Class 11 economics notes Micro Economics – Introduction

Class 11 economics notes Micro Economics – Introduction

(Topics also suitable for CA CPT General Economics Notes)

Ch 1 – Meaning & Scope of Economics Economics – Derived from Greek Word “Oikonomia” means ‘Household’ or ‘Household Management’.

1. Economics as science of wealth (classical economists )

Adam Smith(Father of Economics)- An inquiry into the Nature and Causes of Wealth of Nations(1776)-At birth called ‘Political Economy’.   JB Say– Science which deals with wealth.             Criticism – Materialistic and neglect of welfare  

2. Economics as science of material well being (neo classical economists)

Alfred Marshall – welfare aspect of economics -normative aspect – “Economics is on the one side a study of wealth, and on the other and more important side, a part of the study of man”. Prof. A.C, Pigou – “The range of our enquiry becomes restricted to that part of social welfare which can be brought directly into relationship with measuring rod of money”. Criticism – Neglect of immaterial things, concept of welfare vague(unclear)  

3. Economics as science of Choice Making

Lionel Robbins:- i. Positive science       ii. Economics is neutral between ends. Wrote book – Nature and significance of Economics (1931) – gave scientific definition. “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses”.   Criticism – Impersonal & colorless, ignored macro-economic concepts, no focus on economic growth and development and problem of abundance (excess of resources e.g. unemployed people)

4. Economics as science of dynamic growth and development

  Paul A. Samuelson – “Economics is the study of how men and society choose, with or without the use of money, to employ scarce productive resources which could have alternative uses, to produce various commodities over time and distribute them for consumption now and in the future amongst various people and groups of society”.   Prof Henry Smith – “The study of how in a civilized society one obtains the share of what other people have produced and of how the total product of society changes and is determined.”   Jacob Viner – “Economics is what economists do”. – Pragmatic (practical) definition  

5. Economics as a Science: facts are systematically collected and analyzed – a social science whose subject matter is man – it is an imperfect science.

  Economics as an Art: It is practice of knowledge. J.M. Keynes – “An art is a system of rules for the attainment of given end.”  It teaches us to do.  

6. Positive Science – deals with what is – Simply states facts and uses empirical evidence. It does not offer any kind of suggestion about the facts. Thus, positive science is strictly neutral towards ends – more logical and helps in the formulation of theories.

  Normative Science – deals with what ought to be – deals with ethics – offers suggestion for solving the problems – more practical, realistic and useful science.  

7. Microeconomics – Greek word Mikros means small – deals with behaviour consumers, resource owners, etc – deals with allocation of resources – known as price theory- Partial Equilibrium Analysis

Prof Boulding – “Microeconomics is the study of particular firms, particular households, individual price, wages, income, individual industries and particular commodities”.   Macro economics – Aggregative Economics – Method of Lumping – Income Theory – General Equilibrium analysis – deals with aggregates such as national income, aggregate consumption, etc. Mc Connel – “Macroeconomics examines the forest and not the trees. Thus it analyses and establishes the functional relationship between large aggregates”.  

8. Deductive Method – General to particular –more suitable when facts and data are not available – also called as abstract, hypothetical or a priori – based on abstract reasoning – theoretical method. (CPT level)

  The steps in the process of deductive reasoning are: (a)Perception of the problem(theory)    (b)Defining terms and making assumptions (developing hypothesis) (c)Deductive hypothesis (observation)            (d)Testing hypothesis (Confirmation)          

Inductive method – Particular to general – popular among modern economists – more precise,  realistic and scientific – more suitable when facts and data are available – also called as historical, concrete, empirical  or realistic. (CPT level)

  The steps in inductive method are: (a)Perception of the problem (Observation)                (b)Collection of data (Pattern)             (c)Finding out the relationship (Tentative hypothesis) (d) Set rules for the verification of the principles (Making Theory) Deductive and inductive methods are not alternative of each other. Marshall – “Both the methods are needed for scientific thought as the right and left foot are both needed for walking”.

9. Central problem – Problem of choice. Three main causes of central problems are

a.Unlimited human wants     b.  Limited economic resources   c. Alternative uses of resources  

The central problems are:

1.What to produce and how much to produce? The guiding principal is to allocate the resources in the production of goods in such a way that maximizes aggregate utility.

2.How to produce? (Labour Intensive Technique or Capital Intensive Technique). The choice of technique will depend upon –  availability of various factors of production, and The price of factors of production.

3.For whom to produce? Goods and services produced for people who can pay for them – decide about the shares of different people in the national cake of goods and services. Paying capacity depends upon income or purchasing power.

4. (CPT level) What provision should be made for economic growth? Take decision about rate of saving, investment, capital formation, etc – how much sacrifice of current consumption is to be done. (CPT level)  

10. Production Possibility Curve – shows all possible combination of two goods- also called transformation curve or production boundary or production frontier

  All points on Production Possibility Curve (PPC) solve the first two problems and points on a higher PPC solve the problem of economic growth. PPC cannot solve the problem of ‘For whom to produce’. The slope of PPC measures opportunity cost – the slope of PPC is rising – law of increasing marginal opportunity cost –  PPC is concave to origin. If opportunity costs were constant, PPC would be a straight line. PPC is downward sloping due to Scarce resources. We have to sacrifice one good in order to produce more of the other good.

11.Three forms of economic organisations:

a.Capitalist economy     

b. Socialist economy          

c.Mixed economy.

  Capitalism – Means of production are controlled by private individuals – advocates price mechanism  – Prices are determined by the market forces of demand and supply. – basic aim is profit maximization – consumers free to consume whatever they like.

Socialism – Government or public sector owns the factors of production  – the central planning authority decides what, how and for whom to produce – aim is to maximise welfare of the society – consumers consume only those goods which are produced by the government – ensure equitable distribution of income through equality of opportunities.

Mixed economy – Public and private sectors exist side by side- Both price mechanism and central planning authority decide what, how and for whom to produce – Price mechanism is curtailed (controlled) through measured like price control, administered prices etc – Planning is done through incentives like concessions, subsidies, etc. and disincentives like high rate of taxes, strict licensing etc.

Important Tit-Bits

1. The law of scarcity is applicable to the rich and poor countries alike.
2. Robbins said that economics should be neutral between ends (means positive economics)
3. Macro economics is also known as aggregate economics
4. In a free market economy, consumer preference decides the allocation of resources. But due to this not all demands will be met and there will be uneven distribution of income in the society.
5. In PPF, the points lying on the curve show optimum utilization of resources.
6. Trade-off on a PPF is the shifting of a producer from one point of production to another point of production. This involves sacrificing one commodity to gain more of another commodity.
7. The PPF shows full employment production level. So if there is unemployment in an economy, then the economy will operate at a point inside the PPF. If the unemployment is reduced the production will shift towards the PPF and with full employment, it will touch the PPF. Reduction in unemployment doesn’t shift the PPF rightwards.
8. The best definition of economics would be that deals with human wants and scarce means.
9. Positive economics tries to explain the relationship between causes and effects of various economic events or situations. Normative economics tries to work out or suggest solutions for those situations (problems)
10. Capitalist economies – US | Socialist – Finland, China, Denmark | Mixed economies – India
11. MOC increasing – PPC Concave | MOC decreasing – PPC Convex  | MOC constant – PPC downward straight line
12. The PPC shows the maximum amount of any good that can be produced with the available resources. It also shows the limited number of combinations possible with the given resources
13. PPC helps us to understand the problem of scarcity and guides us about the possible combinations of two goods to be produced with limited resources.
14. If there is no scarcity in the world then there is no need to study economics
15. Deductive method is based on abstract reasoning, and subsequent verification with facts