CLASS 12 - iqraias.com

CLASS 12

Introductory Macroeconomics

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INDEX

TOPICS 1) INTRODUCTION

2) NATIONAL

INCOME

ACCOUNTING

3) MONEY AND BANKING

4) DETERMINATION

OF

INCOME

AND

EMPLOYMENT

5) GOVERNMENT BUDGET

AND ECONOMY

6) OPEN

ECONOMY

MACROECONOMICS

PAGES 03-07 08-28 29-35 36-46

47-61 62-73

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Chapter 1 Introduction

Economy

Economy refers to the whole collection of production units by which people earn their living.

Economics

Economics refers to the study of how a society chooses to use its limited resources, which have alternate uses, to produce goods and services and to distribute them among different groups of people in order to satisfy unlimited human wants.

Economic Problem

`Economic problem' is the problem of choice involving satisfaction of unlimited wants out of limited resources having alternative uses. The root cause of all economic problems is `Scarcity'. Scarcity in economics refers to the limitation of supply of a good in relation to its demand.

Reasons for Economic Problem:

Economic problem arises due to: Scarcity of resources: The supply of resources (i.e. land, labour, capital, etc) is limited in relation to their demand and the economy cannot produce all what people want. It is the basic reason for the existence of economic problems in all economies.

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These resources are available in limited quantities in every economy, big or small, developed or underdeveloped. No economy in the world is rich in all the resources. There would have been no problem if resources were not scarce.

2. Unlimited human wants: Human wants are never ending, i.e. they can never be fully satisfied. As soon as one want is satisfied, another new want emerges. Wants of the people are unlimited and keep on multiplying and cannot be satisfied due to limited resources. Human wants also differ in priorities, i.e. all wants are not of equal intensity. For every individual, some wants are more important and urgent as compared to others. Hence, people allocate their resources in order of preference to satisfy some of their wants.

3. Alternative uses of resources: Resources are not only scarce, but they can also be put to various uses. It makes choice among resources more important. For example, land can be used for farming, setting up a factory or a school etc. As a result, the economy has to make a choice between the alternative uses of the given scarce resources. If one resource can be put to only one use, there would be no problem of choice. Two features of resources:

? Resources are scarce and limited. ? Resources have alternative uses.

Two features of human wants:

? They are unlimited, i.e. they can never be fully satisfied. ? Human wants differ in priorities. Some wants are more basic and urgent and

may require immediate attention than the others.

Central Problems of an Economy

Problem of allocation of resources: Every economy faces the problem of allocating the scarce resources having alternative uses to the production of different possible goods and services in such a manner that it ideally meets the needs of the society. It also involves the distribution of the goods and services produced among the individuals within the economy in an optimal manner. `Problem of resource allocation would not arise, if resources do not have alternative uses.' If a resource can be put

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only to a specific use, then the problem of resource allocation would not arise. Central problems are the economic problems faced by every economy. An economy has to allocate its scarce resources after choosing from different potential bundles of goods to be produced, select the technique of production and also decide as to how the output, thus produced, should be distributed in the economy. The central problems faced by an economy can be categorised under three heads: 1.What to produce and in what quantities ? This problem involves selection of goods and services to be produced and the quantity to be produced of each selected commodity. It arises since resources are limited in an economy and can be put to alternative uses. ? Producing more of one good usually means less resources will be available for the production of other goods. For example, production of more cars is possible only by reducing the production of other goods using similar resources. ? Production of more war goods is possible only by reducing the production of civil goods. So, on the basis of the importance of various goods, an economy has to decide which goods should be produced and in what quantities. ? The problem of 'What to produce' has two aspects:

? What possible commodities to produce: An economy has to decide, which

consumer goods (rice, wheat, clothes, etc.) and which of the capital goods (machinery, equipment, etc.) are to be produced. In the same way, economy has to make a choice between civil goods (bread, butter, etc.) and war goods (guns, tanks, etc.).

? How much to produce: After deciding the goods to be produced, the economy

has to decide the quantity of each commodity that is selected. It means, it involves a decision regarding the quantity to be produced, of consumer and capital goods, civil and war goods and so on.

Guiding Principle: The guiding principle is to allocate resources in such a way that gives maximum aggregate satisfaction.

2. How to produce (choice of technique of production) ? The central problem of `how to produce' is the problem relating to the choice of technique of production to be used for producing different goods and services. By `technique', we mean what particular combination of inputs to be used for production.

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