CHAPTER: 1

INTRODUCTION

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ECONOMY
It is a system which provides people, the means to work and
earn a living.
Parts of
Economy ???
VITAL FUNCTION OF AN ECONOMY

CONSUMPTION

CAPITAL
PRODUCTION FORMATION

ECONOMY
WHY STUDY ECONOMICS?
The main reason for study of economics can be simplified to a
single word - SCARCITY
SCARCITY
Scarcity refers to the limitation of supply in relation to demand
for a commodity.
Economics is concerned with selection of resources
under conditions of scarcity
RESOURCES
FACTORS OF PRODUCTION - FOP
ECONOMIZING OF RESOURCES
Refers to making optimum use of the available resources.
ECONOMIC PROBLEM
It is a problem of CHOICE involving satisfaction of unlimited
wants out of limited resources having alternative uses.
REASONS FOR ECONOMIC PROBLEM
1. SCARCITY OF RESOURCES: Resources are limited in
relation to their demand and economy cannot produce all
what people want.
REASONS FOR ECONOMIC PROBLEM
2. UNLIMITED HUMAN WANTS: Human wants are never
ending, i.e. they can never be fully satisfied. As soon as one
want is satisfied, another new want emerges.
REASONS FOR ECONOMIC PROBLEM
3. ALTERNATIVE USES: Resources are not only scarce, but
they can also be put to various uses. It makes choice among
resources more important.
ECONOMICS
Economics is a social science which studies the way a society
chooses to use its limited resources, which have alternative
uses, to produce goods and services and to distribute them
among different groups of people.
MICRO AND MACRO ECONOMICS

MICRO MACRO
Basis Microeconomics Macroeconomics
Meaning Microeconomics deals with the Macroeconomics is the study of
behaviour of the economy as a whole.
individual economic units.
Tools Demand and Supply Aggregate Demand and Aggregate
Supply
Objective To determine the price of a To determine the income and
commodity or factors of employment level of the economy.
production.
Othe It is also known as ‘Price theor It is also known as ‘Income and
r y’. Employment Theory’
Nam
e
Example Individual income, individual National Income, national output.
output.
Aggregation It involves limited degree of It involves the highest degree of
aggregation. aggregation.
POSITIVE AND NORMATIVE
ECONOMICS
DISTINGUISH BETWEEN
Differences Positive Economics Normative Economics

Meaning It deals with the things It deals with the things

“ as they are” “as they should be”
Basis Based upon real facts Based upon individual
opinions
Verification It can be verified It cannot be verified
with actual data
Nature Pure and neutral between Suggestive & optimum in
ends nature
Purpose It aims to make real It aims determine
description of an economic to the ideals.
activity.
Value Judgments It does not give any value It gives value
judgments. judgements.
CENTRAL PROBLEMS OF AN ECONOMY
Production, distribution and disposition of goods and services
are the basic economic activities of life. In the course of these
activities, every society has to face scarcity of resources. Because
of this scarcity, every society has to decide how to allocate the
scarce resources. It leads to following Central Problems of an
Economy.
WHAT TO PRODUCE
This problem involves selection of goods and services to be
produced and the quantity to be produced of each selected
commodity
Guiding Principle: Allocate the resources in such a manner which
gives maximum aggregate satisfaction.
HOW TO PRODUCE
This problems refers to selection of technique to be used for
production of goods and services . Generally, techniques are
classified as LIT & CIT.
Guiding Principle: Combine FOP in such a manner so that
maximum output is produced at minimum cost, using least
possible scarce resources.
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.
Guiding Principle: Ensure that urgent wants of each productive
factor are fulfilled to the maximum possible event.
OPPORTUNITY COST
It is the cost of next best alternative foregone.
PRODUCTION POSSIBILITY FRONTIER
It refers to a graphical representation of possible combination of
two goods that can be produced with given resources and
technology

1. Resources are fixed

2. They can be transferred
3.Only two goods can be produced.
4. Resources are fully and efficiently utiliised
5. Resources are not equally efficient in production of all
products
6. Technology remains constant
FIGURE
SCHEDULE
Production Guns Butter MRT
Possibilities
[OR
Combination]
A 21 0 -
B 20 1 1:1
C 18 2 2:1
D 15 3 3:1
E 11 4 4:1
F 6 5 5:1
G 0 6 6:1
Explanation
When points A, B, C, D, E, F, & G are joined we get a
curve AG, known as ‘Production Possibility Frontier.’
AG curve shows the maximum limit of production of
guns and butter.
Every point on PPC [like A, B, C, D, E, F& G] in figure
indicates full employment and efficient use of
resources.
MARGINAL OPPORTUNITY COST
MOC refers to the number of units of a commodity
sacrificed to gain one additional unit of another
commodity. In case of PPC, MOC is always
increasing.

Reason:-
Increasing MOC operates because productivity and
efficiency of factors of production decrease as
they are shifted from one use to another.
MARGINAL RATE OF TRANSFORMATION
MRT is the ratio of number of units of a commodity
sacrificed to gain an additional unit of another
commodity.
MRT =  Units
Sacrificed
 UnitsitGained
MRT increased because is assumed that no
resources is equally efficient in production of all
goods.
CHARACTERISTICS OF PPF
1. PPF SLOPES DOWNWARDS: More of one goods can be
produced by only by taking resources away from the
production of another good.
2. PPF is CONCAVE SHAPE: Because of increasing MRT. MRT
increases because it is assumed that no resource is
equally efficient in production of all goods.
ATTAINABLE AND UNATTAINABLE COMBINATIONS
CHANGE IN PPC
1. SHIFT IN PPC: When there is change in
productive capacity with respect of both the goods.
2. ROTATION OF PPC: When there is change in productive
capacity with respect to only one good.
CONCLUSION
SCARCITY IS THE ROOT OF ALL ECONOMIC
PROBLEM.

Economics is the study of how man and the society chooses with
or without the use of money, to employ scarce productive
resources which could have the alternative uses to provide
various commodities overtime and distribute them for
consumption now and in future among various people and the
groups of the society.
• PRODUCTION POSSIBILITIES: Different combination of
goods and services which an economy can produce with its
available resources and given technology.

• PRODUCTION POSSIBILITY CUVRE: It is a curve

which depicts all possible combination of two goods that an
economy can produce with the utilization of available
resources and technique of production. It is an important tool
to solve central economic problem. It is also known as
transformation curve or production possibility frontier.

• OPPORTUNITY COST: It is the cost of next best

alternative foregone.
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