levapter 1 > Introduction + For example, we all kn oblem. In addition to it probl railway engines, airplar ommnod 4.3 ECONOMIC PROBLEM As we know, human wants are unlimited, but the me fil our wants caninot be fulfilled. In order to maximise satisfaction, ¢ satisfy them are imited. Therefore thie, as to which goods should be consumed and in what qi tesicnly praia of cloice re volving? satisfaction of watimiited wants ont of Reasons for Economic Problem The 3main reasons for existence of economic problems are 4) Scarcity of Resources: Resources (land, labour, capita, etc.) are limited in relation to thei demand and economy cannot produce all what people want: Itis the basic reason, for existence of economic problems in all economies. Scarcity is universal and ap to all individuals, organisations and countries, There would have been no problem, if oplies resources were not scarce Unlimited Human Wants: Human wants are never ending, 1, they can never be fully satisfied. Assoan as one want is satisfied, another new want emerges. Wants of the people ‘reunlimited and keep on multiplying and cannot be satisfied due to limited res Human wants also differ in priorities, ‘2. all wants are not of equal intensity. For every individual, some wants are more important and urgent as compared to others. Due to this reason, people allocate their resources in order of preference to satisfy some of their wants, ifall human wants ad been of equal importance, then ita ‘ome impossible to male choices. possible (Gi) Alternate Uses: Resources are not only scarce, but they can also bi an also be put to y Trmakes choice among resources more important. For example, in vehicles, but also for running machines, generators, z arious uses petrol is used not only etc. Asa rest Asa result, economy has to rake choice between the alternative uses of the given resoun Resources Vs Human Wants Features of Resources: (W They ate scarce, ie. their s : i. their supply ili Le hey have Sa” n relation to demand tures of Hyman wanes and, {0 They eS : th (i) They aiferinpricrge, "EB ally sting- Introdluctory Microeconomic, 1.4 MEANING OF ECONOMICS Economics is a social science which studies the way a society chooses to use its timiteg resources, which have alternate uses, to produce goods and services and to distribute they among different groups of peaple Apa eer The term ‘Science’ stands for any systematic and organised body of knowledge. Economies also asclence a it's systematic and organised study of economic behaviour of human beings * However itisnot an exact science lke Physi and Chemistry as it deals with the study of human bbehaviour. Therefore, its known as social science. What is Economics all about? Economi that the resources are u: 1.5 POSITIVE ECONOMICS AND NORMATIVE ECONOMICS Positive or Scien Positive econo studies the factsOF 1if@, i.c., it deals with “things as they’are” Positive Economics deals with what are the economic problems and how are they actually solved. For example, India is an overpopulated country or prices are constantly rising, Fositive Economics deals with economic issues related to past, present or future, ke Positive Economes descr lunder the given state of circumstances. These statements, do not pass any value judgements. Positive Economics is neutral between ends Pesiive economics remain strictly neutral with respect to ultimate ends. #66 RHO) (Wale juagemeats: For example, a positive economic theory might describe that manufacturing and sale of cigarettesis injurious to health, butitdoes not provide any instruction orjudgemest on what policy ought to be followed to avoid cigarettes in an economy. According t0 Robbins, economics ls notconcemed with moral or ethical questions and economist sould analyse the things as they are and has no right to glve judgement De not confuse statements of Positive Economics as statements of truth Positive economics statements should not be confused as statements of truth, They rv true or false: For example, If Paras says that India is larger than China in terms of land’ ; While Utcarsh says that China is larger than India in terms of land area, then both are pos™* | statements. However, Paras is wrong and Utkarsh is right Thepointto be notedisthatpositivestatements cap be vere asirue orale bycomparing ithaca! wie Normative Economics (or Science) Normative economics tells u Normative Economics deals with 1 not De! to be or For example, India should 9°" overpopulated country or prices should not rise.beavaided. It gives decisions regarding value judgement Positive Science OR Positive Economics NormativeScionce OR Normative Economics (Deals with what ae the economic problems {beats wth what ought tobe or how th one how are they actualy solved) economic howd be solved) What was? at should happer What wil be? ‘What should heve happene Difference between Positive Economics and Normative Economics _—~ Basis Positive Economics Normative Economics Meaning itdealswithwhat isorhowthe economic Itdeals with what ought to be or how thi problems are actually solved, ‘economic problems should be solved. Verification Jean be verified with actual data, Iteannot be verfied with actual data, Purpose it aims to make real description of an Itaims to determine the ideals economic activity, Suggestive itis based suggestive. ‘on facts, and thus, not| It is based upon individual opinion and therefore, itis suggestive in natu Vohie does not give any value judgements, ie. It gives value judgement ludgements itis neutral between ends. Examples 1. Pricesinindian economy are constantly 1, India should take stepsto control rising prices 2. Income inequalities should bereduced, Hsing, 2, There are inequalities of income in our economy, 1,6 MICROECONOMICS AND MACROECONOMICS The subject matter of economics has beon studied under two proad 1. Microeconomics (Price Theory) xan bes 2. Macroeconomics (Income Theory) These two concepts have become of gen We Of general use in eal g n economics. Let us discuss these ce Microeconomics : (AGAHSMIEFis considered to be has been derived from: isk wor eCofthe eta ft Particularconstimer. fem op ‘every importants it of an economy.Introd 12 OY Micron, LC aapter 3 that part of economte tery, which states the Dehaolonr of it jecatonty. For example, Individual income, individual output, price of ee te tS ma Demand and Supply Macroeconomics P which Microscot The ter ic acroeconamics di It is cone emed with study, Problems of t ote jes las whole. For example, National income, aggregate output atecorsumptin, | 4, eecon are Aggregate Demand and Aggregate Supply, oF Sromics, the letter Astin FORGOT) ic. it studies the econome ‘ iour of individuals . — Micro-Mac tvs discuss the detailed differences be tween the two branches Basie Microeconomics Meaning Microeconomics that part of economic theory which studies the behaviour of individual units of an economy, Tools Demand and Supply, Basic Objective tals to determine pice ofacommedliy ortacters of preduction, Degree of Aggregation | it involves limited degree of sguregation For example. market demand is derived byagaregating individual demands of all ‘buyers inthe particular market. assumes all the macro variables to be constant, ie. it assumes that naticmal income, consumption, savings, ete are constant, Basic Assumptions, Ghatane | Weeeononi baka Kem aa econo s ‘Theory’as itis primarily concerned with | and loyment Theary asitis I determination of prices of commas | concen conan neorntaton aie | —_]axienstomietton nee maaan eee = + __ National income, Nation! out = we Economics is a single subject and the analysis of an economy caymoe be spit it! a ight compartments. It means, microeconomics and macroccononsec are ot apes wi (eter TAY Stands for“A garegat ic. it stuctios the economy = sof economies ifference between Microsconomics and Macroeconomics ‘Macroeconomics ae = wel rest ‘Macroeconomicsisthat pat ofecoromc wl sufier theory which studies the behaviour af agategates of the economy aca nhale Which is mo ‘Aggregate Demand & Aggregate Supp Both, mic: It aims to determine income and an employment level of the ecanemy dw af It Involves the highest degree aggregation, For example, aggreo® demand is derived for tho enteacono™) ovaries the "assumes thatallthe micro vane decisions of households and firms ore Of individual products. ete aWwW perzcern the two. It means, bath microeconomics and Microeconomics depends on Macroeconomics 1. Law of demand existence from the analysis of the behaviour of a group (aggregate) of peopie Price of a commodity is influenced by the general price level j g in the econo Macroeconomics depends on Microeconomics {. National income of a country is nothing but the sum total of incomes of individual unit of the countr 2. Aggregate demand depends on dem: dof individual households of th Micro-Macro Paradoxes there a seemingly absued or contradictory statement, though 1e paradoxes seen in Micro and Macro activities. It means, an act which an individual, may prove to be harmful for the cconomy as a whol ‘Example: fan individual saves, his family will be benefitted, but ifthe whole economy starts saving, it will result in contraction of demand, output, employment and income. As a result, the whole: wil suter Which is more Important — Microeconomics or Macroeconomics? Both, microeconomics and macroeconomics have a place of their own and none of them can b dispensed with. Microeconomics conce rates on the working of the individual macroeconomics studies the economy in general. While the former is of the ay omponents and oncerned w structure yregates, the latter is concerned with the a tructures 1es. So, both the ap regates themsely tary to each other. The superiority of ane approach ax are supple aches the ol cannot be Need for a Separate Theory of Mactoeconomics airned Microeconomics failed to study the aggregates ofthe econom need for a separate theory, which could explain the eee tps to understand the working of an economic system Sa rest Working of the econon, It, there was lain the wy eaten 5 well as to Macroei economics 10S Macroecono mj—reM ess Ramen hoses aa 31669 PP smoveag tas a temas aime ‘sxopmued nun 0} soy nexedas €40} pooue SorMOUOSBODTY Spiwouoss0:2ey Jo Aroays axesedas © 10) paayy Auwouode sjoymaya ting iu) < baandeya(Table 1.2). ¥ represented (Fig, 1.1), itis called ible combinati tvaduction Possibility Frontier (PPF) ref sto graphical repre sentation of possibl d technology. te if two goods that ean be produced with given resources and for the sak ‘goods have been taken jt applied equally /PPF \s also known by the folowing names: «= Production Possibility Curve + Transformation Boundary ity Boundary + Transformation Frontier = Tanslormation Curve ‘Assumptions for PPF Production possiblity frontier is based on the following assumptions: 1. ‘The amount of resources in an economy is fixed, but these resources can be transfe from one use to another 2. With the help of given resources, only two goods can be produced 3. The resources are fully and efficiently utilised 4. Resources are not equally efficient in production of all produc! 50, when resources are transferred from production of one good to another, the productivity de 5. The level of technology is assumed to be constant decreases; The concept of PPF ean be better understood with thehelp of foll schedule and diagram wing imaginary (hy othetical) Table 1.1: Produ: le 1.4: Production Possibility Schedule | Bate {tunis Moc MAT = Guns Butter 16:18 26:18 36:18 46:15 5615 feIntroduction chapter > ‘characteristics or Properties of PF creases because it is assumed tl srces are transferre gunsand butter nit of butter. the e that PPF does not show the point at whi ble possibilities, which an economy can produce. » exact point of operation depends on low well the resources of the economy are used. operate. It only shows the maximum avail 1. Economy will operate on PPF 0 2. Economy wi operate at 3, Economy «a rate productive capacity It means: + Economy can either operate on PPF or inside PPF, known as ‘Atta e Combinations’ * But, economy cannot operate outside PPF, known as ‘Unattainable Combinations’ Attainable and Unattainable Combinations Let us clear the concept of ‘Attainable % and Unattainable Combinations’ with the help of Fig. 1.2: 24 is Attainable Combinations: It refers to tat “4 ~ Any point on PPF (Points A to) those combinations at which economy — 5 2 OF any pointinside PPC Point E) are attainable combinations, * Any point outsia = 1e PPF (point F)is ‘an unattainable combination, : an operate. There can be two attainable options; 1. (Optimum utilisation of resources:) “the resources are used in the best possible manner, then economy will Operate at any point (like, A, B, Cor D)on PPE. Guns (in units)IRI PPE acct MRT } of su in Fig. 14, Itmyst be noted that both these ‘Situations (i. Pf — PF being a. td est abaysherenes So tree conned)cunert > pr and Opportunity Cost 1d. The lost produ: Change in PPF PPP i