Basics of Economics: Study Notes
Page 1 – Introduction to Economics
Economics is the study of scarcity and choice. Human wants are unlimited, but resources are limited.
Because of this imbalance, every society must decide what to produce, how to produce, and for whom to
produce.
Economics is divided into two main branches:
Microeconomics – Studies individual decision-making units like consumers, firms, and households.
Macroeconomics – Focuses on the overall economy, national income, unemployment, inflation, and
government policies.
Page 2 – The Central Problem of Economics
1. Scarcity of Resources – Land, labor, capital, and entrepreneurship are limited.
2. Unlimited Wants – People always desire more goods and services.
3. Opportunity Cost – Choosing one option means giving up the next best alternative.
Example:
If a farmer uses land to grow wheat, the opportunity cost might be the rice that could have been grown on the
same land.
Page 3 – Factors of Production
The four essential inputs required for production are:
1. Land – All natural resources like soil, minerals, forests, water.
2. Labor – Human effort, both physical and mental.
3. Capital – Tools, machinery, buildings, and technology.
4. Entrepreneurship – The risk-taker who organizes land, labor, and capital to produce goods.
Note: Efficient use of these resources determines the economic growth of a nation.
Page 4 – Microeconomics vs. Macroeconomics
Microeconomics:
Consumer demand
Price determination
Supply of goods
Costs of production
Macroeconomics:
National income
Employment and unemployment
Inflation and deflation
Economic growth policies
Example: While microeconomics studies why the price of milk rises, macroeconomics studies why the overall
cost of living increases.
Page 5 – Types of Economic Systems
1. Market Economy (Capitalism)
Decisions based on demand and supply.
Profit motive drives producers.
Minimal government interference.
2. Command Economy (Socialism/Communism)
Government decides production, pricing, and distribution.
Equal distribution is prioritized.
3. Mixed Economy
Combination of market freedom and government control.
Most modern economies (e.g., India, USA) are mixed.
Page 6 – The Production Possibility Frontier (PPF)
Definition: A curve that shows the maximum possible production of two goods using limited resources.
Concepts illustrated by PPF:
Scarcity
Opportunity cost
Efficiency
Example: Producing more food may reduce the production of clothing, highlighting trade-offs.
Page 7 – National Income Concepts
1. GDP (Gross Domestic Product): Value of all goods and services produced in a country in a year.
2. GNP (Gross National Product): GDP + income from abroad.
3. Per Capita Income: Average income per person.
4. Real vs. Nominal GDP: Real GDP adjusts for inflation, nominal GDP does not.
Importance: National income shows the economic health of a country.
Page 8 – Inflation and Unemployment
Inflation: A general rise in prices.
Causes: High demand, low supply, excess money supply.
Effects: Reduces purchasing power.
Unemployment: When people are willing to work but cannot find jobs.
Types:
Frictional (temporary)
Structural (due to mismatch of skills)
Cyclical (due to economic downturns)
Page 9 – International Trade & Globalization
Trade Benefits: Specialization, efficiency, access to foreign goods.
Balance of Payments: Difference between money earned from exports and spent on imports.
Globalization: Integration of world economies through trade, capital flow, and technology.
Example: India exports IT services and imports crude oil.
Page 10 – Role of Government in Economy
1. Fiscal Policy: Government spending and taxation.
2. Monetary Policy: Central bank controls money supply and interest rates.
3. Welfare Role: Ensuring education, healthcare, and social security.
4. Regulation: Preventing monopolies, ensuring fair competition.
Page 11 – Conclusion
Economics is not just about money—it is aboutchoices and decision-making. From individual households to
global trade, economics provides a framework to understand how societies use scarce resources.
Key Takeaways:
Scarcity creates the need for choices.
Opportunity cost is central to decision-making.
Micro and macroeconomics give different perspectives.
Government plays a vital role in balancing growth and equity.
