Introduction to Economics | Economics Class 12 Notes | CBSE

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WHAT IS ECONOMY AND VITAL PROCESSES OF AN ECONOMY

Economy is a system, which provides means to work and earn a living to the people. An economy generally consists of all sources of production in agriculture, industry, transport and communication.




Vital process of an Economy  :-

To provide living to the people, it is necessary that every economy should undertake three economic activities :-

  1. Production of goods and services ;
  2. Consumption of goods and services;
  3. Investment or capital formation.

Reason for studying Economics :-

Human wants are more , than the resources available to satisfy such  Human wants .  In view of this, it is necessary    to allocate the  scarce resources available to satisfy such  Human wants , in a manner so that the maximum demand of human being can be satisfied.  The main reason for studying Economics , to study the problem of scarcity.

Scarcity:-

Scarcity refers to the limitation of supply of a commodity in relation to the  demand for  such commodity.    In such a situation,  where the wants exceed the available resources ,  the society does not have enough resources to satisfy all the wants of its people. Scarcity is universally applicable and    every individual, organization or economy faces scarcity of resources.

The problem of scarcity requires optimum use of the available resources, to meet the wants of human beings.

Scarce Resources have alternate use – Economics Class 12 Notes  : –

In addition to being scarce, the resources also have alternate uses, i.e,  a resource can be put to more than one use, For example : We all know, diesel is both scarce in relation to its demand, as well as it can be used for vehicles, railway engines, airplanes, generators etc.

This gives rise to the problem of choice, as whenever, a commodity is chosen for one use, the other  uses   have to be rejected.

Basic Economic Problem :-

Basic Economic Problem faced by every economy,  is  a problem of choice, which involves satisfaction of unlimited wants of human beings, for which  limited resources which can satisfy these wants are available and such limited resources have alternative uses.

Human wants are unlimited and are never ending. As the means or resources to satisfy such wants are limited, all such human wants cannot be fulfilled. Due to this, the  human beings   want to maximize satisfaction achieved by utilisation of such resources. For achieving maximize satisfaction, every consumer exercises choices , one,  relating to which the goods should be consumed,  and second, in what quantity should each of these goods be consumed.

Economic problem is a problem of choice.




Reasons for Basic Economic Problem   :-

The  main reasons for existence of economic problems are as under :-

(i) Scarcity of resources : –

Resources like land, labour, capital etc are limited (scarce) in relation to their demand . Due to such limited availability, an economy is unable to produce enough to meet all the wants of people. If there were no scarcity, there would not have been no problem of resources and all the demands could have been met.

(ii) Unlimited Human wants:-

Human wants are never ending, unlimited   and can never be fully satisfied. Once a particular   want is satisfied, another new want emerges.

Different Human wants   also differ between themselves in terms of importance. While   some wants are more important , and need to be satisfied before   other wants, some wants can be deferred.  This requires the   people to allocate their resources in order of preference, to satisfy some of their wants. Had all the human wants  been of equal importance,   it would have been impossible to make choices.

(iii) Alternate Uses :-

In addition to being scarce, the resources also have alternate uses, i.e,  a resource can be put to more than one use, For example : We all know, diesel is both scarce in relation to its demand, as well as it can be used for vehicles, railway engines, airplanes, generators etc. As a result, the economy has to make choice between the alternative uses of the given resources.

Features of Resources and Human Wants

Key Features of resources are as under :-

(i) The resources are scarce in terms of availability, i.e. the   supply of resources is limited in related to demand of resources .

(ii) The resources have alternative uses.

Features of Human Wants:-

Key Features of Human Wants are as under :-

(i) Human Wants are unlimited   and can never be fully satisfied.

(ii) Human Wants differ in priorities.

Meaning of Economics:-

Economics is a social science

which studies

the way a society chooses to use its limited resources, which have alternate uses,

to produce goods and services and

distribute them among different groups of people.

The subject matter of economics has two broad branches: –

  1. Microeconomics
  2. Macroeconomics

An economy as a whole, comprises of various individuals, companies various commodities etc. , like individual income, output of a particular commodity by a company etc. When each of such units are combined, we get the aggregate of such attributes for the entire economy. In this light, let us understand the meaning of Microeconomics and Macroeconomics.

Microeconomics :-

The term ‘micro’ has been derived from the Greek word ‘mikros’ which means “small”.

Microeconomics is that part of economic theory, which studies the behavior of individual units of an economy. For example, Individual income, individual output, price of a commodity etc. The main tools of Microeconomics are Demand and supply.




Macroeconomics :-

The term ‘macro’ has been derived from the Greek word ‘makros’ which means ‘large’.

Macroeconomics deals with overall performance of the economy and is concerned with study of problems of the economy like inflation, unemployment, poverty etc. Macroeconomics is that part of economic theory which studies the behavior of aggregates of the economy as a whole.

For example : – National income, aggregate output, aggregate consumption etc. Its main tools are Aggregate Demand and Aggregate supply.

Micro Vs Macro

Microeconomics and microeconomics are not independent of each other and there is a lot of  common ground between them.

Microeconomics depends on Macroeconomics

  1. Law of demand came into existence from the analysis of the behavior of a group (aggregate) of people.
  2. Law of commodity is influenced by the general price level prevailing in the economy.

Macroeconomics depends on Microeconomics

  1. National income of a country is nothing but the sum total of incomes of individuals units of the country.
  2. Aggregate demand depends on demand of individual households of the economy.
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