S are made through market i.e., forces of
demand supply intersect and decides the price and quantity.
2) Centrally Planned Economy / Socialist / Controlled
Economy: All important decisions regarding production,
exchange and consumption of G&S are made by
government
3) Mixed Economy: An economy in which some important
decisions are taken by government and the economic
activities are conducted through the market.
DIFFERENCES
Economic Problems & its emergence
Main causes of economic problems:
Economic problem means problem of choice arising out due to:
1. Human wants are unlimited: Human beings demands and wants are unlimited and never
ends, which means they will never be satisfied.
2. Resources are limited: Resources like labor, land, and capital, etc. are insufficient as
compared to the demand. Therefore, the economy cannot provide everything that people
want.
3. Resources have alternative uses: Resources being scared they are put into different uses.
So, to make a choice among resources are essential. For instance, petrol is not only used
in a vehicle but it is also used for generator, running machine, etc. So, now the economy
should make a choice within the alternative uses.
Central Problems of the Economy
Any economy faces below mentioned problems:
1. What to produce and in what quantity?
Luxury goods, inferior goods, capital goods or consumer goods
2. How are these goods produced?
Problem of choice of technique.
3. For whom to produce?
Distribution of income among all factors of production
4. Growth of Resources & Sustainable Development
Economic development that meets the needs of the present without
compromising the ability of future generation to meet their own needs.
WHAT TO PRODUCE
• A country cannot produce all goods because it has limited
resources.
• It has to make a choice between different goods and services.
• Every economy has to decide what goods and services should be
produced.
• E.g.: If farmer has a single piece of agriculture land. Farmer has to
make choice between two goods whether to grow rice or wheat.
• Similarly, our Government has to decide where to allocate funds for
the production of defense goods or capital goods or consumer
goods and if all then in what proportion.
• Guiding Principle: Allocate the resources in such a manner which gives
maximum aggregate satisfaction.
HOW TO PRODUCE
• This problem refers to the choice of technique of production. This problem
arises when there is the availability of more than one way to produce goods
and services.
• There are mainly two techniques of production. These are:
• Labour intensive technique(greater use of labour)
• Capital intensive technique(greater use of machines)
• Labour intensive technique promotes employment whereas capital
intensive technique promotes efficiency and growth.
• Guiding Principle: Combine FOP in such a manner so that maximum output
is produced at minimum cost, using least possible scarce resources.
FOR WHOM TO PRODUCE
• This problem refers to selection of category of people who will ultimately
consume the goods, i.e. Whether to produce goods for more poor and less rich
or more rich and less poor.
• The society cannot satisfy all the wants of all the people. Therefore, it has to
decide who should get how much of the total output of goods and services.
• Guiding Principle: Ensure that urgent wants of each productive factor are
fulfilled to the maximum possible event.
Opportunity Cost
• It is the cost of next best alternative foregone.
• Opportunity cost for a commodity is the amount of other commodity that
has been foregone in order to produce the first, as production of all the
goods cannot be increased simultaneously.
• Because of its importance in economics, sometimes opportunity cost is
also called the economic cost.
