| Non-Rationalised Economics NCERT Notes, Solutions and Extra Q & A (Class 9th to 12th) | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 9th | 10th | 11th | 12th | ||||||||||||||||
| Class 12th Chapters | ||
|---|---|---|
| Introductory Microeconomics | ||
| 1. Introduction | 2. Theory Of Consumer Behaviour | 3. Production And Costs |
| 4. The Theory Of The Firm Under Perfect Competition | 5. Market Equilibrium | 6. Non-Competitive Markets |
| Introductory Macroeconomics | ||
| 1. Introduction | 2. National Income Accounting | 3. Money And Banking |
| 4. Determination Of Income And Employment | 5. Government Budget And The Economy | 6. Open Economy Macroeconomics |
Chapter 1 Introduction
A Simple Economy
In any society, people have diverse needs and wants for various goods and services, ranging from basic necessities like food and shelter to transportation and specialized services like those provided by teachers and doctors.
Initially, no single individual possesses everything they need. Instead, each person or decision-making unit (like a family farm, a weaver, a teacher, or a laborer with only their labor services) holds limited amounts of only a few specific resources or goods.
Using these limited resources, each unit can produce certain goods or services. They then use part of their produce or earnings for their own consumption and exchange the rest to obtain the many other goods and services they need but do not produce.
For instance, a farm family produces corn, consumes some, and trades the rest for clothing or housing. A weaver produces cloth and exchanges it for desired goods. A teacher earns money by teaching and uses it to buy goods and services. A laborer earns money through work to fulfill their needs.
A fundamental reality is that no individual has unlimited resources compared to their potentially limitless needs and wants. The output a farm can produce is limited by its land and tools, constraining what it can acquire through exchange. This forces individuals to make choices about which goods and services to obtain, as having more of one requires giving up some amount of another. This universal condition is known as scarcity of resources.
Collectively, the goods and services produced by all individuals and units in a society must be compatible with what the people in that society collectively desire to consume.
If too much of a particular good is produced relative to demand, some resources used for that good could have been better used elsewhere. Conversely, if demand exceeds production, resources from other areas might need to be reallocated to meet the higher demand.
Just as individuals face scarcity, the total resources available to society are also scarce relative to the collective wants of its population.
Society must decide how to properly allocate its limited resources among the production of various goods and services in a manner that aligns with the preferences of its members.
Any decision about resource allocation determines the mix of goods and services produced. This output then needs to be distributed among the individuals in society.
Therefore, the two core economic problems facing any society are: allocating the limited resources and distributing the final mix of goods and services produced.
Central Problems Of An Economy
The basic economic activities are production, exchange, and consumption of goods and services. Scarcity of resources is encountered in these activities, giving rise to the fundamental problem of choice for every economy.
Given the alternative uses of scarce resources, every society must decide how to utilize them. The problems of an economy are commonly summarized by these key questions:
What is produced and in what quantities?
Society must determine which goods and services from all possibilities will be produced and in what amounts. This involves trade-offs, like choosing between more food/clothing or more luxury items, more agricultural or industrial output/services, more resources for education/health or military services, more basic or higher education, and more consumption goods now versus investment goods (like machinery) for future production and consumption.How are these goods produced?
Society must decide the combination of resources (like labor and machines) and the specific technologies to be used in producing each good and service. Different production methods require different resource mixes.For whom are these goods produced?
This concerns the distribution of the economy's output among individuals. Decisions must be made about who gets what share of the produced goods, whether distribution is equal or unequal, and whether everyone is guaranteed a minimum level of consumption or access to essential services like education and healthcare.
Thus, every economy faces the challenge of efficiently allocating its scarce resources to produce the desired mix of goods and services and then distributing this output among its members. These two aspects — resource allocation and output distribution — constitute the central economic problems.
Production Possibility Frontier
Just as individuals face scarcity, the total resources available to an economy are limited relative to the collective wants of its population. These scarce societal resources can be used in alternative ways to produce different goods and services.
The economy must decide how to allocate these resources across the production of various items.
Different allocations of resources result in different combinations of total output of various goods and services.
The production possibility set encompasses all possible combinations of goods and services that an economy can produce given its total resources and available technology.
The outer boundary of this set, illustrating the maximum possible combinations of output when all resources are fully and efficiently employed, is known as the production possibility frontier (PPF).
Example 1. Consider an economy which can produce corn or cotton by using its resources. Table 1.1 gives some of the combinations of corn and cotton that the economy can produce. When its resources are fully utilised.
Answer:
Table 1.1 shows several points on the production possibility frontier for this economy:
| Possibilities | Corn (units) | Cotton (units) |
|---|---|---|
| A | 0 | 10 |
| B | 1 | 9 |
| C | 2 | 7 |
| D | 3 | 4 |
| E | 4 | 0 |
Plotting these points (with Corn on the x-axis and Cotton on the y-axis) and connecting them forms the Production Possibility Frontier. This curve depicts the trade-offs faced by the economy. For instance, to produce 1 unit of corn (moving from A to B), the economy must give up 1 unit of cotton (10-9). To produce the 2nd unit of corn (moving from B to C), it must give up 2 units of cotton (9-7).
Points lying on the PPF represent output combinations achieved when resources are fully and efficiently used. Points lying strictly below the PPF indicate inefficient use or underemployment of resources.
The PPF illustrates that because resources are scarce and have alternative uses, producing more of one good requires transferring resources away from the production of another. The amount of one good that must be sacrificed to produce an additional unit of another good is called the opportunity cost. This critical concept in economics highlights the cost of choices due to scarcity.
Ultimately, one of the central problems for any economy is choosing which specific combination of outputs on the PPF best meets the society's needs and wants.
Organisation Of Economic Activities
Societies must find ways to organise their economic activities to solve the central problems of allocation and distribution. The basic problems of what, how, and for whom to produce can be addressed through different mechanisms:
- By allowing individuals to interact freely, making decisions based on their own objectives (Market Economy).
- By having a central authority, such as the government, make and enforce decisions (Centrally Planned Economy).
Most real-world economies combine elements of both approaches (Mixed Economy).
The Centrally Planned Economy
In a centrally planned economy, the government or a designated central authority holds the primary responsibility for making all significant decisions related to production, exchange, and consumption.
The central authority sets goals for the economy and determines the allocation of resources across different industries and sectors to achieve a final mix of goods and services considered desirable for the society as a whole.
For example, the government might decide to allocate more resources to education or healthcare if these are deemed crucial for societal well-being, potentially overriding individual preferences or production incentives.
The central authority might also intervene to ensure a more equitable distribution of output, for instance, by guaranteeing a minimum standard of living or free access to essential services for all citizens.
In such an economy, individual decisions are largely guided by the central plan rather than individual profit motives or preferences.
The Market Economy
In contrast, a market economy relies on the free interaction of individuals and entities in markets to organise economic activities. A market, in economics, is a set of arrangements that facilitate the voluntary exchange of goods, services, and resources between economic agents.
Markets are not necessarily physical locations; exchanges can occur through various means like face-to-face interactions, telephone, or the internet.
Coordination in a market economy, despite the millions of isolated decisions made by individuals, is primarily achieved through the price system.
Prices for goods and services are determined by the mutual agreement of buyers and sellers and reflect their relative value in society.
Prices act as crucial signals throughout the economy. If buyers increase their demand for a certain good, its price tends to rise. This price increase signals to producers that society wants more of this good, incentivising them (driven by the motive of profit) to increase production.
Conversely, if demand falls, prices fall, signalling producers to reduce production. Through these price signals, markets coordinate economic activities, guiding resource allocation and determining what and how much is produced based on consumer demand and producer supply.
Most real-world economies are mixed economies, where the market is the dominant mechanism for organising economic activity, but the government also plays a significant role in certain areas, making some decisions and regulating market behaviour (e.g., setting minimum wages, providing public goods, regulating monopolies).
Economies differ in the extent of government intervention, ranging from minimal intervention (like in the United States) to more significant roles (historically in centrally planned economies like China, or in India post-Independence, although this role has decreased recently).
Positive And Normative Economics
Economics not only seeks to understand how economies function but also to evaluate different economic outcomes and policies. This leads to a distinction between positive and normative economic analysis.
- Positive Economic Analysis: Focuses on describing and explaining economic phenomena as they are. It studies how different economic mechanisms operate and the factual outcomes they produce. Positive statements are objective, testable, and verifiable (e.g., "If taxes on cigarettes increase, cigarette consumption will likely decrease"). It addresses "what is" or "what will be."
- Normative Economic Analysis: Involves making judgments about whether economic outcomes or policies are desirable or not based on values and opinions. Normative statements are subjective and prescriptive (e.g., "The government should increase taxes on cigarettes to discourage smoking for public health"). It addresses "what ought to be."
While this distinction is made, positive and normative analyses are often closely linked. Understanding the factual consequences of a policy (positive) is usually necessary before evaluating its desirability (normative). Conversely, underlying values can influence the research questions posed in positive analysis.
Microeconomics And Macroeconomics
The field of economics is traditionally divided into two major branches:
- Microeconomics: Studies the economic behaviour of individual decision-making units, such as consumers and firms, and how they interact in specific markets for goods and services. It focuses on the determination of prices and quantities in individual markets based on supply and demand. Key concerns include consumer choice, firm production decisions, and market structure.
- Macroeconomics: Studies the economy as a whole. It focuses on aggregate measures of economic performance, such as total output (like Gross Domestic Product or GDP), the overall level of employment, and the aggregate price level (like inflation). Macroeconomics is concerned with understanding how these economy-wide variables are determined, how they change over time (economic growth, fluctuations like recessions), and the causes of problems like unemployment and inflation. Instead of individual markets, it looks at the overall picture and the interactions between major sectors of the economy.
Plan Of The Book
This textbook is an introduction to the basic concepts of microeconomics.
The focus will be on understanding the behaviour of individual consumers and producers concerning a single commodity and analysing how its price and quantity are determined within a market setting.
The structure of the book is as follows:
- Chapter 2 will explore the theory of consumer behaviour.
- Chapter 3 will introduce basic concepts of production and cost for a firm.
- Chapter 4 will examine the behavior of producers (firms).
- Chapter 5 will analyse how price and quantity are determined in a perfectly competitive market.
- Chapter 6 will discuss other types of market structures that exist in the economy.
Key Concepts
Consumption
Production
Exchange
Scarcity
Production possibilities
Opportunity cost
Market
Market economy
Centrally planned economy
Mixed economy
Positive analysis
Normative analysis
Microeconomics
Macroeconomics
Summary
Every economy faces central problems arising from the scarcity of resources relative to unlimited human wants. These problems include deciding what and how much to produce, how to produce, and for whom to produce.
These issues necessitate choices about resource allocation and the distribution of the final output.
The production possibilities frontier (PPF) illustrates the various combinations of maximum output an economy can produce when resources are fully and efficiently utilized, demonstrating the concept of opportunity cost.
Societies organize economic activities through different systems: centrally planned economies (decisions made by government based on societal goals), market economies (decisions coordinated by individuals' free interaction through prices), and mixed economies (combining elements of both, with varying degrees of government intervention).
Economic analysis can be positive (describing factual economic phenomena) or normative (evaluating desirability based on values).
Economics is traditionally divided into microeconomics (study of individual agents and specific markets) and macroeconomics (study of the economy as a whole and aggregate measures).
This book provides an introduction to the fundamental ideas of microeconomics.
Exercises
Exercises are excluded as per user instructions.