Chapter-1 , Introduction of Economics

 

What is an economy?

An economy is a system which provides people, the means to work and earn a living.

 

Scarcity

Scarcity refers to the limitation of supply in relation to demand for a commodity.

 

Economic problem

Economic problem is a problem of choice involving satisfaction of unlimited wants out of limited resources having alternative uses.

 

Reasons for economic problem

The 3 main reasons for existence of economic problems are:

  1. Scarcity of resources: resources (i.g. land, labour, capital, etc) are limited in relation to their demand and economy cannot produce all what people want. It is the basic reason for existence of economic problems in all economies. Scarcity is universal and applies to all individuals, organizations and countries. There would have been no problem, if resources were not scarce.

 

  1. 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. Wants of the people are unlimited and keep on multiplying and cannot be satisfied due to limited resources. Human wants also differ in priorities, i.e. all wants are not of equal intensity. For every individual, some wants are more important and urgent as compared to others. Due to this season, people allocate their resources in order of preference to satisfy some of their wants. If all human wants had been of equal importance, then it would have become impossible to make choices.

 

  • Alternate uses: resources are not only scarce, but they can also be put to various uses. It makes choice among resources more important. For example, petrol is used not only in vehicles, but also for running machines, generators, etc. as a result, economy has to make choice between the alternative uses of the given resources.

Difference between positive economics and normative economics

 

Basis Positive economics Normative economics
meaning It deals with what is or how the economic problem are actually solved. It deals with ought to be or how the economic problems should be solved.
verification It can be verified with actual data. It cannot be verified with actual data.
purpose It aims to make real description of an economic activity. It aims to determine the ideals.
suggestive It is based upon facts, and thus, not suggestive. It is based upon individual opinion and therefore, it is suggestive in nature.
Value judgements It dose not give any value judgements, i.e. it is neutral between ends. It gives value jugements.
examples 1.       Prices in Indian economy are constantly rising.

2.       There are inequalities o income in our economy.

1.       India should take steps to control rising prices.

2.       Income inequalities should be reduced.

 

Microeconomics

Microeconomics is that part of economic theory, which studies the behavior of individual units of an economy. For example, individual income, individual output, price of a commodity, etc. its main tools are demand and supply.

 

Macroeconomics

Macroeconomics is that part of economic theory which studies the behavior of aggregates of the economy as a whole. For example, national income, aggregate output, aggregate consumption, etc. its main tools are aggregate demand and aggregate supply.

 

Difference between microeconomics and macroeconomics

 

Basis Microeconomics Macroeconomics
Meaning Microeconomics is that part of economic theory which studies the behavior of individual units of an economy. Macroeconomics is that part of economic theory which studies the behavior of aggregates of the economy as a whole.
Tool Demand and supply Aggregate demand and aggregate supply.
Basic objective It aims to determine price of a commodity or factors of production. It aims to determine income and employment level of the economy.
Degree of aggregation It involves limited degree of aggregation. For example, market demand is derived by aggregating individual demands of all buyers in the particular market. It involves the highest degree of aggregation. For example, aggregate demand is derived for the entire economy.
Basic assumptions It assumes all the macro variables to be constant, i.e., ity assumes that national income, consumption, savings, etc. are constant. It assumes that all the micro variables, like decisions of households and firms, prices of individual products, etc. are constant.
Other name It is also know as ‘ price theory’ It is also known as ‘income and employment theory’.
Examples Individual income, individual output. National income, national output.

 

 

 

 

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