ECONOMICS NOTES

$$ UNIT 1: The Subject Matter of Economics

* Some Definitions of Economics

 Economics is the social science that examines how people make a
choice for using their limited or scarce resources in order to satisfy
their unlimited wants.

 A/C to Lionell Robbins, Economics is a science which studies human

behaviour as a relationship between ends and scarce means which
have alternative uses.

 A/C to W. Stanley Jevons, "Economics is the mechanics of utility and

self interest."

 A/C to Alfred Marshall, "Economics is the study of mankind in the

ordinary business of life."

* CONCLUSION:-
i. Economics is a Social Science.

ii. Economics examines how people choose to use scarce resources.

iii. Human wants are unlimited.

Q.} Why Study Economics?

Ans.- The purpose of studying economics is trying to understand how
both individuals and nations behave in response to certain material
constraints. {Constraints- }

Note:- Basically Economics is all about Production, Distribution and

Consumption.
* Scope Of Economics
1. Resource Allocation:- The assignment (allotment) of available
resources to various uses.

2. Inventory and Queuing Problem:- Basically Inventory problem is

about holding of optimal levels of stocks of raw materials and
finished goods over a period by considering demand and supply and
Queuing problem is about installation of additional machines or
hiring of extra labour in order to balance the business lost.

3. Pricing Problems:- It is basically about fixing prices for the products

and regarding various methods of pricing to be adopted.

4. Investment Problems:- The problems of allocating scarce resources

over time.

For eg:- Investing in new plants, how much to invest, sources

of funds, etc.
Note:- Income can be used by three aspects:-
i. Consumption
ii. Savings
iii. Investments
 Backward Linkage- Inputs required for product. Eg:- Seeds,
Fertilizers, Machinery, etc.
 Forward Linkage- Allocated resources required after the production
are known as Forward Linkage.
Eg:- Storage, Transportation, Marketing, Advertisement, etc.

➢ Micro Economics- It is the study of individuals, households and

firms' behaviour in decision making and allocation of resources.

➢ Macro Economics- It concerns with large scale or general

economic factors, such as interest rates and national productivity.
 In other words, Macro Economics is a branch of economics that
studies how an overall economy- the markets, businesses,
consumers, and governments- behave.

༓ The Economic Problem: Scarcity & Choice

↪ Scarcity occurs because people want more than what is available.
Scarcity limits us both as individuals and as a society. As individuals,
limited income keeps us from doing and having all that we might like. As a
society, limited resources fixes a maximum amount of goods and services
that can be produced.

↪ Scarcity requires choice. People must choose which of their desires

they will satisfy and which they will leave unsatisfied. When we choose
more of something, scarcity forces us to take less of something else.

✮ Central Problem of Economy

 On the basis of Allocation of Resources-
1. What to Produce?
2. How to Produce?
3. For whom to Produce

✧ What to Produce:-
 It has two aspects-
i. What possible commodities to produce:- An economy has to decide,
which consumer goods and which of the capital goods are to be
produced.

ii. How much to produce:- After deciding the goods to be produced

economy has to decide the quantity of each commodity that is
selected.
 ✧ How to Produce:-
↪ This problem refers to selection of technique to be used for
production of goods and services. A good can be produced using different
techniques of production.

 Generally, Techniques are classified as:

I. Labour Intensive Technique (LIT)- More labour and less technique is
used. For Eg:- India (Due to abundance of labour)

II. Capital Intensive Technique (CIT)- More capital and less labour
utilization. For Eg:- U.S.A., England, etc. prefer CIT due to shortage of
labour and abundance of capital.

✧ For whom to Produce:-

↪ This problem refers to selection of category of people who
will ultimately consume the goods, i.e. whether to produce goods for more
poor and less rich or more rich and less poor.

↪ This problem is concerned with distribution of income among

the factors of production (land, labour, capital and enterprise).

 Distribution of Income categorised under two main heads:-

i. Personal Distribution- National income distributed among different
groups of people.

ii. Functional Distribution- Deciding the share of different factors of

production in the total national product of the country.

* Economic System
 Capitalist Economy (Market Economy) - A Capitalist Economy is a
system where private entities control the factors of production like
labour, natural resources or capital goods.
In a Capitalist
system, the products manufactured are divided among people, not
according to what they want but on the basis of purchasing power, which
is the ability to buy products and services.
 Socialist Economy (Command Economy)- An economic system
wherein the government controls and regulates the entire
mechanism from production to distribution to ensure economic
welfare and equal opportunity for all the people in the country.

*Note:- The government determines what products are to be

manufactured and how the product should be disposed of, in accordance
with the requirements of the society.

 Mixed Economy:- A mixed economic system is a system that

combines aspects of both capitalism and socialism. It is basically a
system that combines elements of both a market economy and a
command economy.

Q.} What is the problem of resource allocation?

Ans.- The problem of allocation of resources arises due to scarcity of
resources. Resources are limited and scarced in nature. A choice is to be
made which wants should be satisfied and which should be left and
unsatisfied.

➢ Interdependencies between Law and Economics:

{i} Primary objective of law is to provide basic rights to human and
Economics gives a better way to deal with human behaviour and get a
good grasp on human behaviour.
{ii} As stated in Shivashakti Sugar Limited V. Shree Renuka Sugar Limited
and others, Economic plays a very big role in determining other
consequences of a judgment.
{iii} As we all know, Economics deals with each and every sector of the
economy. To pass a new legislation, we have to always consider the
parameters of Economics.
{iv} Without Economic Analysis of law, we cannot make better policies for
the citizens of the nation.