RBSE Class 12 Economics Notes Chapter 1 Introduction to Economics

Rajasthan Board RBSE Class 12 Economics Notes Chapter 1 Introduction to Economics

Early man’s livelihood depended on hunting.

At present, industry, trade and other business activities have developed, which have become the means for the employment and income of people.

The literature of economic thoughts related to economic activities, principles and laws, prospered and became popular by the name of economics.

The term ‘varta’ was used for economic activities in our ancient books. Guru Brihaspati, Shukra, Kautilya, etc. used this term for the economic activities of agriculture, animal husbandry, milk production and commerce.

Adam Smith is considered to be the ‘Father of Economics’. He describes that economics enquires into the factors that determine ‘wealth of the country and its growth’ in his book ‘An Enquiry in to the.Nature and Causes of the Wealth of Nations’ in 1776.

Economist Marshall described that wealth is only a secondary thing; it is man and his ordinary business of life which is the primary object of economic study. His study was based on economic welfare.

Lord Lionel Robbins described economics to be related to unlimited wants and limited resources.

Prof. Paul A. Samuelson related economics to development, and stressed the dynamic analysis of economic activities.

Prof. J.K. Mehta describes economics as a means in attainment of the state of lack of wants.

Economics is the science of study of problems related to the choice/selection which is created due to the limitation of resources of individuals or countires, and it is also the art of resolving these problems.

Nowadays, the study of individual unit under the subject matter of economics (one consumer, one producer and one firm), is done in micro-economics, while the study of groups of individual units (a country) at the level of economic behaviours, is done under macro-economics.

Ragner Frisch firstly introduced the term Micro Economics and Macro Economics in 1933. The term ‘Micro’ means small and the term ‘Macro’ means large or extensive. Micro economics is also called Price Theory.

When micro-economic study is done assuming economic variables like cost, etc. to be constant (unchangeable), it is called Micro-static study.

When two stable states are compared, it is called micro-comparative study.

The study done by assuming economic variables to be continuously dynamic, is called micro-dynamic study.

John Maynard Keynes’ book, “The General Theory of Employment, Interest and Money” was published in 1936.

There are various techniques or methods for conducting economic analysis, the brief description of which is as follows:

When economic analysis is done while considering a single factor, it is called Partial Analysis, but when analysis depends on various factors, then it is called General Analysis.

When economic analysis is done on the basis of particular point of time, it is called Static Analysis, while when it is based on two points of time, it is called Comparative Analysis. On the contrary, when we study the services of changes in equilibrium, it is called Dynamic Analysis.

Inductive and deductive methods are complementary to each other, but some differences are found between them.

Deductive method is based on generalization of logic (reasoning). It is also called Hypothetical Method, Abstract Method, a Priori Method, Logical Method, etc.

Malthus has used inductive method in his theory of population. Inductive method is also known as Historical, Analytical and Realistic Method because in this conclusions are drawn on the basis of real world events by collecting the facts and analyzing and classifying them.

Nature of economics refers to whether economics is a science or an art or both, and if it is a science, whether it is a positive science or a normative science or both.

It is true that Economics is a science as it is a systematic body of knowledge which explains cause and effect relationship between various variables such as price, demand, supply, money, production, national income, employment, etc.

Economics as an art because various branches of economics, like consumption, production, distribution, money and banking, public finance, etc., provide us basic rules and guidelines which can be used to solve various economic problems of the society.

The theory of demand guides the consumer to obtain maximum satisfaction with given income. Theory of production guides the producer to equate marginal cost with marginal revenue while using resources for production. Thus, economics is an art in the sense that the knowledge of economic laws helps us in solving practical economic problems in everyday life.

A positive science is that science in which analysis is confined to cause and effect relationship. In other words, it states ‘what is 1 and not ‘what ought to be’. For example, positive economics deals with questions like what are the causes of unemployment? How do we account for inflation?

Economics as a normative science is concerned with what ‘ought to be’. Its objective is to examine real economic events from moral and ethical angles and to judge whether certain economic events are desirable or undesirable.

It is generally agreed now that economics is both a positive and a normative science. Economists now believe that complete neutrality between ends is neither feasible nor desirable.

The following assumptions are made for carrying out economic analysis

Other things remain same.
Discretion of economic unit.
Economic man/human.
Initial state of equilibrium/balance.
Relation with special social, political, economic institutions.
Relation with science and geography.

The basic economic problem is the problem of choice. The problem of choice arises because of three inter-related facts of life:

Unlimited wants having different priorities.
Resources having limited but alternative uses.
Adjustment between wants and economic resources.

The first problem is allocation of time made by each person. This allocation is done between work and leisure.

To find a solution to the main economic problems, it is necessary to understand the concepts of production, possibility curve, opportunity cost and the concept of marginal opportunity cost.

Dominic Salvatore defines, ‘Production possibility curve is the graph which indicates the various production possibilities of commodities when resources are fixed. The production of one commodity can only be increased by sacrificing the production of the other commodity’. It is also called the Production Possibility Curve or Product Transformation Curve.

A production possibility curve is a curve which shows the Various alternatives production possibilities which can be produced with given resources and techniques of production. It is also called Transformation Curve.

Production possibility curve is concave to the origin.

Upon moving from one point to another, the quantity of one commodity decreases while the quantity of other commodity increases.

Opportunity cost of a good is that quantity of good which we have to sacrifice. That cost which encourages resources in their present use is called Opportunity cost.

Concept of scarcity leads to the idea of opportunity cost. The opportunity cost of an action is what you must give up when you make that choice. Another way to say this is, it is the value of the next best opportunity. Opportunity cost is a direct implication of scarcity. People have to choose between different alternatives while deciding how to spend their money and their time. Opportunity cost includes both explicit and implicit costs.

Marginal opportunity cost refers to the amount of a good sacrificed in order to produce a single additional unit of another good.

Economic system is the system of production, distribution and consumption. The economic system is composed of people, institutions and their relationships. It addresses such problems of economics as the allocation of resources.

Economies are broadly classified as

capitalism/market economies
socialism/centrally planned economies and
mixed economies.

Capitalism/Market economies are those economies in which economic activities are left to the free play of the market forces. Producers are free to produce those goods and services which are high in demand, so that they are able to maximize their profits.

Socialism/Centrally planned economies are those economies in which the course of economic activities is dictated or decided by some central authority or by the government.

Mixed economies exhibit the characteristics of both market economies and centrally planned economies. In these economies, economic activities are generally left to the free play of the market forces, but simultaneously the government exercises its control with a view to regulating the overall course of production, consumption and investment.

Every economy faces three central problems. These are offshoots of the basic problem of resource allocation. These are

what to produce
how to produce and
for whom to produce

Important Glossary

Trade : The action of buying and selling goods.
Economics : It is a social science related to production, distribution and consumption of goods and services.
Economy : The economy is the organized system of human activity involved in the production, consumption, exchange and distribution of goods and services.
Economic Problem : An economic problem is basically the problem of choice which arises because of scarcity of resources.
Economic Activities : Such tasks that include the production, distribution and consumption of goods and services at all levels within a society.
Household : A household is all the people in a family or group who live together in a house.
Scarcity : It is the deficiency of resources or the creator of economic problem.
Production : It is the process to produce or making goods or services for consumption.
Producer : One that produces, especially a person or organization that produces goods or services for sale.
Services : These are abstract and invisible, i.e. the work done by doctor and teacher is included under service.
Resources : Such commodities and services, which are used to produce other commodities and services, i.e. land, labour, tools and machines, etc.
Allotment of Resources : That quantity of each resource which is used in production of each commodity and service.
Society : A large group of people who live together in an organized way, to make decisions about how to do things and sharing the work that needs to be done.
Commodity : Such a physical and touchable thing which fulfils the needs of man, i.e. foodstuff, clothes, etc.
Micro Economics : Micro economics may be defined as that branch of economic analysis which studies the economic behaviour of the individual unit, which may be a person, a particular household or a particular firm.
Macro Economics : Macro economics is the branch of economics that studies the behaviour and performance of an economy as a whole.
Consumption : The using up of goods and services having an exchangeable value.
Exchange : Exchange economy is the technical term used in micro economics research to describe the interaction between many agents. Each agent brings its own liability, and they can exchange products among them on the basis of price system.
Distribution : The product is spread across the market, which means that many people can buy it.
National Income : National income is the total value of a country’s final output of all new goods and services produced in one year. Understanding how national income is created is the starting point for macro economics.
Development : The process of economic and social transformation that is based on complex cultural and environmental factors and their interactions.
Unemployment: It is an event that occurs when a person who is actively searching for employment is unable to find work.
Inflation : Inflation is defined as a continuous increase in the normal level of values of goods and services in a country and it is measured as an annual percentage change.
Balance of Trade : The balance of trade compares the value of the import and export of any country. When export is higher than import, then it is a trade surplus and when import is higher than export, it is called trade deficit.
Paradox : A paradox is a statement that may seem absurd or contradictory but still can be true or at least understandable.
Factor : One that actively contributes to the production of a result.
Static : Lacking in movement, action or change, especially in an undesirable or uninteresting way.
Inductive : Inductive method, which also called Empirical Method, was adopted by the “Historical School of Economists”. It involves the process of reasoning from particular facts to general principle.
Deductive : The deductive method is also named as analytical, abstract or prior method. The deductive method consists in deriving conclusions from general truths, takes a few general principles and applies them to draw conclusions.
Hypothetical : Which can be imagined or suggested, but not necessarily real or true.
Abstract : Existing in thought or as an idea but not having a physical or concrete existence.
Priori : Regarding or denying logic or knowledge arising from theoretical deduction rather than observation or experience.
Population : The number or body of inhabitants in a place belonging to a specific social, cultural, socio-economic, ethnic or racial subgroup.
Public Finance : The collection of taxes by the people who benefited from the provision of public goods by the government and the use of those taxes, funds for the production and distribution of public goods.
Production Possibility: The probability of production is the possibility of the production of goods and services with a number of available resources and the presence of systematic knowledge.
Opportunity Cost : It refers to value of a factor in its next best alternative use.
Marginal Opportunity Cost : It refers to the amount of a good sacrificed in order to produce a single additional unit of another good.
Capitalism : It is an economic system in which financial decision-making and pricing of goods and services are fully guided by the overall interaction of individual citizens and businesses of a country.
Socialism : It is an economic organization in which the means of production are state owned and regulated. Distribution of resources and goods is done by the state under the direction of the planning commission.
Mixed Economy : It exhibit characteristics of both market economies and centralized schematic economies. In these economies, economic activities are generally left to the free play of market forces, but simultaneously the government exercises control to regulate the overall curriculum of production, consumption and investment.