Introduction Flashcards
What is an economy
It is the framework within which economic activities of production, consumption and capital formation (investment) take place.
It is a system which provides people a means to earn and make a living.
Includes production units within an area, with provides a mean for people to work and earn an income.
Existence of economy depends on two fact: Wants are unlimited, are resources are limited
Meaning and definition of economics
Social science that aims to allocate the scarce resources in such a way that consumers can maximise satisfaction, Producers can maximise profit and society can maximise social welfare.
It is about making choices in the presence of scarcity.
Meaning of Scarcity
It is excess of demand over available supply, demand of resources are greater than available resources. Lack of supply as compared to demand.
What are the causes of economic problems
- Resources are scarce (If a commodity has no demand, it cannot be called scarce)
- Wants and many (endless)
- Resources can be put to alternate (endless use)
- Intensity or Urgency of a want varies in a population
Scarcity and Choice go hand in hand. Explain
This is due to the fact that only because resources are scarce, do we have to make a choice between are wants. If resources were unlimed, one could have all he/she aspires to have, and thus this economical problem wouldn’t arise. But reality is, people, no matter how wealthy, always aspire higher quality of life and overall development. Want may be development for one may be detrimental to another. Thus as a society, we have to make a choice, as inevitably something is always going to be lost.
Central problems of an economy
Also called allocation of resources.
They are as follows:
1. What to produce and in what quantity? Where to allocate resources and how many. Consumer goods or capital goods can be produced
2. How to produce? Choosing technique to produce (Labour intensive / capital (machine/money) intensive. India is labour intensive while UK is capital intensive. Also depends on objective or producer
3. For whom to produce? It is the problem of distribution of national income. (Functional distribution - factors of production, and Personal distribution - Distribution of production amongst consumers in a society)
What is opportunity cost?
Due to scarcity of resources a choice has to be made. Opportunity cost is the value or the next best alternative (not the alternative chosen) that is forgone (sacrificed).
It is the value of the benefit that is sacrificed choosing and alternative.
What is marginal opportunity cost?
When resources are transferred from one use to another, there will be a decrease in production of one good to increase the other. The value of the good decreased, in order to increase production of another good, is called mariginal opportunity cost. It is also called rate of sacrifice.
MOC = Loss/gain
MOC is the slope of PPC
What is production possibility curve? What does it indicate?
The PPC (Production Possibility Curve) is a graphical representation showing all possible combinations of two goods that an economy can produce with available resources and technology. It illustrates:
- Scarcity (points beyond the curve are unattainable)
- Choice (choosing between different combinations)
- Opportunity Cost (to produce more of one good, some of the other must be sacrificed)
* The slope of PPC is MOC
What does a concave PPC indicate?
A concave PPC shows increasing opportunity cost—as more of one good is produced, larger quantities of the other good must be sacrificed due to resource specialization.
What causes an outward shift in the PPC?
The PPC shifts outward when there is economic growth due to:
- Increase in resources (labour, land, capital).
- Improvement in technology.
What causes an inward shift in the PPC?
The PPC shifts inward due to economic decline, caused by:
- Natural disasters (earthquakes, floods).
- Wars and destruction.
- Loss of resources (depletion of natural reserves).
What are the assumptions of the PPC?
- Fixed resources – The economy has a limited amount of factors of production.
- Fixed technology – The technology available for production remains constant.
- Efficient resource use – All resources are fully utilized without waste.
- Production of only two goods – The model assumes an economy produces only two goods.
- Resources vary in efficiency
What determines the curve of the PPC?
MOC
Relation between MOC and PPC curve
If MOC constant, PPC is straight line
If MOC increases, PPC is concave to origin
If MOC decrease, PPC is convex to origin
*in real life PPC is always concave
Characteristics / Properties of PPC
- PPC slopes downwards
- PPC is concave to origin
By whom and why was the term economics first used?
The term economics was first used by doctor Marshall in 1890 in his famous book, ‘Principles of Economics’.
Who is known as the father of modern economics?
Adam Smith
Examples of no effect on PPC
- When resources are not fully employed - Point inside PPC - Underutilized
- Impact towards reducing unemployment
- Economic slowdown in foreign countries affecting exports from India
What is a rotation in the PPC?
When there is a change in resources/technology for only one good, PPC will rotate (not shift).
Also known as a pivot
How can economies be classified?
- Centrally Planned economy
- Market Economy
- Mixed Economy
What is a centrally planned economy?
A centrally planned economy is one where all rules and regulations are set by the government. Its priority is social welfare and reduction of economic inequality.
Also known as a socialist economy.
Means of production controlled and owned by public sector.
What is a market economy
All economic activities are organized through the market. Also called capitalist economy. Problems of an economy are solved by market (price mechanism), market dictates demand and supply.
Main goal is to earn profits
Not government interference
Means of production owned by private sector.
What is a mixed economy?
Mix of public and private sector.
Economic decisions or policies are taken by government, but economic activities are done by the market. Decisions aim to achieve acheive
