JKBOSE/CBSE Class 12th Economics Notes | Introduction to Economics Part 1 | jkboseclassnotes.blogspot.com

JKBOSE/CBSE Class 12th Economics Notes | Introduction to Economics Part 1


Introduction to Economics 

Knowledge has many branches and Economics is an important and useful branch of knowledge. The science of Economics is relatively young as it is just about two and a half century old. Every science or branch of knowledge is concerned with a particular subject. The science of physics deals with the properties of Matter and Energy. The science of chemistry deals with the constitution and composition of matter. Political science studies the nature of state and Government. In biology, we study the constitution and Evolution of living organisms. 

The question which a beginner is likely to ask is “What is Economics about”? Many Economists have tried to define Economics. But by defining Economics, Economists have tried to delimit the scope of Economics. 

Economics has been variously defined by different Economists from time to time. This is partly because “Economic is an unfinished Science”. With time there have been significant development in economics. It is still in the process of growth and development. Therefore, the old definitions of economics have become inadequate. The definition of a science or a body of knowledge delimits its subject. Matter that is already in existence. But in science like economics that is growing and developing. It is not possible to give its adequate correct and satisfactory definition let it be noted at the outset that there is no universally accepted definition of Economics. The eminent economists of different 
generation-right from Adam Smith-The father of Economics, down to the modern economists, have defined economics differently as per their own perception of economics. 

Definitions of Economics

Adam Smith: “An enquiry into the nature and causes of the wealth of the nations”. 

Alfred Marshall (20th Century Economist): “Economics is the study of mankind in the ordinary business of life."

Robbins: “Economics is the Science which studies human behavior as 
relationship between ends and scarce means which have alternate uses”.

What Economics is about can be better understood from the study of the problems with which economists are concerned. The economic problems arise due to the scarcity of resources relative to the wants of the people, which are unlimited. 


Branches/Types/Forms of Economics

Broadly Economics is divided into two parts /types/forms/branches.
1. Micro-Economics 
2. Macro-Economics

1.Micro –Economics: The term Micro-Economics is derived from the Greek word Mikros, meaning “Small”. Thus Micro-economics deals with the analysis of small individual units of the economy such as individual, consumers, individual firms. Micro-economics studies the economic actions and behavior of individual units and small groups of individual units. 

In micro-economic theory, We discuss how the various cells of economic organism, that is, the various units of the economy such as thousand of consumers thousands of producers or firms, thousands of workers in the economy do their economic activities. In other words, in Micro-economics we make a microscopic study of the economy. 

For example, in Micro-economic analysis we study the demand of an individual consumer for a good and from there go on to device the market demand for the good. Micro-economics occupies a vital place in economics and it has both theoretical and  practical importance. It is highly helpful in the formulation of economic policies that will promote the welfare of the masses.  

2. Macro-Economics: The term Macro-economics is derived from the Greek word Makros, meaning “large”. Macro-economic concern itself with the analysis of the economy as a whole and its large aggregates such as total national output and income, total employment, total consumption, aggregate investment. Macro- economics is also known as Aggregative Economics. 

 
Types of Economy

Economy is classified into three categories namely:

  • Market Economy  
  • Centrally Planned Economy
  • Mixed Economy

Market Economy: are those economics, in which economic activities are left to the free play of the Market forces.

Centrally Planned Economy: are those economics where the course of economic activities is dictated or decided by some central authority or by the government. 

Mixed Economy: Share the characteristics of both Market and centrally planned economy. 


Basic /Central Problems of an Economy: Human wants are endless as they go on increasing whereas resources available to satisfy human wants are scarce. The scarcity of resources relative to human wants gives rise to various basic problems  which have to be solved by an economy. All these problems involve choice to be made by the society. 

These problems are:  
i) What to produce 
ii) How to produce 
iii) For whom to produce 

1. What to Produce: This means that what goods and in what quantities are produced by a society. The problem “what to produce” is the problem of choice between commodities to be produced. 

This problem arises mainly for two reasons. 

a) Scarcity of resources do not permit production of all the goods and 
services that people would like to consume and 

b) All the goods and services are not equally important for the consumer. Some commodities are more important than the others. Since all the goods and services cannot be produced for lack of resources, and all that is produced may not be bought by the consumers, the problem of making choice between the commodities arises. 

The problem ‘what to produce’ is essentially the problem of efficient allocation of scarce resources so that the output/production is maximum. The objective is to satisfy the  maximum needs of the maximum number of people.  

2. How to produce: is the problem of choice of technology, i.e., the production technique. Usually, there are various alternative techniques of producing a commodity and the society has to choose among them, each technique using a different combination of resources like labour and capital. 

For instance, cotton cloth can be produced with either handlooms or automatic looms. Production with technique of handlooms involves the use of more labour relatively to capital and therefore represents labour-intensive techniques. On the other hand, the production of cloth with automatic looms  of the modern textiles mills involves use of more capital relative to labour and hence represents a capital-intensive technique of production. With the use of better or technologically advanced machines productivity is higher but they require less labour. In the choice of a technique of production prices of different factors play an important role. If the economy uses its resources inefficiently, the output would be smaller and there would be unnecessarily sacrifice of goods that otherwise would have been available.

3. For Whom To Produce: It means who will get how much for consumption. There are rich buyers and poor buyers in the economy. In a  free-economy, producers would obviously be inclined to produce more for the rich buyers. This would maximize their profit. But this surely will increase the gulf between the Rich and the poor buyers of the society. To reduce this gulf, often the government intervenes to regulate the use of resources. So that enough production is done for poorer sections of the society. The government offers subsidy and tax-breaks for the production of goods for poorer sections of the society.


Production Possibility Curve (PPC)
The issue of choice when resources are scarce/limited and the nature of some basic economic problems can be better understood with the aid of an important graphic tool known as Production Possibility Curve(PPC) or Production Possibility frontier (PPF) OR Boundary or Transformation curve. The resources of an economy as a whole are limited in comparison to demand for them. Therefore, every society has to determine how to allocate its scarce resources to different goods and services. Given the total amount of resources. It is possible to allocate the resources in many different ways and thereby achieving different  combinations of all goods and services.
 
Production Possibility Curve shows graphical presentation of various combinations of two goods that can be produced with available technologies and given resources assuming that the resources are fully and efficiently utilized.