Notesale: Turn your study into money

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Chapter 1
Economics , Economy and Central Problems of an
Economy
1
...
Economics is a subject matter, when we
study about any area’s economy then it is called economics
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That means economy is the
area only like Indian economy, USA economy
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Definition of Economics -

“Economics is a subject matter that focuses on rational management
of scare resources in such a manner that our economic welfare is
maximized
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Basic problems of an economyThere are two basic problems in an economy
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Scarcity of resources and
II
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Scarcity of resources – It means we have limited resources as
compare to our wants
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It can only be managed ; it can never be
solved
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That means we
have to choose some options and to other not
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3
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which are1
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Macro economics

Economics

MICRO

MACRO

Micro EconomicsThis word is derived from the English word ‘ MICROX’
which means “ small”
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It
considers only individual demand , supply , and individual price
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It’s main concentration is overall economy as a whole
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-The difference between them is as followsS
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Basis of
differences
1
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Scope

3
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It concentrate on
individual level
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It’s derived from
“macrox” word which
means “ big”
It concentrate on overall
economy as a whole
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Vital components of economics are as followsMicro economics – There are three vital components of it
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Consumer theory – In this we study about consumer behavior
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we study
that how consumer will allocates his total income towards different
uses to achieve maximum profit
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Producer theory- In this we study about producer behavior
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we study how
supplier / producer will allocate his resources in such a way that
profit should be maximized
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Price theory- In this we study about price level of any product
which is decided on the basis of demand and supply forces of the
product in a market
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Which are as follows1
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2
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that means transaction of one country with
other country
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GDP Rate- In this calculation of Gross Domestic product (
GDP) is considered
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Government Budget
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budget is
discussed
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Economy and its central problem –
‘Economy’ is widely used concept in economics
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As we know the basic problem of an economy which are
scarcity of resources and that have alternative uses
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Central problems are follows-

1
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How to Produce ? and
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?

What to produceThis problem has two dimensions 1
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In what quantity goods and services are to be produced
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But finding an answer is
not so easy
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Because , both consumer and
capital goods are of significance
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capital goods are essential to increase
production capacity
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How to produce‘How to produce’ refers to the technique of production
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Broadly , there are two
techniques of production
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Labour intensive – it implies greater use of labour than capital
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capital intensive- it implies greater use of capital than labour
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For Whom to ProduceThe problem relates with the distribution of product to whom
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For richer one how much will be
there and for poorer one how much will be there
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5
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It means that producers are free to decide ‘
what how and for whom to produce’
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What to produce ? The producers will produce those goods
which are more in demand and less in supply
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How to produce ? The producers will use those input which keep
their cost of production as low as possible
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For whom to produce ? In a free economy , the producers will
produce goods for those people who can afford to pay high price
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unlike the market economy profit maximization is not the
consideration
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How to Produce ? That technique of production will be adopted
which is most desirable for the society
...
on
For whom to produce ? The main concentration is on poorer
section of the society even when production of such goods does
not yield profit
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Mixed EconomyMixed economy is that economy in which merits of planned and
market economy are taken together
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In this economy some sectors are for profit earning and
some are for social welfare
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How to produce? Both type of techniques means labour and
capital intensive both will be used
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For example in India producers are free to produce cloth or steel
to maximize their profits
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6
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It means different combinations of two goods which can be
produced with given resources on the assumptions that
(i) resources are fully and efficiently utilized
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The table showing different possibilities of production of wheat
and rice is called Production Possibility Schedule
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like in above graph X and B is treated as attainable but Y
is as unattainable combination
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Chang in resources

a
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Accordingly PPC shifts to the right
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2

Fig
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Resources are reduced:
If resources are reduced , we can produce
less of both the goods
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, as
shown in fig
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2
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Efficient technology for the production of commodity XEfficient Technology for the production of commodity –x would mean
more production of x with the same resources
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Fig
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Efficient technology for the production of commodity- Y
Efficient Technology for the production of commodity –Y would mean
more production of -Y with the same resources
...
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Fig
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Efficient technology for the production of commodity X and YEfficient Technology for the production of commodity –X andY would
mean more production of – X andY with the same resources
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6


...
6
Note- “If growth of the Resources will be there then PPC will be also be
shifted
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PPC slops downward –
PPC slops downward from left to right
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More of Good X can be produced only
with less of good Y
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PPC is concave to the point of originPPC slops downward with increasing rate of its slope which is MRT (
marginal rate of transformation )
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- The End-



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