Introduction

Introduction

                               Introduction

(Economic problems, Central problems, PP curve & Application)

 Key words

 Economy: - An economy is a system which
provides the means to work and earn a living.
 Economics: - Economics is a social science
which studies the way a society chooses to use
its limited resources, which have alternate uses,
to produce goods and services and to distribute
them among different groups of people.
 Scarcity: - Scarcity refers to the imitation of
supply in relation to demand for a commodity.
 Economizing of resources: - it refers to making
optimum use of the available resources.
 Opportunity cost: - Opportunity cost is the cost
of next best alternative foregone.
 Marginal Opportunity Cost (MOC): - MOC
refers to the number of units of a commodity
sacrificed to gain one additional unit of another
commodity.
 Marginal Rate of Transformation (MRT): - MRT
is the ratio of number of units of commodity
sacrificed to gain an additional unit of another
commodity.
Δ Units Sacrificed
Δ Units Gained
 Economic Problem

 Meaning: - Economic problem is a problem of
choice involving satisfaction of unlimited wants
out of limited resources having alternative use.
 Reason of Economic Problems:
 Unlimited Human Wants:- One want is satisfied,
the another new wants emerge
 Scarcity of Resources: - Availability of resources
(i.e. Land, Labour, Capital etc.) less than its
demand.
 Alternative uses of Resources: - Like petrol used
in vehicles, Machines and Generators etc.
 Positive & Normative Economics
S. Positive Economics Normative Economics
1 It Deals with what is
or how the economic
problems are actually
solved.
It Deals with what
ought to be or how the
economic problems
should be solved.
2 It can be verified with
actual data.
It cannot be verified
with actual data.
3 It aims to make real
description of an
economic activity.
It aims to determine
the ideals.
4 It based upon facts,
and thus, not
suggestive.
It based upon individual
opinion and therefore,
it is suggestive in
nature.
5 It does not give any
value judgement, i.e.
it is natural between
ends.
It gives value
judgements.
6 (I)Prices in Indian
economy are
constantly rising.
(II)There are
inequalities of income
in our economy.
(I)India should take
steps to control rising
prices.
(II)Income inequalities
should be reduced.
 Micro & Macro economics
s. Microeconomics Macroeconomics
1 It is that part of
economic theory
which studies the
behaviour of
individual units of an
economy.
It is that part of
economic theory
which studies the
behaviour of
aggregate of the
economy as a whole.
2 Demand and supply. Aggregate demand
and aggregate supply.
3 It aims to determine
price of a commodity
or factors of
production.
It aims to determine
income and
employment level of
the economy.
4 It is also known as
price theory.
It is also known as
income and
employment theory.
5 Example:- Individual
income and
individual output
Example:- National
income and National
output.
 Central Problems of an Economy
1. What to produce?
(I) It is the problem of choosing which
commodity should be produced and in
what quantities.
(II) Society faced the problem of choosing to
produce consumer goods (i.e. Cloth, sugar,
wheat etc.) or to produce capital goods
(i.e. Tools, Machines, trucks etc.) and
luxury goods or essential goods.
(III) Here, the guiding principle is to allocate
resources in a way that generates
maximum aggregate unity.
(IV) The problem of what to produce arises
because resources are scarce and they
have alternative uses.
2. How to produce? (Reasons for
utilization of resources)
(I) It is the problem of choosing the
appropriate technique to be used for
producing goods.
(II) Techniques are classified as Labour
Intensive Technique (LIT) and Capital
intensive Technique (CIT).
(III) The selection of techniques is made with a
view to achieve the objective of raising the
standard of living and to provide
employment to everyone.
(IV) At the Macro level the most level the most
efficient technical method is one which
uses least amount of scarce resources.
(V) In India LIT is most suitable due to
abundance of labour and USA, England,
etc. prefer CIT due to abundance of capital
or shortage of labour.
3. For whom to produce?
(I) This problem is concerned with
distribution of goods and services produce
in the economy.
(II) This problem actually boils down to the
distribution of income generated from
production of output in the society.
(III) The private sector solves this problem
through price mechanism, i.e. the factor
forward is determined in the free market.
(IV) It is called the theory of functional


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