class 11 basic issues and allocation of resources

Class 11

Economics

Unit:

Basic concepts of economics and allocation of
resources

( 6 marks i.e. 1 marks of 1 question + 5 marks of 1 Q)

Economics is derived from the Greek word oeconomicus which means
management of household
Ancient
Kautilya
Mercantilists
Economics is treaded by politics , religious social . Part of other discipline such as
logic psychology , politics ethics

economics is separate subject after the publication of Adam smith book in 1776
AD
Adam smith is known as the father of economics

Critically explain the wealth definition of economics

Or critically explain the Adam's definition of
economics

Adam smith who was the Scottish philosopher and economist gave the definition of
economics in famous book "An enquiry in to the Nature and causes of wealth of
Nation ." It was published in 1776 .It was popularly Known as Wealth definition of
economics .His definition supporters were J.B Say ,JS mill, David Ricardo .
Name of book is itself the definition of book

The main characteristic of definition are as follows

1. Study of wealth of Nation: Economics study about the national wealth

.Economics explains the production, consumption ,exchange and distribution
of wealth.

2. Study of economic activities: economics is only related with those

activities which governed by economic man but non-economic man.

3. Main goal of Human beings is to earn wealth: the main objective

of economic man is to earn the wealth because only wealth can fulfil the
human wants .

4) primary place to wealth :wealth definition gives first priority to wealth .

It assumes that mankind is for the wealth but wealth is not for mankind.

5)Source of wealth :the source of wealth of nation are the employed labor

whose productivity can be increased through division of labor. Division of labor
again depend on extension of market.

Criticism of wealth definition

The wealth definition of economics is criticized by famous economist like carlyle,
Ruskin and Marshal. They criticized this definition by saying 'Gospel of mammon',
'science of bread and butter' dismal science .

The major criticism are given below
1. Too much emphasis on wealth : the wealth definition has

overemphasized on wealth rather than human beings . Critics point out that
wealth is for human beings and human beings are not for wealth .Human being
need wealth to promote human welfare.

2. Emphasis on economic man : the wealth definition assumed that evert

human beings who wants to earn more wealth in life as economic man . But
this definition has not covered those person who are pensioners house worker,
social worker and so on.

3. Ignorance of human welfare: this definition does not give importance

to the economic welfare of society. It emphasizes only the accumulation of
wealth .It pays no attains ion to equitable distribution of wealth and its uses for
welfare of society

4. Narrow definition : wealth definition only study about economic man ,

tangible goods . It ignored non-economic man ,non-material goods, human
welfare and scarcity and choice

However, wealth definition provide unique place to economics.

Welfare definition or neoclassical
definition or marshal definition

Critically explain the welfare definition of
economics .

Alfred Marshall was British economist, leader of neoclassical economist and author
of ‘Principal of Economics' .According to Alfred Marshall "Economic is a study of
mankind in ordinary business of life. It enquires how a man earns income how he
uses it. Thus, it is on the one side study of wealth and on the other side study , most
important part, is the study of mankind" supporters of this definition are AC Pigou
and Edwin cannon

Characteristic of Marshall definitions

This definition has the following main characteristic or features

1) Primary importance to mankind : According to this definition wealth

is for betterment of mankind. So economics study how a man in the ordinary
business of life earn wealth and utilize his income for betterment. Hence economics
should give primary importance to mankind

2) Study of ordinary man: Every man works mostly to earn wealth and

spends his earning to get the maximum satisfaction out of this .This the activities of
an ordinary men. Ordinary man do not only accumulating wealth .Economics do not
study man like hermit and mad

3)Study of material welfare: The main emphasis of welfare definition is

material welfares i.e. the satisfaction or utility obtained from the consumption of
physical goods or material goods rather than human welfare i.e. prosperity of
human beings

4) Social science: As per this definition , economics is a study of mankind in

ordinary business of life. It explains that part of individual and social action which
is connected with material welfare. It does not study isolated person . So economics
is a social science

Normative science: AS per this definition economics studies what should be

done to promote the material welfare of man. It stress material welfare as objective
and wealth is regarded as means

criticism of Marshall's definition of economics

Marshall's definition was quite popular until it was criticized by Robbins in his book

"An essay on the nature and significance of economic science"

The main criticism are

1. Classificatory definition:- Marshal's definition classified as material

welfare and no material welfare, ordinary men and extra ordinary men and

individual action and social action. Therefore, in the view of Robbins's this

definition is classification rather than analytical in nature

2. Narrow or limited scope: Alfred Marshall stress on material welfare and

study of man in the ordinary business life. Critics point out that there are some

other non-material economic activities like service of doctor .this definition

restricted economics to the study of material goods social life , value judgments

.

3. Lack of clear concept of welfare: there are some material like drug

which gives satisfaction to users and increase economic activities but does not t

promote human welfare .So, welfare is ambiguous concept .Marshal himself

does not define it clearly

4. Not analytical : this definition is only classification in nature . It doesn't tell

us the central problem of economic. According to Robbins , economics is

positive science it must be related to the scientific analysis of economic

activities.

5. It involves value judgments: the word 'welfare' in Marshall's definition

involves value judgment and relates economic to the branch of ethics. But

according to Robbins ,economics is neutral regarding moral judgments.

Comparison between Adam smith and Marshall's
definition

Adam smith Marshall

Economics is science of Economics is science of

Based on the concept economic man it is based on the concept of

ordinary human being s

It assigns primary importance tom It assigns primary importance to

wealth mankind wealth

Wages earned by labour as a single Both labor and resources

source of wealth of nation

This definition is narrow Marshall definition is more broad

than Adam smith

Scarcity, modern or Robbins definition of

economics

Critically explain the Robbins definition of
economics

Robbins was British economists , author of 'an essay on the nature and Significance
of economic science'. It was published in 1932 AD. According to Robbins "
Economics is the science which studies human behavior as a relationship between
unlimited ends and scare means which have alternativists. " supporters of definition
are Stigler an peter
Main features of Robbins Definition

1. Unlimited wants or ends: Robbins called wants as the end .Human

being has unlimited ends. When one ends is fulfilled immediately another
superior end arises .

2. Limited or scarce means : Most of the means or resource which can be

used to satisfy want are very scarce or limited in supply comparison to human
demand .

3. Means have alternative uses: Resources have large numbers of uses

.Man is always faces with the problem of allocation of limited resources

4. Wants are of different intensities :All the wants are more intense than

others .some need immediate satisfaction .This creates choice between wants

5. problems of choice: limited resource with multiples uses and unlimited

wants with different intensities compel to choice. According to Robbins choice
is economic problem and subject matter of economics

6. Positive science: limited resource and unlimited wants creates the

problems of choice to maximize the satisfaction so analysis, relationships
,cause and effect are needed to choose the right alternative. Hence economics is
positive science .

Critics of scarcity of definition

The definition given by Robbins is logical and scientific . But some economists
on the different ground have criticized it as below

1. Neglect the burning issues of modern economy : the critics said

that Robbins was unable to address the burning issues of modern economy such
as unemployment poverty, inequality , economic growth , economic
development, national income trade cycle

2. Concealed the concept of welfare: Robbins has rejected Marshall

definition for its welfare content. According to him economics concerned with

choice between ends and allocation of resource .It is guided by maximum

satisfactions i.e. welfare .

3. Unclear on scope of economics: choice is so wide that economics

along cannot solve the problem .

4. Economics is not only a positive science : if we follows Robbins

definition then economics is intellectual exercise. It is study for study sake .It is

the responsibility of economist to provide suggestion to solve economic

problems. Economics become dry and dull science if economics is only

positive science and out of material welfare

5. Lack of rationality : According to Robbins human being becomes rational

in time of choice but in practice human being may not always rational in case

of habit, fashions and culture practice .

6. Impractical definition : According to Robbins scarcity is the main cause

of economic problem. But some economic problems arise from abundance e.g.

inflation, economic depression, unemployment. Some rich county may face

problems due to abundance of resources. Positive science without normative

value and judgments become impractical

Comparisons between the welfare and scarcity
definition of economics

According to Marshall
According to Robbins
Similarity
1. Both definition give importance to men then to wealth
2. Both definition regard economics as science
3. Both have aims to achieve maximum satisfaction
4. Both the definition are based on the assumption of rational behaviors of man

Differences

Marshall definition of economics Robbins definition of economics'
It is classificatory It is analytical
Marshall consider economics as a Robbins consider economics as a human
social science science
Economics is a normative science Economics a positive science

It is based on a normal person It is based both normal and abnormal
person
It is based on material welfare It is based on both scarcity and choice
it is useful for economic policies It is abstract and use I formulation

Superiority of Robins definition

1. Robbins definition is more scientific .It is analytic
2. Robbins definition has wider scope it is applicable in capitalist , socialist and

mixed economics
3. Robbins definition has point out the central problem of economics
4. Robbins definition has given clear concept of human behavior for economic .

What is the difference between the positive and

normative economics

 Positive economics :

The economics which studied the reality is called the positive economics .It is
the systematic knowledge related to 'what was', what is ,'what will'. It explain
the relationship, cause and effect between the economic issues .

 Normative economic :

the economics which studies as they should be. It is the study things as they
what should be. It uses value judgments on economic issues .

Difference between the positive and normative economic

Positive Normative
it inquires what is what was what will
it based on fact and empirical evidence it inquires what should be
it deals with realistic situation It based on ethic
it can be verified with actual data It deals with idealistic situation
it is use to develop theory it cannot be verified with actual data
its results are widely applicable it is use to formulate policy
its results are applied to specific
it was supported by classical and issues
modern economists it was supported by neoclassical
E.g. inflation decrease the value of economist
money e.g. unemployment is worse than the
inflation

Difference between the microeconomic and

macroeconomics

Microeconomics :

The economics which study the economic activities in microscopic perspective i.e.

in depth is called microeconomics .

Macro economics: the economics which study the economic activities in

aggregate manner is called macroeconomics

Difference between the microeconomics and
macroeconomics

Microeconomics Macroeconomics
it deals with aggregate economic issues
it deals with individual economic
issues it is derived from the Greek word
it is derived from the Greek 'Macros ' which means Large .
word 'Mikrons ' which means
small it is known as income theory
It is known as price theory It study the aggregate demand supply
it study a particular or ,national income saving investment
individual price wages , income, general price level
industry, commodity . economic development, price stability ,
Utility maximization for maintaining favorable BOP , reducing
consume and profit unemployment etc are the major
maximization for produce are its objectives .
major objective

Goods :

I n economic , goods are material that satisfies human wants and provide utility to its
users . Goods are tangible or physical

Service :services are the facility which satisfies the wants of consumers .

Services are intangibles or non-physical .

Types of Goods

Economic and free goods :those goods and services for which the consumer

should pay to have the goods are called economic goods for example mobile .those
goods which are available at abundance and consumers should nor pay for them
are called free goods . For example air sunlight

Normal goods normal goods are those good whose quantity demand have

positive relation with income of consumer and negative relation with price of goods
for examples fruits furniture vehicles

Giffen goods : A commodity for which quantity demand increase at higher price

and falls at lower price is called a Giffen goods . If price of Giffen Goods decrease
consumers substitute by higher quality .There is inverse relation between the Giffen
Goods and income of consumer. Examples of Giffen goods in Nepal are maize,
millet, bread .

inferior Goods: inferior goods whose quantity demand falls as income rises and

quantity demanded rises due to fall in income .It is comparative concept . for
example black and white TV is inferior then color TV .

Substitute Goods substitute Goods are those goods which can be use in the

absence of other for example tea and coffee. There is positive relation between price
and quantity of substitute goods

Complementary goods : commentary Goods are those Goods which are used

together to fulfill their particular wants

Public Goods : public good are those Goods which are non-rivalry and non-

excludable .Examples of public goods re read street light , National defense

private Goods: Good that re consumed by someone and not available to anyone

else are called private goods . private goods are rivalries’ in consumption and they
are excludable .Example of private good are vehicles, rice cooker, fan, pen.

Production

Production is defines as activities which create utility or value . It deals with the
process in which raw material or intermediates goods are converted into final or
finished goods
all the goods and services which help in the process of production are called factor
of production.
they are

1. land
2. labor
3. Capital
4) organization

What is land ? Explain its characteristics

Land : in ordinary sense land means the surface of the earth . But in economics it

includes all free gift of nature such as land surface forest , sea level, air, rain,
minerals , mountain , sunshine likes etc.
characteristics of land

1. Free gift of nature : land con not be produce or created by man . It is given

to us free of cost by nature .so. It does not hold cost of production but it holds
market value or price . Value of land depends on its fertility or productivity
power

2. fixed in supply :the supply of land is fixed . Its supply neither be increased

nor decreased by human effort

3. land is indestructible .: lad is not destroyable . Human beings can

destroy the quality of land but not the quantity of it . The quality or fertility of
land is destroyed by effort of human or by others means. But the total size of
land remains constant permanently .

4. Passive factors of production .Land land is passive factor of

production in sense that it can produce nothing by itself. It is made productive
with human efforts.

5. Immobile factor : land is fixed factor it remains fixed where it is . It is not

transferable from one pace to another place . But it can be used for several
purpose .

6. Differ in quality ( heterogeneous) : quality of is differs from place to

place . Some land found more fertile others are less fertile. For example land of
mountain land of plain.

What is Labor ? Explain its characteristics

Labor is referred to the mental as well as physical exertion which are directed to
produce goods and service in expectation of a rewarded wage. Any work done for
the sake of pleasure or entertainment does not represent the labour in economics.

Characteristics of labor

1) labor is perishable : it cannot be stored as other factors of production like

capital raw materials . If a worker does not work a day , his labor is lost fore ever . It
cannot be store for future works. So labour is highly perishable factor of
production.

2) Labor is an active factor of production : it is the most active and

indispensable factor of production like land capital technology and equipment
in production process together .

3) labor is a mobile factor : since it can be transformed from one place to

another . It is taken as a mobile factor of production .However it less mobile
than capital because it has feeling of love and attachment with family and
with that pace where he lives.

4) Differ in efficiency : Different labors have different degree of working

efficiency due to their experience, knowledge ,skill ,training, place
environment , balance diet motivation etc.

5) The labor has weak bargaining power : since labor is perishable a

labor has to sell his labor at low remuneration .but nowadays , the bargaining
power of labour has been increased due to strong pressure of trade union.

6) Labour is both a means and an end: labor is used to produce any

commodity so it means. Labor is consumer of goods , commodity service to
satisfy his wants . So labor is both a means and end .

What is Capital ? Explain its characteristics .

capital is a manmade means of production which is used in further production of
goods and services .All wealth is not capital but all the capital is wealth . Capital
consists the money, tools, machines and raw material , share, bonds, government
promissory notes .
characteristic or feature of capital

1. Manmade factor . Capital is not automatically created but it is produce by
human effort as well other means of production some economist consider
capital as the storage of the past labour as well

2. most mobile factor . Various forms of capital like machinery , money
equipment vehicles etc. can be easily mobilized from one pace to another pace
. So capital is one of the mobile factor .

3. Capital is depreciable: intrinsic value of capital decreases if capital is used in
production . It has to be repaired and replaced time to time . So capita is
depreciable .

4. Supply of capital is elastic : capital is manmade factor . So , supply of capital
can be increase or decrease. Therefore supply of capita is elastic or flexible

Entrepreneurship or organization

organization is a factor of production which organizes others factors of
production and take risks to earn profit . Sole trading organization , partnership
, joint stock , multinational company etc. are types of organization
Features of organization
. 1) collection of people : in an organization different people are collected to
achieve the goal and target . Individuals are assigned in different role to
perform various task.
2. Structure : In an organization , whole work is divided into different structure
and level.
3. Technology: Technology is the technique which is used tor transformation of
input into desired output . Technology may be labor intensive or capital
intensive
4. Environment: organization is affected by various factors like political,
economic , socio cultural , global factors etc. So organization works in open
environment .

5. Risk and return : organization takes different types of and degree of risk to
earn profit.