CLASS XI G -ECONOMICS NOTES

CHAPTER 1--INTRODUCTION TO MICRO ECONOMICS

Meaning of an Economy
A system which provides people , the means to work and earn a living. All
organisations, who are involved in undertaking three economic activities,
production, consumption and capital formation (investment) are collectively
called an economy .

It is a framework within which economic activities are undertaken. Economy

includes all the production units in a defined area which provide people with the
means to work and earn an income. Existence of an economy depends on two
facts. First, human wants for goods and services are unlimited, and secondly
availability of productive resources to produce these goods and services is limited.

What is meant by an economic problem?

An economic problem is basically the problem of choice. In comparison to
unlimited human wants, resources to satisfy them are limited. Resources are not
only limited but have alternative uses also. This creates need for making choices
in best use of resources so as to get maximum satisfaction and social welfare.
Every individual, every firm and every economy has to face the problem of choice.
Whenever resources are limited and they have alternative uses, choice has to be
made between alternative uses of available resources. In short, economic
problem is the problem of allocation of resources or making choices in the use
(allocation) of scarce resources which have alternative uses.

Why does the problem of choice arise?

Scarcity of resources having alternative uses in relation to unlimited wants gives
rise to an economic problem. Thus scarcity is the root cause of an economic
problem.

Following are the three main causes of economic problem. 1. Unlimited

Wants 2. Limited Resources 3. Alternative uses of Resources.

i. Human wants (or ends) are unlimited. Multiplication of human wants is

the basic fact of life. We always pine for what is not. There is no end to

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 human wants since as soon as one is satisfied, many others crop up and this
goes on endlessly, Lucky dates differ in intensity as some are more urgent
than other wants. This fact enables a man to arrange his wants in order of
preference and make a choice among different wants, in order of urgency.
ii. Resources to satisfy wants are limited. Resources which are used for
production of goods and services are limited as against wants which are
unlimited.
 Scarcity of resources creates choice problems. It means whenever there is
scarcity of resources, there arises problem of choice. Thus scarcity and
choice go together. Scarcity of resources means limited availability of
resources in relation to demand for them. Economising of resources means
making best use of available resources. The need for economising of
resources arises because resources are scarce and have alternative uses.
iii. Resources have alternative uses. Resources or means are not only limited
but can be put to alternative uses also. The same resource cannot be used
simultaneously for more than one purpose at a time. An economy is
constantly faced with the problem of making choice between alternative
commodities that can be produced with these resources.

Explain in detail, the three Central problems relating to allocation of

resources.
What to Produce and in What Quantities

This is the first basic problem of allocating resources among

different alternative uses. This is also called problem of resource allocation.
It is related to the selection of goods, as all goods cannot be produced
because of limited resources. The economy has to decide whether to
produce more of food, clothing, housing or luxury goods, whether to have
more of consumer goods or to have capital goods. Problem of choice
requires the decision of what to produce and what not, which wants are
urgent and which wants can wait has to be decided .It is a two fold
decision:
i) Which goods and services are to be produced ; e.g., consumer goods
or capital goods, war time goods or peace time goods etc.
ii) Quantity of goods and services; after a decision has been taken on
types of goods, quantities of these goods should also be decided.

Factors guiding What to produce are: available technology, cost, profit,

demand, maximum utility etc.

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How to Produce
This is also called the problem of choice of technique of production. There are
two techniques :

(i) Labour intensive technique. It uses more of labour and less of capital.
(ii) Capital intensive technique. It uses more of capital (machines) and less
of labour.
 Choice of labour intensive would mean that the economy makes better use
of its available manpower (generation of employment).
 Choice of capital intensive would mean that the economy develops its
infrastructural base required for rapid economic growth.
However choice of technique depends on the objective of the
producer. It may be labour intensive or capital-intensive. It can also be a
combination of both. The efforts should be, to use the efficient technique
of production. For example, India prefers labour intensive technique due to
abundance of labour and developed economies that prefer capital intensive
technique due to abundance of capital. Efficient technique is the one which
uses the least amount of scarce resources to produce maximum. In other
words, the production should be undertaken at minimum cost.

Factors guiding, How to produce are : Objective of the producer, availability of

technique, availability of resources. etc.

For Whom to Produce ?

This is also called the problem of distribution of national income among the
factors of production. Goods and services are produced for the consumers and
consumer's capacity to purchase goods and services depends on his income. It is
very important to ensure that a person should get income equal to the
contributions he makes to the national product. The problem of 'For whom to
produce' is the problem of determining wage rate for the use of labour, rent for
the use of land, interest rate for the use of capital and profits for the
entrepreneur. More equitable is the distribution of income, more equitable will
be the distribution of national product.

There are two aspects of the problem of 'For Whom to Produce' :

(i) Personal distribution. This is concerned with distribution of production

among consumers in the society.
(ii) Functional distribution. This is concerned with distribution of production
(or income generated through production) among factors of production,
viz land, labour, capital and entrepreneur

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Factors guiding, For whom to produce are Distribution of income among income
earners, social justice or equity.
Differentiate between Micro economics and Macro economics
MICRO ECONOMICS
1 It is the study of economic
behaviour of an individual
unit.
2 The Word Micro originated
from the Greek word
MIKROS which means Small
3 The main instruments to
study micro economic
problems are demand and
supply
4 It is also called Price Theory
5 It aims to determine price of
a commodity or prices of
factors of production
6 Consumers behaviour,
Producers behaviour and
Study of Markets are coved
by Micro economics
Differentiate between Positive Economics and Normative Economics.
Positive economics
1 It deals with economic issues
as they are, i.e. ‘what is ‘or
‘what was’.
2 It is based on actual facts
and data.
3 It is based on cause and
effect relationship.
4 It does not involve value
judgements
5 In this, we study how the
different mechanisms
function.
MACRO ECONOMICS
It is the study of aggregate
units.
The Word Macro originated
from the Greek word
MAKROS which means Big
The main instruments to
study macro economic
problems are aggregate
demand and aggregate supply
It is also called Income Theory
It aims to determine income
and employment and general
price level in the economy.
National Income, Theory of
Employment, Foreign
Exchange and Money are
covered by Macroeconomics
Normative economics
It deals with economic issues
as they ought to be , i .e
‘what ought to be’
Under this , the conclusions
and results are not based on
facts.
It is based on opinions and is
suggestive in nature
It involves value judgements
It tells how economic
problems should be solved.
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DEFINITIONS OF ECONOMICS

I. Economics is the science which studies human behavior as

a relationship between ends and scarce means which have
alternative uses
LIONEL ROBBINS

II. Economics is the study of how people and society choose to

employ scarce resources that could have alternative uses in
order to produce various commodities that satisfy their wants
and to distribute them for consumption among various persons
and groups in society.
PAUL SAMUELSON.
QUESTIONS AND ANSWERS TO BE WRITTEN IN THE NOTE BOOK
1.What do you mean by an economy?
2.Why do economic problems arise?
3.Explain the central problem of ‘What to produce.
4.Explain the central problem of ‘Choice of technique’.
5.Explain the central problem of ‘For whom to produce.
6 Define Scarcity.
7.Differentiate between Positive economics and Normative
economics.
ASSIGNMENT
A) “SCARCITY AND CHOICE GO TOGETHER”-DO YOU AGREE WITH THE
STATEMENT? GIVE EXPLANATION TO SUPPORT YOUR ANSWER.