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I NTRODUCTORY MI CROECONOMI CS CENTRALPROBL EMS MSOFAN ECONOMY
ECONOMICS Economics is the study of how individuals, firms and governments make choices on allocating their limited resources to satisfy their unlimited wants.
What is economics all about? Economics is all about how people make choices. Choice means selecting one out of the various available alternatives. The need for making choices arises due to scarcity of resources. An individual cannot satisfy all of his wants because the wants are unlimited and means to satisfy them are limited and the limited means have alternative uses. Hence, economics deals in selection in the conditions of scarcity of resources.
Characteristics of Resources 1. Scarcity Scarcity of resources means that an economy does not have sufficient resources or means to satisfy all of its wants.
2. Alte Altern rnat ati iee !ses !ses Alternative uses means that a resource has many available options to be put to use. ut it can be used for only one purpose at a time. !or e"ample, a plot of land can be used to construct only one out of residential comple", school, hospital, offices etc. at a time.
Economisin" of Resources #t refers to the use of scarce resources in such a manner that wastage is avoided and ma"imum output is obtained. Economising of resources is needed because the resources are scarce or limited and they are to be used to satisfy wants wants that are unlimited.
#RANC$ES O% ECONOMICS 1. Micr Microe oeco cono nomi mics cs The branch branch of econom economics ics,, which which studi studies es the behavi behaviour our of indivi individua duall econom economic ic units units is called called microeconomics. Economics activities related to a consumer, a producer, a firm an industry or price are studied under microeconomics. E"amples of microeconomic studies$ i. %eterm %etermina inatio tion n of the the price price of of its prod product uctss by a firm. firm. ii. %eterminati %etermination on of an indiv individua idual&s l&s demand demand for a product product.. iii. 'ricing 'ricing of a factor factor of productio production. n.
2. Macr Macroe oeco cono nomi mics cs The branch of economics, which studies the aggregates and averages related to economy as a whole is called (acroeconomics. )ational #ncome, Employment Employment level, *eneral price level are studied under under macroeconomics. E"amples of macroeconomic studies$ i. %ete %eterm rmin inat atio ion n of nati nation onal al inco income me.. ii. %eterminati %etermination on of the the level level of unemploym unemployment ent in the the country country.. iii. %eterminati %etermination on of general general price price level. level.
Central Problems of an Economy
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NA&!RE O% ECONOMICS
1. Economics as a 'ositie Science OR 'ositie Economics A positive statement is a statement about what is and that contains no indication of approval or disapproval. Economics, as a positive science, analyses cause and effect relation between economic variables but it does not pass any value udgments. #t describes economic activities as neutral with regard to welfare and silent about value udgment.
2. Economics as a Normatie Science OR Normatie Economics A normative statement e"presses a udgment about whether a situation is desirable or undesirable. Economics, as a normative science involves value udgments and describes what the things should be . #t is concerned with welfare propositions. -hen we say, prices are rising due to high demand we make a positive statement that does not involve a value udgment. ut when we say demand should be reduced to control prices we make a normative statement indicating what is desirable. ECONOM( A system that provides living to the people is called an economy. #t consists of shops, offices, hospitals, and schools etc where people work to earn a living.
Central 'roblems of an Economy Every economy, whether underdeveloped, developing or developed, faces certain problem in utili/ing their scarce resources in satisfying unlimited wants to the optimum level. Since these problems are related to making choice between different alternatives, they are knows as 'roblems of Choice, and because they are prevalent in every economy irrespective of the level of development achieved, they are called Central or !undamental 'roblems. 'roblems of Choice or Central 'roblems of an Economy arise because of$ 0. Scarcity of resources, and +. Alternative uses of the resources. 1. 2nlimited wants and their recurring nature. #n any given period of time each economy tries to solve the following problems of choice$ 1. What to 'ro)uce? This problem is, in fact, 3the problem of allocation of resources &. #t is also known as the problem of 3choice of goods to be produced &. Therefore this problem is related to selecting those goods, for the manufacture of which the resources are to be put to use. #t involves two fold decisions$ i. -hich goods to produce4
Central Problems of an Economy
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The economy has to decide which goods and services are to be produced. !or e"ample, the economy has to decide which among the consumer goods viz . wheat, cloth, sugar etc. and which among the capital goods viz . machines, tractors etc. it has to produce. ii. The 5uantity of goods to be produced. 6nce the economy has decided upon the goods and services it has to produce, the ne"t problem it faces is the decision about the 5uantity of various goods it re5uires to produce. 2. $o* to 'ro)uce? This problem is related to select the technique of production. There are mainly two techni5ues of production$ i7 Labour-intensive technique$ #n this techni5ue, more labour and less capital is used for production of goods and services, for e"ample, handloom. ii7 Capital-intensive technique$ #n this techni5ue, more capital or machinery and less labour is used for production of goods and services, for e"ample, power loom. +. %or *hom to ,ro)uce? This problem is in fact the problem of distribution of income among factors of production who will consume the goods and services produced. #t is related to how much does each individual or factor of production earn and how much wealth or assets does each have4 #t determines the purchasing power of people, which depends upon the distribution of income from output among the factors of production. &('ES O% ECONOMIES 1. Mar-et Economy #t is the system where means of production are privately owned and economic activities 8production, Consumption, distribution of income etc.7 are guided by the operations of market. #t is also called Capitalist economy. %eatures of Mar-et Economy !ollowing are some important characteristics of a capitalist economy$ i. Private property #n this system the properties are owned and managed privately by the people. This property can be transferred to their heirs. ii. Price Mechanism %emand and supply forces determine the prices of the commodity. !ree flow of market forces helps the producer to decide what to produce and how much to produce, how to produce and for whom to produce. This price mechanism decides the economic activities such as production consumption, distribution, investment and savings. iii. Profit motive Enterprises engage themselves in the economic activity to earn the ma"imum profits. iv. Freedom of enterprises An enterprise has the power to own a business without intervention of State or *overnment. An individual can himself take decisions regarding what to produce, where and for whom to produce. He takes decision with respect to availability of resources on the basis of his skills and knowledge. v. Self interest Self interest is the prime motive in this system. All the market elements labour, consumer, producer etc. are centered to their own interest to ma"imi/e their satisfaction.
Introductory Microeconomics
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As the *overnment or State has very limited control on the decision making, it is guided b y the self interest of factors in economic activity. The self interest for the producer is ma"imi/ation of revenues, minimi/ation of cost, thereby ma"imi/ation of profits. !or a consumer it is ma"imi/ation of satisfaction for his consumption basket. Solution of economic ,roblems in a Ca,italist Economy 'rice mechanism works through the demand supply forces and thereby the e5uilibrium price and 5uantities. #t solves the problem as follows. i. hat to produce! Consumers decide on the basis of their preferences at what prices they are ready to buy what amount of a commodity. #t decides the demand for goods in the market. 6n the other hand, producers decide on the basis of cost of production, what commodities and what 5uantities they are ready to supply at different prices in the market. This determines the supply of the commodities. -here these two forces 8 i.e. demand and supply7 intersect each other, the price and 5uantity of the commodity is determined. ii. "o# to produce! #t is the problem of choice among techni5ue of production. A producer will always employ the cheapest techni5ue to minimi/e his cost of production. The cost techni5ue is based on the price of inputs used in the production. #nput prices are determined by the price mechanism. 6n the basis of the prices of inputs, a producer decides the techni5ue which is less costly. iii. For #hom to produce! This is the problem of distribution of national income among the different section of its people. #n the capitalist system the share of a factor decides its share of national income. #f the labour class has larger share the necessities or common goods will be produced and if the capitalist class has more share in the national income more lu"urious goods will be produced. #n this system, distribution of income determines the distribution of goods and services.
2. 'lanne) Economy #n a 'lanned Economy the means of production are collectively owned and decision regarding planning, production, economic development are taken by the Central 'lanning Authority or state. %eatures i. Collective $#nership #n this case, *overnment is the representative of the society and all means of production are owned by the society. )o individual has any right on the property. ii. Central Plannin% All the economic decisions are taken by the central planning authority, which decides it through economic plans. iii. &ovt. Control All the economic planning takes place under control of government or State. *overnment has the power to implement their plans without any interruption. State has full monopoly power so there is no competition. iv. Social #elfare The obective of the government is to ma"imi/e the social welfare of the people and not to earn the economic profit. v. Lesser scope of private sector All the essential sectors are dominated by the public sector or *ovt. There is very limited scope for private sector.
Central Problems of an Economy
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Solution of economic ,roblems in a Socialist Economy #n the socialist economy the central problems will be solved through the state or central economic planning. The central planning authority decides the amount of goods and services to produce according to the re5uirement of the country and needs of its people. #t ensures the minimum income e5uality of the disposable income so that every individual can receive the minimum of the goods and services. There could be different ways to achieve targeted output. The central planning authority takes into consideration the social welfare aspect and development related gods for selecting a techni5ue of production. +. Mie) Economy #t is the economy which comprise the attributes of both socialist as well as the capitalist economy. Here both the sector private as well as public sectors control the economy and fully participate in the economic activity. #t gives economic freedom to private sector with government regulation or intervention. *overnment leaves the private sector to freely move and employs its resources where private sector is not interested to employing its resources but essential for social welfare point of view.
