1 Meaning and Definition of Economic, CONTENTS 1, Definitions of Economics 1.1 Wealth Definition | 1.2 Welfare Definition | 1.3 Scarcity Definition | 1.4 Growth Definition 1.5 Keynes's Definition 2, Micro and Macro Economics 2.1 Meaning of Microeconomics 2.2 Meaning of Macroeconomics 2.3 Distinction between Microeconomics and Macroeconomics | 3. Types of Activities 3.1 Economic Activities 3.2 Non-economic Activities 3.3 Difference between Economic and| Non-economic Activities 1. DEFINITIONS OF ECONOMICS The term” was originally derived from the two Greek words “oikas” which means “household” and “nomous” which means ‘management’, Thus, it refers to management of a household using the limited funds. In fact, the same is true for a society as a whole. The society also faces the problem of satisfying unlimited wants with its limited resources. Thus, economics studies the ways and means in which people onganise themselves to tackle the problems of scarcity Han do you know wnat 1s Economics’ Not exactly, but have studied Economics at secondary stage is t related to money tke Rupees, Doliars etc 7 Generally, economics is defined as the social science that studies economic activites. This definition is however, too broad ft does not specify the exact manner in which the economic activities are to be studied. Moreover, coonomists at different times have emphasised different aspects of economic activities and hence have arrived at different definitions of economics, We shall now discuss the major definitions of economics under the following four groups = (i) Wealth Definition, (ii) Material Welfare Definition, (iii) Scarcity Definition, and (iv) Growth Definition. Social Science The social sciences study how society is organised and functions. Economics, sociology, anthropology, psychology and political science are all social sciences. Each studies the organisation and functioning of society from a particular angle. Economics is often regarded as the queen of all social selences. It studies the economic behaviour of individuals and organisations in society. It studies individuals and organisations engaged in the production, distribution and consumption of goods and services. 1.1 Wealth Definition cf In this category, the definition of economics given by Adam Smith (1723-90) and his followers sf included. Adam Smith, the father of modern econom's>: in his book “An Enquiry into the Nature and Cause’ of Wealth of Nations” (1776) defined economics the which *Selence of Wealth’. That means econom'> studies production and consumption of wealthMeaning and Definition of Economics ‘Adam Smith He laid much emphasis on wealth which is contained in the very title of the book. ‘The great object of the political economy of every country, according to Adam Smith, is to increase the wealth of the country. He, therefore, thought economics as an “enquiry into the nature and causes of wealth of nations.” The central point in Adam Smith's definition is ‘wealth’, According to him, economies is a subject which tells us how to make a nation wealthy. He assumed that the wealthier a nation becomes, the happier are its citizens. In Adam Smith’s view, wealth refers to gold, silver, land, buildings and the whole production of goods and services that can be consumed, According to him, “It (wealth) is the annual produce of the land and labour of the society.” It is important to note here that money is not a part of wealth because money is not demanded for its own sake. It is only a medium of exchange of goods and services. Adam Smith's followers, like J.B. Say, J.S. Mill, Walker, ete., gave similar definitions, Features : Following are the main features of wealth definition (Study of Wealth : According to wealth definition, the only proper subject of economics is wealth Economies studies the nature of wealth and the causes that increase wealth, To increase wealth, production of material goods has to be stepped up. (il) Study of Material Goods Only + In wealth definitions, the term wealth has been used only for material goods which are scarce and useful like lable, chair, book, pen, ete. Non-material goods Like services, water and sunshine, etc., have not been connidered as wealth Gil) Causes of Wealth : Lconomics is considered 4 study of causes of wealth accumulation, The ichness brings economic developinent. In order to increase wealth, production of material goods have to be increased. (iv) Economie Man : Wealth definition lays emphasis on the man who does all activities of his self- interest, Such a man motivated by self-interest is called ‘economic man’ In wealth definition, wealth was kept at the centre, while human welfare is at the periphery as shown in Fig. 1.1. Ce Fig. 1.1: Emphasis on Wealth Features of Adam Smith Definition Economics is a study of wealth Economics constitutes only material goods which are scarce and useful Economics studies the causes of wealth accumulation. This definition is based on the concept of | economic man that is, economi study of economic man, Criticism of Wealth Definition Wealth definition of Adam Smith has been criticised on the following grounds 1. Adam Smith gave undue importance to wealth. In fact, wealth is not an end itself. Critics point out that human life cannot be sacrificed for wealth. Wealth is only @ means to improve human welfare. 2. Adam Smith considered onty material goods and ignored the role of non-material goods and services is 3. Adam Smith's wealth definition ts based on the concept of economic man who works tox seltish motive only. But i real lite, man’s activities are not always influenced by self interest but abo by social, mnoral and religious fictors4 1.2 Weltare Definition Prof, Alfred Marshall (1842-1024), in his: book Principles of Economics’ which was published in 8%, gave 4 maternal welfare definition of economics. In his definition, he gave more importance to human welfare in comparison to wealth. He said that wealth is only @ means to satisfy human wants and not an end in itself. He emphasised that wealth is for man and not man for wealth. He defined economics as “a study of mankind in the ordinary business of life. It examines that part of individual and social actions which is most closely connected with the attainment and use of material requisites of well-being.” Thus, it is on one side, a study of wealth and on the other and more important side, a part of the study of man, Therefore, in Alfred Marshall's viewpoint, man was at the centre and wealth at the periphery as shown in Fig. 1.2 PE Emphasis on Human Welfare liam Beveridge, Fig. 125 Feonomists like Pigou, Cannan, etc., also gave similar definitions Features : The main features of welfare definitions are as follows (i) Study of Mankind : Economics studies the economic activities of human beings. It studies the role of man in the creation of wealth Marshall, thus, stated the welfare definition of economics and shifted: the emphasis from wealth to economic welfare TENE Bovmaanic Aaptioations <1 Features of Marshal's Detinition + Boonomics is a sti of mankind, # Beonomics is a study of ordinary business of life (ie, economic activities of man). It is 4 study of real man, * Beonamies is concerned with the causes of material welfare. '* This definition considers maternal (or economic) welfare, ry Business of Life : Every (i) Study of Or person acts mainly to eam and collect wealth and spends those camings €0 get the: marin ction. Marshall called this activity ‘the ondinary business of life.’ Thus, economics studies an ondinary man who ears and spends: wealth to get maximum satisfaction. It does not study an extraordinary man like a Sadhu or Saint Thus, Marshall has given more importance on consumption (use) of wealth, Study of Material Welfare : The most important feature of this definition is that wealth is not considered the fundamental motive behind all economic activities. The primary importance is given to human welfare. Money and wealth are simply the means for achieving human welfare Further, economics does not study the whole of human welfare but only that weltane which is of material type (ie. economic welfare). Material ‘or economic welfare is that part of social welfare which can be measured in terms of money. The study of non-material welfare lies outside the scope of economics. sat aii) In short, material welfare (instead of earning money) is the motive behind all economic activities. Wealth is regarded only a means achieve this objective Use of Money : This definition considers material or economic welfare as a part of social welfare which can be easily measured with the measuring rod of money Criticism of Welfare Definition Prof Robbins enticised welfare definition of Marshall on the following grounds 1. According 1 Robbins, the classification of activities into economic and non-economic is not correct brocause all activities have some degree o economic — —iteeMeaning and Definition of Economics aspect. He opined that economics does not deal only with economic activities, but it deals with all human activities from an economic point of view Robbins pointed out that material goods alone do not promote welfare. Non-material goods (such as services of doctors, teachers, domestic servants etc.) also promote welfare. 1.3 Scarcity Definition Prof. Lionel Robbins (1898-1984) not only criticised Marshall’s definition but also gave his own definition which is known as scarcity definition. According to him, “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.” He gave this definition in his book An Essay on the Nature and Significance of Economic Science which was published in 1932. Lionel Robbins According to this definition, economics studies those activities of human beings which they perform with scarce means having alternative uses in order to satisfy their unlimited wants. Thus, economics studies human behaviour as a relationship between unlimited wants and scarce means which are capable of being alternatively used. Scarcity of means, in relation to unlimited wants, leads 10 the problem of making a choice, i.e., economic problem. Hence, economic problem is the central idea in Robbins’ definition, —— ‘is a science of choice arising out of Features : Following are the main features of Robbins’ definition. (Unlimited Ends ; By ‘ends’ Prof. Robbins meant human wants which are unlimited. We possibly cannot satisfy them all. If one want is satisfied, 5 another crops up. In fact, there is no end to human wants. Hence, man is forced to select the most urgent wants first for their immediate satisfaction and less urgent wants later on. (ii) Scarce Means : Human wants are unlimited and the means or resources at our disposal to satisfy these wants are scarce or limited. The ‘means’ refer to funds or resources which are used to satisfy wants. Compared to the unlimited wants for various goods and services, these resources seem to be insufficient. It implies that even if all these available resources are fully employed for producing various goods and services, only a small part of human wants can be satisfied. So, scarcity of resources is another important reason behind choice problem in any society. The term scarce means shortage of funds and resources in relation to their demand. This scarcity again compels us to postpone some of our wants. (iii) Alternative Uses of Means : Not only our means are scarce but they can also be put to a number of uses. For example, coal is used in factories, in running railways and in thermal stations for electricity generation and also by households Features of Robbins’ Definition We fants are unlimited. ‘© Means (resources) to satisfy wants are limited. ‘© Means have alternative uses. * Economies is a science of scarcity (or science of choice). Scarcity of resources makes the choice necessary. (iv) Efficient Use of Scarce Resources are unlimited, these wants are to be ranked in order of priorities. On the basis of such priorities, the scarce resources are to be used in an efficient manner for the satisfaction of wants. Since wants (v) Science of Choice (or Science of Searcity) + Since wants are numerous and means are searee, we have fo select the most urgent wants from the humerous leaving of course other wants which can be satisfied later on, and choose some of the ist'y the selected means from scare ones to wants, In this sense, the seareity of means makes choice necessary. That is why economics is described as a “science of choice.Criticism of “Scarcity Definition 1. In Robbin’s definition, scarcity is considered as 4 cause of economic problem. But the fact is that even abundance may cause an economic Problem. The Great Depression of 1930s is a good example of economic crisis which was caused by abundance (surplus) of goods. 2. Robbins has considered that availability of Tesources to be scarce, However, the resources may be increased over a period of time. So, in Robbins’s definition, growth in resources is not taken into account, Robbins’ definition is superior to the earlier definitions because this definition has universal applicability. It applies to all individuals, groups and nations, no matter what type of economic system they follow. Robbins emphasised on setting up an effective relationship between the human wants and scarce means to maximise the satisfaction of most of the unlimited wants in the economy. Therefore, it gave an universally applicable definition which can be followed by all the economists to solve the problem of scarcity in the economy. 1.4 Growth Definition Scarcity definition explains about the presence of economic problems. It is concerned with the positive aspect of the subject, i.e., analysing the problems arising out of scarcity. But modern economists, like Samuelson, Paterson, etc., feel that economics should also suggest how the scarce means should be used to satisfy more wants and to attain higher living standard. Paul Samuelson (According to (Prof. Samuelson, “Economies is the study of how man and society choose, with or without the use of mone; ploy scarce productive resources, which could have alternative uses, to produce various commodities over time and distribute “= momie Applications ~ 1x them for consumption now and in the future among various people and groups of society.7 A large number of modem economists subscribe to this broad definition of economics. They opine that economics and econornist, cannot remain neutral between ends. They have to decide what to do and what not to do. Things cannot be left w, themselves. Samuelson’s definition of economics focuses on the sustainable development of the economy as it deals, with the people who can utilise scarce resources to produce various commodities for present as well as future generations. Features : The main features of growth definition of economics are as follows (i. Efficient Allocation of Resources : Like Robbins 44, Samuelson has also emphasised the need of choice \ which arises due to unlimited wants and scarcity of » Fesources. Growth definition not only lays stress on the allocation of resources but also on their prope utilisation so that more wants could be satisfied. (ii) Growth of Resources : According to Samuelson, available resources should not only be used prop- erly, but efforts should also be made to increase them so as to satisfy ever increasing wants. Solutions to Economic Problems : Economics is not only concerned with the identification of economic problems but it should also suggest ways and means to solve them. Dynamism : Economic growth is measured in terms of change in national product overtime. This definition states that economics is concerned with determining the pattern of employment of scarce Tesources to produce goods over time, Thus, the dynamic problem of production has been brought within the purview of economics. It takes into account the problem of choice in the dynamic framework of economics. Features of Samuelson's Definition | * Economics is concerned with determining the method of utilising the scarce resources to| produce commodities for present as well as future generation, * It is concemed with the method of consumption, not only now but also in the future de Gi) (iv) ¥ ov * Itis concerned with the distribution for consumption’ ‘among various individuals and groups in a society.Meaning and Definition of Economies In short, Samuelon's definition of e inost comprehensive of alll earlier definitions. It includes all the issues which were highlighted in the earlier dlotinitions on the one hand, and the issues of economic development on the other, Economies, as it stands today, ty buill_on the basis of this comprehensive definition. onomics is the The greatest merit of Samuelson’s definition is. that AW recognises the dynamic changes taking place both in the means (resources) and ends (wants) with the passage cof time, That is the reason of deseribing it as a growth- oriented definition, 1,5 Keynes's Definition The earlier economists including Marshall and Robbins explained economic activities in the context of ‘an individual only. But economic problems are related to individual as well as the society. Marshall and Robbins overlooked this John Manyard Keynes (1883 ~ 1946) Lord Manyard Keynes (1883 ~ 1946) explained economic activities from the viewpoint of society as ‘a whole, According to him, Economics is a study of administration of scarce means and the determinants of employment and income.* Thus, economic problem of scarcity of means and choices was approached from the viewpoint of economy as a whole instead of analysing at 2.3 Distinction between Microeconomics and Macr “We may pet sum ypthe distinction between 0 Microeconomics Microeconomics isthe study of economic an economy such as a consumer, a produc indiv Microeconomics is primarily concerned wit determination of prices of goods and servic icroeconomics and macroeconomic its such as household, firm, etc. 0} the individual point of view. According to Keynes, economics is the study of economy as a whole. National income, aggregate demand, total consumption, total savings, total investment, total employment and the effects of all these on each other and on the economy as a whole are studied in economics, what he called macro economics. 2. MICRO AND MACRO ECONOMICS The subject matter of economics is broadly divided into two parts - microeconomics and macroeconomics These terms were coined by Prof Ragnar Frisch in 1933 2.1 Meaning of Microeconomics ‘The word, ‘micro’ has been derived from the Greek word ‘mikros’ meaning small, In this context, microeconomics deals with small parts of the economy. Microeconomics studies behaviour of small economic units of an economy like individual consumers, producers and resource owners (factors of production). In MICRO, the letter ‘I’ stands for individuals. Thus, microeconomics studies the economic behaviour of individuals. Consumers decide how much of various goods to purchase, and producers decide how much output to produce, Every consumer allocates his resources to the purchase of different goods to maximise his satisfaction. Similarly every producer tries to allocate his resources in a manner that maximises his profits. Prices have their important effeets on these individual decisions. That is why. microeconomics is sometimes called ‘price theory’ 2.2 Meaning of Macroeconomics Macro means the aggregates or groups of entire economy. In ‘macro’, the letter ‘A’ stands for aggregates. Thus, macroeconomics studies the aggregates of an economy or economy as a whole e.g., gross domestic product, total employment, aggregate demand, aggregate supply, general price level ete, It, thus, focuses on macroeconomics variables. That is why macroeconomics has also been called “aggregative economics” oeconomics as under Macroeconomics asa whole | idual | Macroeconomics is the study of economy | total {and its aggregates such as national income, ete, | consumption, general price level ete ation ved with the determine wvel in the | | — the Macroeconomics is concern es. | of aggregate output and general price le economy as a whole8 = 3. Tools Demand and supply of a particular commodity | Age no microeconomics 4. Alternative | 11 is also known as price theory. Name Seeeeseee eee Economic Applications . yy regate demand and aggregate supply of all woo, ieee are the ia s of macroeconomic, oF factor of production are the main tools of | and services are the main tools of m: onomic employment. Macroeconomics should be carefully distinguished from microcconomics. It should be noted that microeconomics also deals with some ‘aggregates*, but not of the type with which macroeconomics is concerned, Example : (a) Market demand and market supply of @ product are aggregative concepts which are studied under microeconomics. These aggregates are confined to 4 single product or a single industry, Examples of : (6) Macroeconomics deals with aggregate output ofa goods and services. Macroeconomics also examine the sub-aggregates of these large aggregates. For example, total production of consumer goods such as foodgrains, cloth, T.V sets, watches, milk, epg, etc, Similarly, in macroeconomics total production of capital goods is studied which means total production of machinery, office furnitures, trucks tractors, etc. Microeconomic Studies * Price of a commodity or service. Macroeconomic Studies © General price level. | * Household income. * National income. ¢ Demand of a good or service in the market © Supply of a commodity. ° Aggregate demand of goods and services in an economy, © Aggregate supply of goods and services. © Output of a firm © National output 3. TYPES OF ACTIVITIES Human life is full of activities which can bri classified into economic and non-economic activi idly be 3.1 Economic Activities og In our day-to-day life, we find different people engaged in different types of activities so as to eam their living. All of us are concerned with one or another type of activity to earn wealth or money to meet our wants All those activities which are carried out in exchange for ‘money are called economic activities. Their main purpose is to satisfy human wants, Examples () When person goes to office or to a factory of to a shop to cam money, these are covered under economic activities. (i) When a person goes to market to purchase something, this activity also is known as economic activity. Economic activities in any society take place within the framework of certain rules, conventions, laws, customs, ete Features of Economic Activities @® Economic activities ai re wealth producing activities. (il) They are measurable in t terms of money. Gi) The purpose of economic activities is to satisfy human wants, Economie activi but also provide Of the society, (ivy not only satisfy human wants 4 basis for economic development Types of Economie Activities + Economie ‘re classified into four parts as under 0 Production : Production is the most important the nie activity, Scarce resources wre weed in the production of goods and services. Goods and services are produced with the objective of Satisfying our needs and wants, Production ot Process, inputs are used to creale 4 Bood or service, For ie "t Or example, the process of ‘Making biscuits by yo,Meaning and Deion of Economi (i) Consumption : It includes the economic activities which are related with the use of goods and services for the satisfaction of want directly. For example, cating food to satisfy the want of hunger. Distribution : Distribution refers to sharing of produced wealth among individuals or factors of production. In other words ‘who should get more and who should get less.” ii) (iv) Exchange : It consists of the economic activity which is concemed with the sale and purchase of good or service. The sale and purchase is mostly done through money. 32 Non-economic Activities Non-economic activities are those activities that are carried out solely out of love, affection, sympathy or patriotism. They are performed only for the purpose self satisfaction. People who engage in such activities do not receive any financial/monetary gain. Nothing is produced for the market. Examples (1) Teaching by father to his son at home (2) Domestic work by the housewife (3) Washing of father’s car by the son (4) Scholarship to a student (5) A person engaged in social work. Features of Non-economic Activities are : (1) Non-economic activities are done only for the purpose of self satisfaction (2) They provide no financial gain in return. (3) They cannot be measured in money terms (4) Non-economie activities do not produce anything for the market. Zz Basis Economic Activities ‘Types : Non-economic activities are classified as under (a) Social Activities : For example, attending marriage or birthday parties of relatives or friends, organising cultural programmes, etc. (b) Political Activities : For example, activities performed by various political parties such as Congress, BLP., etc Religious Activities : Such as worship, donations for temples, etc. Charitable Activities: Such as helping the poor or the disabled persons. © @ Parental Activities : Activities performed by parents towards their children such as love and affection, etc. Recreational Activities : Such as playing games, dancing, TV-watching, etc. © oO Remember, when the above mentioned non-economic activities involve any money aspect, then they become economic activities. For example, when a cricket player plays cricket for his own recreation or pleasure, it will be a non-economic activity. But when he plays cricket to ‘eam money, it becomes an economic activity. Likewise, when a teacher teaches his own son at home, it will be a non-economic activity. But when he teaches in a school and gets salary for that job, the activity will become an economic activity. Thus, the motive of eaming wealth or income is the basic criterion for deciding whether a human activity is economic or non-economic. 3.3 Difference between Economic and Non- economic Activities On the basis of above explanation the difference between economic and non-economic activities can now be summed up as under : Non-Economic Activities | Economic activities are those activities that are carried out in exchange for money, 1. Meaning Economic activities are per eam money or wealth Production, consumption, distribution and exchange are the main types of economic activities 4. Measurement | They ure measured in money terms formed to Non-economie activities are those activ carried out solely for the sake of love, affectio and patriotism. S that are sympathy Non-economic activities are performed for pleasure, love and affection, These activities do not have money aypect Non-economic activities can be divided into social, political, religious, charitable, parental and recreational activities. y lack money measurementON 10 Keonamie Applications. yy &. Scope Economic activities take place either| These activities generally ote between ami between employer and employee or] members or between social workers an Nae between supplier and consumer or | being served by them, between professional and client. L _ aot | 6. Income Economic activities generate income. | Non-economic activities do not generate income. | tivities. Non-cconomie activities do not constitute pan In economies, we are confined to the study of econom of economics. SUMMARY | 1. Economies : Economics is all about making choices in the presence of scarcity 2, Meaning of Economics : Economics is a subject that studies the economic activities of man. Non-economic 3. Classification of Definitions of Economics : Various definitions of economics as given by different economists can broadly be grouped into four categories as under : (a) Wealth Definition, (b) Welfare Definition, (c) Scarcity Defni (d) Growth Definition. 4. Wealth Definition : Adam Smith, the father of economics, defined economics as the study of nature and causes of a nation’s wealth. According to him, economics is concerned with the study of wealth only, 5. Welfare Definition : During the later part of the 19th century, economists (like Marshall, Pigou) shifted their emphasis from wealth to welfare while defining economics. According to them, &. Scarcity Definition : Robbins defined economics as a pure science which According to him, scarcity of means or resources is considered as a cause of economic problem. He defined economics as under which have alternative uses.” 7. Growth Definition : Samuelson gave a growth-oriented “Economics is the study of how people and society choose, with or without ty, Productive resources which could have alternative uses, to produce various on them for consumption now and in the future among various 8. Meaning of Economic Activities : Economic activities refer to money or wealth. They relate to the production, consumpti Gefinition of economics. He defined economics as under © use Of money, to employ scarce mmodities over time and distribute Persons and groups of society." jo those activities of human beings which are related ee pe QUESTIONS oo MULTIPLE CHOICE QUESTIONS 1. “Economics is the science of wealth”. Who gave this definition? (a) Marshall (b) Robbins () Adam smith ® uk 2 “An Enauity into the Nature and causes of Wealth of Nations" is the boos eka (a) Adam Smith (b) Marshall () Robbing lomist 3. Who has given the scarcity definition of economics? (2) None of these (a) Adam Smith (b) Marshail (c) Robbins 4, What is true about the scarcity definition? (9) Pigou (a) Considers material weltare (b) Stud (c) Economic problem ) ty of wealth (A) Study of material goodsMeaning and Definition of Economics 5. Identity the main feature of welfare definition of economics from the following options. 10. 1. 12. 13, 14. 15. (a) Study of wealth (c) Study of ordinary business of life Who is known as the father of modem economics? (a) Adam Smith (b) JM. Keynes Identify the feature of economic activity {a) Economic gain (©) Performed out of love and affection Non-economic activities are undertaken (a) Out of love and affection (c) Both (a) and (b) Which of the following is not an economic activity? (a) Teaching by father to his son at home (©) Washing of father's car by the son What is the name of the book written by Alfred Marshall? (a) Wealth of Nation (©) Principles of Economics What is known as the study of individual units? (a) Macroeconomics (©) Income theory Study of aggregates is known as (a) Monoeconomics (©) Price theory (b) Study of material goods only (d) Scarce resources (0) Alfred Marshal (d) Robbins (b) Cann't be measured in money terms (4) Results in satisfaction and happiness (b) performed due to social reason (4) Neither (a) nor (b) (b) Domestic work by the housewife (a) All of these (b) Political Economy (d) Welfare Economics (b) Microeconomics (d) Development economics (b) Microeconomics (6) Factor price determination Which of the following options is a micro-economic study? (a) National income (c) Agricultural production (b) Aggregate demand for goods and services (d) Household income Which of the following options is not a macro-economic study? (a) Output of a firm (c) Market demand of apples (b) Household income (d) All of these Mr Arvind wants to study the national income. Which branch of economics will he have to study? (2) Microeconomics (c) Macroeconomics Which of the following is NOT an economic activity? (a) To worship (c) Donating blood to an injured person 17. Identity economic activity from the following (a) A child playing with toys (c) Pouttry farming a — © 2) 30 4) 5) (a) | 1%) 14. (0) 15. (c) 16. (a) 17. (0) See Question Bank Q No 2 7, (a) —— SHORT ANSWER TYPE QUE! AC Wirat do you mean by economic activites (b) Factor price determination (d) Price theory (b) To help the poor (d) Allof these (b) Awoman doing cooking her family (8) None of these 8. (c) 9 (d) 10. (c) 11, (db) 12. (@) 2. Classify the following activities into econome and non-economic activitiesa WL _______ ICSE Economic Application, », cling of news ? Give 9 (@ Selling of ne student in the “Who is known as the father of economics? Give »,, morning ae > Tame of his famous book. (b) Washing own car See Question Bank Q.No. 4 _4- Give Adam Smith's definition of economics. ° See Question Bank Q.No. 9 SC What is welfare definition of economics? (c) Dance Performance by a student (@) A doctor in a hospital (e) Pocket allowance by father to his son See Question Bank Q.No. 10 (9) Public speech by Narendra Modi 6. Give Robbins’ definition of economics. (g) Playing cricket by Rohit Sharma for India ‘See Question Bank Q.No. II Hint : Economic Activities : (a). (d), (g) AF Give growth definition of economics. None-economic Activities : (b), (c), (e), (f) ‘See Question Bank Q.No. 12 LONG ANSWER TYPE QUESTIONS 1. Distinguish between economic and non-economic of economics? activities. Give suitable examples. See Section 1.2 . See Section 3.2 (Differences. between economic and non- A Critically examine Robbins’ definition of economics economic activites) See Section 1.3 2. Critically discuss wealth definition of economics as 5. Explain Samuelson's definition of economics given by Adam Smith. See Section 1.4 See Section 1.1 oR _3--What are the main features of Marshall's definition Explain the growth-oriented definition of economics QUESTION BANK 4. What is economics? ——. Ans. Economics is all about making choices in the presence of 2. Explain economic activity. Ans. Economic activity refers to the activities of eaming and spending money. It is also called the study of huma activities in relation to wealth. 3. Mention the three economic activities. Ans. Three economic activities are— () Production (ji) Exchange (ii) Consumption 4. Who is the father of economics? Also write the name of his famous book. Ans. Adam Smith. His book ‘An Enquiry into the Nature and Causes of Wealth 5. Give the definition of goods. ‘Ans. Anything that can satisfy a human want is called a good in economics. 6. What is wealth in economics? Ans. All goods whose supply are scarce in relation to its demand and for which o as wealth in economics. money payments are made are know of Nations’ was published in 1776 7. Why does an individual need wealth? ‘Ans. An individual needs wealth because wealth has want satistying power. 8. What do you mean by scarcity of wealth? ‘Ans. Scarcity of wealth means limitation in the supply of a commodity in ro 9. Write the definition of economies given by Adam Smith, Ans. According to Adam Smith, “Economies is a science of woalth." 10. Write the definition of economics given by Marshall ‘Ans. According 10 Marshall, “Economics is a study of mankind in ordina : activities connected with acquisition and use of wealth” "Y Business of lite, it deals with all huma! 11. Discuss scarcity definition of economics given by Prot. Robbins, . According to Robbins, “Economics is a science which studies human behavi ‘Ans. coerce means which have allernative uses, laviour as a lation to its demand, relationship between ends 2Meaning and Definition of Economics B 42, Give Samuelson's definition of economic: ‘Ans. According to Samuelson, “Economics is the study of how man and society choose, with or without the use of money, to employ scarce productive resources, which could have alternative uses, to produce various commodities, ‘over time and distribute them for consumption now and in the future among various people and groups of society.” 13. What is resource in economics? ‘Ans. Wealth or resource in economics means such type of scarce goods and services which have cost of production and ‘satisfy human wants. 14, Explain the features of Adam Smith's definition of economics. Ans. Features of Adam Smith's Definition () Economics is a study of wealth (ii) Economics studies only material goods. (ii) Economics studies only about an economic man. 15. Explain the salient features of Marshall's def Ans. Features of Marshall's Definition () Economies is a study of economic activities of mankind. (ii) Economics is a study of human welfare of material type. (ii) It lays more importance on human welfare in comparison to wealth. 16. What are the features of Robbii Ans. (i) Human wants are unlimited. (ii) Resources required to satisfy these unlimited wants are limited in supply. (ii) Means are having alternative uses. 17. Explain the features of growth definition of economics. Ans. Features of Growth Definition (i) It lays emphasis on the need of choice which arises due to unlimited wants. (ii) tt also lays emphasis on the need for the growth of resources. (ii) Economics is concerned with the uses of scarce resources to produce goods over time. ion of economics. 1s" definition of economics? 18. Compare and contrast the definitions of economics given by Adam Smith and Marshal. ee ‘Adam Smith's Definition Marshal's Definition | 1. According to Adam Smith, economics is a| 1. According to Marshall, economics is a science of | science of wealth. material welfare. | 2. Economics is a study of economic man. 2. Economics is a study of real man. 19. Compare and contrast between the definitions of economics given by Marshal and Robins. Marshal's Definition Robbins’ Definition |. Marshal laid emphasis on material welfare 1. Robbins laid emphasis on human behaviour on | human behaviour with the problems of scarcity. 2. It is classificatory as it classifies the activities| 2. Robbins definition is analytical as it considers | into economic ahd non-economic. analytically as to why does economic problem arise™ CONTENTS 1. Economy and Its Main Sectors 1.1 Meaning of an Economy 1.2 Main Sectors of an Economy 2, Basic Units of Economic Analysis 2.1 Meaning of an Economic Entity 22 Classification of Basic Economic Entities _ 2.2.1 Consumers ~ 222 Households Ve / 223 Firms (Producers) \ 22.4 Goverment 3. Consumers 3.1 Ciassification of Consumers 3.1.1 Direct Consumers uw \ 3.1.2 Consumers by Exchanging Goods 3.1.3 Modem Consumers 3.2 Importance of Consumers 4, Producers 4.1 Classification of Producers ¢ 4.1.1 Primary Producers 4.1.2 Secondary Producers 4.1.3 Tertiary Producers 42 Importance of Producers 5. Government 5.1 Direct Role 5.2 Indirect Role 1. ECONOMY AND ITS MAIN SECTORS 1.1 Meaning of an Economy Various factories, farms, mines, offices, shops, transport systems, railways, etc. are all around us, All these institutions and establishments help people to cam income. In other words, these institutions help to produce goods and services which directly and indirectly satisfy human wants. All these institutions and organisations may be collectively, called an economy. ~A system by which people get a living.” -AJ. BROWN For the smooth functioning of an economy, the processes of production, consumption, exchange, distribution and investment are essential. That is why they are called ‘essentials ot vital processes ofan economy, Thus, economy js the sum total of all economic activities of any society In simple words, a framework within which all the economic setivities of an area or region can be described is called the economy. ‘two Main Functions of an Economy ‘an economy performs the following two main functions \“ (a) To produce goods and services to satisfy hums wants, (b) To provide employment or income carnin ‘opportunities to its people. ‘An economy can be also described into two diffees ways : (a) a system of cooperation among produces (b) a system of mutual exchange. (a) A System of Cooperation among Producers In the process of providing living to the peopl various goods and services are produced ins economy in order to satisfy human wan’ * Production of goods and services is done by? very large number of people. * Goods and services are produced by the mut! cooperation of people as producers. For example, farmers produce cotton, Provus** engaged in the production of cotton yar seh fon the farmers for the supply of rv © Again, producers of cotton cloth depen & Producers of cotton yarn # Therefore, an economy can be describe! 4 system of cooperation Produce goods and services that satistt P*° ad nong produce” ©ti an Economy _ (b) A System of Mutual Exchange ‘© Aman cannot produce everything that he wants, Therefore. he has to depend on others to meet his wants. This is true in all the economies. ‘¢ In the traditional simple village economies, wants of the people were limited. Some people specialised on the production of food; some produced cloth, while others made hand tools Each one of them produced more than his own requirement so that he could exchange the surplus to obtain other goods of his requirements. Such a system where goods are exchanged for goods is called barter system In modem economies of today, goods and services are exchanged through the medium of money. For example, a person working in a sugar mill ears his income in terms of money by selling labour services to the owner of that factory. Then, he uses this money to buy goods and services as he wants, 4.2 Main Sectors of an Economy On the basis of nature of economic activities, an economy is broadly classified into three main sectors, i.e., primary sector, secondary sector and tertiary sector (or service sector). Primary Sector The activities in an economy based directly on natural resources are called primary sector of the economy. Agriculture, forestry, animal husbandry, fishing, poultry farming, mining, quarrying are the activities of this sector. In this sector of the economy, goods are produced by exploiting economy's natural resources which includes: land, water, forest, minerals. For example, nature has a great hand in the production of agricultural commodities. Likewise, nature cooperates with man in producing wood of timber, in raising cattle or in catching fish. Goods Produced by this sector are known as primary goods ot natural products When we produce a good by exploiting natural ‘Tesources, it is an activity of the primary sector. This is primay because it forms the base for all | ote Pett we prove. Secondary Sector Secondary sector (also known as manufacturing sector) includes all those activities which produce goods with the help of raw material produced in the primary sector. Mt neludes those activities which result in transformation of natural products into other form of manufacturing, Since this sector is associated with different kinds of industries it is called industrial sector. Goods produced by this sector are known as manufactured goods or secondary goods Here primary products (or natural products) are converted into finished goods through the process of manufacturing, This could be in a factory or a workshop or at home. For example, using cotton fibre from the plants, we spun yeam and weave cloth; using wheat as raw material, we make flour and bread; using sugarcane we make sugar or gur (Jaggery). Tertiary Sector It is the third sector of the Indian economy. Tertiary means third in order. \t does not produce goods as produced by the primary and secondary sectors. Tertiary sector comprises activities that provide support to the primary and secondary sectors through various services. Transport, storage, communication, banking, trade insurance, health education, tourism are examples of tertiary sector activities, since these activities provide services (rather than goods), the tertiary sector is called the service sector. For example, goods produced in the primary or secondary sector would need to be transported by trucks or trains and then sold in wholesale and retail shops. At times, it may be necessary to store these in godowns. We also may need to talk to others over telephone or send letters (communication) or borrow money from banks (banking) to help production and sale of goods. 2. BASIC UNITS OF ECONOMIC 4.NALYSIS 2.4 Meaning of an Economic Entity ¢ Aneconomy operates through its various entities NS (CAn institutional unit whieh-iscapable af dois, economic activities independently ts called ati economic enuis > © An economic entity can the following activities: (a) acquiring assets (b) taking up responsibilities and incur Liabilities; (c) participating in economig activities: (d) undertaking transactions with other economic ndependently pertorm entities in the economy22 Classification of Basic Economic Entities tuoaleete Afe millions of people participating in the anne of an sconamy. By ‘economic entities’ we inean those individuals or institutions which take economic decisions, Vor a systematic study of their behaviour, we classity them into four important groups - consumers, households, firms or producers and government. These Jour groups are known a» basic economic entities. We would now study and analyse them one by one. 2.2.1 Consumers asic economic entities in an ious goods and servic jsfaction from Consumers are the economy. They consume Their objective f 10 maximise their the consumption of such goods and services. Generally, # consumer iy considered as an individual. In this sense, 4 consumer means anyone_who consumes goods and services (0 satisfy his/her wants, But in practice consumers consist of ipstitutions,. individuals, and groups of individuals, They take decisions regarding consumption. For example, educational institutions take decisions with regard lo consumption of blackboards, stationery, ete Economists hye replaced the concept of the consumers with that of the households. So we generally use the concepts of Consumers and households interchangeably. Hence, we take three basic entities in an economy, viz., households, firms and government 2.2.2 Households 4 household refers to a group of people living under single roof and taking economic decisions jointly. @ The main objective of every household is to maximise satisfaction with its limited income or means. Thus, household ts primarily a unit relating to consumption, A household has to decide whether to spend more on education of children or on acquiring durable consumer goods. It hus also to decide what part of income would be consumed and what part to be nave, 7 Lace Pee wus SOL, Functions of Household! Households offer factor services to the firms’ (or producers) and receive rewards in cash or kind for the Services rendered. They, thus, perform the following two 4 main functions (a) Households are the owners of different factors of production (eae land, labour egpitad. They supply factor services to the firms and’ééim factor income, For example, the households carn wage income tor supplying labour services to the firms and the government om ____ICSE Economic Applic x (b) They purchase different consumer goods 4, services. For example, households purcy,. various consumer goods like food items, eloyie furniture, home appliances, car, etc. 7 Importance of Households ‘The various aspects of the importance of houschojg, are discussed below. (i) Source of Demand : Consumers are the bigocs source of demand for various goods and sery produced in an economy. The greater the demand, the larger will be the production of goods and services (ii) Diversification in Production : Differen, consumers have different preferences or liking, Some consumers like butter while others preter ice cream. Some consumers prefer scooters whereas others like motorbikes, ete. As a result, producers are encouraged to diversify their products. They tend to produce goods of different designs ang colours to attract the consumers towards their products (ili) Demand for Services : The consumer demand is just not confined to consumer goods. It extends to services too, say like transport services, banking services, health, education, ete. Thus, the growth of service sector in an economy would depend upon the number of consumers of such services. () As owners of factors of production, they supply factor services to the firms. i) As a consumer, they provide market for various goods and services produced in the economy (ii) Households are also tax payers, They pa the government such as income tax, sales tax, et | Thus, they contribute revenue to the government (iv) Households save a part of their income which becomes the basis of capital formation. They sav money in the financial market from where it goes to the producing sector. 2.2.3 Firms (Producers) The term firm refers to @ particular unit pr @ commodity or service with a pep modi —Nice With @ view §p_earn pron! undertakes the activi y of creating eee ‘combining 3° organising the factors of production, Here the basic dec'si0” cesar ummm a