RAINBOW PUBLIC SCHOOL, RUDRAPUR

CLASS :- XI COMMERCE STUDY MATERIAL SUBJECT :- ECONOMICS

Meaning and Subject-matter of Microeconomics

The word ‘Micro’ is derived from the Greek word mikros meaning small. Microeconomics
deals with small segments of the society. Microeconomics is defined as the study of behavior
of individual decision-making units, such as consumers, resource owners and firms. It is
also known as Price Theory since its major subject-matter deals with the determination of
price of commodities and factors. Microeconomics has both theoretical and practical
importance. It solves the three central problems of an economy, i.e., what, how and for
whom to produce.

Meaning and Subject-matter of Macroeconomics

The word ‘Macro’ is derived from the Greek word makros meaning large. Macroeconomics
Deals with aggregative economics. Macroeconomics is defined as the study of overall
Economic phenomena, such as problem of full employment, GNP, savings, investment,
Aggregate consumption, aggregate investment, economic growth, etc. It is also known
As Theory of Income and Employment since its major subject-matter deals with the
Determination of income and employment. The study of macroeconomics is used to solve
many problems of an economy like, monetary Problems, economic fluctuations, general
unemployment, inflation, disequilibrium in The balance of payment position, etc.

Difference between Microeconomics and Macroeconomics

Basis Microeconomics Macroeconomics
1. Definition 1. Microeconomics is that 1. Macroeconomics is that part
part of economic theory of economic theory which
which studies the behavior studies the behavior of
of individual units of an aggregates of the economy as
economy. a whole.
2. Tools of Demand and Supply. 2. Aggregate Demand and
Analysis Aggregate Supply.
3. Main 3. It aims to determine price 3. It aims to determine income
Objective of a commodity or factors and employment level of the
of production. economy.

4. Basic 4. It assumes all the macro 4. It assumes that all the micro
Assumptions variables to be constant, variables, like decisions of
i.e., it assumes that national households and firms, prices
income, consumption, of individual products, etc. are
saving, etc. are constant constant
5. Other Name 5. It is also know as ‘Price 5. It is also known as ‘Income
Theory’. and Employment Theory’.
Economics as a Positive Science
Positive economics deals with what is or how an economics problem facing a society is actually
solved. Robbins held that economics was purely a positive science. According to him,
economics should be neutral or silent between ends, i.e., there should be no desire to learn
about ethics of economic decisions. In other words, in positive economics we study human
decisions as facts which can be verified with actual data. Examples of positive economics are:
(a) India is an overpopulated country.
(b) A fall in the price of a good leads to a rise in its quantity demanded.
(c) Prices have been rising in India.
(d ) Minimum Wage Law increases unemployment.
(e) A profit maximising firm will set its price where marginal revenue is equal to marginal cost.
(f ) Air is a mixture of gases.
(g ) Increase in real per capita income increases the standard of living of people.

Economics as a Normative Science

Normative economics deals with what ought to be or how an economic problem should be
solved. Alfred Marshall and Pigou have considered the normative aspect of economics. They
maintain that economics is a normative science as it prescribes that course of action which is
desirable and necessary to achieve social goals.
In other words, in normative economics there is no reservation on passing value judgment on
moral rightness or wrongness of things. Normative economics gives prescriptive statements.
Examples of normative economics are:
(a) Government should guarantee a minimum wage for every worker.
(b) Government should stop Minimum Support Price to the farmers.
(c) India should not take loans from foreign countries.
(d ) India should spend more money on defiance.

Difference between Positive and Normative Economics

Positive Economics Normative Economics
1. It expresses what is. 1. It expresses what should be.
2. It is based on cause and effect of facts. 2. It is based on ethics.
3. It deals with actual or realistic situation. 3. It deals with idealistic situation.
4. It can be verified with actual data. 4. It cannot be verified with actual data.
5. In this value judgments are not given. It is 5. In this value judgments are given.
neutral between ends. 6. It deals with how an economic problem
6. It deals with how an economic problem is \Should be solved.
solved. 7. Economists of normative school are
7. Economists of positive school are Adam Marshall, Pigou, Hicks, Kaldor Scitovsky.
Smith and his followers. 8. Compare these examples:
8. Observe these examples: (a) What is a fair price rise?
(a) What determines the price rise? (b) Unemployment is worse than inflation.
(b) Government has adopted policies to (c) The rate of inflation should not be more
reduce unemployment. than 6 per cent.
(c) The rate of inflation in India is 6per cent. (d) Ethics.
(d) Chemistry.
Economy: Meaning
An economy is a system in which people earn their living by performing different economic
activities like production, consumption and investment. In other words, an economy refers to
the whole collection of production units in an area (geographical area or political boundary) of
a country by which people get their living.
An economy is classified into market economy and planned economy. These economies can be
subdivided into closed economy and open economy.

Meaning of Economic Problems

Economic problem is the problem of choice. The problem of choice has to be faced by every
economy of the world, whether developed or developing. Human beings have wants which are
unlimited. When these wants get satisfied, new wants crop up. Human wants multiply at a fast
rate. The economic resources to satisfy these unlimited wants are limited.
In other words, resources or factors of production (they are defined as goods and services
needed to carry out production i.e., land, labour, capital and entrepreneurship) are scarce.
They are available in limited quantities in relation to the demand. Resources are not only
scarce but they also have alternative uses. All this necessitates a choice between which goods
and services to produce first.

Causes of Economic Problems

The three main causes of economic problems are:

1. Human Wants are Unlimited. Human beings have wants which are unlimited. Human want
to consume more of better goods and services has always been increasing. For example, the
housing need has risen from a small house to a luxury house, the need for means of
transportation has gone up from scooters to cars, etc. Human wants are endless. They keep on
increasing with rise in people's ability to satisfy them. They are attributed to (i) people’s desire
to raise their standard of living, comforts and efficiency; (ii) human tendency to accumulate
things beyond their present need, (iii) multiplicative nature of some wants e.g. buying a car
creates want for many other things - petrol, driver, car parking place, safety locks, spare parts,
insurance, etc. (iv) basic needs for food, water and clothing, (v) influence of advertisements in
modern times create new kinds of wants and demonstration effect. Due to these reasons
human wants continue to increase endlessly.

2. Resources are Limited. Scarcity of resources is the root cause of all economic problems. All
resources that are available to the people at any point of time for satisfying their wants are
scarce and limited. Conceptually, anything which is available and can be used to satisfy human
wants and desire is a resource. In economics, however, resources that are available to
individuals, households, firms and society at any point of time are traditionally natural
resources (land). Human resources (labour), capital resources (like machine, building, etc.)
and entrepreneurship are scarce. Resource scarcity is a relative term. It implies that resources
are scarce in relation to the demand for resources. The scarcity of resources is the mother of all
economic problems. It forces people to make choices.

3. Resources have Alternative Uses. Resources are not only scarce in supply but they have
alternative uses. Same resources cannot be used for more than one purpose at a time.
Economics as a social science analyses how people (individuals and the whole society or
economy) make their choices between economic goals they want to achieve, between goods
and services they want to produce and between alternative uses of their resources which will
maximize their gains.

Economic Problems of an Economy

Economic problems are reflected in the form of Central or Basic Problems of
an economy. Any economy—whether market, centrally planned, or mixed—has
to face these problems. According to Samuelson, there are three fundamental
and interdependent problems in an economic organization—what, how and for
whom—which are grouped under allocation of resources. Allocation of
resources means how much of each resource is devoted to the production of
goods and services.

1. Allocation of Resources
(a) What Goods to Produce and How Much to Produce?
Due to limited resources, every economy has to decide what goods to produce
and in what quantities. If the means were unlimited, then it would lead to a
stage of salvation. But the means are limited and the economy must decide the
efficient allocation of scarce resources so that both output and output-mix are
optimum. An economy has to make a choice of the wants which are
important for the economy as a whole. For example, if the economy
decides to produce more cloth, it is bound to reduce the production of food.
The reason is that resources used to produce food and cloth are limited and
given. An economy cannot produce more of both food and cloth. Thus, an
economy has to decide what goods it would produce on the basis of availability
of technology, cost of production, cost of supplying and demand for the
commodity.
(b) How to Produce?
It is the question of choice of technique of production. Since resources are
scarce, an inefficient
technique of production, which would lead to wastage and high cost, cannot be
applied. A technique of production which would maximize output or
minimize cost should be used. We generally consider two types of
techniques of production: labour-intensive and capital-intensive techniques. In
labour-intensive technique, more labour and less capital is used. In capital-
intensive technique, more capital and less labour is used.
For example, it is always technically possible to produce a given amount of
wheat or rice with more of labour and less of capital (i.e. with labour intensive
technology) or with more of capital and less of labour (i.e. with capital intensive
technology). The same is true for most commodities. In the case of some
commodities however, choices are limited. For example, production of woollen
carpets and other items of handicrafts is by nature labour intensive, while
production of cars, TV sets, computers, aircrafts, etc., is capital intensive. In
most commodities, however, alternative technology may be available.
Alternative techniques of production involve varying costs. Therefore, the
problem of choice of technology arises. The guiding principle of this problem is
to adopt such technique of production which has least cost to produce per unit
of the commodity. At macro level the most efficient technique is the one which
uses least quantity of scarce resources. Hence, producers must always produce
efficiently by using the most efficient technology.
Thus, every economy has to choose the most efficient technique of
producing a commodity.
(c) For Whom to Produce?
This is the question of how to distribute the product among the various sections
of the society. National product is the total output generated by the firms.
Goods and services are produced in the economy for those who have the ability
(i.e. capacity) to buy them. Ability or capacity or purchasing power of people
depends on their income. More income means more capacity to buy. The total
output ultimately flows to the households in the form of income, i.e., their
wages, rent, profits or interest. There are millions of people in a society. Each
one cannot get sufficient income to satisfy all his wants. This raises the problem
of distribution of national product among different households. Who should get
how much is thus the problem? Thus, guiding principle of this problem is output
of the economy be distributed among different sections of the society in such a
way that all of them get a minimum level of consumption.