Economy
Lecture 02: Basic Concepts of Economics
Sources:
● There are two sections in Economy, such as:
○ Static Part:
➢ PW Books, or Ramesh Singh, or Singhania.
➢ NCERT-IX (Read Chapters 2,3 and 4), Xth (1, 2, 3, 4, and 5), XIth (Read
Chapters 1 to 7), XII-Micro (Read Chapters 1, 2,4,6), and Macro (Read
Chapters 2, 3,4, 5, and 6).
○ Current Affairs Part:
➢ News Paper- The Hindu, or Indian Express.
➢ Read weekly economics newspaper-Financial Times, Business Times, and
Financial Express.
● We need to know the basics to understand the news.
Resource:
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● A resource is a supply or support that can be drawn upon to meet a need or goal.
● There are three characteristics:
○ Alternative use:Using items for purposes other thantheir original intended
functions.For example:Soil, Water, Air, Land, etc.
○ Scarcity (Limited Availability):Limited supply ofresources related to demand,
causing shortages.
○ Evolving Nature:Continuous adaptation and change.For example:Hydrogen Fuel
cells.
Human:
● There are the following things such as:
○ Needs:Needs is which are a must for human existence,but they vary by time and
space. They are simply limited.For example: Food:Every human being requires a
certain amount of energy (Measured in calories), which they get from foods.
➢ Temporal Variation, or Food varies from time to time.
➢ Food must be forphysical growth, mental growth, societalgrowth,and
economic growth.
Food as a need according to time Food as a need according to space
● Child age ● Tropical areas
● Adult age ● Temperate areas
● Old age ● Polar areas
➢ There are a few more examples of needs likeclothes,shelter, power,
health care,andinternet(Like payment, transport,communication),etc.
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○ Wants:Wants are limitless, and they change from human to human. They are
psychological.
Economics:
● Economics is the study ofhow individuals and societieschoose to use the scarce
resources(which have alternative uses) that natureandprevious generations have
provided.Economics is a behavioral, or social science.It is a study of how people make
choices, which when added uptranslates into societalchoices.
● PlatoandAristotlethought of economics as a matterof ‘Moral Philosophy’.
● The English term ‘Economics’ is derived from the Greekword‘Oikonomia’. ‘Oikos’ stands
for household and ‘Nomos’ means management.
● In the context of India:Kautilya,also known asChanakya,authored theArthashastra, a
comprehensive treatise on polity, the duties of a king, governance, and international
relations. In this seminal work, he also discusses the concept of "Kosha," which refers to
the treasury.
Modern Understanding of Economics:
● Modern Understanding of Economics,in his famous work,An Inquiry intoNature, and
Cause of Wealth of Nation(1776),Adam Smithprovidedthe subjectscope of
Economics, and since then it has been evolving.
Wealth Definition (by Adam Smith):
○ The wealth definition was given by Adam Smith. According to this definition, economics is
termed the “science of wealth”, that is, the economyof a nation is concerned with the
nature and causes of wealthof Nations and it is relatedto thelaw of production,
distribution, exchange, and consumption of wealth.
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Demerits of the wealth:
○ The wealth only focused onthe creation of goods and not services concerned.
○ The wealth onlyfocused on wealth generationratherthan awelfarist approach.
Alfred Marshall:
● Welfare Definition by Alfred Marshall (1842-1924) wrote the book Principles of Economics
in 1890. He defined economics as the study of mankind in the ordinary business of life. An
altered form of this definition isEconomics is thestudy of man’s actions in the
ordinary business of life.
Demerits of the Definition:
● Do not focus onimmaterial aspectsagain.Servicesare not at all given importance.
● The definition mentions the term‘welfare’but doesnot explain what exactly welfare is.
Scarcity Definition (by Lionel Robbins, 1932):
Growth Oriented Definition – Paul Samuelson:
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Understanding Positive and Normative
Economics:
● Normative Economicsfocuses on how
economics should be, giving a futuristic
overview andPositive Economicsstresses
What is, was, will be, how, and why.
Example of positive economics:For example:
25% of the Indian population is BPL.
● Example of Normative Economics:What to do to uplift25% population out of poverty.
Branches of Economics:
● Micro Economics:Microeconomics studies the actionsor behavior ofindividual entities.
○ Whether asingle person, a household, or a business,economists may analyze how
theseentities respond to changes in priceand whythey demand what they do at
particular price levels.
○ Adam Smith is considered to be the ‘Father of Microeconomics’
○ Bottom-up Approach:Microeconomics uses aBottom-Upapproach focusing on
individual units like households, firms, etc rather than the whole economy.
○ It is also known as the ‘Price Theory.’
○ Example:Price determination of a particular commodity,Consumer equilibrium,
output generated by an individual organization, and Individual income, and savings.
● Macro-Economics:The term was first coined byNorwegianeconomist Ranger Frischin
1933. However, the founder of macroeconomics is considered to beJohn.M. Keynes(1936).
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○ Macroeconomics studies the economy-wise aggregates, and it is concerned withall
the individuals in the country, all households, and firms in the country.
○ The focus of macroeconomics:It focuses on foreign trade, government fiscal and
monetary policy, unemployment rates, the level of inflation, interest rates, the
growth of total production output, and business cycles that result in expansions,
booms, recessions, and depressions.
○ The macroeconomics follows a ‘top-down approach’.A top-down approach starts
with the broader economy, analyses the macroeconomic factors, and targets
specific industries that perform well against the economic backdrop.
○ It is also known as the ‘Income Theory.’
○ It isaggregate demandandaggregate supply.
○ Example:National Income, and saving, General pricelevel, aggregate demand, and
aggregate supply, Poverty, Rate of unemployment.
Relationship between Economy and Economics:
● An economy is acomplex system of interrelated production,consumption, and exchange
activitiesthat ultimately determine how resourcesare allocated among all the participants.
● When a country or a geographical region is defined in the context of its economic activities,
it is known as an economy or economic system.
● An economy is thepractical application of economics.
● An economy mayrepresent a nation, a region, a singleindustry, or even a family.
● Economics is thestudy of the subject.
Economic System:
● There are three types of questions in the economic system:
○ What to produce?
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➢ We transform resources like steel into either consumer goods (For example:
Pen) or capital goods (For example: Machine).
○ How to produce?
➢ When addressing "How to produce?" in the economicsystem, considerations
arise regarding the balance between labor-intensive and capital-intensive
methods. While labor-intensive approaches may generate more employment
opportunities, they could be less efficient. Conversely, capital-intensive
methods may reduce employment but enhance efficiency.
○ For whom to produce?
➢ The question "For whom to produce" revolves arounddetermining the target
market or consumer base for goods and services, It also means depending
on your purchasing power.For instance, Tata manufacturesboth the Nano,
aimed at budget-conscious consumers, and Jaguar, targeted at high-income
individuals. Similarly, Parle produces Parle-G, catering to the mass market,
alongside Hide and Seek, which targets consumers seeking premium
products.
Types of Economies:
● Free market/Capitalist economy:
○ In a capitalist economy (or
free market economy),
resources are held by
individuals or controlled by
private individuals for profit.
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○ There is verylittle but some degree of government interventionin the form of
regulation against monopolies and in favor of fair trade.
○ The motive of such economies would beprofit maximization.
● Command/Communist Economy:The Russian Revolution set the backdrop of the Command
Economy (1917). This system has adominant centralizedauthoritywithin a country or a
nation in the form of a government.
○ The economy in such a country iscontrolled by thegovernment.
○ Ideally, the command system takes into consideration thebest interests of its
population.
○ The government which holds the resources woulddecideon behalf of the
individuals regarding how the resources would be utilised.
● Mixed Economy:A mixed economy is acombination offeatures of both a capitalist and
a socialist economyin which both markets and thegovernment decide how resources are
allocated.
○ A mixed economy contains a system that has characteristics of bothpublic and
private sectors.
○ They differ only in terms of inclination towards thecommand or free market
economy.
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