AL YASMIN INTERNATIONAL SCHOOL

CHAPTER: 1
INTRODUCTION
 ECONOMY
It is a system which provides people, the means to work
A and earn a living.
Closed Economy-When it has no economic relations with
Y other countries.
I Open Economy-When it has economic relations with other
countries
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 Parts of
Economy ?
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Types of Economy
Market Economic System
A market economic system or capitalist economy involves very less
government interference and incorporates the principles of the free
market. There is a scant exercise of control over resources. Market forces
regulate demand and supply.
However, there does exist some degree of government intervention in
the form of regulations against monopoly, and in favour of fair trade.
Centrally Planned Economic System
Command or Socialist economic system has a dominant centralised
authority in the form of government. The economy is such a country that
is controlled by the government. It is the sole decision-making authority
for determining production and allocation.
Ideally, the command system takes into consideration the best interest of
its popula
Main Differences between a Capitalist and aSocialist
Capitalist Economy Socialist Economy
Economy
Definition
A Capitalist Economy is a system where private entities A Socialist Economy is an economic system where the
control the factors of production like labour, natural factors of production like labour, natural resources or
resources or capital goods. capital goods are under the control of the government.
Determination of Price
In a Capitalist Economy, the demand and supply forces In a Socialist Economy, the price of goods and services is
influence the price of goods and services. under the government’s supervision and control.
Motive of Production
The main motive of the production of goods and services in The main motive of producing goods and services in a
a Capitalist Economy is to earn profit. Socialist Economy is the welfare of the general public.
Role of Government
There is minimal or no role of the government in a In a Socialist Economy, the government has complete
Capitalist Economy when it comes to the production and control over the production and distribution of goods and
distribution of goods and services. services.
Role of Private Sector
The private sector completely dominates the production of The private sector has no role in the production of goods
goods and services and the distribution within a Capitalist and services and the distribution within a Socialist
Economy. Economy.
Competition
Competition between multiple businesses is an integral In a Socialist Economy, there is no competitor to the
part of a Capitalist Economy. government.
Distribution of Income
The distribution of income is unequal in a Capitalist The distribution of income is more or less equal in a
Economy. Socialist Economy.
 VITAL FUNCTIONS OF AN ECONOMY

A INVESTMEN
CONSUMPTION
Y T OR
CAPITAL
I FORMATION
S DISTRIBUTION
PRODUCTION

ECONOMY
 WHY STUDY ECONOMICS?
The main reason for study of economics can be simplified to a
single word - SCARCITY
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 SCARCITY
Scarcity refers to the limitation of supply in relation to demand
for a commodity.
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Economics is concerned with selection
Y of resources under conditions of scarcity
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 RESOURCES
FACTORS OF PRODUCTION - FOP
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 ECONOMIZING OF RESOURCES
Refers to making optimum use of the available resources.

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 ECONOMIC PROBLEM
It is a problem of CHOICE involving satisfaction of unlimited
wants out of limited resources having alternative uses.
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 REASONS FOR ECONOMIC PROBLEM
1. SCARCITY OF RESOURCES: Resources are limited in
relation to their demand and economy cannot produce all what
A people want.
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 REASONS FOR ECONOMIC PROBLEM
2. UNLIMITED HUMAN WANTS: Human wants are
never ending, i.e. they can never be fully satisfied. As soon as
A one want is satisfied, another new want emerges.

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 REASONS FOR ECONOMIC PROBLEM
3. ALTERNATIVE USES: Resources are not only scarce,
A but they can also be put to various uses. It makes choice
among resources more important.
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 ECONOMICS
Economics is a social science which studies the way a society
A chooses to use its limited resources, which have alternative
uses, to produce goods and services and to distribute them
Y among different groups of people.
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 MICRO AND MACRO ECONOMICS

A MICRO MACRO
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 Basis Microeconomics Macroeconomics
Meaning Microeconomics deals with the Macroeconomics is the study of
behaviour of individual the economy as a whole.
economic units.
A Tools Demand and Supply Aggregate Demand and Aggregate
Supply
Y Objective To determinethe To determinethe

I price
commodity
of a
or
income and
employment level of the economy.
S factors of
production.
Oth It is also known as ‘Price It is also known as ‘Income and
Er theory’. Employment Theory’
Nam
e
Example Individual income,individual National Income, national output.
output.
 POSITIVE AND NORMATIVE
ECONOMICS.
A Positive economics is the stream of economics that has an objective
approach, relied on facts. It concentrates on the description,
Y quantification, and clarification of economic developments, prospects,
I and allied matters. It tries to establish a cause-and-effect relationship.
For Eg. A rise in price of commodity leads to fall in its quantity
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Normative economics deals with prospective or theoretical situations.
This division of economics has a more subjective approach. It focuses on
the ideological, perspective-based, opinion-oriented statements towards
economic activities. For Eg. A rise in prices will hit the poor hard
 DISTINGUISH BETWEEN
Differences Positive Normative
A Meaning
Economics
It deals with the things“ as
Economics
It deals with the things “as
Y they are” they should be”

I Basis Based upon real facts Based

opinions
upon individual

S Verification It can be It cannot be verified

verified with
actual data
Nature Pure and neutral between Suggestive & optimum in
ends nature
Purpose It aims to It determine
make real aims to
 CENTRAL PROBLEMS OF AN ECONOMY
Production, consumption and distribution of goods and services
are the basic economic activities of life. In the course of these
A activities, every society has to face scarcity of resources. Because
of this scarcity, every society has to decide how to allocate the
Y scarce resources. It leads to following Central Problems of an
Economy.
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 WHAT TO PRODUCE
This problem involves selection of goods and services to
be produced and the quantity to be produced of each selected
commodity
A Guiding Principle: Allocate the resources in such a manner which
Y gives maximum aggregate satisfaction.
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 HOW TO PRODUCE
This problems refers to selection of technique to be
used for production of goods and services . Generally,
techniques are classified as LIT & CIT.
A Guiding Principle: Combine FOP in such a manner so that
Y maximum output is produced at minimum cost, using least
possible scarce resources.
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 FOR WHOM TO PRODUCE
This problem refers to selection of category of people
who will ultimately consume the goods, i.e. Whether to produce
A goods for more poor and less rich or more rich and less poor.
Y Guiding Principle: Ensure that urgent wants of each productive
factor are fulfilled to the maximum possible event.
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 OPPORTUNITY COST
It is the cost of next best alternative foregone.
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 PRODUCTION POSSIBILITY FRONTIER
It refers to a graphical representation of possible combination of
two goods that can be produced with given resources and
A technology .
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1. Resources are fixed
I 2. They can be transferred
3.Only two goods can be produced.
S 4. Resources are fully and efficiently utiliised
5. Resources are not equally efficient in production of
all products
6. Technology remains constant
 FIGURE

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 SCHEDULE
Production Guns Butter MRT
A Possibilitie
s [OR
Y Combination]
I A 21 0 -
B 20 1 1:1
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C 18 2 2:1
D 15 3 3:1
E 11 4 4:1
F 6 5 5:1
G 0 6 6:1
 Explanation
When points A, B, C, D, E, F, & G are joined we get a
A
curve AG, known as ‘Production Possibility Frontier.’
Y AG curve shows the maximum limit of production
I of guns and butter.
S Every point on PPC [like A, B, C, D, E, F& G] in
figure indicates full employment and efficient use
of resources.
 MARGINAL OPPORTUNITY COST
MOC refers to the number of units of a commodity
A sacrificed to gain one additional unit of another
Y commodity. In case of PPC, MOC is always
I increasing.
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Reason:-
Increasing MOC operates because productivity and
efficiency of factors of production decrease as they
are shifted from one use to another.
 MARGINAL RATE OF TRANSFORMATION
MRT is the ratio of number of units of a
A commodity sacrificed to produce an additional
Y unit of another commodity.
I MRT = Units Sacrificed
S Units Gained
MRT increased because it is assumed that no
resources is equally efficient in production of
all goods.
 CHARACTERISTICS OF PPF
1. PPF SLOPES DOWNWARDS: More of one goods
can be produced by only by taking resources away from
A the production of another good. The PPC slopes from left
Y to right.
2. PPF is CONCAVE SHAPE: Because of increasing
I MRT. MRT increases because it is assumed that no
S resource is equally efficient in production of all goods.
CAN PPC BE A STRAIGHT LINE A PPC curve can be a straight line only if
the marginal rate of transformation (MRT) is constant throughout the
curve. A MRT can remain constant only if both the commodities are
equally constant and the marginal utility derived from their production
is also constant.

CAN PPC BE CONVEX TO THE ORIGIN PPC is convex shaped because of

decreasing marginal rate of transformation. It implies that less and less
units of commodity sacrificed to gain an additional unit of another
commodity
 ATTAINABLE AND UNATTAINABLE COMBINATIONS

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 CHANGE IN PPC
1. SHIFT IN PPC: When there is change
in productive capacity with respect of both the goods.
A 2. ROTATION OF PPC: When there is change in productive
Y capacity with respect to only one good.
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WHAT CAUSES SHIFT IN PPC?

Shifts in the production possibilities curve are caused by things that

change the output of an economy, including advances in technology,
changes in resources, more education or training (that's what we call
human capital) and changes in the labour force. Shift can be either
towards rightward or towards leftward, when there is a change in
resources or technology with respect to both goods.