Introduction to Economics

Introduction
The Term Economics owes it’s origin to the Greek word “Okinoma”
means managing the household. Economics is the study of how we
work together to transform scare resources into goods and services,
how we distribute these goods and services among ourselves so that
we can satisfy our needs.
Two fundamental facts of economics are---

• Human being have unlimited wants and

• The means of satisfying these wants are relatively limited
Definitions of Economics

• Wealth Definition
• welfare Definition
• Scarcity Definition
• Growth Definition
Wealth Definition
Adam Smith, the father of economics, defined economics in his famous
book “ An Enquiry into the Nature and Causes of Wealth of Nations” as
“ the science of wealth”. He insisted that economics deals with
acquisition, accumulation and expenditure of wealth.
Merits of this definition—
• Stress on wealth
• Addressing the problem of economic growth
• Attention to the important economic issues
Criticism
• It is too materialistic
• Neglect of welfare
Welfare Definition

Neo-classical economist A C Pigou defined economics as “ the range of

our enquiry becomes restricted to that part of social welfare that can
be brought directly or indirectly into relation with measuring rod of
money”.
Criticism------

• Neglect of immaterial things-services

• The concept of welfare is vague
Scarcity Definition
Lionel Robbines defined economics as “ economics is the science which studies human
behavior as a relationship between ends and scare means which have alternative uses.”
His definition deals with the following aspects---
• Unlimited Wants
• Limited Means and
• Alternative uses

Criticism---

• No focus on economic growth and Development

• Problem of abundance and
• Ignored macro-economic issues
Growth Definition

“Economics is the study of how men and societies choose, with or

without the use of money, to employ scare productive resources which
could have alternative uses, to produce various commodities over time
and distribute for consumption now and in the future amongst various
people and groups of society.”
Paul A samuelson
Scope of Economics
• Micro Economics
• Macro Economics

• Micro Economics
It deals with functioning of individual industries and the behavior of individuals’
economic decision making.
The subject matter of micro-economics mainly are-
• Product Pricing
• Consumer Behavior
• Factor Pricing
• Study of Firms etc
• Macro Economics
Macro Economics looks at the economy at a whole. It is the branch of
economics that examines the economic behavior of the aggregate-
income, employment, output and so on- on a national level.

It includes--
• National Income and Output
• General Price Level
• Balance of Trade and Payments
• Employment and Economic Growth etc..
Central Economic Problems

Economy has to deal with central problem of scarcity of resources.

These central economic problems are-

• What to Produce
• How to Produce
• For whom to Produce
• What provisions should be made for sustainable economic growth
Production Possibilities Curve
• The production possibilities frontier is a graph that shows the
combinations of output that the economy can possibly produce given
the available factors of production and the available production
technology
Production Possibilities Production of Cloth (in ,000 mtr) Production of wheat (,oooo tons)
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0
Economic System

An economic system refers to sum total of arrangements for the

production and distribution of goods and services in a society.
Types of Economic System—

• Capitalist Economy
• Socialist Economy
• Mixed Economy
Capitalist Economy
Capitalist economy is an economic system in which all means of production are
owned and controlled by private individuals for profit. Here, profit making is the
driving force and the government are not supposed to interfere in the
management of economic system.
Features of Capitalist Economy

• Right of Private Property

• Freedom of Enterprise
• Freedom of Choice by the Consumer
• Profit Motive
• Competition
• Inequalities of Income
Demerits of Capitalism

• Welfare is not protected

• Economic Instability- over production, business cycle etc are common
• Class conflict arises between employees and employer
• It leads to monopoly
Socialist Economy
In Socialist economy, the material means of production i.e. capital, land
etc are owned by community represented by state.

Features
• Collective Ownership
• Central Planning Authority
• Absence of Consumer Choice
• Minimum Role of Market Forces
• Relatively Equal Income Distribution
Merits of Socialism
• Equitable distribution of wealth and income
• It is a planned economy- ensures better utilization of resources
• Socialism ensures right to work and minimum standard of living to people
• Here, laborers and consumers are protected from exploitation by the employers
and the monopolies.

Demerits of Socialism
• It restrict the freedom of individuals
• It take away the right of property
• It creates state monopolies
• It will not provide necessary incentive to hard work in the form of profit
Mixed Economy

Mixed economy is a system which tries to include the best features of

both the systems – capitalism and socialism while excluding the
demerits of both the systems.
Features

• Co-existence of private and public sector

• Existence of economic planning
• Positive role of the government
Merits of Mixed Economy
• It ensures the merits of both while avoiding the evils of both
• It protects individual freedom
• Price mechanism is allowed to operate
• Economic fluctuations can be avoided due to the presence of centrally planned
economy
• It helps under-developed countries to have rapid and balanced economic
development.
Demerits
• It is difficult to operate
• Excessive control and heavy taxation are likely to prevail
• Problem of red tapism , favoritism are found in this system
MCQs
1. Which of the following statements about the use of resources is not one of the key questions in economics?
a) How are resources used?
b) Where are resources used?
c) For what are resources used?
d) For whom are resources used?

2. What is meant by intermediate goods and services?

a) The same as capital goods, such as plant, buildings, vehicles and machinery.
b) Products which one firm buys off another and then uses up in its own products.
c) All inputs bought by firms, including labour and raw materials.
d) Imports.

3. What is meant by the term final goods and services?

a) The same as the term intermediate goods and services.

b) The same as the term consumer goods and services.
c) All goods and services except those traded second hand.
d) Goods and services which are finished as far as the economy is concerned.
4. Which of the following policies would increase production by taking it to a point closer to the production
possibility frontier, but would not shift the frontier?
a) A policy that encouraged firms to buy more industrial plant.
b) A policy that encouraged firms to develop and introduce improved technology.
c) A policy that encouraged firms to buy more machinery.
d) A policy that encouraged firms to adopt better technologies that are already available.
5. Suppose you buy Economics by David King. What is the opportunity cost of your purchase?

a) The money you paid for the book.

b) Whatever you would have spent the money on if you had not bought the book.
c) The cost of producing the book.
d) The time you spend studying the book.
6. Economics is the study of

A) Production technology
B) Consumption decision
C) How society decides what, how, and for whom to produce
D) the best way to run society
7. The opportunity cost of a good is
A) The time lost in finding it
B) The quantity of other goods sacrificed to get another unit of that good
C) The expenditure on the good
D) The loss of interest in using savings
8. A market can accurately be described as

A) a place to buy things

B) a place to sell things
C) the process by which prices adjust to reconcile the allocation of resources
D) a place where buyers and sellers meet
9. In a free market __________ ___________

A) Governments intervene
B) Governments plan production
C) Governments interfere
D) Prices adjust to reconcile scarcity and desires
10. In the mixed economy
A) Economic problems are solved by the government and market
B) Economic decisions are made by the private sector and free market
C) Economic allocation is achieved by the invisible hand
D) Economic questions are solved by government departments
11. Microeconomics is concerned with
A) the economy as a whole
B) the electronics industry
C) the study of individual economic behavior
D) the interactions within the entire economy

12. Macroeconomics is the study of ___________________

A) Individual building blocks in the economy
B) The relationship between different sectors of the economy
C) Household purchase decisions
D) The economy as a whole