• Economy
Economy refers to the whole collection of production units by which people make their living.
• Economics
Economics refers to the study of how a society chooses to use its limited resources, which have alternative uses, to produce goods and services and to satisfy unlimited human needs among different groups of people. to distribute.
OR
Economics : It is a social science concerned with the allocation of scare resources means in such a manner that consumers can maximize their satisfaction, producers can maximize their profit and the society can maximize its social welfare.
OR
Economics studies those economic activities of Human in which scarce resources (labour, land, capital entrepreneur) are used so that unlimited human wants can be satisfied producer gets profit and society gets welfare
Many definitions of economics have been given which are as follows :-
(1) Definition of wealth: – First of all, in 1776, an economist named ‘Adam Smith‘, Wrote his first book on economics “An Inquiry into the Nature Wealth of Nation“. Adam Smith envisioned such an economic man whose aim was only to earn money. According to him, all economic activities are done only to earn money. That is why Adam Smith considered economics as the ‘science of money’, he is also called the father of economics.
(2) Definition of welfare: – This definition was Given by Prof. Marshall, he wrote a book called “Principal of Economics” in 1890. According to him, the purpose of all economic activities carried out by man is not to earn money but to do human welfare, Money is only a “Resource” while ‘Motive’ is human welfare.
(3) Definition of Scarcity :- The credit for this definition goes to ‘Prof Robinson‘. This definition was given by him in the year 1932, According to him the resource of production are scarce while human wants are unlimited, making efficient use of these resources is economics.
(4) Development Related Definition :- This definition was propounded by ‘Prof. Peterson and Samuelson‘. According to him, economics studies all those economic activities whose purpose is to satisfy humane wants and welfare of the people. Both of them made it clear that all the above definitions are correct. But along with these development of human and natural resources is essential.
Note :- Natural Resources like :- Coal, Petrol
Macro-Economics :- Macro-economics is the study of economy as a whole. It is related to national income, general price level and national product.
Micro- Economics :- Micro economics is the study of particular firms, particular households, individual prices, wages, income, individual industries and particular commodities.
Difference Between Microeconomics and Macroeconomics
| Microeconomics | Macroeconomics |
| It is the branch of economics that studies the behavior of individual economic units of an economy. | It is the branch of economics that studies the behavior of a set of economies as a whole. |
| Its main tools are demand and supply. | Its main instruments are aggregate demand and aggregate supply. |
| The basic objective of this theory is ‘price determination’ | The basic objective of this theory is ‘determination of national income and employment’. |
| It is also called ‘value theory’. | It is also called ‘Theory of Income and Employment’. |
| Examples of Microeconomics Studies:- (i) The study of the demand (or supply) of a person or market for a commodity. (ii) Determination of the price of a commodity. |
Examples of Microeconomics Studies:- (i) Study of income and employment in an economy. (ii) Study of inflation rate or general price levels in an economy. |
Interdependence of Microeconomics and Macroeconomics :-
Microeconomics depends on macroeconomics. For example, the demand for a commodity is affected by the taxation policies prevailing in the economy. Similarly, macroeconomics depends on microeconomics. For example, national income is the sum total of factor income earned by all residents of an economy in a financial year.
Positive economic analysis :-Positive (Real) economic analysis shows the rates of those issues which can be substantiated with the help of facts. What is there and what was there, things are studied. Example: – In a country, 25 percent of the population is below the poverty line, it can be proved
Normative Economic analysis :- This deals with what ought to be in an economic analysis, It analysis shows those economic issues which cannot be proved with the help of facts, hence its nature is suggestive. Example: – Government assistance should be given to farmers to get good returns on their investment
Difference between positive and general economics
| Positive economics | General economics/Normative Economic |
| Positive economics deals with ‘what is’ and is a statement of economic facts. | Standard semantics deals with ‘what should be’ or ‘what should be’. |
| It is based on facts and can be verified using actual data | It is not based on facts and cannot be verified using real data. |
| It does not contain solutions so is not suggestive in nature. | It contains solutions, so is suggestive in nature. |
| Example: (i) Price levels are rising in India. (ii) India has a high rate of unemployment. |
Example: (i) The unemployment rate should be reduced. (ii) To bring down the rate of inflation the government should reduce its expenditure |
Economics activity : Those activities which are based on or related to the use of scarce resources for the satisfaction of human wants. All those activities whose purpose is to earn money are called economic activities. These activities are production, consumption, investment and exchange.
Production : It is a process of creating goods and services or increasing the value of commodities already produced.
OR
Production refers to those activities in which goods and services are created and made exchangeable to satisfy the needs of the people. Production is mainly done of two items:-
1. Consumer Goods 2. Producer Goods
Consumption : It means using of goods and services for the satisfaction of our wants.
OR
The use of goods and services by human to satisfy his desires is called consumption. Consumption is the end of all economic activities. In this also mainly two types of items are included:-
1. Single Use Good 2. Durable Goods
Investment : It means using up goods (like tools and machinery) for further production.
OR
That part of savings which is put back into production is called investment. It is because of investment that more and more goods are created.
Exchange: It refers to the sale and purchase of goods and services.
Economic problem: Economic problem is the problem of choice because:-
- Human wants are unlimited
- Resources to satisfy wants are limited
- Resources have alternative uses
Economic problem
The ‘economic problem’ is the problem of selection involving the satisfaction of unlimited needs from a limited number of resources with alternative uses. The root cause of all economic problems is ‘rarity’.
In economics, ‘rarity’ refers to the function of supply relative to demand for a commodity.
Due to financial problems:-
Economic problems arise because:
(a) resources are limited (b) human needs are unlimited and (c) alternative uses of resources are possible
1. Scarcity of Resources: The supply of resources (i.e. land, labour, capital, etc.) is limited in relation to their demand and the economy cannot produce everything that the people want. These are available in the resources of all economies, so this is the root cause of economic problems. These resources are available in limited quantities in every economy, big or small, developed or underdeveloped. No economy in the world is rich in all the resources. If there was no shortage of resources, there would have been no problem.
2. Unlimited Human Needs: Human wants are never exhausted, that is, they can never be completely satisfied. When one desire is fulfilled, another new desire arises. The needs of the people are unlimited and keep on increasing and cannot be satisfied due to limited resources. Human needs also differ in priorities, that is, not all needs are of equal intensity. For every individual, some needs are more important and necessary than others. Therefore, people allocate their resources in order of preference to meet some of their needs.
3. Alternate Uses of Resources: Resources are not only scarce, but they can also be put to various uses. This makes the choice between resources more important. For example, the land can be used for farming, to set up a factory or a school etc. As a result, the economy has to choose between alternative uses of the given scarce resources. If a resource can be put to only one use, there will be no problem of choice.
Two characteristics of resources:
a) Resources are scarce and limited. b) Resources have alternative uses.
Human needs have two characteristics:
a) They are infinite, that is, they can never be completely satisfied.
b) Human needs differ in priorities. Some needs are more basic and urgent and may require immediate attention than others.
What is meant by scarcity, what does it have to do with selection?
Scarcity: – Scarcity means the limited resources as compared to the demand, in other words ” Low supply as compared to the demand of a substance is called scarcity”.
Relationship between scarcity and choice :- scarcity and choice complement each other. The problem of choice arises because of scarcity, that is, scarcity is the mother of choice. We can explain this on the basis of two examples:-
(1) scarcity means limited income and choice means selection . This limited income should be spent on goods and services in such a way that maximum satisfaction is achieved. This is possible only through selections.
(2) scarcity means limited resources while choice means distribution of limited resources. These should be distributed in such a way that maximum benefit is obtained.
Therefore it is clear that scarcity is the mother of selection.
finally, Scarce means that the supply of sources are less than their demand.
Economy : An economy is a system that provides people with the means to work and earn a living in the process of production
- Market economy: A market economy is one in which all economic activities are organised through the market, through price mechanism.(it is also called capitalist economy)
- Centrally planned economy: Centrally planned economy is one in which all important activities are planned and decided by the central planning authority or the government.
- Mixed economy: It is an economy in which public sector and private sector co-exist with each other. Here central problems of an economy are solved partly through direct planning and partly through market
Central problem of an economy
Answer:- Central problems of an economy:-
Problem of allocation of resources: Every economy has to face the problem of allocation of scarce resources whether the economy is underdeveloped like India or developed like America, this problem is found in every economy because the needs of each economy are unlimited and resources are limited, due to which Every economy has to make a choice of resources. This problem of allocation of resources is called the central problem.
Central problems are the economic problems faced by every economy. An economy has to allocate its scarce resources after selecting from various possibilities to be produced, choose the technology of production and also decide how the output thus produced should be distributed in the economy. .
The central problems faced by an economy can be classified into three parts:-
Whether the economy is underdeveloped like India or developed like America, this problem is found in every economy because the wants of each economy are unlimited and resources are limited, due to which every economy has to choose the Resources. The problem of this allocation of resources is called the central problem.
1. What to produce: It is the problem of choosing which commodities should be produced and in what quantities.
What to produce (what to produce and in what quantity):-
• The problem involves the selection of goods and services to be produced and the quantity of each selected commodity to be produced. It arises because resources in an economy are limited and they can be put to alternative uses.
• Producing more of one commodity usually means that fewer resources will be available to produce other goods. For example, it is possible to produce more cars only by reducing the production of other goods using the same resources.
• Production of more war material is possible only by reducing the production of civilian goods. Therefore, on the basis of the importance of different goods, an economy has to decide which commodity to be produced in what quantity and in what quantity.
For example:- if the economy is underdeveloped like India, it will produce more food goods, but if the economy is developed like America, it will produce more capital goods.
• The problem of ‘what to produce’ has two aspects:
(i) What are the possible goods to be produced: An economy has to decide which consumer goods (rice, wheat, clothes, etc.) and which capital goods (machinery, equipment, etc.) are to be produced . In the same way, the economy has to choose between civilian goods (bread, butter, etc.) and war goods (guns, tanks, etc.).
(ii ) How Much to Produce: After deciding the goods to be produced, the economy has to decide the quantity of each commodity that is selected. This means, it includes decisions about the quantity to be produced, consumer and capital goods, civil and war goods, etc.
Guiding Principle: The guiding principle is to allocate resources in such a way that gives maximum overall satisfaction.
2. How to produce: This is the second fundamental central problem of the economy, this problem is related to technology. There are many techniques to produce any item. Every economy wants to produce as many goods as possible with limited resources.
How to produce (choice of production technology)
• The central problem of ‘how to produce’ is the problem relating to the choice of technology of production to be used to produce various goods and services. By ‘technology’ we mean a particular combination of the means used for production.
• A commodity can be produced by using different techniques of production depending upon the availability of resources. Broadly speaking, the choice lies between two types of techniques – labor-intensive techniques and capital-intensive techniques.
There are mainly two techniques of production :-
(1) Labour-intensive Technique:- This technique is used in that stage when the economy has more Labour resources than capital resources. This technique is used in more quantity in underdeveloped countries because they have more population and less capital.
(2) Capital intensive technique:- This technique is used by the economy when the capital resource in the economy is more than the Labour factor. This technique is used in developed countries because they have more capital resources.
For example: U.S. In India, being capital-rich, wheat is produced using capital-intensive techniques, whereas in India, being labour-rich, wheat is produced using labour-intensive techniques.
Guiding Principle: The guiding principle for the selection of technology is to adopt that technique through which maximum production can be done at minimum cost by using least possible scarce resources.
3. For whom to produce: The central problem of ‘for whom to produce’ means that ‘who will buy the goods produced? Clearly, those who have income will buy. But the real question arises- from where the money income comes? The source of money income is the national income. People earn income in the form of wages, rent, interest and profit.
for whom to produce (or the problem of distribution of production and income among the members of society)
• Goods and services are produced for those who have the ability to pay and the ability to pay for goods and services depends on their level of income. That means, this problem is concerned with the distribution of income among the factors of production (land, labour, capital and enterprise), which contribute to the production process. Thus this problem is related to the ‘distribution of national income’.
Guiding Principle: The guiding principle is to ensure that the most urgent needs of the society are met to the maximum extent possible.
• The problem is related to the distribution of goods and services produced among individuals within the economy, i.e. the selection of the category of people who will ultimately consume the goods, i.e. to produce more goods for the poor and more or less for the rich. less for the rich and less for the poor.
• Since every economy lacks resources, no society can meet all the needs of its people. Thus, the problem of choice arises.
All the above problems are based on traditionalist ideology, other problems mentioned below were clarified by modern economists.
(4) Efficient use of resources: – The resources of every economy are limited, so to use them incompletely or not to use them is to waste them in a way. That is why it is the responsibility of every economy to make full and efficient use of all the resources so that no resource remains unused or underutilised.
(5) Development of Resources:- The development of any economy depends on natural resources like human resources. These natural resources are also scarce, as well as a feature is found in them that one day in the future these resources will be exhausted. If this happens, the growth of the economy will stop. Therefore, every economy should search for new resources so that there is no reduction in the growth of the economy, so this has also become a basic problem.
Opportunity cost: The opportunity cost of a given activity is defined as the value of the next best activity which is sacrificed.
Example:- If Ram has 3 options of employment 1. Rs 5000 2. 6000 Rs 3. 7000 then Ram chooses the best option 3 which gets Rs 7000 per month. Its opportunity cost will be Rs.6000 per month. that was his best option
OR
Opportunity Cost:-
Opportunity cost is defined as the best value of the next option.
Opportunity cost of a commodity is the cost that it has to sacrifice in order to choose the best one among the various alternatives. According to Prof. Lipsey, the opportunity cost of using a resource is the amount of other things that have to be sacrificed, such as:- Rs.50 a Hum India Pakistan match ticket, restaurant’s food, movie in cinema hall etc., excluding the book of economics The best option out of all these is our opportunity cost to give up eating food in restaurants.
Note:- It is also called alternative cost.
Marginal opportunity cost: Marginal opportunity cost refers to loss of output of output of good-Y for producing an additional unit of Good-X, when resources and technology are constant.
or
Marginal Opportunity Cost: Marginal opportunity cost refers to the sacrifice made in the production of good-Y to produce one additional unit of good-X, when available resources and technology are available.
Production possibility curve: It was define by Prof. Samuelsson. Its main function was to solve the first fundamental central problem of the economy “What to produce“. A production possibility curve is a curve that shows the different alternative possibilities of producing two imaginary goods with the given resources and technology. These goods can be food and capital
PPC is based on the following assumptions:
- The resources available are fixed
- The technology remains unchanged.
- The resources are fully employed.
- The resources are efficiently employed.
- The resources are not equally efficient in production of all goods. Thus if resources are not equally efficient in production of all goods. Thus if resources are transferred from production of one good to another, the cost increases. In other words, MRT increases.
Note: it is also called production possibility boundar, production possibility frontier, transformation line, transformation curve.
Production possibility schedule:- the production possibility schedule summaries the various production possibility that are available to the economy. In the table we will see that as the production of one goods increases that of the other falls. This is because resources are scarce. As more resources go into one sector and produce more, less is available for to sectors and they will produce less than before.
Suppose, a manufacturer decides to produce only two goods, wheat and cement, with available resources and given technology.
| Possibilities | Wheat(in units) | Cement(in units) |
| A
B C D E |
20
18 14 8 0 |
0
1 2 3 4 |
As it is clear from the table that in the first possibility A, if all the resources are used in the production of food grains (wheat), then the production of cement remains zero, as in the production of cement, by removing the 2 resources from the production of wheat. If this happens, then the production of cement increases in comparison to the production of wheat. And on the combination of E, the production of the food grain (wheat) commodity remains zero, thus it is clear that there is an inverse relationship between the two because the resources are limited.
DiagrammaticRepresentation
As it is clear from the diagram that the production of wheat is shown on the X-axis and the production of cement is shown on the Y-axis, as there is a decrease in the production of cement, while the production of wheat is increasing, so The production possibility curve is falling downwards.
Features of PPC
PP curve slopes down from left to right : It is possibility curve slops downward from left to right, because in a situation of fuller utilisation of the given resources, production of both the goods cannot be increased. More of Good-x can be produced only with less of Good-y.
Due to the limitation of resources, when the production of the commodity located on the X axis is increased, the production of the commodity located on the Y axis has to be reduced, that is, there is a negative relationship between the production of the X and the Y commodity, due to which the production possibility curve is downwards. side falls.
Production possibility curve is concave to the point of origin: It is because to produce each additional unit of good-x, more and more units of good-y will have to be sacrificed than before. Opportunity cost of producing every additional unit of good-x tends to increase in terms of the loss of production of good-y. In other words, production will obey the law of increasing opportunity costs.
OR
Due to rising marginal opportunity cost, the production possibility curve is concave towards the origin. Opportunity cost refers to the quantity discarded. When efficient resources are removed from the production of one good and used in the production of another commodity, then those resources do not prove to be efficient and efficient in the production of the other commodity, due to which the amount of sacrifice increases, that is why the production possibility curve shifts towards the origin. Happens next.
For each additional unit of good A produced, more and more units of good B have to be sacrificed. As a result, the opportunity cost of producing each additional unit of good A outweighs the loss of production of good B. In other words, production will obey the law of increasing opportunity cost.
Shifts in the PPC :-
There are two types of shifts in the production possibility curve:-
(1) Shifting to the right:- The production possibility curve shifts to the right when there is an increase in the quantity of resources or a change in technology in an economy. Three situations arise when the production possibility curve shifts to the right. :-
(a) When the most efficient technology is used in the production of X, the output of X increases. But the output of commodity Y remains constant so that the production possibility curve shifts to the right on the X axis.
(b) When efficient technology is used in the production of only good Y, the production of good Y increases but the output of commodity X remains constant, causing the production possibility curve to shift to the right on the Y-axis.
(C) When there is a technological improvement in both the goods on the production possibility curve, the production possibility curve shifts to the right from both the X and Y axis
PPC can also to the left if the resources decrease. It is a rare possibility but sometimes it may happen due to fall in population, due to destruction of capital stock caused by large scale calamities, war, etc.
(2) Shifting to the left:- The stage in which the production possibility curve shifts to the left is called underutilization of resources. Some of the resources available in this remain unemployed. It is a rare possibility but sometimes it may happen due to fall in population, due to destruction of capital stock caused by large scale calamities, war, etc.
The inefficient use of resources is considered when production is not done on all the combinations shown on the production possibility curve but is produced at some other point inside, then it is called underutilization of resources.