Notes Class 11 Chapter 1 Economics Maharashtra Board

Basic concepts in economics

Introduction

Economics is a social science that studies how people manage their unlimited wants with limited resources. It is often called the “Queen of Social Sciences” because it deals with the economic behavior of humans. The term “Economics” comes from the Greek word Oikonomia, meaning household management.

Types of Sciences

• Natural Sciences: These are exact sciences (e.g., Physics, Chemistry, Mathematics) with universal laws that can be tested in labs.
• Social Sciences: These are behavioral sciences (e.g., Psychology, Sociology, Economics) that study human behavior. Their laws are not universal but show general tendencies, as human behavior cannot be tested in labs.

Meaning of Economics

Economics focuses on how people satisfy their endless wants using scarce resources. It is a social science that examines economic aspects of human behavior.

Key Definitions of Economics

Adam Smith’s Wealth-Oriented Definition (1776)

• Book: An Inquiry into the Nature and Causes of Wealth of Nations
• Definition: Economics is a science of wealth.

Key Points:

• Supports Laissez Faire (no government interference).
• Focuses on wealth and capital accumulation.
• Emphasizes division of labor for economic growth.
• Believes in natural laws guiding economic activities.

Note: Adam Smith is called the “Father of Economics.”

Alfred Marshall’s Welfare-Oriented Definition (1890)

• Book: Principles of Economics
• Definition: Economics studies mankind in everyday life, focusing on actions related to material well-being.

Key Points:

• Studies ordinary people’s behavior.
• Focuses on material welfare (not just wealth).
• Economics is a behavioral science.

Note: Marshall is a neo-classical economist.

Lionel Robbins’ Scarcity-Oriented Definition (1932)

• Book: An Essay on the Nature and Significance of Economic Science
• Definition: Economics studies human behavior in relation to unlimited wants and scarce means with alternative uses.

Key Points:

• Wants are unlimited.
• Resources (means) are limited.
• Wants can be prioritized (gradable).
• Scarce resources have alternative uses.

Note: This is the most widely accepted definition.

Kautilya’s Views on Economics

• Kautilya (also known as Chanakya or Vishnugupta) was an ancient Indian philosopher, economist, and advisor during the Maurya period.
• Book: Arthashastra (Science of Wealth)

Key Points:

• Artha means wealth, and Shastra means science.
• Focuses on the role of the state in creating and managing wealth.
• Emphasizes efficient governance and administration.
• Arthashastra is a treatise on political economy.

Branches of Economics

In 1933, Ragnar Frisch introduced two branches of economics: Microeconomics and Macroeconomics.

A) Microeconomics

• Meaning: Micro means small. It studies individual units like households, firms, or industries.
• Definition by Kenneth Boulding: Microeconomics studies specific firms, households, prices, wages, incomes, industries, or commodities.
• Focus: Individual behavior and decision-making.

Basic Concepts of Microeconomics

Want

Meaning: A feeling of lack of satisfaction that motivates people to fulfill it.

Reasons for Growth of Wants:

• Desire for better living due to innovations.
• Rising population.

Characteristics of Wants:

• Unlimited: New wants arise after satisfying one.
• Recurring: Some wants repeat (e.g., food), while others are occasional.
• Differ by Age: Wants vary with age (e.g., toys for kids, books for students).
• Differ by Gender: Men and women have different needs.
• Differ by Preferences: Wants depend on personal tastes and habits.
• Differ by Seasons: Wants change with weather (e.g., umbrellas in monsoon).
• Differ by Culture: Food and clothing preferences vary by culture.

Classification of Wants:

• Economic Wants: Require payment (e.g., food, medicines).
• Non-Economic Wants: Free to satisfy (e.g., air, sunshine).
• Individual Wants: Satisfied personally (e.g., a doctor’s stethoscope).
• Collective Wants: Satisfied as a group (e.g., train travel).
• Necessities: Basic needs (e.g., food, shelter).
• Comforts: Make life easier (e.g., washing machine).
• Luxuries: For pleasure (e.g., AC car, big house).

Goods and Services

• Goods: Tangible items that satisfy wants (e.g., chalk).
• Services: Intangible actions that satisfy wants (e.g., teaching).

Utility

• Meaning: The power of a commodity to satisfy a want.
• Example: A pen has utility if it helps you write.

Value

Types:

• Value-in-Use: Usefulness of a commodity (e.g., sunshine is useful but free).
• Value-in-Exchange: Worth of a commodity in terms of another (e.g., price of a TV).

Water-Diamond Paradox:

• Water has high value-in-use (essential for life) but low value-in-exchange (cheap).
• Diamonds have low value-in-use (not essential) but high value-in-exchange (expensive due to scarcity).

Wealth

Meaning: Anything with market value that can be exchanged for money.

Characteristics:

• Utility: Must satisfy a want (e.g., furniture).
• Scarcity: Limited supply compared to demand (e.g., gold).
• Transferability: Can be transferred between people or places (e.g., car).
• Externality: Must be external to the human body (e.g., chair, not beauty).

Types of Transferability:

• Physical: Actual transfer of goods (e.g., vehicle).
• Notional: Transfer of ownership rights (e.g., land).

Note: Inborn qualities (e.g., beauty, voice) are not wealth as they are not transferable.

Personal Income

Meaning: Total earnings from all sources (e.g., salary, rent).

Personal Disposable Income (PDI)

Meaning: Income left after paying direct taxes (e.g., income tax).

Types of Income

• Fixed Income: Stable over time (e.g., rent).
• Fluctuating Income: Varies (e.g., profit).
• Money Income: Cash received (e.g., ₹5000).
• Real Income: Purchasing power of money income.
• Contractual Income: Paid as per agreement (e.g., wages).
• Residual Income: Left after paying all factors (e.g., profit).
• Earned Income: From productive work (e.g., salary).
• Unearned Income: From non-productive sources (e.g., lottery).

Economic Activity

Types:

• Production: Creating utility using factors like land, labor, capital, and entrepreneur.
• Distribution: Sharing factor rewards (rent, wages, interest, profit).
• Exchange: Buying and selling goods/services for money.
• Consumption: Using goods/services to satisfy wants.

Note: Non-monetary activities (e.g., charity) are unproductive in economics.

Factors of Production

• Land: Natural resources (e.g., soil, minerals). Reward: Rent.
• Labor: Physical or mental effort. Reward: Wages.
• Capital: Man-made resources (e.g., machinery). Reward: Interest.
• Entrepreneur: Organizes production. Reward: Profit.

B) Macroeconomics

• Meaning: Macro means large. It studies the economy as a whole, focusing on aggregates like national income, total employment, or general price levels.
• Definition by Kenneth Boulding: Macroeconomics deals with aggregates like national income, general price levels, and national output, not individual units.

Basic Concepts of Macroeconomics

National Income

• Meaning: Total monetary value of all final goods and services produced in a country in a year.
• Definition by National Income Committee: Measures the volume of goods and services produced without double counting.
• Importance: Shows a country’s economic performance.

Saving

Meaning: Part of income not spent on current consumption, saved for future needs.

Investment

Meaning: Using savings to create capital assets (e.g., machinery).

Trade Cycles

Meaning: Ups and downs in economic activities.

Types:

• Inflation: Continuous rise in general price levels.
• Depression: Continuous fall in prices and economic activity.

Note: Cyclical unemployment occurs due to trade cycle fluctuations.

Economic Growth

• Meaning: Increase in real national income over a long period (quantitative).
• Example: Higher production of goods/services.

Economic Development

• Meaning: Economic growth plus improvements in quality of life (e.g., education, health) (qualitative).
• Example: Better living standards with growth.

Economic Growth vs. Economic Development