Andhra Pradesh BIEAP AP Inter 1st Year Economics Study Material 1st Lesson Introduction Textbook Questions and Answers.
AP Inter 1st Year Economics Study Material 1st Lesson Introduction
Discuss Wealth definition.
Adam Smith was the first person to give a precise definition of Economics and separate this study from other social sciences. Adam Smith is considered as ‘Father of Economics’. He defined it in his famous book Wealth of Nations’, as “An enquiry into the nature and causes of wealth of nations”. Most of the economists in the 19th century held this view.
J.B. Say states that “The aim of political economy is to show the way in which wealth is produced, distributed and consumed”. The other economists who supported this definition are J.B. Say, J.S.Mill, Walker and others.
The main features of Wealth definition :
- Acquisition of wealth is considered as the main objective of human activity.
- Wealth means material things.
- Human beings are guided by self-interest, whose objective is to accumulate more and more wealth.
Criticism : The wealth definition was severely criticised by many writers due to its defects.
- Economists like Carlyled and Ruskin pointed out that economics must discuss ordinary man’s activities. So they called it as a ‘Dismal Science’.
- Adam Smith’s definition, wealth was considered to consist of only material things and services are not included. Due to this the scope of economics is limited.
- Marshall pointed out wealth is only a means to an end but not an end in itself.
- This definition concentrated mainly on the production side and neglected distributed side.
Explain Welfare definition.
Alfred Marshall tried to remedy the defects of wealth definition in 1890. He shifted emphasis from production of wealth to distribution of wealth.
According to Marshall “Political economy or Economics is a study of mankind in the : ordinary business of life. It examines that part of individual and social action which is most closely connected with the attainment and with the use of material requisites of well-being. Thus Economics is on one side, a study of wealth and on the other and more important side, a part of study of man”.
Edwin Cannan defined it as “The aim of political economy is the explanation of the general causes on which the material welfare of human beings depends”.
In the words of Pigou “The range of enquiry becomes restricted to that part of social welfare that can be brought directly or indirectly into relation with the measuring rod of money”.
The main features of Welfare definition :
- Economics as a social science is concerned with man’s ordinary business of life.
- Economics studies only economic aspects of human life and it has no concern with the social, political and religious aspects of human life. It examines that part of individual and social action which is closely connected with acquisition and use of material wealth for promotion of human welfare.
- According to Marshall, the activities which contribute to material welfare are considered as economic activities.
- He gave primary importance to man and his welfare and to wealth as means for the promotion of human welfare.
- Robbins criticised Marshall’s economics is a ‘social science’ rather than a human science, which includes the study of actions of every human being.
- Marshall’s definition mainly concentrated on the welfare derived from material things only. But non – materialistic goods which are also’ very important for the well being of the people. Hence, it is incomplete.
- Critics pointed out that quantitative measurement of welfare is not possible. Welfare is a subjective concept and changes according to time, place and persons.
- According to Marshall, economics deals with those activities of men which will promote human welfare. But production of alcohol and drugs do not promote human welfare. Hence the scope of economics is limited.
- Another important criticism is that it is not concerned with the fundamental problem of scarcity of resources.
- According to Robbins the economic problem arises due to unlimited wants and limited resources. These factors are ignored in this definition.
Explain how Robbings definition is superior to the welfare definition.
Lionel Robbin’s of London School of Economics introduced the ‘Scarcity’ definition of Economics, in his book.
‘An Essay on the nature and significance of Economic Science’.
According to Robbin’s “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses”. Scarcity of resources is the central idea in Robbin’s definition.
Main features of Robbin’s definition :
- Unlimited wants or ends
- Means are scarce or limited
- Means have alternative uses
- Problem of choice.
Welfare definition: According to Marshall “Economics is on one side a study of wealth and on the other and more important side a part of study of man.” Marshall in his definition gave more importance to man than wealth.
Marshall defined “Political economy or Economics is a study of mankind in the ordinary business of life, it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well-being.
Main features of welfare definition :
- He assumed that Economics must be a science which is study of man kind in the ordinary business of life.
- Economics is concerned with real man influenced by human considerations and it has no concern with the political, social and religious aspects of life.
- Wealth is a means for promoting human welfare, i 4) The main emphasis of Marshall is on material welfare and the immaterial aspects are ignored.
Superiority of Robbin’s definition over Marshall’s definition :
- According to Marshall “Economics Studies the activities of those people who live in society”. But Robbin’s says that Economics studies, all human activities whether they promote human welfare or not.
- According to Marshall “The scope of Economics is limited. But Robbin’s the scope of Economics is wide”.
- Robbin’s definition has universal applicability. Because it is applicable to all types of societies.
- Robbin’s definition of Economics is neutral between ends. He made economics a positive science. It does not pass value judgements.
Define Prof. Samuelson’s growth definition.
Robbin’s definition does not take into consideration the dynamic problem of economic growth. As the time passes the scarcity of means ends, targets choices undergo a change. The inherent defect of Robbins definition has been rectified by Paul Samuelson in his definition of Economics.
Prof. Paul Samuelson, a Nobel Prize winner of 1970 provided a new definition of economics in which he introduced time element and it is dynamic in nature. Therefore his definition is known as growth oriented definition.
According to Samuelson “Economics is the study of how people and society choosing with or without the use of money, to employ scarce productive resources that could have alternative use to produce various commodities and distribute them for consumption. Now or in the future among various persons and groups in society.
Important features of the definition :
- Scarcity : Like Robbins, Samuelson emphasises the scarcity of resources, unlimited wants and the alternative uses for the means.
- Dynamism : Samuelson’s definition is dynamic. He talks about production, distribution and consumption in the present and also in the future.
- Wide Scope : This definition widen the scope of Economics. It deals with problems of choice in a dynamic society.
- Economic growth : He gave importance to economic growth the future consumption is safeguard by productive investment which leads to economic growth.
Thus Samuelson definition of economics is considered to be the most satisfactory definition of economics as it clearly states.
Distinguish between “Micro” and “Macro Economics”.
Modem economic theory divided it into two branches, namely (i) Micro Economics (ii) Macro Economics. Ragnar Frisch was the first economist to use the words “Micro and Macro” in economic theory in 1930.
Micro Economics : The term “Micro Economics” is derived from the Greek word MIKROS’ which means small. Thus micro economics is the theory of small. It was developed by classical economists like Adam Smith, J.B.Say, J.S.Mill, Ricardo, Marshall etc. It studies about individual units or behaviour of that particular units like individual income, price, demand etc. Micro Economics is also known as partial analysis. If main, concentrates on the determination of prices of commodities and factors of production. It is also known as “Price theory”. According to K.E. Boulding Micro Economics is the study of particular firms, particular households, individual prices, wages, incomes individual industries and particular commodities.
Shapiro says “Micro Economics has got relation with small segments of the society.
Macro Economics : The term Macro Economics is derived from the Greek word ‘MAKROS’ which means large. Thus Macro Economics is the study of economic system as a whole. It was developed by J.M. Keynes. It studies aggregates in the economy like national income, total consumption, total saving and total employment etc. It is also known as Income and Employment theory.
According to Boulding “Macro Economics studies National Income not Individual income, general price level instead of individual prices and national output instead of individual output. Macro Economics also studies the economic problems like poverty, unemployment, economic growth, development etc. It is also deals with the theory of distribution.
The difference between Micro Econoinics and Macro Economics : Micro and Macro Economics are interrelated to each other. Inspite of close relationship between the two branches of economics, fundamentally they differ from each other.
- The word micro derived from the greek word ‘ Mikros’ means “small”.
- Micro Economics is the study of individual units of the economy.
- It is known as Price theory.
- Micro Economics explains price determination both commodity and factor markets.
- Micro Economics is based on price mechanism which depends on demand and supply.
- The word macro derived from the greek word ‘Makros’ which means large”.
- Macro Economics is the study of economy as a whole.
- It is known as Income and Employment theory.
- Macro Economics deals with national income, total employment, general price level and economic growth.
- Macro Economics based on aggregate demand. and aggregate supply.
Short Answer Questions
Free goods and Economic goods.
- Free goods are nature’s gift.
Ex : Air, Sunshine etc.
- Their supply is abundant.
- They do not have price.
- These goods don’t have cost of production.
- Free goods have only value in use.
- These goods are not included in National Income.
- Economic goods are man made.
Ex: Book, Pen etc.
- Supply is always less than their demand.
- These goods command price.
- Economic goods have cost of production.
- Economic goods have both use value and exchange value.
- Economic goods are included in National Income.
Characteristics of Wants. [March 18, 17, 16]
Human wants are starting point of all economic activities. They depend on social and economic conditions of individuals.
Characteristic features of wants :
1) Unlimited wants : Human wants are unlimited. There is no end to human wants. When one want is satisfied another want takes its place. Wants differ from person to person, time to time and place to place.
2) A particular want is satiable : Although a man cannot satisfy all his wants, a particular want can be satisfied completely in a period of time.
Ex: If a person is thirsty he can satisfy it by drinking a glass of water.
3) Competition : Human wants unlimited. But the means to satisfy them are limited of scarce. Therefore they complete with each other in priority of satisfaction.
4) Complementary: To satisfy a particular want we need a group of commodities at the same time.
Ex: Writing need is satisfied only when we have pen, ink and paper together.
5) Substitution : Most of our wants can be satisfied by different ways.
Ex : If we feel hungry, we take some food and satisfy this want.
6) Recurring : Many wants appear again and again thought they are satisfied at one point of time.
7) Habits : Wants change into habits, which cannot be given up easily.
Ex : Smoking cigarettes for joke results into a habit if it is not controlled.
8) Wants vary with time, place and person : Wants go on changing with the passage of time. They are changing from time to time, place to place and person to person. Human wants are divided into 1. Necessities, 2. Comforts and 3. Luxuries.
Various types of utility.
The want satisfying capacity of a commodity at a point of time is known as utility.
Types of utility:
1) Form utility: Form utilities are created by changing the shape, size and colour etc., of a commodity so as to increase its want satisfying power.
Ex : Conversion of a wooden log into a chair.
2) Place utility : By changing the place some goods acquire utility.
Ex : Sand on the sea shore has no utility. If it is brought out and transported to market, it gains utility. This is place utility.
3) Time utility : Time utilities are created by storage facility.
Ex : Business men store food grains in the stock points in the off season and releases them to markets to meet high demand and obtained super normal profits.
4) Service utility : Services also have the capacity to satisfy human wants.
Ex: Services of Lawyer, Teacher, Doctor etc. These services directly satisfy human wants.
Hence they are called as service utilities.
Jacob Viner’s definition. [March 18, 17, 16]
Jacob Viner’s-definition of Economics is considered as modem definition of Economics. He is an American economist known for his short run and longrun cost curve analysis. According to Jacob Yiner “Economics is what economists do”.
The problems of the economy are :
- What to produce and in what quantities : The economy has to decide whether to produce consumer goods and capital goods. These decisions are influence by individuals as well as government.
- How to produce these goods : A decision has to be made whether to use labour intensive or capital intensive techniques.
- For whom to produce these goods and services: It is concerned with the distribution of income and wealth among different sections of the society.
- How efficient the productive resources are in use : This refers to the efficiency of economic system.
- Whether the available resources are fully utilised : If resources are fully utilised that it can provide more employment opportunities.
- Is the economy growing or static over a period of time.
Various economic investigations.
According to Peterson “The term method refers to the techniques and producers used by economists for both construction and verification economic principles. There are plainly two methods used by the economists for conducting economic investigations. They are :
- Deductive method
- Inductive method.
1. Deductive method : This method is also known as the analytical and abstract method. The method of studying phenomenon by taking same assumptions and deducing conclusions from those assumptions is known as the deductive method. It proceeds from general to the particular or from universal to the individual. This was advocated by economists belonging to the classical school. There are four steps involved in drawing inference through deductive method. They are :
- Selecting the problem
- Formulating assumptions
- Formulating hypothesis
- Verifying the hypothesis.
The law of diminishing marginal utility is one law derived using this deductive method.
Merits of deduction:
- It is less expensive and less time consuming.
- It analyses complex economic phenomena and bring exactness to economic generalizations.
- It helps in laying down basic principles of human behaviour.
Inspite of the above stated advantages, it is not free from limitations. It is based on unrealistic assumptions with little empirical content.
2. Inductive method : This method is also known as Historical, Empirical, Concrete, Ethical or Realistic. This method was strongly advocated and made use of by economists belonging to the historical school. This method proceeds from a part to the whole from particular to general or from the individual to the universal.
The following are the important steps involved in deriving economic generalisations through inductive method.
- Selection of the problem
- Collection of data
Merits of induction method :
- It is nearer to reality and therefore expected to depict reality.
- This method involves less chances of mistakes.
Inspite of several advantages it has its own defects. This method is expensive and consuming. It can be used by those who possess skill and competance in handling ex data.
What is meant by Micro Economics ? Discuss its importance.
The tehn ‘Micro Economics’ is derived from the greek word ‘MIKROS’ which means ‘small’. Thus Micro Economics deals with individual units like individual demand, price, supply etc. It was popularised by Marshall. It is also called as ‘Price Theory’ because it explains pricing in product market as well as factor market.
- Micro Economics provides the basis for understanding the working of the economy as a whole.
- This study is useful to the government to frame suitable policies to active economic growth and stability.
- This study is applicable to the field of international trade in the determination of exchange rates.
- Micro Economics provides an analytical tool for evaluating the economic policies of the government.
- It can be used to examine the condition of economic welfare and it suggests ways and means to bring about maximum social welfare.
What is meant by Macro Economics ? Discuss its importance.
The term Macro Economics is derived from the greek word ‘MAKROS’ which means large. It was developed by j.M.Keynes. Macro Economics deals with economic system as a while like national income, aggregate demand, aggregate supply, general price level etc. It is also known as ‘Income and Employment’ theory.
- Macro Economics study is more useful to the government for formulation and execution of policies for achievement of maximum social benefit.
- It helps in understanding the problems of unemployment poverty, inflation etc, and suggests has to solve them.
- It gives us a picture of the working of the economy as a whole;
- The study of Macro Economics is helpful in analysing the causes of business cycles and in providing-remedies.
- Macro Economics includes economic growth and suggests how developing countries can use their resources to maximise their growth.
- Macro Economic study is useful for making international comparisons in terms of average national income.
Explain the circular flow of income with suitable diagram.
Income is a flow over a period of time. Income flow is of circular in character. Where beginning and end cannot be traced. National output originates in private and public sectors. It moves to the households. The household is the basic consuming unit in economic life. In every economy income flows from households to firms and vice versa. Thus the factor market and the product market are closely related to each other.
The circular flow of income can be explained with the help of the following diagram.
According to the above diagram, it is clear that the factor market and commodity market are closely related to one another.
The households supply the resource services and receives in returm payment interms of money. Thus money flows from producing units to households. The household exchange that money for goods and services they want. As a result the money flows from households to firms. Thus there is a circular flow of income and output.
Explain the differences between Consumer goods and Capital goods.
Anything that can satisfy a human want is called a good. Goods can be classified into two types namely,
- Free goods
- Economic goods.
Further the economic goods divided into two types namely :
- Consumer goods
- Capital goods or Producer goods.
1) Consumer goods: A consumer good is an economic good or commodity purchased by households for final consumption. Thus these goods satisfy human wants directly.
Ex : Foods, books etc.
Consumer goods further divided into two types.
a) Perishable goods
b) Durable goods
a) Perishable goods : They lose their value in single use.
Ex : Milk, fruits etc.
b) Durable goods: These goods which yields service over period of time. Hence utility from these goods can be derive’d for a long time.
Ex : T.Vs & Computers.
2) Producer or Capital goods: Goods which are used in the production of other goods -lied producer or capital goods. They satisfy human wants indirectly.
Ex : Machines, buildings etc.
Differences between Consumer goods and Capital goods.
- These goods satisfy human wants directly. Ex: Milk, fruits etc.
- They have direct demand.
- These are the goods of first order.
- They are net used in the production process of other goods.
- They yield utility to the owners of these goods.
- These goods satisfy human wants indirectly. Ex: Machines, raw-materials.
- They have indirect or derived demand.
- These are the goods of second order.
- These are used in the production process of other goods.
- They yield income to the owners of these goods.
Very Short Answer Questions
Economic goods are man-made, they have cost of production and price. They are limited in supply. They have both value in use and value in exchange.
Ex : Pen, Book etc.
Goods which are used in the production of other goods are called producer or capital goods. They satisfy human wants indirectly.
Ex : Machines, tools, buildings etc.
Intermediary goods [March 17]
Goods which are under the process of production and semi finished goods are known as intermediary goods.
Ex : Cotton and fibre etc.
Wealth [March 18, 16]
Wealth means stock of assets held by an individual or institution that yields has the potential for yielding income in some form. Wealth includes money, shares of companies, land etc. Wealth has three properties. 1. Utility 2. Scarcity 3. Transferability
Ans. Income is a flow of satisfaction from wealth per unit of time. In every economy income’ flows from households to firms and vice versa. Income can be expressed in two types.
- Money income which is in terms of money.
- Real income which is in terms of goods and services.
Utility [March 16]
Utility is the wants satisfying capacity of goods and services. It is a subjective concept. No one can measure it in mathematical terms.
Exchange value is the purchasing power of one commodity to another. All economic goods have exchange value.
Price [March 18, 17]
The price of anything is its value measured in terms of money.
Ex: A commodity is exchanged for 50 rupees then the price of commodity is 50 rupees.
The choice problem is the central problem of Economics. The problems of the economy “What to produce ? How to produce” ? The problem of choice between commodities and the problem of choice of production techniques respectively.
Deductive method is the process from general to particular or from the universal to the individual.
It is the process from particular to general or from the individual to the universal.
Economic statistics : It refers to the functional relationship between the two variables whose values are related to the same point. This concept was introduced by J.S. Mill.
J.S. Mill introduced this concept in Economics. It refers to the analysis where the functional relationship is established between relevant variables whose values belong to different point of time.
It was popularised by Marshall. It exists when an equilibrium relates to a single variable.
This concept was popularised by Leon Walras. General equilibrium exists when an equilibrium relates to number of variables or even the economy as a whole.
Ans. The word ‘Micro’ derived from Greek word ‘Mikros’ which means ‘small’. It was developed by Marshall. It is the study of the individual units like individual demand, price, supply etc.
The word ‘Macro’ derived from Greek word ‘Makros’ which means large. It was developed by J.M. Keynes. It studies aggregates or economy as a whole like national income, employment, general price level etc. It is also called “Income and Employment” theory.