Karnataka 2nd PUC Economics Notes Chapter 1 Introduction to Micro Economics
An economic system or economy is a mechanism where the sources are channelized on priority to produce goods and services. These goods and services produced by all the sectors of the economy, determine the national income.
1. What to produce: Every country has to decide which goods are to be produced and in what quantities. Whether more guns should be produced or more foodgrains should be grown or whether more capital goods like machines, tools, etc., should be produced or more consumer goods (electrical goods, daily usable products etc.) will be produced.
2. How to produce: There are various alternative techniques of producing a product. For example, cotton cloth can be produced with either handloom or power looms. Production of cloth with handloom requires more labour and production with power loom .needs use of more machines and capital. It involves selection of technology to produce goods and services.
There are two types of techniques of production viz.,
(a) Labour intensive technology and
(b) Capital intensive technology.
3. For whom to produce: Another important decision which an economy has to take is for whom to produce. Economy cannot satisfy the wants of all the people^ Therefore, it has to decide who should get how much of the total output of goods and services.
Apart from the above, an economy also faces other problems: They are as follows:
(a) The problem of economic efficiency: The efficient utilisation of existing resources of an economy has also become a major problem. The optimum use of both natural and human resources is needed to prevent-the wastage of these resources.
(b) The problem of full employment: Full employment means utilisation of resources to the fullest extent. Under utilisation of human resources leads to unemployment, disguised unemployment etc. If the natural resources are not used to the maximum, there is a wastage of potentiality of an economy.
(c) The problem of economic growth: Every nation wants to increase its Gross Domestic Product to achieve economic growth. This in turn improves standard of living and reduces poverty. A higher standard of living will put more demand on the products available.
Organisation of Economic Activities:
The main types of economic system are:
(a) Socialistic/Centrally planned Economy,
(b) Capitalistic/Market Economy and
(c) Mixed Economy.
(a) Centrally planned Economy or Socialistic Economy: A centrally planned economy also called as socialistic economy is that economy where the economic activities are controlled by the central Government. Here, the Government takes decisions about the allocation of resources in accordance with objectives to attain economic and social welfare. Example, Russia, China, North Korea etc.
(b) Market Economy or Capitalistic Economy: A Market economy also known as Capitalistic economy is that economy in which the economic decisions are undertaken on the basis of market mechanism by the private entrepreneurs. It functions on demand and supply conditions. Example: USA
(c) Mixed Economy: A mixed economy is that economy in which we can see co-existence of both private and public sector enterprises. It is the combination of Socialistic and Capitalistic features.
The best example is India.
Positive and Normative Economics:
→ Positive economics is the study of what was’ and ‘what is’ under the given set of circumstances. It is concerned with how the economy performs, the basic functions of what to produce, how to produce and. for whom to produce. It explains how the economy takes decisions about consumption, production and exchange of goods.
→ It deals with the scientific explanation of the working of the economy. It analyses every issue of economics from a positive perspective without passing any value judgments. It deals with the cause and effect relationship of economic variables.
→ Normative economics studies ‘what ought to be’. It explains about ‘what should be and should not be done’. Here we try to understand that whether the mechanisms are desirable or not. The normative economic statements are sometime called matters of opinion or statements of value.
→ Economists who advise Governments are normally concerned about normative economics. In India, Economic advisers who are appointed by the Government are responsible for advising the Prime Minister as to which of the policies are good and beneficial to the country’s economy and which are bad and detrimental on the whole.
Economics is both Positive and Normative:
But, Economics is both positive and normative science. The study of economics involves both scientific investigation and policy analysis. Economists first use science to explain the world and understand how the economy wonts, later policies are explored for the economic development.
Deductive and Inductive Methods of Economics
Under this method, the conclusions are drawn based on inferences from the universal to the individual or from general to the particular. This method derives new conclusions from fundamental assumptions. It is also called as ‘Scientific Method’. It is of four stages viz.,
- Identification of the hypothesis to be tested.
- Generations of predictions from the hypothesis.
- Conducting experiments to check whether the predictions are correct.
- Confirming the hypothesis.
→ This is also called as empirical method. This method was advocated by Frederic List, Rosher and Hilde Brand. Inductive
→ Method is a process of reasoning from a particular to general or from individual to the universal. It functions in four stages viz.,
- Selection of an economic problem and defining the same clearly.
- Collection of data using statistical techniques.
- Analysing the data.
- Observation and generalization to establish a general truth.
Micro economics is the study of the economic actions of individuals and small groups of individuals. According to Boulding, “the study of particular firm, particular household, individual price, wages, income, individual industry, particular commodity, is micro economics.”
Micro economics is an important method of economic analysis. It has both theoretical and practical importance.
- Helpful in the efficient deployment of resources-allocation of resources.
- Helps in understanding the working of the economy.
- Provide tools for formulating economic policies.
- Useful in understanding the problems of Taxation.
- Helpful in International Trade.
- Helps us to know the Market structure.
- Construction and use of economic models to understand the economic phenomenon, (viii) The basis of predictions.
- Solution to the problem of choice.
- Help to business executives.
- Helps in formulation of economic planning.
- Expands intellectual capacity of Human mind.