Economy - An economy is indeed a system that enables people to produce goods and services, distribute them, and ultimately, earn a living. It encompasses the various institutions, organizations, and activities involved in these processes.
Three vital processes of an economy are production, consumption, and investment. These processes are essential for an economy to function and meet the needs of its people.
Economising of resource means using available resources efficiently and effectively to maximize output and minimize waste
Scarcity, in economics, describes a shortage in the supply of a product or service that is inevitably resolved by a higher price.
Why study economics?
Because of scarcity
What is Economics about?
Take an
example, Ram has Rs.1000He is free to spend to spend the money as he like.
What will he do? He has many options before him,
(i)
He
can purchase a dress for him.
(ii)
He
may go to watch a movie and eat in a restaurant.
(iii)
He
can give tuition fees for his children.
What do you
notice about this above example? He has many options before him. He is not
enough money to fulfil his all wants. This arises due to means are limited and
human wants are unlimited. The two main facts for this –
a. Human beings have unlimited wants, and
b. The means of satisfying these wants are relatively scarce,
Term economics is derived from Greek word Oikonomia meaning household.
Microeconomics and Macroeconomics
The subject matter of economics has been divided into two parts – microeconomics and macroeconomics. In Microeconomics we study the economic behavior of an individual units like firm. It is basically concerned with the mechanism of allocation of resources. It is show partial equilibrium analysis as it seeks to determine price and output in an industry independent of those in other industries. Following are studied under this branch-
(a) Product pricing (Theory of Demand and Theory of Production & Cost)
(b) Consumer behavior
(c) Factor pricing (Theory of Distribution)
(d) Economic conditions of a section of the people
(e) Study of firms and location of a industry
The term Macroeconomics derived from Greek word Makros which means large. In macroeconomics we study the economic behavior of the large aggregates such as the overall economic conditions of the economy such as total production, total consumption etc. Following are come under macroeconomics-
(a) National income and output
(b) General price level
(c) Balance of trade and payments
(d) External value of money
(e) Savings and investment; and
(f) Employment and economic growth
Economy and its Central Problems
Economy refers to the nature and level of economic activities in an area, which may be a village, a city, a country as a whole. Economic activities include production, consumption, investment and exchange.
There are three types of the economy which are as follows-
A.
Capitalist
Economy – Capitalism is an economic system in which all the means of production
are owned and controlled by private individuals for making profits. In brief,
private property is the mainstay of capitalism and main motive to earn maximum
profits. Price is determined with the free interplay of forces of demand and
supply.
There are many features of capitalism:
(i)
The
right of private property
(ii)
Freedom
of enterprise
(iii)
Freedom
to choice by the consumers
(iv)
Profit
maximization
(v)
Competition
among firms
(vi)
Inequalities
of income
B.
Socialist
Economy – The material means of production i.e. factories, capital, mines etc.
are owned by the whole community represented by the state is known as socialist
economy or centrally planned economy. Its main objective to attain maximum
welfare for the whole society.
(i)
There
is collective ownership of all means of production except small farms,
workshops and trading firms which may remain in private hands.
(ii)
There
is a central authority to set and accomplish socio-economic goals.
(iii)
Freedom
from hunger is guaranteed.
(iv)
A
relative equality is an important feature.
(v)
Price
mechanism exists in a socialist economy.
C.
Mixed
Economy – In a mixed economy, the aim is to develop a system which tries to
include the best features of both the controlled economy and the market economy
while excluding the demerits of both.
Features of the
mixed economy:
(i)
Private
sector
(ii)
Public
sector
(iii)
Combined
sector
Central problems of an Economy
Resources are scarce, every economy faces the problems of choice. It is the problem related to the allocation of resources to alternative uses, is called the problems of resource allocation. There are four basic problems:
1. What to produce? - As there is the problem of choice, the economy has to decide which goods and services are to be produced. For example, which of the consumer goods such as wheat, rice, cloth are to be produced and which of the capital goods such as machines and tools are to be produced.
2. How to produce? - This problem refers to the selection of techniques to be used for the production of goods and
services.
A good can be produced using different techniques of production;
generally, two techniques are used :
a) Labour Intensive Technique (LIT) : In this technique more Labour
and less capital are used.
b) Capital Intensive Technique (CIT) : In this technique more
capital and less Labour are used.
The selection of technique is made to achieve the objective of raising the standard of living of
people to employ everyone.
For example : In India, LIT is preferred due to the abundance of labour; whereas, countries
like the USA prefer CIT due to the shortage of labour and abundance of capital.
3. For whom to produce? - This problem involves the selection of a category of people who will ultimately consume the
goods i.e., whether to produce goods for poorer and less rich or richer and less poor.
Goods are produced for those who have the paying capacity and the paying
capacity depends upon the level of income.
It means this problem is concerned with the distribution of income among
the factors of production.
Production Possibility Frontier
The Collection of possible combination of goods and services that are produced from a given amount of resources and a stock of technological knowledge, is called PPF.
Explanation of Curve :
If the economy uses all its resources to produce only guns, then a maximum of 10 units of cotton and no corn can be
produced. (point A).
If all resources are used for corn, then a maximum of 4 units of corn and no cottons can be produced. (Produced E).
There are various possibilities with different combinations of guns and butter in between.
When A, B, C, D and E points are joined, we get a curve AE, known as the „Production Possibility Frontier‟.
AE curve shows the maximum limit of production of cotton and corn.
Properties of PPC
PPC is downward sloping from left to right because there exists an inverse relationship between the change in the quantity of one commodity and the change in the quantity of another commodity.
In other words, more of one good can be produced only by taking resources away from the production of another good.
PPC Slopes Downwards
PPC is concave shaped because of increasing MOC
(Marginal Opportunity Cost) i.e. more and more units of one commodity are sacrificed to gain an additional unit of another commodity.
Opportunity Cost
Opportunity Cost is the next best alternative foregone in choosing a given alternative. For example : Mr. X is working in a bank at a salary of Rs 40,000 per month and he receives two more job offers :
a) To work as an executive at Rs 30,000 per month.
b) To become a journalist at Rs 35,000 per month.
The opportunity cost of working in the bank is the cost of the next best alternative foregone i.e., Rs 35,000
MRT is the ratio of the number of units of a commodity sacrificed to gain an additional unit
of another commodity.
MRT =
∆ 𝐔𝐧𝐢𝐭𝐬 𝐒𝐚𝐜𝐫𝐢𝐟𝐢𝐜𝐞𝐝/∆ 𝐔𝐧𝐢𝐭𝐬 𝐆𝐚𝐢𝐧𝐞𝐝
Attainable Combinations
It refers to those combinations at which the
economy can operate.
There can be two attainable options :
a) Optimum utilization of resources;
b) Inefficient utilization of resources.
Unattainable Combinations
With the given amount of available resources it is
impossible for the economy to produce any
combination more than the given possible
combination.
An economy can never operate at any point outside
the PPF.
Positive Economics
Positive Economics deals with what are economic problems and how are they
solved.
For example : India is an overpopulated country and prices are constantly
rising.
Positive economics statements should not be confused as statements of truth
as they may be true or false.
Positive statements describe what was, what is or what will be under the
given state of circumstances. These statements do not pass any value
judgement.
Normative Economics
Normative Economics deals with what ought to be or how the economic
problems should be solved.
For example : India should not be an overpopulated country and prices
should not rise.
Normative economics given by Prof. Marshall Deals with how the world ought
to be.
Normative economics discusses what are desirable things and should be
realized and what are undesirable things and should be avoided. It gives
decisions regarding value judgement
Q. 1. What is likely to be the impact of "Make in India" appeal to the foreign investors by the Prime Minister of India, on the production possibilities frontier of India? Explain.
Ans. "Make in India' appeal signifies invitation to foreign producers to produce in India. This will lead to increase in resources thus raising production potential of the country. As a result PP curve will shift upwards.
Q. 2. What is likely to be the impact of efforts towards reducing unemployment on the production potential of the economy? Explain.
Ans. Reducing unemployment has no effect on the production potential of the country. It is because production potential is determined assuming full employment.
Unemployment indicated that the country is operating below potential. Reducing unemployment simply helps in reaching potential.
Q. 3. What will be the impact of "Education for All campaign" (Sarva Shiksha Abhiyan) on the Production Possibilities Curve of the Indian economy and why?
Ans. Education raises efficiency by making a worker a skilled worker. This will increase production potential shifting the PP curve upwards.
Q. 4. Explain the effects of floods in Jammu and Kashmir on its production possibilities frontier.
Ans. Floods have damaged and reduced resources. Since potential production declines the production possibility frontier shifts to the left.
Q. 5. The Government establishes a large number of Institutes of science and technology. How will it affect the production possibility frontier? Explain.
Ans. By these institutes skill development will improve. This would result in increase in the production potential of the country. So the PP will shift to the right.
Q. 6.Do rich countries also face central problems? Give reasons for your answer.
Ans. Yes, even in rich countries, resources are scarce, having alternative uses and wants are unlimited.
Q. 7.Assuming that no resource is equally efficient in production of all goods, name the curve which shows production potential of the economy. Explain, giving reasons, its properties.
Ans. The curve is called Production Possibilities Frontier (PPF), Discuss the following Two Properties of PPF: (i) PPF is downward sloping; (ii) PPF is Concave Shaped.
Q. 8. Explain the concepts of Opportunity Cost and Marginal Rate of Transformation using a production possibility
schedule based on the assumption that no resource is equally efficient in production of all goods.
Ans. Suppose the only two goods produced are X and Y.
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