INTRODUCTION
“All such institutions and organistions, which provide people with the means to work and earn an income, are collectively called an Economy.
Basic activities of an Economy.
1. Production refers to creation of utility or increasing the value of commodities already produced.
2. Consumption is using up of goods and services to satisfy haman want directly.
3. Capital Formation/Investment refers to addition to the capital stock of an economy.
Economic Problem :- It is basically problem of making choices in the use of scarce resoures for satisfaction of choice arises due to scarcity of resources and their alternative uses, For an economy Economic problem is the problem of resource allocation or making choices in the allocation of scarce resources having alternative uses.
Causes of Economic Problem:
(i) Human wants are unlimited (ii) resouces to satisfy wants are limited (iii) resources have alternative uses.
Central (Basic) Problem of an Economy Allocation of resourcesor making choices among alternative uses of scarce resources is the fundamental problem.
1. What to produce and in what quantity?
It is the problem of choosing which commodities should be produced and in what quan tity i.e. necessity goods or luxury goods.
2. How to produce?
It is problem of choosing method or technique of production of goods. i.e. Labour inten sive or Capital intensive.
3. For whom to produce.
It refers to distribution of factor income among various factors of production since production is the result of combined efforts of factors of production i. e. Iand, labour, capital, enterprise.
DISTINCTION BETWEEN MARKET ECONOMY AND CENTRALLY PLANNED ECONOMY.
1- Market Economy : An economy in which all economic activities are organised through the market i.e. free interaction of buyers and sellers to affect purchase and sale of a commodity. (Price mechanism)
Central Problems of what, how and for whom to produce are solved by price-mechanism.
2. Centrally Planned Economy :- It is one in which all important activities are planned and decided by the central planning authority or the Govt.
Central Problems of what, how and for whom to produce are solved by the central authority known as planning commission appointed by the Govt.
Branch of Economics
1. Micro economic theory (also called Price Theory) deals with the allocation of resources which is decided by price mechanism.
2. Macro-economic Theory deals with full employment of resources along with other aggregrates of economy i.e. national income, price level, national saving etc.
Production Possibility Frontier
It is a curve which depicts all possible combinations of two goods which an economy can produce with available technology and with full and efficient use of its given resources.
Assumption
1. Resources are fixed.
2. Resources are fully & efficiently used.
3. Technology does not change.
4. Resources are not equally efficient in production of all goods.
Production Possibility Schedule
with MOC & MRT
Production Possibilities | Wheat (w) (Lakh tonnes) | TanKs(T) (thousands) | MOC of Wheat | MRT= ∆ tanks/ ∆wheat |
A | O | 15 | - | - |
B | 1 | 14 | 1(15-14) | 1 W = 1 T |
C | 2 | 12 | 2(14-12) | 1 W = 2 T |
D | 3 | 9 | 3 | 1 W = 3 T |
E | 4 | 5 | 4 | 1 W = 4 T |
F | 5 | 0 | 5 | 1 W = 5 T |
By joining the different possibilities of production i.e. wheat on x-axis and tanks on y-axis production possibility curve is drawn.
1. Every point on PP curve (A, B, C, D, E) reflects situation of full and efficient employment resources.
2. Point Below PP curve reflects the silation of inefficient utilisation or under-utilisatiion of resources. (Leftward shift)
3. Point above PP curve indicates situation of growth of resources. (Rightward shift)
SHAPE OF PRODUCTION POSSIBLITY CURVE
1. It slopes down from left to right because in a situation of full employment of resources production of one good can be increased only after sacrificing some quantity of other good.
(1 W = 2 T............ ..............)
2. The shape of PP curve is concave to the origin due to increasing marginal opportunity cost. It implies that for producing an additional unit of a good, sacrifice of units of other good goes on increasing.
(*) PP curve could be a straight line if sacrifice of units of good is constant. MOC(MRT) is constant.
Marginal opportunity cost :- It refers to the amount of other good which is sacrificed to produce an additional unit of the particular good.
Marginal Rate of Transformation : It is defined as the ratio of units of one good scarificed for production of an additional unit of other good.
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Positive economic analysis :-
1. It studies the actuals as “they are”
2. It analyses the cause & effect relationship.
3. Ethics of economic decisions are not touched. i.e. INDIA
Normative economic analysis :
1. It deals with things as they ought to be”
2. It passes moral judgement.
3. It deals with idealistic situation instead of actual situation i. e. Interest free loans should be given to the poor farmers.
Micro economics :- It is that part of economic theory which deals with the individual parts of the economic system such as individual households, individual firms or industries.
It is called price theory because it is concerned with the determination of price of individual commodities and factors.
Macro economics: - It is that part of economic theory which studies the economy in its totality or as a whole, dealing with aggregrates. such as ‘National income, aggregate employment, general price-level
It is also known as “Theory of income and employment because the subject-matter of macro-economics revolves around determination of the level of income & employment.
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