NCERT CBSE microeconomics from Economics Terms and Definitions for Class 11 & 12, competitive exams like upsc, ca-cpt,icwa(cma) & cs
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Economics is the study of how people use their limited resources, which can be put to other uses, to satisfy their neverending needs and wants.
Wealth Related Definitions:
These definitions focus on wealth and have been criticized for turning economics into a “bread and butter” science.
According to Adam Smith: ‘Economics is a science which studies the
nature and causes of the wealth of nations’.
According to JB Say, ‘Economics is a science
which deals with wealth’.
Material Welfare Related Definitions:
These definitions shifted the emphasis from wealth to material goods accumulation as a means of achieving welfare.
As per Alfred Marshall,
‘Economics is a study of mankind in the ordinary business of life. It
examines that part of individual and social action which is most
closely connected with the attainment and with the material requisites
of well-being’.
Scarcity Related Definitions:
Economics was first recognised as a science of decision-making by these definitions.
Lionel Robbins, ‘Economics is the science which studies
human behaviour as a relationship between ends and scarce means
which have alternative uses’.
Although this definition provided economics with a scientific outlook, it did not address the issues of growth and resource distribution.
Growth Related Definitions:
The modern concept of economics is defined by these definitions.
According to Samuelson, ‘Economics is the study of how men and
society choose, with or without the use of money, to employ scarce
productive resources which could have alternative uses to produce
various commodities overtime and distribute them for consumption
now and in future amongst various people’
The following are the major economic schools of thought:
- Classical economics: Adam Smith established this school of thought in 1776, when he proposed the first modern economic theory. People who act in their own self-interest and produce goods and wealth, according to classical economics, benefit society.
This school of thought also advocated for the government to play a passive role in the market, not restricting or interfering with it. - Neo-classical economics: It progressed from the classical school of thought.It brought two new ideas to classical economics: utility and marginalism.
- Behavioural economics: It seeks to integrate the fundamental principles of neoclassical economics with human psychology. It appeared in the early twentieth century when neoclassical economics failed to explain the peculiarities of modern market economies.
- Monetary economics: It explores how money circulates within an economy and examines the government’s role as a monetary and financial market regulator.
- Environmental economics: This school of thought investigates the effects and costs of economic decisions on the external environment and suggests solutions to reduce or, if possible, eliminate these costs in order to promote social well-being.
The subject of economics can be divided into two major branches:
- Microeconomics:The term “micro” is derived from the Latin word “mikros,” which means “very small.” Thus, microeconomics is the study of the economic behaviour of individual economic units and individual economic variables, such as individual households, firms, and industries.
Microeconomics studies how resources are allocated among various individual firms and industries, how product prices are determined, and how output is distributed among those.
Thus, microeconomics is concerned with theories of product pricing, factor pricing, and economic welfare, with demand and supply serving as the primary tools. - Macroeconomics: The term ‘macro’ is derived from the Latin word ‘makros,’ which literally means ‘very large.’ Thus, macroeconomics is primarily concerned with aggregates or sum totals.
It investigates an economy as a whole rather than individual units. In a nutshell, it addresses broad economic aggregates or “big issues” such as high inflation, widening income disparities, general price level, national income, and so on.
The basic tools in this case are aggregate demand and aggregate supply.
A paradox is a contradictory statement that continues to baffle the reader. In economics, many paradoxes can be found.
A micro-macro paradox is defined as an act that is beneficial to an individual but harmful to the economy, or vice versa.
Savings, for example, are necessary for an individual, but they have a negative impact on a country’s economy because they lead to less demand and production.
The following are some points to consider about the nature of economics:
- Economics as a Science: Economics has the characteristics of science in that it is a systematic body of knowledge that explains the cause and effect relationship between various variables such as price, demand, supply, and so on.
However, economics cannot compete with physical sciences in terms of precision because human and social behaviour is complex and unpredictable. As a result, economics is an imprecise or social science.- Economics as a positive science: A positive science is one in which the analysis is limited to the cause and effect relationship. It simply states ‘what is’ rather than ‘what ought to be.’ It makes no value judgments about what is right or wrong. Positive economics is concerned with economic facts as they exist.
Positive economics, for example, addresses problems such as “what causes unemployment?” and “why are prices rising?” - Economics as a normative science: Economics, as a normative science, is concerned with the question of ‘what ought to be.’ It examines real economic events from moral and ethical viewpoints and determines whether or not certain economic events are desirable. It makes value judgments and prescribes methods to correct unfavourable events.
- Economics as a positive science: A positive science is one in which the analysis is limited to the cause and effect relationship. It simply states ‘what is’ rather than ‘what ought to be.’ It makes no value judgments about what is right or wrong. Positive economics is concerned with economic facts as they exist.
- Economics as an Art: JM Keynes defines art as “a system of rules for achieving a given end.” As a result, unlike science, which is theoretical, art is practical. With the above interpretation in mind, we can easily conclude that economics is an art.
For example, the theory of demand directs the consumer to maximise satisfaction with a given income, thereby assisting him in solving an economic problem. - Economics as a Science and an Art:In methodology, economics is a science, and in application, it is an art. ‘Economics is the oldest of the arts and the newest of the sciences—indeed, the queen of social sciences,’ says Paul A Samuelson.
The following are the primary methods of economic analysis:
- Deductive method:The logic in this method moves from general to specific. A general or universal truth is discovered using this method, and deductions are made from it. For example, we can infer from the basic law of demand that a consumer will buy more at lower prices. This method is also known as an abstract method or a priori method.
- Inductive method: The logic in this method continues to progress from particular to general. This method collects a large amount of data from actual experience with regard to an economic phenomenon, and on the basis of these observations, certain generalizations are made and conclusions are drawn.
The two approaches aren’t mutually exclusive. They are used in conjunction in any scientific study, i.e. they are complementary.
An economy is a system in which and through which people earn a living in order to satisfy their desires through the processes of production, exchange, and distribution. There are two types of economies:
On the Basis of Government Control:
- Capitalist economy:Also known as a market economy or a free economy, this economy allows the market to operate without government intervention.
Private entrepreneurs manage business activities, and the government’s role is limited to governance. In this economy, market forces of demand and supply determine price and output, with profit being the primary motivator. America and Germany, for example, are examples of capitalist economies. - Socialist economy: Under this economy, also known as a centrally planned or controlled economy, the government or a central authority of a country plans all important activities such as production, distribution, exchange, and so on. Prices are set by the same authority, and social welfare is the primary motivator. China, for example, is an example of a socialist economy.
- Mixed economy: This economy combines elements of both the capitalist and socialist economies. In this economy, the government and private entrepreneurs coexist.
Certain business sectors that are not of strategic importance are given autonomy and operate according to market forces of demand and supply. Strategic units, on the other hand, are managed and regulated by the government. Profit maximization and social welfare are both goals of this economy. India, for example, is an example of a mixed economy.
- Capitalist economy:Also known as a market economy or a free economy, this economy allows the market to operate without government intervention.
- On the Basis of Development:
- Underdeveloped economy: This economy is differentiated by a low Gross Domestic Product and per capita income.
The primary sector is the most visible and important sector, contributing the most to GDP and providing the most jobs. Infrastructure is underdeveloped, birth and death rates are high, superstition reigns supreme, and the standard of living is extremely low. Countries with such economies are referred to as “third world countries,” such as Zambia and Kenya. - Developing economy: (Emerging economy) This economy is distinguished by rising but still low GDP and per capita income. The primary sector, despite its prominence, is declining. Secondary and tertiary education are expanding. Death rates are decreasing as medical facilities improve, but the birth rate remains high.
Infrastructure is still in need of improvement. As an example, consider India. - Developed economy: This economy is distinguished by a high GDP and per capita income. Secondary and tertiary education are becoming increasingly important, with the secondary and tertiary sectors accounting for the majority of Gross Domestic Product. The primary sector is losing its clout.
Infrastructure is highly developed and advanced. Both birth and death rates are low. People are well educated, and the standard of living is high. Countries that exhibit characteristics of a developed economy, such as America and Germany, are referred to as “first world countries.” - Transitional economy: These economies are going to transition from one type of economy to another. As a result, a transitional economy exists when the socialist economy is replaced by a mixed or market economy.
- Underdeveloped economy: This economy is differentiated by a low Gross Domestic Product and per capita income.
Now that we’ve learned about the different types of economies, let’s try to understand the nature of the Indian economy.
India : An Underdeveloped Economy
In the case of India, we can say that it has a developing economy. This is due to the following characteristics:
(i) Agriculture is still the most common occupation in India. Even today, agriculture employs roughly 53% of the total workforce.
(ii) Poverty is extremely prevalent in India. Indians account for one-third of the world’s poor. In 2009-10, 29.8 percent of the population was poor, according to the Planning Commission.
(iii) The Indian population has increased at a rate of more than 2% per year over the years. The country is dealing with a population explosion.
India has a dependency ratio of 57.5 percent, which is much higher than that of other developing countries.
(iv) In 2011, India’s per capita income was $1420. It is low not only in comparison to developed countries such as the United States, the United Kingdom, and Germany, but also in developing countries such as Sri Lanka and Indonesia.
(v) Due to low incomes, the rate of savings is also low, resulting in a low rate of gross capital formation.
(vi) Production techniques, particularly in the agricultural sector, remain archaic.
(vii) Unemployment is also quite common in India. As per National Sample Survey Office’s (NSSO) 66th round of survey, 66 people out of 1000 in the labour force are unemployed.
(viii) The level of human well-being in India is also quite low. According to the most recent UNDP Report 2013, India ranked 136 out of 187 countries in terms of relative global ranking on the HDI index.
(ix) Income and wealth distribution in India is unbalanced.
According to the Human Development Report-2010, India’s Gini Index from 2000 to 2010 was 0.368.
Gini Index
It assesses how far the distribution of income/consumption among individuals within an economy deviates from a perfectly equal distribution. A Gini Index of 0 indicates perfect equality, while a Gini Index of 1 indicates perfect inequality.
n The observations made above lead to the conclusion that the Indian economy is underdeveloped. However, this is not entirely correct.
It is a combination of three fundamental indicators of human development: longevity, knowledge, and standard of living.
This is an important tool for determining ‘what to produce and in what quantities.
A country first assesses its resources, and then, with those resources in mind, develops a schedule known as a Production Possibility Schedule, which depicts all of the possible combinations of different goods that can be produced using the resources.
The Production Possibility Curve is a graphical representation of this schedule (PPC).
PPC is also known as:
(i) The Production Possibility Frontier (PPF),
(ii) the Production Possibility Boundary (PPB),
(iii) the Transformation Curve (TC),
(iv) the Transformation Boundary (TB), and
(v) the Transformation Frontier (TF)
A imaginary Production Possibility A schedule depicting the production of only two goods, namely a cold drink and cheesy pizza, with a country’s resources totaling 100 lakhs.
Over the years, the Indian economy has grown significantly.
It is rapidly progressing on the path of development.
The following facts demonstrate India’s characteristics as a developing country economy:
(i) In 2010, India’s national income was 45,72,000 crores (at constant prices). 2011-12. It increased by about 17 times over a six-decade period. The global recession also had no effect on the rate of growth ofNational Earnings
(ii) In 1950-51, the per capita income was $7,114. In 2011-12, it increased to 38,037.
Thus, over a period of about six decades, per capita income has increased. increased by more than fourfold It has roughly increased at a rate of 5.5 percent per year
(iii) The occupational structure in India has changed dramatically.The table below depicts the occupational structure in India.The above table shows that over a six-decade period, there has been a shift in labour force from primary to secondary and tertiary sectors, indicating economic development.
(iv) The decline in the agricultural sector’s share of the overall Gross Domestic Product is an important indicator that India is growing (GDP).The table below depicts how structural changes in India have occurred over the last six decades. The share of agricultural and allied activities in GDP has decreased, while the shares of the industrial and tertiary sectors have increased.
(v) The development of a strong industrial base in the country is another indicator that the economy is growing. During the planning period, a large number of industries were established in the country.
(vi) When social overhead capital expands, it is an indicator of a country’s economic growth. Transportation, irrigation and medical facilities, energy, education and health systems, and so on are examples of social overhead capital.
Since India’s independence, these facilities have greatly improved, as evidenced by the following points:
(a) Indian Railways currently has the world’s fourth-largest rail network.
(b) Diesel and electric locomotives have taken the place of steam engines.
(c) With a total length of 4.69 million kilometers, India’s road network has grown to become one of the world’s largest.
(d) The installed electricity generating capacity in 2011-12 was 2,36,000 MW, compared to 2300 MW in 1950-51.
(e) Irrigation infrastructure has grown. In 2008-09, there was 88.4 million hectares of irrigated land, up from 22.6 million hectares in 1950-51.
(f) The country has also made tremendous progress in the field of education. Literacy rates have increased from 18.33 percent in 1951 to 74% in 2011. (Economic Survey 2011-12).
The following characteristics are observed in India, indicating that it is a mixed economy:
(i)Agriculture, as well as the majority of the industrial and service sectors, are privately owned in India.
(ii) Demand and supply market forces play a free role in determining prices in various markets.
(iii) Over time, many large business houses have emerged and grown, such as Reliance, Infosys, Bajaj, and others.
(iv) Following independence, the government recognized the importance of providing infrastructure to support the growth of the private sector. As a result, the public sector grew on a grand scale.
Based on the characteristics listed above, we conclude that the Indian economy is a mixed economy.
Because a country’s resources are limited, but its needs are vast, these issues are common to all types of economies, whether socialist or mixed, developed or underdeveloped.
Three major economic issues are as follows:
(i) What to produce and in what quantities This is the first issue that every economy faces. With limited resources and multiple uses, economies must decide which goods to produce (consumption, capital, or war goods) and in what quantities in order to meet the needs of their citizens. The Production Possibility Curve (PPC) is an important tool for resolving this issue.
(ii) How to Produce This issue is about deciding on a manufacturing technique. There are two types of production methods: capital intensive (production with more machines/capital) and labour intensive (production with more labour).
Again, an economy must decide which method to use while keeping its resources in mind. As a result, in a country like ours, where the population is enormous, labor-intensive production techniques will be appropriate. On the other hand, for developed countries with abundant capital, the first technique would be preferable.
(iii) For whom to produce This problem is concerned with the distribution of income and production generated by an economy among factors of production and consumers. As a welfare agency, the government strives for equitable distribution to reduce income disparities.
This is a useful tool for determining ‘what to produce and in what quantities.’
A country first assesses its resources, and then, with those resources in mind, creates a schedule known as a Production Possibility Schedule, which depicts all of the possible combinations of different goods that can be produced using the resources.
A graphical representation of this schedule is known as the Production Possibility Curve (PPC).
PPC is also known as:
(i) Production Possibility Frontier (PPF)
(ii) Production Possibility Boundary (PPB)
(iii) Transformation Curve (TC)
(iv) Transformation Boundary (TB)
(v) Transformation Frontier (TF)
An imaginary Production Prospect A schedule depicting the production of only two goods, namely cold drinks, and cheesy pizza, using a country’s resources worth 100 lakhs.
Production Possibility Curve Assumptions
A PPC makes the following assumptions:
(i)Resources are provided and fixed.
(ii) A two-product economy is considered for convenience.
(iii) Resources are used to their full potential.
(iv) The technological level is constant.
(v) Only two factors of production, labour and capital, are used.
Characteristics or Properties of the Production Possibility Curve
The following are the key characteristics of PPC:
(i) It has a negative slope, i.e. it is a downward sloping curve from left to right due to an inverse relationship between the production of two goods, because increasing the production of one requires decreasing the production of the other.
(ii) It is concave to the origin due to an increase in the Marginal Opportunity Cost.
We must forego increasing the number of units of one product in order to produce more units of another. This occurs because production factors are not perfect substitutes for one another.
The salient features of PPC are:
- It has a negative slope, which means it slopes downward from left to right due to an inverse relationship between the production of two goods, because increasing one requires decreasing the production of the other.
- Because of an increase in the Marginal Opportunity Cost, it is concave to the origin. We must forego increasing the quantity of one product in order to increase the quantity of another. This is due to the fact that production factors are not perfect substitutes for one another.
The shift in Production Possibility Curve
It is possible only in two conditions:
- Change in technology for both the goods
- Change in resources
Rotation in Production Possibility Curve
When technological advances are made solely for the production of a single good.
Economy can run on PPC or within PPC, which are known as ‘attainable combinations.’
Outside of PPC, the economy cannot function, which is referred to as ‘unattainable combinations.’