Chapter 1: Meaning and Definition of

Economics
 The word ‘Economics’ has been derived from the Greek
word ‘oikos’ meaning Household and ‘nomous’ meaning
Management. Hence it is the prudent (efficient)
management of one’s household matters
 Economics is a social science. It studies the economic
behaviour of individuals and organisations in society
 The society faces the problems of:
i) Unlimited human wants
ii) Limited resources/Scarcity of resources (money)
iii) The resources (money) have alternative uses
iv) Hence, it leads to the problem of Choice

v) Economics is a social science which studies Economic

activities. Social science as it studies the activities of the
society.
Definitions of Economics:
Wealth definition: Prof. Adam Smith
Book: An Inquiry into • Study of Wealth
Known as Father Of the Nature and causes • Study of material goods
Economics of Wealth of Nations only
(1776) • Causes of Wealth
Features • Economic man

According to him,
Defined Economics as Wealth refers to Gold,
‘Science of Wealth silver, land, buildings • Undue importance to
and production of goods Wealth
• Considered only
material goods and
Criticism ignored services
• Based on the concept
Followers: J.B. Say, J. S. of Economic man who
Mill, Walker work only for selfish
motive
Welfare definition: Prof. Alfred Marshall
• Study of mankind
More importance given
Book: Principles of
to human welfare
• Study of ordinary
Economics (1890) business of life
rather than wealth
Features • Study of material welfare
• Use of money
Definition: Economics is
He said, Wealth is only a means to
the study of mankind in
satisfy human wants and not an end
the ordinary business
to itself.
of life
• Activities are not only
Economic but also non
Hence, It is on one side economic
Followers: Pigou,
Cannan, William
the study of wealth and
on the other and more Criticism • Material goods alone do
not promote welfare, non
Beveridge important side, a part
of study of man economic goods also do
Scarcity definition: Prof. Lionel Robbins
• Unlimited ends (human
“Economics is the science wants)
which studies human Features • Scarcity of means (money)
Book: An Essay on the
behaviour as a relationship
Nature and Significance of
between ends and scarce
• Alternative uses of means
Economic science
means which have • Efficient use of scarce
alternative uses” resources
• Science of Choice

Economics studies human

Hence, it leads to the Criticism • Not only scarcity, abundance
behaviour as a relationship
problem of Choice – ie may also cause economic
between unlimited wants problem
Economic problem
and limited means
• Resources may not always be
scarce, it can be increases
over a period of time

Economics is a science Robbins definition is superior to the earlier definition as

arising out of scarcity of it applies to all individuals, groups and nations no
resources matter what economic system they follow
Growth definition: Prof. Samuelson
• Definition: “Economics is the study
of how man and society choose, • Features:
with or without the use of money, • Efficient allocation of resources
to employ scarce productive
resources, which could have • Growth of resources
alternative uses, to produce • Solution to economic problems
various commodities overtime and • Dynamism
distribute them for consumption
now and in the future among
people and groups of society”
• His definition focuses on
sustainable development
Keynes Definition
• Full name: John Manyard
Keynes
• “Economics is the study of
administration of scarce means and the
determinants of employment and
income”.
• Hence, Economic problem of scarcity of
means and choices was approached from
the viewpoint of economy as a whole
instead of analysing from the individual
view point
• The concept of Macro Economics was
introduced by him. Eg. National income,
aggregate demand total consumption,
etc. He studied the economy as a whole
 Micro Economics
• The word ‘Micro’ has been derived
from the Greek word ‘mikros’
meaning small. The letter ‘I’ in
MICRO stands for Individual
• Hence, Micro economics studies
behaviour of small economic units
of an economy like, individual
consumer, producer, etc
• Every individual
consumer/producer allocates its
resources to maximise satisfaction
• Price plays a very important role
here. Hence, Micro economics is
sometimes called ‘Price Theory’
 Macro Economics
• In Macro, the letter ‘A’ stands for
Aggregate
• Hence, Macro Economics studies
the aggregates of an economy or
the economy as a whole. Eg.
Aggregate demand, aggregate
supply, National Income, etc
• It is also known as ‘aggregative
economics’
Economic Activities are of two types…
 Economic activity: Activities which deals
with the earning of money. Eg. A teacher
teaching students in school, a doctor
treating patients in hospital, etc
 Features:
 Economic activities are wealth producing
 They are measurable in term of money
 Purpose is to satisfy human wants
 It not only satisfies human wants but
also provides basis for economic
development of society
Types of Economic activities
• Production: Converting raw
materials into finished goods. Eg.
Use of threads to make clothes
• Consumption: Use of goods and
services for the satisfaction of
human wants. Eg. Eating food to
satisfy hunger
• Distribution: Sharing of produced
goods among individuals or factors
of production.
• Exchange: Sale and purchase of
produced goods and services with
the help of money
Non Economic activities
• Non-Economic activity: Activities done
out of love, affection, etc. Eg. A mother
looking after her sick child at home, etc
 Features:
 Done only for self satisfaction
 Provide no financial gain in return
 Cannot be measured in terms of money
 Such activities do not produce anything
for the market
 Types: Social Activities, Political
activities, Religious activities, Charitable
activities, Parental activities,
Recreational activities
Difference between Economic and Non
economic activity
Chapter 1: Meaning and Definition of
Economics
Chapter 2:
Basic Economic Entities in an Economy
• There are many institutions which
help to produce goods and services
which directly or indirectly satisfy
human wants
• These institutions or organisations are
collectively called as Economy
• An Economy is a system by which
people earn a living
OR
• Economy is a system which provides
people with goods and services which
directly or indirectly satisfy their
wants
• Hence, Economy in the sum total of all
economic activities of any society
Functions of an Economy
• There are two main functions of an
Economy:
a) To produce goods and services to
satisfy human wants
b) To provide employment or
income earning opportunities to
its people
• An Economy may also be described
in two different ways
a) A system of cooperation among
producers
b) A system of mutual exchange
a) A system of cooperation among producers
• Various goods and services are
produced in an economy in order to Farmers produce cotton
satisfy human wants
• Production of goods and services are
done by large number of people
• Goods and services are produced by
the mutual cooperation of people as Producers in cotton yarn
producers industry depend on the
farmers for raw cotton
• Eg. Farmers produce cotton,
producers in cotton yarn industry
depend on the farmers for raw
material, producers of cotton cloth
depend on the yarn producers for raw Producers of cotton cloth
material depend on the yarn
producers for raw material
b) A system of mutual exchange
• A man cannot produce everything
that he wants. Hence, he has to
depend on others to meet his
needs. Farmer
• A system where goods are
exchanged for goods is known as
Barter system
• In modern days, people work and
earn money, then he uses that
money to buy goods and services
to satisfy his/her wants Cotton
Doctor
• Hence, One person’s expenditure is producer
another person’s income
Three Sectors of an Economy
• Primary: Activities/production based
directly on natural resources. Eg.
Agriculture, mining, fishing, animal
husbandry, etc
• Secondary: Activities which produce
goods with the help of raw materials
produced in primary sector. Also
known as manufacturing sector. Eg. All
production in industries
• Tertiary: Activities that provide
support to the primary and secondary
sector through various services. Eg.
Transport, banking, communication,
etc
Meaning of Economic Entity
a) An institutional unit which is
capable of doing economic
activities independently is known
as an Economic entity
• Economic activities like:
a) Acquiring assets
b) Taking up responsibilities and
incurring liabilities
c) Participating in economic activities
d) Undertaking transactions with
other economic entities in the
economy
Four Basic Economic Entities….
Consumer, Household, Firm, Government
Types of Income/Payment…
• Factor income/Factor payment:
Earned income against rendering
some productive services. Eg.
Wages, salaries, rent, etc
• Transfer income/Transfer
payment: Unearned income
received without rendering any
productive services. Eg
Scholarship, money sent by a
son to his old parents in India
Four Factors of Production…
Classification of basic Economic entities..
Consumer
• Consumer: A person who buys
goods and services to satisfy Consumer

his/her wants
• Their main objective is to
maximize satisfaction Economic
Government Household
• Generally a Consumer is Entities

considered to be a single person

but in Economics they can
consist of institution or groups Firms
of individuals also
Basic Economic entity.. Household
• Household: Refers to a group of • Functions of a Household
people living under a single roof
and taking economic decisions • i) They are the owners of Factors
jointly of Production.. (Land, Labour,
Capital). They supply these
• Its main objective is to maximise
satisfaction with the limited factor services to the firms and
income earn factor incomes
• It has to take important • ii) They purchase different
decisions related to consumer goods from the firms
consumption, expenditure and to satisfy their wants
also savings
Classification of Consumers
• Types: • Importance of Consumers:
• Direct Consumers: Consumers who • Source of demand: Generates
produce for self consumption demand as human wants are
• Consumers for Exchanging goods: unlimited
Those who exchange goods for • Diversification of production:
goods, ie the Barter system Various types of goods and services
• Modern Consumers: Those who are demanded by the consumers
produce goods and services for which motivated the producers
selling in the market • Demand for services: Not only
goods but services are also
demanded by the consumers. Eg
transport, communication,
banking, etc
Basic Economic entity… Firm (Producers)
• Firm: Production unit with the main • Importance:
motive of earning profit • Supply of goods and services: An
• Function/Role: increase in the number of producers
will lead to increase in the supply of
• i) Produce and sell various goods and goods and services
services in exchange for money • Efficient utilization of resources: All
• ii) They purchase different factors of resources in the economy are properly
production by paying factor services utilized by the producers
• Expansion of Income and Employment
opportunities: When production
increases, employment opportunities
also increase
• Increase in Export earnings: When
production increases, we have
sufficient goods to export also
Classification of Producers
• Primary producers: Producers
who produce goods by
exploiting natural resources. Eg.
Farmers, fishermen
• Secondary producers: Producers
engaged in manufacturing
goods. Eg. Baker, Cobler
• Tertiary producers: Producers
engaged in production of
services. Eg. Doctor, Engineer
Basic Economic entity.. Government
• Government: Includes all
regulatory bodies which exercises
control over the behaviour of
households and firms
• It acts as a consumer as well as a
producer
• Like Household, the government
spends on goods and provides
services. Eg Electricity, defense,
medical facilities, etc
• Like firms, it makes roads, dams,
bridges, etc
Role of the Government…Direct Role
1. Development of infrastructure: Like, power, transport, hospitals, schools, etc
2. Removal of inequalities of Income and wealth
• a) Progressive tax system
• b) Increase govt. spendings on poor
• c) Nationalisation of industries
3. To direct the market forces: Guide and control the demand and supply in the country to
favour the poor
4. Industrial development:
• a) Accelerate the growth of the basic and key industries like Iron and Steel, fertilizers, etc
• b) Setting up industries in backward areas to accelerate the pace of development
• c) Defence industries should be set up only by the state not by private industries
Role of the Government…(contd..)
• 5. Agricultural development: The state needs to play an important role by,
• Playing a positive role in improving productivity
• Introducing various institutional and technological measures to raise productivity
• Make arrangements for supplying institutional credit to small farmers on easy
terms
• Take steps to provide storage and marketing facilities
• Introduce crop insurance schemes to safeguard poor farmers from crop failures
• 6. To raise the rate of investment: In underdeveloped countries, due to low
income, the rate of savings is low which in turn leads to low rate of investment
• 7. Maintenance of Law and Order: To make the process of development smooth
Role of the Government…Indirect Role
• 1. Monetary policy: Policy of the govt regarding controlling and regulating the supply of
money and availability of credit in the country. Reserve Bank of India (RBI) conducts it.
• 2. Fiscal policy: Taxation policy of the govt (receipts and expenditure)
• a) Increasing savings and capital accumulation by restricting consumption
• b) Helping in reducing inequalities of income and wealth
• c) Controlling inflation
• d) Correcting the situations of excess demand and deficit demand
• 3. Foreign trade policy: Balancing imports and exports
• a) The govt can solve the problems of balance of payment deficits by adopting measures
like export promotion and import substitution
• b) Timely import of raw materials by removing export restrictions
• 4. Price policy: The govt helps to create economic stability by reduction excess
fluctuations of prices
Chapter 2:
Basic Economic Entities in an Economy