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DAILY
CLASS NOTES
ECONOMICS

Lecture – 01
INTRODUCTION TO ECONOMICS

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INTRODUCTION TO ECONOMICS
Overview about Economics:
Definition:
❖ The English term ‘Economics’ is derived from the Greek word ‘Oikonomia’. ‘Oikos’ stands for household
and ‘Nomos’ means management.
➢ Together it means ‘household management’.
➢ Plato and Aristotle thought of economics as a matter of ‘Moral Philosophy’.
Definition of Economics by various scholars:
❖ Wealth Definition – Adam Smith: The wealth definition was given by Adam Smith. According to this
definition, economics is termed as the “science of wealth”, that is, the economy of a nation is concerned with
the nature and causes of wealth of Nations and it is related to the law of production, distribution, exchange
and consumption of wealth.
➢ Demerits of the definition:
▪ The definitions only focused on creation of goods and not services concerned.
▪ The definition only focused on wealth generation rather than a welfarist approach.
❖ Welfare Definition + Separated Economy from Political Economy– Alfred Marshall:

❖ Demerits of the definition:

➢ Does not focus on immaterial aspects again. Services are not at all given importance.
➢ The definition mentions the term ‘welfare’ but does not explain what exactly welfare is.
❖ Scarcity Definition – Lionel Robbins:

❖ Demerits of the definition:

➢ It ignored the concept of welfare.
➢ The definition ignores the concept of growth and development. Example: In case of surplus production,
the goods can be sold and be used to purchase other goods for further development and progress of one’s
growth.

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❖ Growth Oriented Definition – Paul Samuelson:

Understanding Positive and Normative Economics:

❖ Normative Economics focuses on how the
economics should be, giving a futuristic
overview and the Positive Economics stresses on
How it actually is?
➢ Example: The GDP of India is 2.7 trillion
USD while the normative economy will
stress the inclusivity of the economy which
would look into equitable distribution of the
resources and move towards a greener
economy.
Branches of Economics:

❖ Micro Economics: Microeconomics studies the behaviour of individual entities.

➢ Whether a single person, a household, or a business, economists may analyse how these entities
respond to changes in price and why they demand what they do at particular price levels.
➢ Further, within the dynamics of supply and demand, the costs of producing goods and services, and how
labour is divided and allocated and how individuals approach uncertainty and risk in their decision-
making.

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➢ Adam Smith is considered to be the ‘Father of Microeconomics’

➢ Bottom-up Approach: Microeconomics uses a Bottom-Up approach focusing on individual units like
households, firms,etc rather than the whole economy.
➢ It is also known as the ‘Price Theory.’
❖ Macro- Economics: The term was first coined by Norwegian economist Ranger Frisch in 1933. But the
founder of macroeconomics is considered to be John.M. Keynes (1936).
❖ Macroeconomics studies the behaviour and performance of an economy as a whole.
➢ Focus of macroeconomics: It focuses on foreign trade, government fiscal and monetary policy,
unemployment rates, the level of inflation, interest rates, the growth of total production output, and
business cycles that result in expansions, booms, recessions, and depressions.
➢ Example: While India was facing unemployment issues in the rural sector, MGNREGA was introduced
and extended towards every agrarian corner in the rural societies (so unemployment is the macro study
and extending the MGNREGA is the micro study. So both micro and macro are interdependent to each
other.)
❖ The macroeconomics follows a ‘top-down approach’. A top-down approach starts with the broader economy,
analyses the macroeconomic factors, and targets specific industries that perform well against the economic
backdrop.
❖ It is also known as the ‘Income Theory.’
Third Branch of Economics –> Econometrics:
❖ It uses economic theory, mathematics, and statistical inference to quantify economic phenomena.
❖ In other words, it turns theoretical economic models into useful tools for economic policymaking.
❖ The objective of econometrics is to convert qualitative statements (such as “the relationship between two
or more variables is positive”) into quantitative statements (such as “consumption expenditure increases
by 95 cents for every one dollar increase in disposable income”).
Relationship between Economy and Economics:
❖ An economy is a complex system of inter-related production, consumption and exchange activities that
ultimately determines how resources are allocated among all the participants while economics is the study of
how individuals and societies allocate resources to satisfy their wants and needs.
❖ An economy is the practical application of economics.
❖ An economy may represent a nation, a region, a single industry or even a family.
Types of Economies:
Liberal economy:
❖ The period of industrial revolution gave birth to the idea of liberal economy where the State or the King
started playing a pivotal role in regulating the trade of the state.
Command/Communist/Socialist Economy:
❖ Russian Revolution set the backdrop of the Command Economy (1917). This system has a dominant
centralised authority within a country or a nation in the form of a government.
➢ The economy in such a country is controlled by the government.

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➢ Ideally the command system takes into consideration the best interests of its population.
➢ The government who holds the resources would decide on behalf of the individuals regarding how the
resources would be utilised.
▪ Example: When students go for a picnic, they are asked to pay 50 rupees (resource collected) which
they submit to the head person. Now it is upon the head person how he/she will be utilising the
resources collected. It is to be understood that, the students themselves gave up the right or discretion
or choice to utilise their own resources.
❖ Competition within the economy is restrictive in nature.
❖ The motive would be focused towards public welfare.
❖ The efficiency would be limited. Example: Operation of railways in India and its related problems.
Free market/Capitalist economy:
❖ In a capitalist economy (or free market economy), resources are held by individuals or controlled by private
individuals for profit.
❖ There is very less but some degree of government intervention in the form of regulation against monopoly
and in favour of fair trade.
❖ The Economy also incorporates the principles of the free market.
❖ Market sources regulate the demand and supply.
❖ The economy has a free market as any individual can come and go. So the competition remains high
(increasing prices of airlines) and regulated in some cases (dominance of OLa and Uber and wiping out of the
Kali Peeli taxis).
❖ The motive of such economies would be profit maximisation.
❖ The efficiency of such economies would be generally high.
View of Smith: According to Adam Smith, utilisation of resources within a country or nature of production or
generation of wealth would be determined by an invisible hand (according to Smith it was greed but in economic
sense, it would be termed as demand and supply).

Mixed Economy:
A mixed economy is a combination of features of both capitalist and a socialist economy in which both markets
and the government decide how
resources are allocated.
❖ A mixed economy contains a
system that has characteristics
of both public and private
sectors.
❖ They differ only in terms
inclination towards the
command or free market
economy.

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➢ Example: At present, there is no Pure Planned Economy nor any Pure Free Market Economy.
Countries have mixed economies with a certain degree of inclination towards command or capitalist
economies.
❖ India has socialist tilt.
➢ Example: A person travelling in a 2nd ACcompartment might pay 1500 in India whereas if another
person travels in a 2nd AC compartment in the UK, the amount would be a lot higher. The profit generated
here would be used for railway maintenance. The reason behind the price difference is because of the high
purchasing power of the citizens of the UK in comparison to Indians. In India, the government instead
of profit maximisation prioritises welfare of its citizens.
➢ Similarly, the biggest Maharatna of India, ONGC works towards profit maximisation. It is going after
pure competition.
Central problem of an economy:

Production possibility curve:

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Example: For instance, Ravi has an acre of land which would be producing sugarcane (consumer goods) but Ravi
cannot consume the bulk of sugarcane that would be produced. So, in half of the land he cultivates wheat (capital
goods) and in the other half he cultivates sugarcane. So as he increases the area of capital goods, the area for
producing consumer goods would shrink.
❖ The production possibility curve helps us in understanding three things:
➢ The problem of choice
➢ notion of scarcity
➢ Solution of central problems
Domestic Economy and External Economy:
❖ The Domestic Economy has the household and legal entities. In legal entities there are corporate firms and
non-profit organisations. This feature is the same for the external economy like the domestic one.
❖ Domestic Economy is divided into the following sectors:
➢ Government Sector: It produces non-profitable goods and services. Example: Government producing
weapons which are not marketable.
➢ Real Sector: It is the interaction between the non-financial sector even in the absence of money. Example:
Ravi purchases juice for the street vendor and pays him the amount. This is a direct transaction.
➢ Financial Sector: Example: Ravi can also deposit that amount in the bank which would ultimately be
used by the bank to invest in some juice business.But in the latter case, the transaction is not direct.
Goods:
Meaning of goods:
❖ Goods are physical, produced objects for which a demand exists, which makes us feel good.
Features of goods:
❖ They are tangible in nature i.e., they have physical dimensions.
❖ They can exist independently of their owner.
❖ They are transferable in nature.
❖ They can be exchanged for money. So this means that they have economic wellbeing.
Types of goods:
❖ Free and Economic goods:
➢ Free goods: Even though according to the economists, there is nothing as such free goods and everything
has an opportunity cost, but still, we might infer that there are certain goods which are freely available.
➢ Economic goods: these are goods which have money or economic value.
❖ Consumer and Capital goods:
➢ Consumer goods: These are created for our consumption. Example: Ice cream, t-shirts, etc.
➢ Capital goods: These are used to create or produce other goods. Example: Heavy machinery, other units
of production, etc.
A good can be consumer or capital depending on the way we use it. Example: An automobile can be used as a
consumer goods or it can also be used as a capital good when it would be used for transportation services.

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❖ Durable and Perishable goods:

➢ Durable goods: Example: Chair, machines, etc.
➢ Perishable goods: Example: Food items, services offered at hospitals, etc.
❖ Excludable and Non-Excludable goods:
➢ Excludable goods: Those goods whose access can be restricted on the basis of payments and
subscriptions are termed to be as excludable goods. Example: Unlike earlier times, The Hindu charges
subscription fees for getting the facility, private parking slots, OTT platforms,etc.
➢ Non-Excludable goods: The goods which are not excluded amongst the population and every person gets
the right to use it. Example: Accessing roads, use of STD’s and PCO’s for calling purposes.

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