Subject: - Economis

Grade: - 11
Teacher’s Name: - Mr. yared
Item: - Note(week two)

Feedback for the Practical work

1. Scarcity Vs. Shortage

Scarcity and shortage are not synonyms. Scarcity is the simple concept that,
while some resources may be limited, supply equals demand. Shortage, on the
other hand, occurs when markets are out of equilibrium and demand exceeds
supply. Just because a product is scarce, does not mean that there is unfilled
demand.
2. Microeconomics and macroeconomics
Microeconomics is the study of individual and business decisions regarding the
allocation of resources and prices of goods and services. ... Macroeconomics is the
study of the decisions of countries and governments. The term analyzes entire
industries and economics rather than individuals or specific companies.
3. Deductive method and inductive method

A deductive approach involves the learners being given a general rule, which is
then applied to specific language examples and honed through practice exercises.
An inductive approach involves the learners detecting, or noticing, patterns
and working out a 'rule' for themselves before they practice the language.

4. Free resources and economic resources

A resource or good that is not scarce, even when its price is zero, is called a free
resource or good. Economics, however, is mainly concerned with scarce resources
and goods. It is the presence of scarcity that motivates the study of how society
allocates resources and goods.
5. Positive vs Normative Economics.

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 Positive economics describes and explains various economic phenomena or the
"what is" scenario. Normative economics focuses on the value of economic
fairness, or what the economy "should be" or "ought to be.”... Most public policy is
based on a combination of both positive and normative economics.

Session 01

Economic Growth

Economic growth may be defined as an increase over time in per-capita output of

material goods. Economic growth or growth of resources can be achieved in different
ways, including technological advancement and the production of new types of goods.
Rapid economic growth is necessary for raising the living standard of any economy’s
population.

The Production Possibility Curve (PPC)

A production possibility curve (PPC) shows us all possible combinations of production

quantities of multiple products. The production quantities represent maximum possible
output and are based on full and efficient use of currently available resources and of the
current production technology. Let’s now consider a hypothetical production situation
and the PPC associated with it. Note that all production possibility curves assume full
and efficient use of: • current available resources required to produce the products • the
current technology used to produce the products For the sake of simplicity, let us
assume that, with the given resources, only two goods – guns and butter – can be
produced.

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Session 02

1.4 ECONOMIC SYSTEMS

Every modern society faces certain basic economic problems, such as: •What goods and
services should be produced and in what quantity? •How and where should production
be organized so as to produce the required goods and services most efficiently? •How
should the resulting output be distributed?

Basic Economic Questions

What to Produce?

This problem is also known as the problem of allocation of resources. It implies that
every economy must decide which goods and in what quantities are to be produced.

How to Produce?

This problem is also known as the problem of choice of technique. Once an economy has
reached a decision regarding the types of goods to be produced, and has determined their
respective quantities, the economy must decide how to produce them, choosing between
alternative methods or techniques of production.

Broadly speaking, the various techniques of production can be classified into two groups:
labour-intensive techniques and capital-intensive techniques. A labor-intensive
technique involves the use of more labour, relative to capital, per unit of output. A
capital-intensive technique involves the use of more capital, relative to labour, per unit of
output.

For Whom to Produce?

This problem is also known as the problem of distribution of national product. It relates
to how a material product is to be distributed among the members of a society. National
product is the sum total of all the goods and services produced in an economy during a
particular period.

Economic system may be defined as the legal and institutional framework within which
economic activities take place.

It can also be referred to as an organization for the purpose of satisfying the peoples’
needs by using available means of production. We shall now study different types of
economic systems, classified on the basis of ownership of resources. These are:

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Capitalistic Economy (Capitalism)

Main Features of Capitalistic Economy

o The Right to Private Property

o Freedom of Enterprise
o Freedom of Choice by Consumers
o Profit Motive
o Competition
o Price Mechanism
o Minor Role of Government
o Self-Interest
o Inequalities of Income
o Existence of negative externalities
Command Economy (Socialism)

Main Features of Command Economy

o Collective Ownership
o Clear Social and Economic Objectives
o Central Economic Planning
o Government strong role
o Maximum Social Welfare
o Relative Equality of Incomes
Mixed Economy

A mixed economy is an economy containing the characteristics of both capitalism and

socialism: a combination of private and public ownership of the means of production,
with some measures of control by the government.

Main Features of Mixed Economy

o Co-existence of Public and Private Sectors

o Economic Welfare
o Economic Planning
o Price Mechanism

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 o Economic Equality

Session 03

1.5 DECISION-MAKING UNITS AND CIRCULAR FLOWS OF ECONOMIC ACTIVITIES

The Decision-Making Units of an Economy

Household Sector

Households are the main owners of factors of production – land, labour, capital and
entrepreneurship. They sell the services of these factors (called factor service) to
producers and, in return, receive their income in the form of rent, wages, interest, etc.

Business Sector (Firms)

In economics, government is taken in the sense of ‘general government’ so as to exclude

government enterprises. General government gets its income largely from taxes imposed
on households and on the business sector in the form of direct and indirect taxes.
General government buys goods and services from the producers and factor services from
the households. It uses these commodities and factor services to provide free services,
such as police, education, medical facilities, sanitation facilities, judicial services, etc.,

The Rest of the World

Different sectors of an economy have transactions not only with each other, but also with
foreign countries – the rest of the world. A country exports goods and services to other
countries, and similarly it imports goods and services from other countries.

Definition:

A circular flow of income is a visual model of an economy that shows how a currency,
such as the Birr, flows through markets among decision-making units.

Circular Flows of Income and Expenditure

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A circular flow is a pictorial representation of the continuous flow of payments and
receipts for goods and services and factor services between different sectors of the
economy.

Flow Types

Real Flows

Real flows consist of the flows of

 Factor services from the owners of factor services to the producers and
 Goods and services from the producers to the buyers.

Session 04

Money (Financial) Flows

Money flows consist of the flows of

 money incomes from factor services such as rent, wages, interest, etc., and
 the money expenditures incurred for the purchase of goods and services

Models of Circular Flow

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For closed economies, we have two models of circular flow:

 Two-sector model, consisting of the flows between households and the business
sector (firms).
 Three-sector model, consisting of the flows among households, the business
sector, and the government sector
Two-Sector Models of Circular Flow

The two-sector model represents a private closed economy with only two sectors – the
household sector and the business sector (firms). It can further be divided into these two
types:

i Two-sector economy without savings

ii Two-sector economy with savings

I Two-Sector Economy without Savings

In this model our assumptions are:

 There are only two sectors in the economy: the household sector and business
firms.
 Household sectors are owners of factors of production and they supply factor
services to the firms.
 Firms produce goods and services and sell their entire output to households
 Households receive income for their factor services and spend the entire amount
on consumption.
 There is no savings in the economy.
 There is no government sector.
 It is a closed economy, and therefore there are no exports or imports.
The circular flows in a two-sector economy without savings are illustrated in

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 Practical Work

Write very short answers to the following:

1. Which economic system provides the right to private property?

2. What does a point lying inside a PPC indicate?
3. If an economy’s technology improves, in what direction does the PPC shift?
4. Can there be an economy without economic problems?
5. Who solves the central problems in a command economy?

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