1. What Economics is About?
Economics is a science of human behavior concerned with the allocation of scarce means in such a manner that consumers can maximise their satisfaction, producers can maximise their profits and the society can maximise its social welfare.
Scarcity and Choice is the Essence of Economics
Scarcity
→ It refers to the situation when what you have is less than what you wish to have. In other words, 'scarcity' implies a situation when supply of resources is less than the demand for resources.
Choice
→ Choice refers to the process of selection from available limited alternatives. It emerges because:
(i) resources are scarce, and
(ii) resources can be allocated to alternative uses.
The Essence of Economics
⇒ Scarcity of resources in relation to unlimited human wants
⇒ Problem of choice or allocation of resources to alternative uses
⇒ Economic problems arising out of 'scarcity' and 'choice'.
Thus, Economics is a science of Human Behavior
Confronted with:
The problem of choice or the problem of allocation of scarce resources to their alternative uses
For achieving the objectives of:
— Maximisation of satisfaction for the consumers
— Maximisation of profit for the producers
— Maximisation of welfare for the society
2. Microeconomics And Macroeconomics
Microeconomics
→ The term 'Micro' in English language has its origin in the Greek word mikros which means small. It studies economic activities of an economic unit, like demand for salt by an individual household, or economic activities by a small group of economic units, like demand for salt by all the households.
Macroeconomics
→ The term 'macro' in English language has its origin in the Greek word makros which means large. It studies economic activities related to economy as a whole. For example, it studies aggregate demand for all goods and services in the economy.
| Microeconomics | Macroeconomics |
|---|---|
| (i) Microeconomics studies economic relationships or economic problems at level of an individual—an individual firm, an individual household or an individual consumer. | (i) Macroeconomics studies economic relationships or economic problems at the level of the economy as whole. |
| (ii) Microeconomics is basically concerned with determination of output and price for an individual firm or industry. Accordingly, microeconomics is briefly referred to as the Theory of Price. | (ii) Macroeconomics is basically concerned with determination of aggregate output and general price level in the economy as a whole. Accordingly, macroeconomics is briefly referred to as the Theory of Income and Employment. |
3. Positive And Normative Economics
Positive Economics
→ Positive economics deals with economic issues related to past, present or future. It deals with such economic situations which can be studied by using facts and figures.
Normative Economics
→ Normative economics is the economics of 'what ought to be'. It deals with 'opinions' of the economists related to economic issues or economic problems. Different economists may offer different opinions on the solution to an economic problem. Opinions involve value judgements.
| Positive Economics | Normative Economics |
|---|---|
| (i) Positive economics deals with economic issues (or economic behavior) related to past, present and future. | (i) Normative economics deals with opinions of the economists not related to economic issues or economic problems. |
| (ii) Statements of positive economics relate to 'what was', 'what is' and 'what would be'. | (ii) Statements of normative economics relate to 'what ought to be'. |
| (iii) Statements of positive economics are not necessarily the statements of truth. These may be true or false. Example: Somebody says: population of India is more than the population of China, it is definitely a positive statement. But, it is wrong. One can verify it. | (iii) Normative statements cannot be termed as true or false. These statements involve opinions only. Example: Somebody says that old-age pensions should be stopped. It is just an opinion. |
4. What Is An Economy?
→ Economy is a system by which people of an area earn their living.
5. A Simple Economy
→ A simple economy is the one in which the degree of interdependence and exchange is of a moderate degree.
| Simple Economy | Complex Economy |
|---|---|
| (i) Income level of the people is low. | (i) Income level of the people is high. |
| (ii) Wants are multiple but not so enormous. | (ii) Wants are multiple as well as enormous. |
| (iii) Mutual interdependence is limited. | (iii) Mutual interdependence is very high. |
| (iv) Degree of exchange is moderate (limited). | (iv) Degree of exchange is very high. |
6. Organisation of Economic Activities: Types of Economies
Economic System
| Socialist | Capitalist | Mixed |
|---|---|---|
| (i) These are the economies where the economic activities (production, consumption, investment and exchange) are firmly controlled by some central authority. | (i) These are the economies where the economic activities are controlled by the market forces. | (i) These are the economies where the economic activities are governed by the free play of market forces but are regulated by the government. |
| (ii) Economic decisions are driven by the motive of social welfare. | (ii) Economic decisions are driven by the motive of profit maximisation. | (ii) Economic decisions are driven by the motive of both profit maximisation and social welfare. |
| (iii) The consumer is not sovereign (the central authority decides what goods are to be produced for the people). | (iii) The consumer is sovereign. The consumer buys goods according to his choice. | (iii) The consumer is sovereign. However, PDS (Public Distribution System) ensures the supply of essential goods to the consumer. |
| (iv) Most resources are owned by the govt. The govt decides at what price the goods are to be sold in the market. | (iv) Most resources are owned by people. The market determines the prices of goods and services. | (iv) Resources are controlled by both govt and people. Prices are determined by the market but the govt regulates/controls the prices of essential goods. |