ChapterI Introduction to Economics 1

CHAPTER-I

INTRODUCTION TO ECONOMICS Introduction: The term “Economics” is originally derived from the ancient Greek Word “Oiks” which means household and “Nemein” which means management. Thus, it refers to managing of a household using the limited funds. The Greeks then applied this term to the city-state, which they called polis. Many experts have defined economics in a number of ways; however, all the definitions given by experts are classified into four categories.

A. B. C. D.

Adam Smith’s wealth definition Marshall’s welfare definition Lionel Robbins’s scarcity definition Samuelson’s growth-oriented definition A. Wealth Definition:

The classical economists like Adam Smith, J.S. Mill, Ricardo, Senior and others were the first to give a systematic definition of economics. Among them the prominent definition was given by Adam Smith, father of political economy in the year 1776 in his famous book “An enquiry into the Nature and Causes of Wealth of Nations” defined economics as “The science of wealth” This means that economics studies about wealth. It examines how people earn wealth and spend wealth. Senior opined that, the subject treated by political economy is not happiness but wealth.” According to J.S. Mill, “Economics or political economy is the practical science of production and distribution of wealth in the economy”. According to J.B, Say, “Political Economy makes known the nature of wealth”

Characteristics and implications: 1. Study of wealth: According to wealth definition, economics is the study of wealth only. It is the practical science of the production and distribution of wealth. Thus, the subject matter of economics is production and expansion of wealth. 2. Concept of wealth: Adam smith, J.B. say and others defined wealth as material commodities such as land and buildings, gold, silver and whole of production of goods that can be consumed. 3. Causes of wealth: Economics is considered as study of causes of wealth accumulation which brings economic development. Wealth can be created by increasing the production of material commodities. 4. Based on Economic liberty and free trade: Wealth definition is based on laissez faire in trade and industry; it implies that there is no state intervention in trade and commerce in the country. 5. Highlights the economic man: General Economics

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Wealth definition view human beings as the economic man who is always aware of his self-interest. Self interest leads to material gains. Economic man gives primary importance to wealth and secondary importance to other motives. 6. Treats Economics as a science: Wealth definition considered economics a science of creation and expansion of wealth. Merits: 1. Highlights creation and expansion of wealth: Wealth definition highlights the most basic issue of creation, accumulation and expansion of wealth encountered by every economy. 2.Wealth as solution to economic problems: Problems of economy such as poverty, unemployment etc can be solved only with the help of money or wealth. So, wealth is the basis for economic development and prosperity. 3.Separates Economics from politics: Adam smith separated economics from politics and gave a separate and distinct identity to economics. 4.Examines the causes of wealth: This definition seeks to examine the causes which lead to increase in wealth in the economy. Demerits: 1) Narrow definition of wealth: Wealth definition fully ignored the non-material items such as services of doctors, Engineers, chartered Accountants etc., which are important source of wealth in the present situation. 2) Ignores human social welfare: Wealth definition ignored the ultimate objective of Economics which is the promotion of human and social welfare. Wealth is not an end in itself it is only a means to attain the ends. i.e. human and social welfare. 3) A dismal and mean science: Many economists described wealth definition as a dismal science because undue and excessive emphasis on wealth creates unrest and disharmony in the society. Human beings tend to become highly selfish and self-centered by giving primary importance to wealth. 4) Ignored Scarcity of resources: Wealth definition ignored the scarcity of material and non-material resources in the economy which makes attainment of objective of economics even if wealth is abundantly available. B. Welfare Definition: Dr. Marshall, in 1890 in his book, ‘principles of Economics’, defined Economics thus: “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 the use of material requisites of well-being. Thus, it is on one side a study of wealth; on the other and more important side a part of the study of man”. General Economics

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According to A.C. Pigou, The range of our inquiry becomes restricted to that part of social welfare that can be brought directly or indirectly into relation with the measuring rod of money”. Characteristics and implications: 1.Study of mankind: According to Marshall, economics is the study of mankind rather than of wealth. He gave prominent place to human being and secondary place to wealth. He emphasized the importance of human being because wealth was for human being human being was not for wealth. 2.Study of ordinary man: Economics is the study of economic aspects of life of human begins. It is a study of how human beings earn and spend their income to get maximum satisfaction. Thus, it is a study of economic activities only and not concerned with social, religious activities of human beings. The fulfillment of economic needs is a very important business which every human being ordinarily does. 3.Studies human welfare: Economics studies the economic or material human welfare. It explores the material means which promote human welfare. Due to this reason this definition is also known as welfare definition of economics. 4.Wealth is only a means: In Marshall’s definition, wealth is given secondary place and importance, it is not considered as an end in itself but as a means to welfare as a source of the betterment of the human life. Wealth leads to material welfare of human beings and society. 5.Study of social man: Economics studies a real or social man who possesses several qualities and is influenced by economic and non-economic factors in society. His or her decisions are in the interest of self and society which leads to social welfare. 6.Study of science and Art: This definition by merging human beings and social welfare with wealth makes economics a social and normative science. So According to Marshall, economics is both science as well as an art. 7.Money as a measuring rod: Marshall believed that welfare can be measured with the help of money. Money is general measure of income by use of which economics can be explained. Merits: 1.Primary place to human welfare: Welfare definition completes Adam Smith’s wealth definition by adding human being and welfare to wealth as the subject matter of economics. 2.Proper explanation of relationship between welfare and wealth:

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Marshall defines economics as a noble science. He explained how wealth is a means to achieve the objective of Economics, The human welfare. Prior to Marshall Economics was a dismal science hated by many. 3.Made economics Meaningful: Marshall made economics not only a science but also a social and normative science by doing so he made economics a life giving discipline. As a social and normative science economics became the basis for human welfare and social development. 4.Made economics a fruit bearing science: Welfare definition clearly classifies economic activities into two parts as material and non-material welfare. It gives importance to material welfare which in turn leads to prosperity in the society. Non-material welfare is excluded from the scope of economics. Demerits: 1.Ignores immaterial things: Marshall’s definition includes only material things and completely ignores immaterial things used in promotion of human welfare. The services of teachers, lawyers, doctors, chartered Accountants, Architects etc are nonmaterial goods which have been excluded by Marshall in his welfare definition. 2.Concept of welfare is vague: According to Robbins, the concept of welfare is not fixed and definite one, if differs in different countries and at different times. Welfare is a subjective thing and it varies from person to person. Therefore, it cannot be said in objective terms which things would promote welfare and which will not. In addition to this, economics included many economic activities which are generally thought to be harmful to human welfare but cannot be ignored due to their effect on economic conditions in the economy. 3.Welfare cannot be quantitatively measured: The critics point out that welfare cannot be quantitatively measured. Even if money price is used as an instrument for measurement of welfare, it is only a rough and not a satisfactory measurer of welfare. When two persons pay the same price for a commodity, it would not mean that both are getting an equal amount of utility or welfare. Utility or welfare is a subjective phenomenon and differs from person to person and measurement is not possible. 4.Limits the scope of economics: Marshall assumes economics as a social science rather than human science. A social science studies the activities of those individuals who are members of society, while human science studies all human beings, whether they live in an organized community or live outside society. Marshall narrowed the subject matter of economics to the study of persons living in ht society. Broadly speaking the fundamental laws of economics apply to all human beings and therefore economics should be treated as human science and not just a social science which limits its scope. 5.Ignored the problem of scarcity:

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Welfare definition does not emphasize the importance of scarcity of resources that causes economic problem.

C. Scarcity Definition: According to Robbins” Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternatives uses. In the words of Stonier and Hague, “Economics is fundamentally a study of scarcity and the problems which of scarcity give rise to”. According to Scitovosky, “Economics is a science concerned with the administration of scarce resources”. Characteristics and implication: 1.Unlimited wants: The fundamental fact on which Robbins definition is based is that human wants are unlimited. In the definition ‘Ends’ implies human wants. Human wants provide the motives for all the human activities. Human wants are unlimited is a very important and fundamental fact of economic life of people. It can be observed in the real life of the people that there is no limit to their wants, when one want gets satisfied, another want crops up, and it is an unending process. All human wants are not of equal intensity some are more intense than others. It is because of difference in intensities people are able to allocate the resources to satisfy different types of wants. 2.Scarcity of means or resources: The second important fact in scarcity definition is that resources are scarce in relation to unlimited human wants. Thus, scarcity is a relative concept and it should be understood in relation to demand, a commodity may be available in small quantity but if nobody demands it, then it is not scarce. Means or resources refer to goods and services which people use to satisfy their wants. They include both material and Man-made goods such as oil, minerals, iron-ore, capital goods, consumer goods, money, time, and ideas etc which are at our disposal. Scarcity of means is the basis for all economic problems. 3.Alternative uses of Means: The third important fact on which Robbins’s Scarcity definition is based is that resources or means have various alternative uses. i.e. the resources can be put to various uses. For example, land which is scarce can be used for cultivation, house construction, playground etc. Thus, in practical life the goods can be put to alternative uses of varying importance. 4.Explains clearly the economic problem: Robbins explains clearly the cause of economic problem. According to him, the multiplicity of wants, the scarcity of means and application of scarce resources or means for the alternative uses impose an economic problem. The problem is how to satisfy the unlimited wants with limited means which have alternative uses. Robbins describes this problem as the problem of economizing scarce resources. In other words, it is the choice of making General Economics

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an economic activity. Thus, economics is a study of economic problem and means of solving the economic problem. 5.Economics studies science of choice: According to Robbins, economics is a science of choice. The problem of economizing resources leads to another problem i.e. the problem of choice. Since wants are numbers and resources are scarce, we have to choose the most urgent wants from the numerous wants and satisfy them first with scarce resources other wants can be satisfied later. Thus economics deals with how the resources of society should be allocated or chosen for the satisfaction of different wants. 6.Economics is natural between ends: According to Robbins, economics should study all the goods and services which can satisfy the wants, whether the goods and services are favourable to human welfare or not. Robbins emphasized that economics does not deal with the question as to what ends should be achieved, i.e. what wants should be satisfied and what not because in this regard human beings themselves have to decide. Economics itself does not make a choice. It only tells in what ways the given ends or wants can be achieved with the minimum possible resources. What ends or wants should be selected by human beings for satisfaction is not the concern of economists. Whether the wants chosen by human beings are good or bad, moral or immoral, economics should study them, because the task of economics is not to praise or condemn but only to analyze and explain. To decide about the desirability or otherwise of a thing is beyond the scope of economics. Merits: 1.Scientific presentation of economics: Marshall explains one kind of behaviour as distinct from another in economics, so his definition is criticized as unscientific. But the scarcity definition analyzing human behavior explains any behavior under one aspect. In this way, this definition is scientific. 2.Widens the scope of economics: Marshall in his definition limits the scope of economics to the material means of welfare. But Robbins on the other hand by studying any behavior connected with the problem of scarcity widens the scope of economics from the boundaries of material welfare. 3.Universal in nature: Scarcity definition is more precise and comprehensive and is considered universal. It is applicable to all individuals, groups and society. Moreover, it deals with the problem of unlimited wants and scarce means. This problem is common everywhere. 4.Makes economics clear and definite: According to Marshall, economics should involve value judgment; however, this will lead to difference of opinions and endless controversy among economists thereby rendering economics indefinite and fruitless. But when economics is neutral between ends it becomes free from all these controversies and confusion then economics will be clear and definite and understanding will easy and simple. General Economics

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5.Gives Logical explanation of economic problem: Robbins definition is highly logical in explaining the economic problem. According to him, economic problem arises due to scarcity of means in relation to their demand. It is not concerned with material well being. 6.Analytical study of human behavior: Robbins analyses human behaviour and states that human behaviour is the subject matter of the science of economics. This definition studies the human behavior of an individual as well as of a society. Demerits: 1.Makes economics meaningless by ignoring normative aspect: According to many economists, economics can play an important role in promoting social welfare and economic growth only if it considers and takes into accounts the value judgment, i.e. it has to give its decisions regarding what is good and what is bad in deciding ends. If economics is to serve as an engine of social betterment, it has to tell what is good or bad, noble or ignoble for welfare and progress and whether efforts should be made to attain some given ends or not. 2.Ignored welfare aspect: According to many economists, the end of human activities is human welfare. And economics should be a means in achieving human welfare. However , Robbins opposed the idea of making economics a means in achieving human welfare and believed that the end of human behaviour was to get maximum satisfaction by the use of limited resources at his/her disposal. Maximum satisfaction without value Judgments need not be maximum welfare always. 3.Restricts economics to allocation of resolves, factor and product pricing: According to Robbins, economics should study only the allocation of resources among the production of various goods and consequently how the prices of goods and factors are determined, However, in reality economics is not restricted just to these; it also considers and studies national income, output, employment etc in order to provide solutions to overcome instability and fluctuations in these at macro level in the economy. Thus, Robbins’s definition does not explain about the macroeconomic concepts which are also of significance in solving economic problems. 4.Ignored theory of economic growth and development: Robbins takes the resources as given and discuss about their allocation however, there is no mention in his definition about reducing the scarcity of resources. The theory of economic growth is concerned with reducing the scarcity of resources through raising the level of national income and creating more capital and wealth. Economic growth is the means to reduce poverty and raise the standard of living of people in the economy. Economic growth and development is the primary objective of every economy. Robbins fully ignored this aspect which makes his definition incomplete. 5.Does not explain problem of unemployment:

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Robbins definition deals with the problem of scarcity, however the problem of unemployment is not the problem of scarcity but one of excess of human resource in relation to demand for it. Thus, it is clear that there is no definite positive correlation between scarcity and economic problem always as claimed by Robbins in his definition of economics. 6.Considers only deductive method: Robbins definition considers only deductive method while explaining problem of scarcity. It ignores inductive method which is more practical and empirical in nature in solving economic problems. D. Growth-Oriented Definition: According to Prof. Samuleson, “Economics is the study of how people and society a end up choosing with or without the use of money, to employ scarce productive resources that could have alternative uses to produce various commodities over time and distributing them for consumption, now or in the future, among various persons and groups in society. It analyses costs and benefits of improving patterns of resource allocation”. According to Benham,” Economics is the study of the factors affecting employment and standard of living”. According to Henry smith, Economics is the study of how in a civilized society one obtains the shares of what other people have produced and how the total product of society changes and is determined.

Characteristics and implications: 1.Economics deals with growth and development of economy: Growth definition incorporates the theory of economic growth and development. It states that economics should study and explain the factors which determine economic growth of the country. In other words, it should state the means and ways of increasing national product over a long period of time. 2.Studies distribution of income and level of employment: Growth definition studies how distribution of income among the various members of the society takes place and how level of employment is determined in the economy. 3.Stresses the problem of scarcity: The growth definition stresses on the problem of scarcity of resources in relation to unlimited ends and alternative uses of resources. 4.Studies the problem of choice: This definition deals with the problem of choice which relates not only to present but also to future. It considers economics to be the study of the allocation of scarce resources in relation to unlimited ends. 5.Economics is science as well as an Art: According to Samuelson, economics is both science as well as an art. It is the oldest among arts and newest among the groups of sciences. In fact it is

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the queen of social sciences. It means that economics studies both the theoretical and practical aspect of the economic problem. 6.Not natural as regards ends: According to Growth definition, economic welfare forms part of the study of economics. Economics welfare is that part of general welfare which is measured in terms of money. Economics studies both material and nonmaterial means of economic welfare. Merits: 1.Growth definition covers all aspects of economic problems: Growth definition covers both micro as well as Macroeconomic aspects. It studies allocation of resources, product and factor pricing which are micro in nature and national income or product distribution of national income and level of employment determination which are macro in nature. It makes economics comprehensive and complete. 2.Dynamic in natural: This definition has an element of time in it which makes it dynamic in nature. It talks about efficient allocation and optimum utilization of resources in the present and the future. In addition to this, it emphasizes on reducing the scarcity of resources by discovering and creating new resources by discovering and creating new resources in the economy. 3.Makes economics meaningful and fruit bearing : By considering both the positive and normative aspect of economic problems, it makes economics meaningful, purposeful and fruit bearing. 4.Proper explanation of economic problems: The growth oriented definitions provide proper explanation of economic problems. Economic problems arise because human wants are unlimited but means to satisfy them are scarce. They have alternative uses this gives birth to the problem of choice making i.e. efficient allocation of scarce resources. This in turn accelerates the rate of economic growth. 5.Widens the meaning and scope resources: Growth definitions widened the meaning of economic resources by including natural human or physical resources which can be used to satisfy human wants. They are scarce but have alternative uses.

General Meaning of economics: Economics is the study of the individual and social choice in the face of scarcity. The law of scarcity implies that consumer’s wants will never be completely satisfied. Economics is the systematic and comprehensive of economic activities of rational individuals, firms and the economy in order to attain the objectives effectively and efficiently in a consistent manner. SCOPE OF ECONOMICS The scope of economics can be systematically studied under the following heading. Scope means area covered by the subject under its study.

A. Subject Matter of economics. B. Nature of Economics. C. Relationship of Economics with other sciences. General Economics

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D. Limitations of economics. A.Subject Matter of Economics: The subject-matter of economics is connected to those economic activities of human beings which they perform for a proper utilization of the scarce means in order to get the maximum satisfaction of their wants. These economic activities are called consumption, production, exchange and distribution. The subject matter of economics can be studied from two points of view in economics. A. Classical View: Thus, the subject matter according to traditionalists’ views is the study of human behaviour relating to allocation of scarce resources among competing ends. However, Prof. Boulding classified the entire subject matter of economics into five branches of Consumption, Production, Exchange, Distribution and Public Finance. 1. Consumption studies the consumers’ behaviour and laws of consumption. 2. Production deals with the factors, organization and laws of production of

goods and services. 3. Exchange connecting consumption and production discusses the exchange

of goods for money and the underlying principles of price determination. 4. Distribution explains the division of national income among the four factors

of production. 5. Public Finance deals with public income, public expenditure and public debt

of state and Central Government. B. Modern View: Criticizing the traditional views of economics as artificial and overlapping, Modern economists like Stonier and Hague have divided economics into: 1. Economic Theory 2. Applied Economics and 3. Descriptive Economics 1. Economic theory: Economic theory is a hypothesis that has been successfully tested. Its purpose is to predict and explain. Economic theory includes all those laws and principles which explain, analyses, predict and establish the cause and effect relationship among economic variables. It is derived by logical analysis in a scientific way. Economic theory describes what, why and how of an economic phenomena. Economic theory is built around three things: a. Definition of variables b. Assumptions relating to variables and situations c. Predictions about future events. 2. Applied economics: Applied economics attempts to apply the result of economic analysis to solve problems. Applied economics is art of using conclusion of economic theory to solve different economic problems. For example, Business economics is an applied economics where economic tools are used to solve the problems of business. 3. Descriptive economics:

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Descriptive economics is the systematic and comprehensive study of a particular area or topic by collecting relevant facts about that particular topic. It involves in-depth study and analysis of a particular sphere or area of study. Indian Economics is an example of descriptive economics.

Micro and Macro Economics: Another view of studying the subject matter of economics was put forward by Prof. Ragnar in the year 1933. He divided subject matter of economics into ‘Micro and Macro economics.

Meaning and scope of Microeconomics: The word ‘micro’ is derived from the Greek word mikros meaning small. Microeconomics deals with small segments of the society. Micro economics is defined as the study of behaviour 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. Scope of microeconomics is vast and includes the following topics:

Importance of Microeconomics: Microeconomics has both theoretical and practical importance. It is clear from the following points: 1. Microeconomics helps in formulating economic policies which enhance productive efficiency and results in greater social welfare. 2. Microeconomics explains the working of a capitalist economy, where individual units i.e., producers and consumers are free to take their own decisions. 3. Microeconomic describes how, in a free enterprise economy, individual units attain equilibrium position. 4. It helps the government in formulating correct price policies. 5. It helps in efficient employment of resources by the entrepreneurs. 6. It helps business economists to make conditional predictions and business forecasts. 7. It is used to explain gains from trade, disequilibrium in the balance of payment position and determination of international exchange rate.

Limitations of Microeconomics: Microeconomics fails to explain the functioning of an economy as a whole. It cannot explain unemployment, poverty, illiteracy and other problems prevailing at the country level.

Meaning and scope of Macroeconomics: The word ‘Macro’ is derived from the Greek word “macros” 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. General Economics

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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. The scope of macroeconomics includes the following topics: Importance of Macroeconomics: Macroeconomics has emerged as the most challenging branch of economics. In the words of Samuelson, “No area of economics is today more vital and controversial than macroeconomics.’’ The importance of macroeconomics on theoretical and practical reasons is clear from the following points. 1. It gives an overall view of the growing complexities of an economic system. It provides powerful tools to explain the working of the complex economic systems. 2. It provides the basic and logical framework for formulating appropriate macroeconomic policies e.g. for inflation, poverty, unemployment etc. to direct and regulate economy toward desirable goals. 3. It helps in analyzing the reasons for economic fluctuations and provides remedies.

Limitations of Macroeconomics: Some of the major limitations macroeconomics is: 1. Macroeconomics ignores structural changes in an individual unit of the aggregate. The conclusions drawn on the basis of aggregate variable may be misleading. 2. Most of macro magnitudes which figure so largely in economic discussions are subject to errors and ambiguities.

Difference between Microeconomics and Macroeconomics Microeconomics Macroeconomics 1. It studies individual economic 1. It studies aggregative economic

units. units. 2. Examples, 2.Example, a. Consumer demand. a. Aggregate demand. b. Per Capita income. b. National Income. 3. It may assume full employment 3. It does not assume full of resources in the economy. employment of resources in the 4. It is also called Price Theory. economy. 4. It is also called theory of income and Employment. Interdependence of micro and macroeconomics: It is difficult to demarcate or differentiate between micro and macro economics. What is macro from an economy’s point is micro in the context of the world. It is difficult to say which is more important. Both have their own significance. According to Professor, Samuleson, knowledge of both is absolutely vital and there is no competition between macro and micro

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economics. Both are complementary and should be fully utilized for understanding of an economy.

B.

Nature of Economics:

Nature of economics implies whether it is science or art or both science and art. The question whether economics is a science or an art, there is different views. The English economists of the classical school hold the view that economics is a science. But the economists of Continent Europe, Germany and India regard economics as an art. In the words of Prof. Samuleson, “Economics is the oldest of the arts, the newest of sciences, indeed the queen of all the social sciences.’’

Meaning of science: Science is an accumulated and accepted knowledge that has been systematized and formulated with reference to the discovery of general truth or operation of general law. Science refers to systematic knowledge and studies cause and effect relationship between different variables and on the basis of analysis attempts to draw generalizations which are popularly known as principles or laws which are supposed to have a very degree of precision. Thus, a science is built upon facts as a house is built of stones.

Characteristics of science: 1. Science is a systematized body of knowledge where relationship

between cause and effect is systematically studied. 2. The cause and effect relationship is rigidly defined. 3. It has a well defined subject matter. 4. It has a well accepted and accurate means of measurement. 5. The subject matter is capable of perfect measurement with the help of means of measurement. 6. It has its own methods of study for generalization and formulation of scientific laws and theories. 7. Science has ability to forecast future events and phenomena with a high degree of accuracy and precision. 8. Scientific laws are universal in nature and therefore have universal application. 9. Scientists have uniform opinion about particular event.

Arguments in favour of Economics as a Science: 1. Economics has a systematized body of knowledge and it involves the

study of cause and effect relationship. 2. It has well defined subject matter. The subject matter in economics is human behaviour as a consumer. 3. The means of measurement in economics is money. 4. The subject matter is capable of measurement in terms of money. 5. It has its own methods of study for generalization and formulation of

economic laws and theories.

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6. Its laws are Scientific in nature; however, they are based on certain

assumptions. 7. Economics forecasts the future market condition with help of various statistical and non-statistical tools.

Arguments against Economics being a Science: The cause and effect relationship in economics is not rigidly defined. 2. Money, which is the means of measurement in economics, is not perfect. Money itself is a dependent variable. 3. The subject matter of economics is the study of “Human Behaviour as a consumer (economic activities)” which is highly unpredictable and in addition to that, money is not a perfect measurer of economic activities, therefore, subject matter of economics is not capable of perfect measurement. 4. Economic forecasts are approximately true. In economics it is not possible to make correct predictions about the behaviour of economic variables. 5. The laws of economics are not exact Laws. They are based on number of assumptions. 6. There exists difference among Economists regarding its application. It doesn’t have uniform opinion about a particular event. 7. The laws of economics are not Universal Laws. 1.

Thus, it can be concluded that economics is not a perfect of physical science like mathematics, physics, chemistry, biology etc. however, it has some features of science.

Meaning of social science: Social science is a systematized body of knowledge created on the basis of systematic and comprehensive study of human behaviour in relation to some important social phenomenon. The following are the important characteristics of social science: 1. Social science is a systematized body of knowledge. 2. Social sciences study the human behaviour in relation to some social phenomenon. 3. Social sciences change due to change in social values.

Economics is considered as a social science: 1. Economics studies human behaviour in the social context, and not `

just individual instances. 2. Economics studies and analyses the process of satisfying wants, which is a social process, not an individual process. Thus, economics covers social behaviour i.e. behaviour of human beings in groups. 3. Economics takes into account social factors while analysing economic problems and solutions.

Is Economics A Positive or Normative Science? General Economics

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Another question regarding the Nature, whether economics is a positive or normative science has been discussed for very long time. There are different views on the issue. The economists like Robbins and Friedman advocated economics as a positive science. But scholars including Marshall and pigou etc. maintained the view that economics is both a positive and normative science.

A.

Economics is a Positive Science:

A positive science is that science in which exactness of the subject is studied. Almost all the classical economists declared that science of economics should be concerned only with ‘What is ‘and not “what ought to be’ In other words they maintained economics as only a positive science. They said that economics should not explain rightness or wrongness of things and should not pass any moral judgement. Senior thought that economists could not add even a single word of advice. Prof Stigler observes, ‘Strictly speaking, words like ‘ought’ and ‘bad; cannot occur in economic discussion.” Lionel Robbins reaffirmed the view that economics is nothing but a positive science. According to Robbins – Economics is neutral between ends. It does not pass value judgments. Anyone with the limited amount of money may use it for buying liquor and not milk. Arguments in favour of Economics as a Positive Science: a. More Logical b. More Efficiency c. More uniformity d. More Neutrality e. Formulation of Theories Examples of positive science: 1. Planned economics allocate resources via government departments. 2. Most transitional economics have experienced problems of falling output and rising prices. 3. There is a greater degree of consumer sovereignty in the market. 4. Faster economic growth results in an economy which has higher levels of investment. 5. Higher levels of unemployment will lead to higher levels of inflation. 6. Analysis of the relationship between the price and quantity demanded

B.

Economics as a Normative Science:

It refers to “What ought to be” or it makes an assessment of an activity and offers advice. It is based on welfare economics – (Marshall & pigou). Complete neutrality between ends is, however, neither feasible nor desirable. It is because in many matters the economist has to suggest measures for achieving certain socially desirable ends. Challenging the views of the classical school, Marshall, pigou and historical school put the argument that economics is a normative science, According to Marshall, economics is a normative science because it has a norm or aims viz, welfare, Macfile remarks that “economics is fundamentally a normative science, General Economics

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not merely a positive science like chemistry’. This science also offers suggestions for solving the problems, as a normative science, Economics will offer several kinds of suggestions, such that there shall be economic development of the country, there should be stability in prices, there should be full employment, and there should be an equitable distribution of income etc Economics does not deal only with the study of facts, rather is also determines the economic facts. Arguments in favour of Normative Economics: a. More Practical. b. More Realistic. c. Useful Science. d. Maximum Welfare. e. Growth–Oriented. Examples of normative science: 1. Reducing inequality should be major priority for mixed economy. 2. Changing the level of interest rates is a better way of managing the economy than using taxation and government expenditure. 3. Govt. ought to guarantee that farmer’s income will not fall if harvest is poor. 4. India should not take loan from foreign countries. 5. Rich people should be taxed more. 6. Free education should be given to poor. 7. India should spend more money on defence. 8. The demand for productive commodities should be encouraged in the society. Thus Economics is both positive science and normative science. Difference between Positive and Normative Economics: Positive Economics Normative Economics It expresses What is. It expresses What Should be. It is based on cause and effect of It is based on ethics. facts. It deals with actual or realistic It deals with Idealistic situation. situation. It can be verified with actual data. It cannot be verified with actual data. In this value judgements are not In this value judgements are given. given. It deals with how an economic It deals with how an economic problem problem is solved. should be solved. Economists of Positive school are Economists of Normative school are Adam Smith, Robbins and their Marshall, Pigou, Hicks and others. followers.

What is an Art? Art is a skill, dexterity, or the power of performing certain actions acquired by experience, study or observation. Art refers to skill of collecting and handling of

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data to draw logical inference and arrive at certain conclusions. The degree of precision in such inferences is not as high as it is in scientific laws.

Economics as an art: 1. Economics as an art is a systematized body of knowledge which explains the cause and effect relationship between different factors. 2. The relationship between cause and effect cannot be rigidly defined. The effect changes due to application of different talents of different people to solve same problems. 3. It is capable of application and practice. For example, various branches of economics provide practical solutions to various economic problems. Arguments in favour of economics as an Art: 1. Economics as an art provides different solutions to solve same economic problems. 2. Economics as an art studies problem in realistic situation. 3. It can remove doubts that arise with regard to the real nature of economic laws. 4. As an art it facilitates the verification of economic theories. Arguments against economics as an Art: 1. One subject cannot be science as well as art at the same time. 2. Economics as an art cannot be effective because problems are not just economic problems, they economic, social and political at a time. 3. Different economists will frame different policies and uncertainty increases. 4. Lack of immediate solution to the problems. Economic is both science and an art: Economic is both science and an art. It is science in its methodology and art in its application. Methods of Economic Theory: Meaning of economic theory: Economic theory is a hypothesis that has successfully tested. Its purpose is to predict and explain. Economic theory includes all those laws and principles which explain, analyse, predict and establish the cause and effect relationship among economic variables. It is derived logically in a scientific way. Two methods used in construction of an economic theory are: 1.Deductive Method 2.Inductive Method 1. Deductive method:

Deductive method is also known as the analytical or abstract method or a priori. This method accepts certain universal truths or axioms and tries to deduce inference about the particular events though a process of logical reasoning. The predictions are made on the basis of certain assumptions. Once predictions are empirically tested and verified for their accuracy, they are accepted as an economic theory. Otherwise predictions are either amended or rejected. In economics, this method was developed by Ricardo, Robbins, J.S.Mill and others. Deductive method is the process of reasoning from general to particular or universal to individual, this method is called abstract, hypothetical or a priori because it is based on abstract reasoning and not on actual facts. General Economics

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Example: Let the general assumption be that man is rational. The prediction is that he aims to earn maximum wages. When this prediction is empirically tested, it is found that workers are moving from lower wage jobs to higher wage jobs. The general assumption gets verified and, thus becomes an economic theory. Types 1. Mathematical 2. Non-mathematical Merits of Deductive Method: The advantages of this method are as follows: 1. It is a simple method which does not involve much collection of data. 2. It is based on basic facts of human nature and is, thus, universally applicable. 3. It brings accuracy and exactness to economic generalizations with the use of logic and mathematics. Demerits of Deductive Method The disadvantages of this method are as follows: 1. The conclusions have limited applicability as the underlying assumptions keep on changing. 2. The results are not dependable. 3. Conclusions drawn are generally not based on facts. Thus, there is every possibility that they may not exist is real life. 4. It is a static approach.

Inductive Method: It is also known as a posteriori, historical or empirical method, in inductive method; we start with particular facts and then make general theory based on the analysis of facts. It is the process of reasoning from particular to general or from individual to the universal. The generalizations are based on observations of individual instances. The method involves use of the following three steps in a systematic order. 1. Collection of data 2. Analysis of data 3. Formulation of general principles. The general theory is arrived at by collecting large number of observations or data. Some examples of theories or laws based on this method are Malthusian theory of Population and Engel’s Law. Example: Particular fact observed is that when two persons are sent to the market to buy a good, they both buy more at a lesser price. From this particular behaviour we generalize that all men buy more at lesser price and vice versa. This established the general law of demand which states that price and quantity demanded of a commodity are inversely related. Merits of Inductive method: The advantages of this method are as follows: 1. The method is precise, realistic and reasonable because it takes into consideration the changes in the conditions surrounding an economic activity. General Economics

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2. The method tests and verifies economic facts. 3. It is a scientific method as facts are subject to scientific analysis. 4. It is Dynamic. It is based on previous experiments and observations.

Demerits of Inductive method: The disadvantages of this method are as follows: 1. The method is complex and difficult. 2. It is an expensive and time consuming method. 3. Chances of personal bias of the investigators in the process of collection and analysis of data are present. Interdependence of Deductive and inductive methods: Both deductive and inductive methods have their merits and demerit. Deductive method was popular among classical economists. Modern economists prefer inductive method of constructing an economic theory. The methods are not alternative of each other. Deductive method is more useful where facts and data are not available and inductive method is more suitable where facts and data are available. According to prof. Marshall, ‘’ Induction and deduction are both needed for scientific thoughts as the right and left foot both are needed for walking. Methods of Constructing Economic Theory Basis of Deductive Method distinction Processing of From general to particular reasoning Terms used to A priori, Abstract, Analytical. describe Popularity Popular among classical economists Merits Simple, universal and accurate. Suitability More suitable when facts and data are not available

Inductive method From particular to general A posteriori, Historical, Empirical. Popular among Modern economists Precise, realistic, scientific and verifiable More suitable when facts and data are available

Central Problems of Economy: Human beings have wants which are unlimited. Wants get satisfied by consuming goods and services, but new wants keep cropping up. The amount of goods and services that can be produced depends on the amount of resources available. Resources are scarce, i.e. they are available in limited quantities. Resources are not only limited but they also have alternative uses. All this necessitates a choice between which wants to satisfy first, where to use the resources and in what quantities. Individuals, business firms and societies must decide how to use limited resources. Economic problem is the problem of choice or the problem of economizing. It is the problem of utilizing the limited resources to satisfy the maximum number of wants. The clash between the limitations of nature and the unlimited and non-saturating human wants is the basis of economic problems. The scarcity of resources creates this situation. If we employ more resources for production of good A, we will have to forego the production of B. General Economics

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Hence, we have to choose which of the two goods gives us more satisfaction. Any issue arising out of the existence of scarcity which compels people to choose out of a range of alternative economic possibilities is an economic problem. This fundamental economic problem is reflected in an economy in the form of three problems which are called the Central Problems, of an economy. Any economy -whether capitalist, Socialist, agricultural, mixed, and undeveloped, etc has to face these problems. According to P.A, Samuelsson there are three fundamental and interdependent problems in an economic organization -what, how and for whom. these are grouped together allocation of resources problem. These are:

1. 2. 3. 4.

What goods to produce and How much to produce. How to produce. For whom to produce. Economic Growth.

1. What goods to produce and How much to produce:

This is the problem of allocation of resources. Due to limited resources, every economy has to decide what goods to produce and in what quantities. If the means were unlimited, then according to Frideman, it would lead to as stage of salvation. But the means are limited and the economy must decide the proportion of resources that would go into the production of civilian goods and the proportion of resources that would go into the production of defence goods. This is essentially the problem of efficient allocation of scarce resources so that both output and output-mix are optimum. The Problem of how much to produce is the problem of determining the quantity of each good to be produced. In economics, the problem of what to produce is studied under price theory. 2. How to produce: It is the question of choice of technique of production. Since resources are scare, an inefficient technique of production, which would lead to wastage and high costs, cannot be applied. A technique of production which would maximize output or minimize cost should be used. Every economy has to choose the most efficient technique of producing a commodity. In economics, the problem of choice of technique of production is studied under the theory of production. 3. For whom to produce: This is the question of how to distribute the national product among various sections of the society. National product is total output generated by the firms. Total output ultimately flows to the household in the form of income, i.e., wages, rent, profits and 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 household, in economics, the problem of distribution of national product is studied under the theory of distribution. 4. Economic Growth:

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This is the question of whether the economy’s capacity to produce goods and services is growing from year to year or is it remaining static. Economic growth is induced by savings and investments i.e. economic development is induce by large amount of capital and advance techniques to production. Problems of this type are studied under the theory of Economic theory. Central Problems 1. Allocation of resources: a.What and how much produce? b.How to produce? c. For whom to produce? 2. Economic growth

Branch of Economics which deals with it. Price Theory to Theory of Production Theory of Distribution Growth Economics

Production Possibility Curve: The economic problem of scarcity and thereby that of choice, can be easily and clearly explained by the technique of production possibility curve. Production possibility curve is a mathematical and geometrical presentation of the economic problem of scarcity and the problem of choice. The concept of Production possibility curve (PPC) was put forward by Prof. Samuelson. According to him “PPC is that curve which represents the maximum amount of a pair of goods and services that can both be produced with an economy’s given resources and technique, assuming that all resources are fully employed. Production Possibility Curve may be defined as a curve which shows the various combinations of two goods or services that can be produced in any economy with a given amount of resources and technology. PPC is also known as Production Possibility Frontier (PPF) and Transformation curve.

Assumptions: Production possibility curve is based on the following important assumptions: 1. The economy produces two commodities only. 2. The quantities and qualities of factors of production viz., land, labour, capital and organisation are fixed. 3. The techniques of production are constant. 4. Resources are fully employed, i.e. there is no wastage of resources. Resources are not lying idle. 5. The prices of factors of production are constant. 6. Resources are not specific, i.e., they can be shifted from the production of one good to the other good. It is assumed that there are only two types of goods–cloth and wheat. The resources of economy can be alternatively used in both the commodities. If the production of a commodity is increased then the production of the other commodity will be decreased. Following table shows the production possibilities of production. Production Clot Whe Increasing Opportunity General Economics

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Possibilities A B C D E F

h 0 1 2 3 4 5

at 15 14 12 9 5 0

Cost ---1 2 3 4 5

Implication of production possibility curve: 1. Production possibility curve is also known as Production possibility frontier: Production possibility curve is also known as production possibility frontier because the economy cannot go beyond the production possibility curve with assumptions. Production possibility curve acts as the border for the economy for productivity. 2. Production possibility curve is also known as transformation

curve: Production possibility curve is also known as transformation curve because looking at it, it appears as if one good is being transformed into another. A movement along production possibility curve implies that more of good ‘x’(cloth) is produced by sacrificing the production of a certain amount of good ‘y’(wheat). 3. PPC and Productivity Efficiency: All points on PPC curve like A, B, C, D, E and F show that goods and services produced at least cost and no resource is wasted and the economy is ‘Productively Efficient’. 4. Opportunity Cost and PPC:

Opportunity cost may be defined as the value of the next best alternative. It is also called “Foregone cost” and “Trade off”. In the context of PPC since there are only two goods, therefore opportunity cost of producing one good is in terms of sacrifice made of the other good. PPC is downward sloping because more production of one good is associated with less of the other good. 5. PPC – Concave to the Origin – Due To Increasing Opportunity Cost:

PPC looks concave to the origin because of increasing marginal opportunity cost. The increasing marginal opportunity cost means that for additional unit of a good, the sacrifice of unit of other good goes on increasing. Principle of increasing opportunity cost the makes the PPC concave to the origin or makes bowed-out shape. PPC may be straight line if opportunity cost is constant. PPC is negative sloped not due to increasing opportunity cost but due to ‘scarcity’ because at any point of time we have limited resources. 6. Unemployment and PPC:

When an economy produces on PPC, it means that there is no unemployment and all the resources are being used efficiently. But if an economy operate inside the PPC then there is unemployment or underemployment and/or inefficient use of resources. General Economics

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In the figure given below point ‘U’ inside the PPC indicate underutilization of resources. In other words economy would not be utilizing its resources fully. Point ‘S’ indicate that an economy could not produce with the given resources and technology. If economy moving from ‘U’ to ‘A’ and ‘B’ point, it indicates resources which were lying unutilized are now being utilized fully. 7. Economic Growth and shift in PPC:

When an economy produced at PPC curve it is productively efficient’> but there is also scope of progress and one PPC can shift to another PPC one the right, It indicates Economic Growth PPC can shift to the right or economic growths are possible in the following circumstances. 1. Improvement in overall technology 2. Greater capital formation 3. Increase in population growth labour force

Properties of Production Possibility Curve: 1. It is also called transformation curve or production possibility frontier. 2. PPC slopes downwards from left to right. 3. PPC is concave to the point of origin.

Different Economic Systems: Meaning of Economic system: Economic system is defined as an arrangement by which the central problems of the economy of an economy are solved. There are many different forms of an economic system. It refers to the mode of production, exchange and distribution and the role which govt. plays in economic activity. It may be of three types. 1. Capitalist Economy. 2. Socialist Economy. 3. Mixed Economy. 1. Capitalist economy (free market economy): Capitalist economy is one in which the factors of production are privately owned and managed and in which production takes place on the initiative for private profits. It is a free economy in which government interference is not found. Characteristics: The following are its main characteristics 1. Right of Private Property: The right of private property means that factors of production such as land, factories, machines and mines etc., are under the private ownership. An individual has the right to acquire, use, control and dispose in many was he likes. 2. Freedom of Enterprise: Freedom of enterprise means that every body is free to engage in whatever economic activity he pleases. In other words, he is free to work in any industry he likes to adopt any occupation or trade he desires. 3. Freedom of choice by consumer: In capitalist economy there is a freedom of choice by the consumers. People are free to spend their incomes, as they like. “In an economy people have the freedom to buy or not to buy the goods offered in the market place, and this freedom to choose what they buy dictates what producers will ultimately produce”. This is known as principle of consumer General Economics

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4.

5.

6.

7.

sovereignty. In a free market economy the allocation of resources is determined by the consumer preference. Profit Motive: Under capitalism, producers or entrepreneurs in their productive activities are guided by their profit motives. Those goods and services are produced to ensure greater profits to the producers. Competition: In a capitalist economy, competition exists among sellers or producers of similar goods in the form of advertisement, price-cutting, discount etc., Price mechanism: In a free market economy (Capitalist economy) prices are decided by the price mechanism i.e., forces of demand and supply and price will be decided at the point where demand is equal to supply. In a free market economy, when consumers increase their purchase of a good and the level of demand exceeds supply then price tend to rise. A capitalist economy uses ‘Price’ as the principal means of allocating resources. Inequalities of Income: There is wide gap of income between the rich and poor, which mainly arises due to unequal distribution of property. It is disadvantage of the capitalist economy that income will tend to be unevenly distributed.

Solution of Central Problems in Capitalist Economy: The main aim of capitalist economy is to earn maximum profits. All the central problems are solved with the help of Price Mechanism (forces of the market demand and supply). What, how and for whom to produce are decided by the private sectors: 1. Deciding what to produce: To earn more and more profits the entrepreneurs produced only those goods, which are demanded by the consumers. In a free market economy the allocation of resources is determined by the consumer preference. 2. Deciding how to produce: To earn more and more profit the entrepreneurs

use that technique of production in which cost of production is minimum. There are two methods of production technique – a. Labour intensive method b. Capital Intensive method 3. Deciding for whom to produce: Goods and Services are produced only for

those who have the buying capacity. Higher the income higher will be his buying capacity. 4. Deciding about consumption, saving and investment: Higher the rate of

interest and higher will be the savings and higher the rate of return higher will be the investment. 2. Socialist Economy: In a Socialist economy, all material means of production i.e., land, capital and mines etc., are owned by the whole community represented by the STATE. All the members being entitled to the benefits from the fruits of such socialized planned production on the basis of equal rights. State decides the size and

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direction of the investment. The state works for the welfare of the society and profit motive is not important for it. Characteristics: 1. Collective ownership of means of production: In a socialist economic system, all the means of production are state-owned. Accordingly, the firms producing goods and services such as factories, banks, insurance, and transport etc., are owned and managed by state. Small farms, workshops and trading firms may, however, remain in the private hands. 2. Centrally Planned Economy: All the basic decisions pertaining to the what, how and for whom to produce are decided by the centrally planned authority. In India it is by the Planning Commission. 3. Economic Equalities: A socialist state strives to achieve economic equally, but it does not mean that everyone earns the same amount of income that there is no social differentiation. The society is divided into various functional strata. Since the requirements of the workers from different strata are unequal, their wages cannot be equal. Skilled and unskilled workers from different strata of the society, and hence are paid different wages. Socialism only guarantees equality of opportunity and equal pay for equal work. 4. Social welfare: Social welfare becomes the guiding light in such a system. Since all the enterprises are state-owned, no individual or private profit accrues. Price policy is guided by the aims of social welfare rather than profit motive. 5. Lack of competition: One of the basic tasks of economics planning is to avoid duplication of efforts and wastage of resources. Since the state has the monopoly of production and investment, it avoids all sorts of competition and rivalry as between different production units. 6. Elimination of exploitation: Since property is state-owned, class distinction do not exists in Socialism. In the absence of class-distinction, there is no exploitation of employees in the hands of employers. 3. Mixed Economy An economic system, which contains elements of both private and public sectors, is called mixed economy. It permits coexistence of controlled market economy. Characteristics: 1. Coexistence of both private and public sector: In the mixed economy both private and public enterprises exists. So in a mixed economy all the economic decisions are partly taken by the state and partly taken by the private entrepreneurs. 2. Planned Economy: It is planned economy. The government has a clear and definite economic plan. The government create necessary atmosphere for the private sector to develop on its own. 3. Balanced regional development: Public sector enterprises may be located in the backward regions so as to ensure its development. Subsidies may be offered to private sector to establish and develop industries in backward regions. 4. Dual system of pricing: In private sector price is decided by the help of price mechanism on the other hand in govt. sector prices are fixed by the General Economics

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govt. The government may also fix the prices of certain essential commodities, which are used by the common man. Over-all planning is done by the State Authority called Planning Commission. Features of three Economic systems: Features Capitalism Socialism Mixed Economy Ownership of Private Public Both private and public property Ownership Ownership Ownership Freedom of Exits No freedom Freedom in private sector enterprise only Motive of Profit Motive Social welfare Profit motive in private production sector only Who governs Price Planning Both price and planning production Mechanism Mechanism mechanism Competition Exists No Exists only in private sector competition Distribution of Very Quite equal Considerable inequalities Income unequal exists Role of No role Complete role Full role in public sector and Government limited role in private sector

Multiple Choice Questions 1. a. Not feasible c. Both (a) and (b)

According to Robbins, neutrality between ends is – b. Not desirable d. Either (a) or (b)

2. a. Science of wealth c. Science of choice making

Robbins defined Economics as – b. Science of material well-being d. Science of dynamic growth and development

3. Economics is different from other social sciences, because it is primarily concerned with the study of ________, it is similar to other social sciences they are all concerned with the study of _________ : a. limited resources, market behaviour c. Social behaviour, limited resources.

b. Scarcity, human behaviour d. Biological behaviour, scarcity

4. a. unlimited wants and needs c. no energy resources

Our economy is characterized by – b. unlimited material resources d. abundant productive labour

5. a. What to produce? c. For whom to produce?

The Central Economic Problem is – b. How to produce? d. All of above

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6. a. A dual system of pricing exists c. Both (a) and (b)

Under a Mixed Economy – b. State regulates prices of essential goods d. Neither (a) nor (b)

7. constant, then the PPC would be – a. Convex c. Backward bending

b. Straight line d. Concave

8. a. Labour surplus economy c. Developed economy

Capital intensive technique would get chosen in a – b. Capital surplus economy d. Developing economy

9. a. Labour surplus economy c. Developed economy

Labour intensive technique would get chosen in a – b. Capital surplus economy d. Developing economy

10. a. b. c. d.

Which of the following economy is without scarcity? The pre-independence Indian economy, where most people were farmers. A mythical economy, where every body is billionaire Any economy, where income is distributed equally among its people None of these

11. Economics? a. Inflation in the economy c. National Income 12. are main features of – a. Mixed economy c. Capitalistic economy 13.

If the marginal (additional) opportunity cost is a

Which

of

the

following

is

to

Micro-

b. Problem of unemployment d. Income from the Railways Competitive market structure and inequality of wealth b. Socialistic economy d. None of the above

a. b. c. d.

Indicate the suitable match – Economics is the science of wealth – Adam Smith Economics is the science of material well being – Samuelson Economics is the science of choice making – Marshall Economics is the science of growth and development – Robbins

14. a. b. c. d.

State, whether economics is – A positive science only. Neither a positive nor normative science. A science, but not Art. A science or an Art depending on who uses economics and for what propose.

15. between end”? a. Robbins c. Pigou

related

Who expressed the view that “Economics is neutral b. Marshall d. Adam Smith

16. Which of the following is the best general definition of the study of Economics? a. Inflation and unemployment in a growing economy. b. Business decision making under foreign competition. c. Individual and social choice in the face of scarcity. d. The best way to invest in the stock market. 17.

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Which of the following embody a more widely

1.27

accepted definition of economics : a. “An inquiry into the nature and causes of the wealth of nations.” b. “The part of social welfare which can be brought directly or indirectly into relationship with the measuring rod of money.” c. “A study of mankind in the ordinary business of life ________ material requisites of well-being.” d. “A science, which studies human behavior as a relationship between ends _____, which have alternative uses.” 18. economic approaches from a national angle – a. Per capita income of the country. c. Income from the railways. 19. economic approaches from a national angle – a. Per capita income of the country. c. Income from the railways. 20. economic approaches from a national angle – a. Unemployment among the educated people. c. Lockout in Indian airlines.

State which of the following refer to the macro b. Capital output ratio in steel industry. d. Both (a) and (b) State which of the following refer to the micro b. Capital output ratio in steel industry. d. Both (a) and (b) State which of the following refer to the micro b. Inflation in the economy d. Distribution of coal in the country.

21. Find the correct match – a. An enquiry into the nature and causes of the wealth of the nation : A.C. Pigou. b. Science, which deals with wealth : Alford Marshall. c. Economics is the science, which studies human behavior as a relationship between ends and scarce means, which have alternative uses : Robbins. d. The range of our enquiry becomes restricted to that part of social welfare that can be brought directly or indirectly into relation with the measuring rode of money : Adam Smith. 22. a. b. c. d.

The law of scarcity – Does not apply to rich / developed countries. Applies only to the less developed countries. Implies that consumer’s wants will be satisfied in a socialistic system. Implies that consumer’s wants will never be completely satisfied.

23. What implication(s) does resource scarcity have for the satisfaction of wants? a. Not all wants can be satisfied. b. We will never be faced with the need to make choices. c. We must develop ways to decrease our individual wants. d. The discovery of new natural resources is necessary to increase our ability to satisfy wants. 24. a. b. c. d. 25. a. b. c. d.

Rational decision making requires that – One’s choice be arrived at logically and without error. One’s choice be consistent with one’s goals. One’s choice never vary. One makes choice that do not involve trade-offs. In a mixed economy – All economic decision are taken by the central authority All economic decision are taken by private entrepreneurs Economic decision are partly taken by the state and partly by the private entrepreneurs None of the above

26. a. b. c. d.

The central problem in economics is that of – Comparing the success of command versus market economies Guaranteeing that production occurs in the most efficient manner Guaranteeing a minimum level of income for every citizen. Allocating scarce resources in such a manner that society’s unlimited needs or wants are satisfied as well as possible.

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27. Which of the following illustrates a decrease in unemployment using the PPC? a. A movement down along the PPC b. A rightward shift of the PPC c. A movement from a point on the PPC to a point inside the PPC d. A movement from a point inside the PPC to a point on the PPC 28. Which of the following can be regarded as the laws of economics? a. There is a direct proportionate change in the price level with a change in the supply of money. b. Prices are determined by total demand and total supply in the market. c. After a point, the marginal increase in output shows a falling tendency with every increase in one or more of the factors of production. d. All of above 29. Which of the following can be regarded as the laws of economics? a. Marginal propensity to consume shows a fall with an increase in income. b. Price of other products show a sympathetic rise with a rise in the prices of food grains. c. Taxes have no relation with the benefit which a person derives from the Government. d. Economy cannot prosper without hard work and sincerity of the people. 30. a. Regulated c. Partly regulated 31. a. State plays a major role c. Both (a) and (b)

Under a free economy, prices are – b. Determined through free interplay of demand & supply d. None of these Under a controlled economy – b. Central authority decides how much will be produced d. Neither (a) nor (b)

32. a. Govt. plays a major role c. Govt. plays a minor role

Under a capitalist economy – b. Govt. plays no role d. None of these

33. PPC denotes – a. Level of output b. Maximum output c. Maximum output possible with several combination of inputs d. None of these 34. principal means of allocating resources – a. Demand c. Efficiency

A capitalist economy uses _________ as the b. Supply d. Price

35. In free market economy, when consumer increase their purchase of a goods and the level of ____ exceeds _______, then price tend to rise – a. Demand, supply b. Supply, demand c. Prices, demand d. Profits, supply 36. Right of private property is found in – a. Socialism b. Capitalism c. Mixed economy d. None of these 37. Which of the following does not suggest a macro approach for India? a. Determining the GNP of India b. Finding the causes of failure of X and Co. c. Identifying the causes of inflation in India. d. Analyze the causes of failure of industry in providing large-scale employment. 38.

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Economic goods are considered scarce resources,

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because they – a. Cannot be increased in quantity b. Do not exist in adequate quantity to satisfy social requirements. c. Are of primary importance in satisfying social requirements. d. Are limited to man made goods. 39. From the national point of view which of the following indicates micro approach? a. Per capital income of India b. Under employment in agriculture sector. c. Lock out in Telco d. Total savings in India. 40. When specifying economic models, economists often make assumptions about the real world. The purpose of assumptions in economic theory is to – a. Make the model more realistic. b. Simplify the model and provide a primary focus for the theory. c. Insure that the model only covers specific conditions d. Guarantee the accuracy of the theory. 41. Which of the following is incorrect? a. The central problem in economics is that of allocating scarce resources in such a manner that society’s unlimited needs are satisfied as well as possible. b. In mixed economy, the government and the private sector interact in solving the basic economic questions. c. Microeconomics best describes the study of the behaviour of individual agents. d. An important theme in economics is that market systems are better than command (socialistic) economies. 42. – a. b. c. d.

An example of ‘positive’ economic analysis would be An analysis of the relationship between the price of food and the quantity purchased. Determining how much income each person should be guaranteed. Determining the fair price for food. Deciding how to distribute the output of the economy.

43. a. b. c. d.

Identify the correct statement – In deductive method logic proceeds from the particular to the general. Micro and Macro – Economics are interdependent. In a capitalist economy, the economics problems are solved by Planning Commission. Higher the prices lower is the quantity demanded of a product is a normative statement.

44. A study of how increases in the corporate income tax rate will affect the national unemployment rate is an example of – a. Macro-economics b. Descriptive economics c. Micro-economics d. Normative economics 45. Which of the following statements is correct? a. In a two – good economy, the production possibilities frontier reflects the maximum amount of one good that can be produced when a given amount of the other good is produced. b. Microeconomics is the study of the behaviour of the economy as a whole. c. Positive economics focuses on welfare of the people of a society. d. None of the above. 46. Which of the following is likely to cause an inward shift in a country’s PPC? a. Earthquake destroying resources of the country b. Scientists destroying new machines c. Workers getting jobs in the new metro-project d. The country finds new reserves of crude oil 47. In an economy, people have the freedom to buy or not to buy the goods offered in the market place, and this freedom to choose – what they buy dictates what producers will ultimately produce. The key term defining this condition is –

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a. b. c. d.

economic power of choice Consumer sovereignty Positive economy Producer sovereignty

48. Production Possibilities Production possibilities Guns Bread

Consider the following table :

A

B

C

D

E

F

G

H

0 105

10 100

20 90

30 75

40 55

50 30

60 0

30 45

The opportunity cost of increasing gun’s production from 20 to 30 units is equal to – a. 10 units of bread b. 15 units of bread c. 25 units of bread d. 24 units of bread 49. In question above, one moves successively from point A to points B, C, D, E and F, the opportunity cost of guns – a. Increases as more of guns are produced. b. Decreases as more of guns are produced. c. Remains constant as more of guns are produced. d. Nothing can be said. 50. In question 48 above, Point D is efficient while point H (30 guns and 45 loaves of bread) is inefficient. Why? a. Point D is outside the PPC while point H is on the PPC. b. Point D is inside the PPC while point H is on the PPC c. Point D is on the PPC while point H is inside the PPC. d. Nothing can be said. 51. Production Possibilities Production possibilities Goods – A Goods – B

Consider the following table : A 0 30

B 1 28

C 2 24

D 3 18

E 4 10

F 5 0

The opportunity cost of increasing Good – A’s production from 2 to 4 units is equal to – a. 10 units of B b. 14 units of B c. 24 units of B d. 2 units of B 52. In question above, the opportunity cost of increasing one unit of Good B from 10 units to 18 units is – a. 3 units of A b. 1 unit of A c. 0.125 units of A d. 0.5 units of A 53. In question 51 above, as successively from point A to point B, C, D, E and F, the opportunity cost of Good A : a. increases as more of good A is produced b. decreases as more of good A is produced c. remains constant d. is always equal to one unit of B

one

moves

from

54. What is the “Fundamental Premise Basis of Economics”? a. Natural recourses will always be scare. b. Individuals are capable of establishing goals and acting in a manner consistent with achievement of those goals. c. Individuals choose the alternative for which they believe the net gains to be the greatest. d. No matter what the circumstances, individual choice always involves a trade-off. 55. Which of the following is a normative statement?

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a. Planned economies allocate resources via government departments. b. Most transitional economies have experienced problems of falling output and rising prices over the past decade. c. There is a greater degree of consumer sovereignty in market economies than planned economies. d. Reducing inequality should be a major priority for mixed economies. 56. Which of the following statements would you consider to be a normative one? a. Faster economic growth should result if an economy has a higher level of investment. b. Charging the level of interest rates is a better way of managing the economy than using taxation and government expenditure. c. Higher level of unemployment will lead to higher levels of inflation. d. The average level of growth in the economy was faster in the 1990s than the 1980s. 57. Which of the following statements is correct? a. Unlike normative economics, positive economics is based on objective analysis of economic issues. b. The opportunity cost of a good is the quantity of other goods sacrificed to get another unit of that good. c. Microeconomics emphasizes interactions in the economy as a whole. d. None of the above. 58. a. b. c. d.

How society manages its unlimited resources. How to reduce our wants until we are satisfied. How society manages its scarce resources. How to fully satisfy our unlimited wants

Economics is the study of –

59. a. b. c. d.

Which of the following statements is correct? Robbins has made economics as a form of welfare economics The law of demand is always true All capital is wealth but all wealth is not capital None of the above

60. connected with the word – a. Extravagant b. Scarce c. Unlimited d. Restricted

The meaning of the word ‘Economic’ is most closely

61. a. b. c. d.

Which of the following statements is correct? Employment and economic growth are studied in micro economics. Micro economics deals with balance of trade Economic condition of a section of the people is studied in Micro Economics External value of money is dealt with in micro-economics

62. a. b. c. d.

National Income General Price level Factor pricing National Saving and Investment.

Which of the following falls under Micro Economics?

63. method in Economics? a. Testing of Hypothesis b. Collection of data c. Classification of data d. Perception of the problem

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Which of the following steps relates only to deductive

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64. efficient” level of output? A

Which point on the PPC shows a “productively B

F

E

C

a. b. c. d.

A B C All of the above

D 65. In question above, which of the following clearly represents a movement towards greater productive efficiency? a. A movement from point A to point B b. A movement from point C to point D c. A movement from point F to point C d. A movement from point E to point B 66. der the following diagram : The opportunity cost of increasing wine production from D to E is : a. 0 litres of grape juice b. 5 litres of grape juice c. 1 litre of wine d. 0.2 litres of wine

Consi

67. In question above, assuming that the PPC does not shift, which of the following is true? a. Point A is desirable but is inefficient. b. Point D represents a more efficient allocation of resources than points A and F. c. Point H is desirable but is not attainable. d. If wine production equals 7 litres, the maximum amount of grape juice that can be produced simultaneously is 28 litres. 68. In question 66 above, the PPC in the diagram reflects : a. Increasing opportunity cost of more wine production and constant opportunity cost of more grape juice production. b. Increasing opportunity cost of more wine production and decreasing opportunity cost of more grape juice production. c. Decreasing opportunity cost of more wine production and decreasing cost of more grape juice production. d. Increasing opportunity cost of more wine production and increasing cost of more grape juice production. 69. Consider following figure : Which point in the above figure shows that the two commodities cannot be produced with given technology? a. P b. S c. Q d. None of the above 70.

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the

In question above, which point in above figure shows

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that the resources are not being utilized fully? a. P b. Q c. S d. R 71. In question 69 above, which point or points in above figure show that outputs are being produced at least cost combination of resources? a. P b. Both P and Q c. Q d. Both R and S 72. the following figure : If the economy is operating at point C, the cost of producing an additional 15 units of bacon a. 40 units of eggs. b. 10 units of eggs. c. 20 units of eggs. d. 30 units of eggs.

73. : a. b. c. d.

Consider opportunity is –

In question above, if the economy was operating at E The opportunity cost of 20 additional units of eggs in 10 units of bacon. The opportunity cost of 20 additional units of eggs is 20 units of bacon. The opportunity cost of 20 additional units of eggs is 30 units of bacon. 20 additional units of eggs can be produced with no impact on bacon production.

74. In question 72 above, if the economy moves from point A to point D, then : a. The opportunity cost of eggs in terms of bacon falls. b. The opportunity cost of eggs in terms of bacon rises. c. The opportunity cost of eggs in terms of bacon is constant. d. The economy becomes less efficient. 75. a. b. c. d.

In question 72 above, point F represents : None of these answers. A combination of production that can be reached, if we reduce the production of eggs by 20 units. A combination of production that can be reached, if there is a sufficient advance in technology. A combination of production that is inefficient, because there are unemployed resources.

76. In question 72 above, which of the following represents a movement towards better utilization of existing resources? a. A movement from point A to point B. b. A movement from point E to point B. c. A movement from point C to point B. d. A movement from point F to point B. 77. following represents the concept of trade-offs? a. A movement from point A to point B. b. A movement from point F to point C. c. Point E d. Point F

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Which

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of

the

78. In question above, moving from point A to point D, what happens to the opportunity cost of producing each additional unit of consumer goods? a. It increases b. It decreases c. It remains constant d. It increase up to point B, then falls thereafter. 79. In question 77 above, which of the following would not move the PPC for this economy closer to point W? a. A decrease in the amount of unemployed labour resources. b. A shift in preference toward greater capital formation. c. An improvement in the overall level of technology. d. An increase in the population growth rate. 80. moving from point A to point B? a. 100 units of capital goods c. 90 units of capital goods

In question 77 above, what the opportunity cost of b. 8 units of consumer goods d. 10 units of capital goods

81. In question 77 above, underemployment of one or more resources is illustrated by production at point – a. A b. C c. F d. E

Unemployment

or

a b d 82. Which of the following combinations of goods could not be produced with the resources the economy currently has? a. A b. A c u c. C d. D e 83. ________ between ends. a. unique c. neutral 84. problem of allocation of resources is – a. micro economics c. econometrics 85. a. b. c. d.

Economics

as

a

positive

science

should

be

b. socially responsible d. inspiring The branch of economic theory that deals with the b. macro economics d. none of the above

An economy achieves “productive efficiency” when : Resources are employed in their most highly valued uses. The best resources are employed The total number of goods produced is greatest Goods and services are produced at least cost and no resources are wasted

86. Which of the following would be considered a disadvantage of allocating resources using a market system? a. Income will tend to be unevenly distributed b. Significant unemployment may occur c. It cannot prevent the wastage of scare economic resources. d. Profit will tend to be low 87.

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Which of the following is a reason for the curvature

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or bowed out shape of the PPC? a. Falling unemployment as we move along the curve b. The economy having to produce less one goods in order to produce more of another goods. c. Opportunity costs increases as more of a good is produced. d. None of the above. 88. Which of the following is a reason for the negative slops of the PPC? a. The inverse relationship between the use of technology and the use of natural resources. b. Scarcity, at any point in time we have limited amounts of productive recourses. c. Recourses specialization. d. Increasing opportunity costs. 89. a. b. c. d. 90. a. c.

If the PPC is linear, which of the following is true? As the production of a good increases, the opportunity cost of the goods rises. As the production of a goods increases, the opportunity cost of that goods falls. Opportunity costs are constant The economy is not at full employment when operating on the PPC Periods of less than full employment correspond to – points outside the PPC b. points inside the PPC points on the PPC d. either point inside or outside the PPC

91. Which of the following would not result in an rightward shit of the PPC? a. An increase in investment in capital stock b. A reduction in the labour unemployment rate c. The discovery of new oil deposits in India d. An increase in the number of people taking management training courses 92. During election campaigns, candidates often promise both more “gun” and more “butter”, if they are elected. Assuming unemployment is not a problem, what possible assumption are they making but not revealing to their audience? a. There will be a sufficient increase in the supply of natural recourses used to produce “guns” and “butter”. b. That there will be an improvement in the technology of both “gun” and “butter” production c. That there will be an increase in the labour force d. All of the above 93. a. convex to origin c. both a and b

A PPC is – b. concave to origin d. neither a nor b

94. What is one of the future consequences of an increase in the current level of consumption in the India? a. Slower economic growth in the future b. Greater economic growth in the future c. no change in our economic growth rate d. Greater capital accumulation in the future 95. Which of the following is not micro-economic subject matter? a. The price of mangoes b. The cost of producing a fire truck for the fire department of Delhi, India. c. The quantity of mangoes produced for the mangoes market. d. The national economy’s annual rates of growth. 96. Which of the following is not one of the four central questions that the study of economics is supposed to answer? a. Who produces what? b. When are goods produced? c. Who consumes what? d. How are goods produced? 97. Mr. A : My corn harvest this year is poor. Mr. B : Don’t worry. Price increase will compensate for the fall in quantity supplied

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Mr. C : Climate affects crop yields. Some years are bad, others are good. Mr. D : The Government ought to guarantee that our income will not fall. In this conversation, the normative statement is made by – a. Mr. A b. Mr. B c. Mr. C d. Mr. D 98. Consider the following and decide which, if any, economy is without scarcity : a. The pre-independent India economy, where most people were farmers b. A mythical economy where everybody is a billionaire c. Any economy where income is distributed equally among its people d. None of the above.

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