INTRODUCTION AND CENTRAL PROBLEMS OF AN ECONOMY.

INTRODUCTION AND CENTRAL PROBLEMS OF AN ECONOMY.
Origin of Economics: The word Economic was derived from Latin words OIKOU (a house) and NOMOS (to manage) Thus economics was used t manage household . Till the end of 19 Centenary Economics was called POLITICAL ECONOMY, later it was called Economics.
The Science of economics was born with the Publication of Adam Smith’s A Inquiry into the nature and Cause of Wealth of Nations in the year1776.
(Adam Smith is regarded as Father of Economics)
Definition: -Economics is a subject matter that studies different economic activities as directed toward the maximization or maximization of profit at the level of an individual, and maximization of social welfare at the level of the country.
According to Robbins, “It is the science which studies human behavior as are relationship between ends and scarce means which have alternative uses.
Acc. to Samuelson, “ It is the study of men and Society choose, with 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 future among various people and the group of society.”
Economic Activities: - By economics activities we mean that which is based on or is related to the use of scare resources for the satisfaction of human wants.
Example:- Consumption, Investment.
Economic Problem:-Economics problems is concerned with the use of scare resources among alternative human wants and in using these resources towards the end of satisfying wants as fully as possible.
Why an Economic problem arises? An economic problem arises whenever limited resources are used to satisfy different ends.

Causes to arise economic problems: -
1. Human wants are unlimited wants.
2. Economic Resources are Limited means.
3. Resources have alternative uses.
CENTRAL PROBLEMS:-Central problems are reflected in an economy in the form of Economics problems of an economy.
Kind of Central Problems: -
1. Allocation of resources:
(a) What goods to produce and how much to produce?
(b) How to produce?
(c) For whom to produce?
Central problems: and Brach of Economics: -
Central Problems Branches of Economics.
Allocation of resources :
(a) What and how much to produce?
(b) How to produce?
(c) For whom to produce?
(d) Fuller utilization of resources.
(e) Economic efficiency.
(f) Economic growth.
Price theory.
Theory of production.
Theory of distribution.
Theory of Income and Employment.
Welfare economics.
Growth Economics.


Production possibility curve: -
It shows all possible combination of two goods that an economy can produce when the the resources are fully and efficient utilised.
Production posibility set: - It referse to different combination of the goods and services that can be produces from a given amount of resources and a given stock of technological knowledge.
Production Possibility schedule: -
Goods Combination

A B C D E

Wheat 100
90 70 40 0
Rice
0 10 20 30 40


PPC, OR Transformation curve OR PP Line/ Frontier AE Curve (PPC) is drawn on the assumption that: -
(a) The given resources of the economy are fully and efficiently utilized employed and
(b) Given technology remained constant.

OPPORTUNITY COST:-It is define as the cost of alternative opportunity given up or scarified. It is the value of next best alternative.
Example:- On a piece of Land both wheat and sugarcane can be grown with the same resources. If wheat is grown with the same resources. If more wheat is grown than opportunity cost of producing certain quantity of wheat is the quantity of sugarcane forgone or given up.
Marginal Opportunity Cost: - The marginal opportunity cost is calculated in terms of the loss of output of say Y good of every addition unit o say X good produced when resources are shifted from Y good to X good.

Marginal opportunity Cost = Change Y / Change X

Production Possibility and Central Problems
PPC can be used to explain Central problems;-
A. What to produce? And how much to produce?
B. Fuller Utilization of resources.
C. Economic efficiency.
D. Economic growth.
E. What to Produce and how much to produce? : -



Fuller Utilization of resources: -

F. Economic efficiency: -
All point on production possibility curve is efficient in production. The aim of the economy, which wants to be economically efficient, is to be on the PPC. Any point beyond the boundary is unattainable.

G. Economic growth: - With discovery of new stock of resources or in advancement in technology the production capacity of the economy increases. Economy will produce more of Y good OR more of X good or Both X and Y goods.
H.

Growth of resources: -





Economy Meaning and type: -
An economy is an organization of economic activities which provides people with the mean to work and earn a living.
There are three form of an economy: -
1. The Market Economy.
2. The Centrally planned economy.
3. The mixed economy.

The Market Economy: - The market economy is a political system based on private property and private profit. In this system prices are determined by Market forces of Demand and Supply. This type of system is also called laissez – faire Or Capitalistic economy.
Features: -
1. Provide ownership of property.
2. Freedom of enterprises.
3. Profit motive of production.
4. Price mechanism guided production decisions.
5. Existence of completion.
6. Consumers are supreme.
7. Very unequal distribution of income.
8. Absence of role of govt.


The Centrally planned economy: - Central planned economy or socialist economy or command economy is based on govt. control and social welfare motive.
Features: -1. Public ownership of property or factors of production.
2. No freedom of enterprises.
3. Social welfare motive.
4. No competition.
5. Absence of consumer sovereignty.
6. Complete role of Govt.


The mixed economy.:- All economy are mixed economies , with element of both market and command or planned.
Features:-
1.Private and Govt. ownership. 2. Private sector produces for profit motive and govt. sector for welfare motives.
3. There is freedom of private enterprises but no freedom in public sector.
4. Consumer sovereignty exists.
5. Freedom of occupation exists.
Important Questions:-
POSITIVE AND NORMATIVE ECONOMICS:-
Positive economics deals with the what is or how an economic problem facing a society is actually solved.
Normative economic analysis deals with what ought to be or how an economic problems be solved?


MICRO AND MACRO ECONOMICS: -
MICRO ECONOMICS: - Micro economics is study of behavior of individual decision making units, such as Consumer, Resources owner and firms.
Macro Economics: - Macro economics define as the study of over all economic phenomena, such as problem of full employment, GNP, Saving, investment, aggregate consumption, aggregate investment and economic growth.
Important Questions: -