UNIT 1 INTRODUCTION TO
ECONOMICS AND ECONOMY
Structure
1.0 Objectives
1.1 Introduction
1.2 Concept of Scarcity
1.3 Meaning of Production
1.4 Central Problems of an Economy
1.4.1 What to Produce?
1.4.2 How to Produce?
1.4.3 For Whom to Produce?
1.4.4 The Problem of Growth
1.4.5 Choice between Public and Private Goods
1.4.6 The Problem of ‘Merit Goods’ Production
1.5 Production Possibility Curve
1.6 Allocation of Resources: Solution of Central Problems
1.6.1 Resource Allocation in a Mixed Economy
1.7 Economic Methodology and Economic Laws
1.7.1 Inductive and Deductive Reasoning
1.7.2 Equilibrium
1.8 Positive versus Normative Economics
1.9 Microeconomics and Macroeconomics
1.10 Stocks and Flows
1.11 Statics and Dynamics
1.12 Let Us Sum Up
1.13 References
1.14 Answers or Hints to Check Your Progress Exercises
1.15 Terminal Questions
*Shri I.C. Dhingra, Rtd, Associate Professor, Shaheed Bhagat Singh College (University of Delhi), Delhi.
7
,Introduction
1.0 OBJECTIVES
After studying this unit, you will be able to:
• explain the problem of scarcity of resources for satisfying ever-increasing
wants of society;
• state the meaning and nature of an economy;
• describe the concept of economic entities;
• discuss the concept of production possibility curve;
• state the issues relating to allocation of resources between investment and
consumption, and between private and public goods;
• explain the methods of resource allocation in a market economy in a
socialist economy and in a mixed economy;
• clearly describe the basic concepts and methodology of Economics;
• state the nature of economic laws; and
• explain some of the analytical concepts associated with economic
reasoning.
1.1 INTRODUCTION
Let us begin with defining the discipline of Economics.
Definition of Economics
Economics has been variously defined. As summarised by Samuelson, some of
the definitions seek to explain that economics:
• analyses how a society’s institutions and technology affect prices and the
allocation of resources among different uses.
• explores the behaviour of the financial markets, including interest rates
and stock prices.
• examines the distribution of income and suggests ways that the poor can
be helped without harming the performance of the economy.
• studies the business cycle and examines how monetary policy can be
used to moderate the swings in unemployment and inflation.
• studies the patterns of trade among nations and analyses the impact of
trade barriers.
• looks at growth in developing countries and proposes ways to encourage
the efficient use of resources.
• asks how government policies can be used to pursue important goals such
as rapid economic growth, efficient use of resources, full employment,
price stability, and a fair distribution of income.
8
, A common theme running through all these definitions is that scarcity is a fact Introduction to
of life and that an efficient use of these scarce resources is to be found. That is Economics and
how we define economics as a science that deals with scarcity. Economy
It explains the behaviour of different economic units, households, firms,
government and the economy as a whole, when they are faced with scarcity.
1.2 CONCEPT OF SCARCITY
“Scarcity” lies at the root of all economic activities. The concept of scarcity
finds an expression in two basic facts of economic life:
A. Unlimited wants or ends, and
B. Scarce resources or means.
A. Unlimited wants or ends
Every person has some wants. Different persons have generally different
wants, and wants of even the same person keep changing with the passage of
time, change of place and status.
Human wants are unlimited and keep on increasing. Different wants differ
in their intensity. Subject to the availability of resources, higher order wants
need be satisfied first and if the resources are still available these may be used
to satisfy lower order wants.
B. Scarce resources or means
Satisfaction of wants requires resources (or the means to satisfy wants).
Availability of resources is limited in relation to requirements.
However, scarce means have alternative uses.
The resources therefore need be allocated among different uses in a systematic
coordinated manner. Every individual and economy has to devise a mechanism
for this.
Different societies try to solve these issues in different ways and in the process
each society creates a set-up called ‘an economy’. The term ‘economy’ or
‘economic system’ is a comprehensive one. It covers the entire set of
institutions and arrangements, (including rules and regulations which facilitate
their interactions) for resolving the basic and permanent problem of an
imbalance between means and wants.
The human society has evolved several sets of such institutional arrangements
each is termed an economic system and they have their own distinguishing
features and nomenclatures. These systems try to adopt their own means and
methodologies for solving the basic problems.
For example, take the case of a capitalist economy. In this case the means of
production are owned and inherited by individuals, and various economic
decisions are guided by prices of goods and services in the market. The income
of an individual is determined by means of production supplied by him to the
market and the price which they are paid for their service. On the other hand, in
a strict socialist economy all the means of production are owned by the state.
The state takes all the decisions regarding the use of available resources.
9
ECONOMICS AND ECONOMY
Structure
1.0 Objectives
1.1 Introduction
1.2 Concept of Scarcity
1.3 Meaning of Production
1.4 Central Problems of an Economy
1.4.1 What to Produce?
1.4.2 How to Produce?
1.4.3 For Whom to Produce?
1.4.4 The Problem of Growth
1.4.5 Choice between Public and Private Goods
1.4.6 The Problem of ‘Merit Goods’ Production
1.5 Production Possibility Curve
1.6 Allocation of Resources: Solution of Central Problems
1.6.1 Resource Allocation in a Mixed Economy
1.7 Economic Methodology and Economic Laws
1.7.1 Inductive and Deductive Reasoning
1.7.2 Equilibrium
1.8 Positive versus Normative Economics
1.9 Microeconomics and Macroeconomics
1.10 Stocks and Flows
1.11 Statics and Dynamics
1.12 Let Us Sum Up
1.13 References
1.14 Answers or Hints to Check Your Progress Exercises
1.15 Terminal Questions
*Shri I.C. Dhingra, Rtd, Associate Professor, Shaheed Bhagat Singh College (University of Delhi), Delhi.
7
,Introduction
1.0 OBJECTIVES
After studying this unit, you will be able to:
• explain the problem of scarcity of resources for satisfying ever-increasing
wants of society;
• state the meaning and nature of an economy;
• describe the concept of economic entities;
• discuss the concept of production possibility curve;
• state the issues relating to allocation of resources between investment and
consumption, and between private and public goods;
• explain the methods of resource allocation in a market economy in a
socialist economy and in a mixed economy;
• clearly describe the basic concepts and methodology of Economics;
• state the nature of economic laws; and
• explain some of the analytical concepts associated with economic
reasoning.
1.1 INTRODUCTION
Let us begin with defining the discipline of Economics.
Definition of Economics
Economics has been variously defined. As summarised by Samuelson, some of
the definitions seek to explain that economics:
• analyses how a society’s institutions and technology affect prices and the
allocation of resources among different uses.
• explores the behaviour of the financial markets, including interest rates
and stock prices.
• examines the distribution of income and suggests ways that the poor can
be helped without harming the performance of the economy.
• studies the business cycle and examines how monetary policy can be
used to moderate the swings in unemployment and inflation.
• studies the patterns of trade among nations and analyses the impact of
trade barriers.
• looks at growth in developing countries and proposes ways to encourage
the efficient use of resources.
• asks how government policies can be used to pursue important goals such
as rapid economic growth, efficient use of resources, full employment,
price stability, and a fair distribution of income.
8
, A common theme running through all these definitions is that scarcity is a fact Introduction to
of life and that an efficient use of these scarce resources is to be found. That is Economics and
how we define economics as a science that deals with scarcity. Economy
It explains the behaviour of different economic units, households, firms,
government and the economy as a whole, when they are faced with scarcity.
1.2 CONCEPT OF SCARCITY
“Scarcity” lies at the root of all economic activities. The concept of scarcity
finds an expression in two basic facts of economic life:
A. Unlimited wants or ends, and
B. Scarce resources or means.
A. Unlimited wants or ends
Every person has some wants. Different persons have generally different
wants, and wants of even the same person keep changing with the passage of
time, change of place and status.
Human wants are unlimited and keep on increasing. Different wants differ
in their intensity. Subject to the availability of resources, higher order wants
need be satisfied first and if the resources are still available these may be used
to satisfy lower order wants.
B. Scarce resources or means
Satisfaction of wants requires resources (or the means to satisfy wants).
Availability of resources is limited in relation to requirements.
However, scarce means have alternative uses.
The resources therefore need be allocated among different uses in a systematic
coordinated manner. Every individual and economy has to devise a mechanism
for this.
Different societies try to solve these issues in different ways and in the process
each society creates a set-up called ‘an economy’. The term ‘economy’ or
‘economic system’ is a comprehensive one. It covers the entire set of
institutions and arrangements, (including rules and regulations which facilitate
their interactions) for resolving the basic and permanent problem of an
imbalance between means and wants.
The human society has evolved several sets of such institutional arrangements
each is termed an economic system and they have their own distinguishing
features and nomenclatures. These systems try to adopt their own means and
methodologies for solving the basic problems.
For example, take the case of a capitalist economy. In this case the means of
production are owned and inherited by individuals, and various economic
decisions are guided by prices of goods and services in the market. The income
of an individual is determined by means of production supplied by him to the
market and the price which they are paid for their service. On the other hand, in
a strict socialist economy all the means of production are owned by the state.
The state takes all the decisions regarding the use of available resources.
9
