SVPrecis_Economics_Introduction & Central problems of an economy Economy: It is a system by which people get a living by A. G. Brown.

Economic activities: Main activities are production, consumption; investment & exchange come under economic activities. 1. Production: - It means the conversion / transformation of one commodity to another commodity that raises the productivity / utility of commodity. 2. Consumption: - It means using goods & services for the direct satisfaction of consumer. 3. Investment: - It means using a good for further production. 4. Exchange: - It refers to the sale and purchase of goods & services. Difference between Micro & Macro Economics: Micro Economics: 1. It studies the economic relationship or economic problem at the level of an individual ex. Individual firm. 2. It is basically concerned with determination of output & price for an individual firm or industry. 3. Study of microeconomics assumes that macro variables remain constant. 4. The basic economic problems are demand, supply, price and output of single firm. Macro Economics: 1. It studies economic relationships or economic problems at the level of economy as a whole. Eg Industry. 2. It is basically concerned with determination of aggregate output and general price level in the economy as a whole. 3. Study of macro economics assumes that micro variables remain constant. 4. The basic economic problems are poverty, unemployment, aggregate demand & aggregate supply etc. Positive economics: Positive economics consist of positive statements which describe what was, what is and what would be under the given set of circumstances with all empirical verification. Normative economics: It consists of normative statements which describe what ought to be. Types of Economy: 1. Market / Capitalist: - It is an economy in which economic activities are privately owned and there is no govt. intervention. The private ownership has an objective of earning maximum profit. Therefore the exploitation of labour is common practice and the price is determined with the help of price mechanism. Intersection of free played demand and supply determine the price and this system is known as price mechanism. 2. Centrally planned / Socialist Economy: - It is an economy in which the economic activities are owned by public or by the govt. The main objective is not to earn profit but social welfare. The price under this economy is determined by the central authority.

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Mixed economy: - It is an economy which consists merits of market economy as well as centrally planned economy.

Central problems of an economy: Every economy has a list of several problems but central problems are broadly classified in three. 1. What to produce 2. How to produce 3. For whom to produce: Production Possible Curve (PPC): It shows different combinations of two goods which can be produced with the given resources on the assumption that 1. Resources are fully and efficiently utilized 2. Technique of production remain constant Properties of Production Possibility Curve: a. PPC slopes downward b. PPC concave to the origin

Possibilities A B C D E

Wheat 100 90 70 40 0

Rice 0 10 20 30 40 Opportunity Cost: It refers to value of a factor in its next best alternative use.

Marginal Opportunity Cost: - The rate at which output in use-1 lost for every additional unit of output in use-2
Q1 Q2

implies marginal opportunity cost.