In a capitalist country production

activities are mainly carried out

by capitalist enterprises.

A typical capitalist enterprise has

one or several entrepreneurs
(people who exercise control
over major decisions and bear a
large part of the risk associated
with the firm/enterprise).
They may themselves supply the
capital needed to run the
enterprise, or they may borrow
the capital.
To carry out production they also
need natural resources – a part
consumed in the process of
production (e.g. raw materials)
and a part fixed (e.g. plots of
land).
And they need the most
important element of human
labour to carry out production.
This we shall refer to as labour.
After producing output with the
help of these three factors of
production, namely capital, land
and labour, the entrepreneur
sells the product in the market.
(a) there is private ownership of
means of production
(b) production takes place for
selling the output in the market
(c) there is sale and purchase of
labour services at a price which is
called the wage rate (the labour
which is sold and purchased
against wages is referred to as
wage labour).
Presence of production units
which are organised according to
capitalist principles. The
production units will be called
firms in this book.
In a firm the entrepreneur (or
entrepreneurs) is at the helm of
affairs.

The money that is earned is

called revenue.

Part of the revenue is paid out as

rent for the service rendered by
land, part of it is paid to capital
as interest and part of it goes to
labour as wages.

The rest of the revenue is the

earning of the entrepreneurs and
it is called profit.

Profits are often used by the

producers in the next period to
buy new machinery or to build
new factories, so that production
can be expanded.

These expenses which raise

productive capacity are examples
of investment expenditure.

In short, a capitalist economy

can be defined as an economy in
which most of the economic
activities have the following
characteristics
Economics: Positive Science and
Normative Science
Positive science deals with what
it is, means, it analyses a problem
on the basis of facts and
examines its causes. For
example, at the time of a price
increase, its causes are analysed.
On the other hand,
normative science responds to a
question like what ought to be.
Here, the conclusions and results
are not based on facts, but on
different considerations
belonging to social, cultural,
political, religious realms. They
are basically subjective in nature.
In short,
positive science is concerned
with ‘how? and why?’ and
normative science with ‘what
ought to be’.
The distinction between the two
can be explained.
An increase in the rate of
interest, under positive science,
would be looked into as to why
and how can it be reduced,
whereas under normative
science, it would be seen as to
whether it is good or bad.
Three statements about each
type are given below:
Positive Economics
a. An increase in money supply
implies a price-rise in an
economy.
b. As the irrigation facilities and
application of chemical fertilizers
expand, the production of food-
grains increases.
c. An increase in the birth rate
and a decrease in the death rate
reflect the rate of growth of
population.
Normative Economics
a. Inflation is better than
deflation.
b. More production of luxury
goods is not good for a less-
developed country.
c. Inequalities in the distribution
of wealth and incomes should be
reduced.
MICRO-ECONOMICS
words ‘micro’ meaning small and
‘macro’ meaning large
Micro Economics is the study of
the economic actions of
individual units say households,
firms or industries.
It studies how business firms
operate under different market
conditions and how the
combined actions of buyers and
sellers determine prices.
Micro economics covers
(i) Value theory (Product pricing
and factor pricing)
(ii) Theory of economic welfare
in microeconomics, you came
across individual ‘economic
agents’ and the nature of the
motivations that drive them
Economic Agents
By economic units or economic
agents, we mean those
individuals or institutions which
take economic decisions.
They can be consumers who
decide what and how much to
consume.
They may be producers of goods
and services who decide what
and how much to produce.
They may be entities like the
government, corporation, banks
which also take different
economic decisions like how
much to spend, what interest
rate to charge on the credits,
how much to tax, etc.
microeconomics was a study of
individual markets of demand
and supply and the
‘players’,were also individuals
(buyers or sellers, even
companies)
who were seen as trying to
maximise their profits
(as producers or sellers) and their
personal satisfaction or welfare
levels (as consumers).
even a large company was
‘micro’ in the sense that it had to
act in the interest of its own
shareholders which was not
necessarily the interest of the
country as a whole.
The nearest that microeconomics
got to macroeconomics was
when it looked at General
Equilibrium, meaning the
equilibrium of supply and
demand in each market in the
economy.
Forces means no. of individuals
*(people as a whole society or
the State decided to pursue
certain important social goals
unselfishly (in areas like
employment, administration,
defence, education and health))
for which some of the aggregate
effects of the microeconomic
decisions made by the individual
economic agents this scenario
affect the country’s economy as
whole & these under the study of
MACRO-ECONOMICS
Macro economics is the obverse
of micro economics.
It is concerned with the economy
as a whole.
It is the study of aggregates such
as national output, inflation,
unemployment and taxes.
These were not variables that
individual buyers or sellers could
change .
In macroeconomics we usually
simplify the analysis of how the
country’s total production and
the level of employment are
related to attributes (called
‘variables’) like prices, rate of
interest, wage rates, profits and
so on
The subject matters covered in
Macro Economics are the areas
such as
employment, national income,
inflation, business cycle, poverty,
inequality, disparity, investment
and saving, capital formation,
infrastructure development,
international trade, balance of
trade and balance of payments,
exchange rate and economic
growth.
Macroeconomics tries to address
situations facing the economy as
a whole. And wealth and welfare
of the country
For the purposes of wealth and
welfare of the country study the
effects in the markets of taxation
and other budgetary policies, and
policies for bringing about
changes in money supply, the
rate of interest, wages,
employment, and output
therefore, Macroeconomics has,
deep roots in microeconomics
because it has to study the
aggregate effects of the forces
(*)of demand and supply in the
markets.
macroeconomic agents ?
for wealth and welfare of the
country macroeconomics deal
with policies aimed at modifying
these forces
In a developing country like India
policies made to remove or
reduce unemployment, to
improve access to education and
primary health care for all, to
provide for good administration,
to provide sufficiently for the
defence of the country and so
on.
macroeconomic decision makers
(or ‘players’)? Macroeconomic
policies are pursued by the State
itself or statutory bodies like the
Reserve Bank of India (RBI),
Securities and Exchange Board of
India (SEBI) and similar
institutions.
Their goals are not those of
individual economic agents
maximising their private profit or
welfare. They work for whole
country’s welfare
an economy as a combination of
four sectors, namely households,
firms, government and external
sector. major players
Importance of Macro Economics
There is a need to understand
the functioning of the economy
at the aggregate level to evolve
suitable strategies and to solve
the basic problems prevailing in
an economy.
 Understanding the future
problems, needs and challenges
of an economy as a whole is
important to evolve
precautionary measures.
 Macro economics provides
ample opportunities to use
scientific investigation to
understand the reality.
 Macro economics helps to
make meaningful comparison
and analysis of economic
indicators.
 Macro economics helps for
better prediction about future
and to formulate suitable policies
to avoid economic crises.
SCOPE OF MACRO ECONOMICS
The study of macro economics
has wide scope and it covers the
major areas as follows
 NATIONAL INCOME:
Measurement of national income
and its composition by sectors
are the basic aspects of
macroeconomic analysis. The
trends in National Income and its
composition provide a long term
understanding of the growth
process of an economy.
 INFLATION:
Inflation refers to steady increase
in general price level.Estimating
the general price level by
constructing various price index
numbers such as Wholesale Price
Index, Consumer Price Index, etc,
are needed.
 BUSINESS CYCLE:
Almost all economies face the
problem of business fluctuations
and business cycle. The cyclical
movements (boom, recession,
depression and recovery) in the
economy need to be carefully
studied based on aggregate
economic variables.
 POVERTY AND
UNEMPLOYMENT:
The major problems of most
resource - rich nations are
poverty and unemployment. This
is one of the economic
paradoxes. A clear understanding
about the magnitude of poverty
and unemployment facilitates
allocation of resources and
initiating corrective measures.
 ECONOMIC GROWTH:
The growth and development of
an economy and the factors
determining them could be
understood only through macro
analysis.
 ECONOMIC POLICIES:
Macro Economics is significant
for evolving suitable economic
policies. Economic policies are
necessary to solve the basic
problems, to overcome the
obstacles and to achieve growth.
ECONOMICS: ITS SUB
DIVISIONS
CONSUMPTION
Human wants coming under
consumption is the starting point
of economic activity. In this
section the characteristics of
human wants based on the
behaviour of the consumer, the
diminishing marginal utility and
consumer’s surplus are dealt
with.
PRODUCTION
Production is the process of
transformation of inputs into
output. This division covers the
characteristics and role of the
factors of production namely
Land, Labour, Capital and
Organization and also the
relationship between inputs and
output.
EXCHANGE
Exchange is concerned with price
determination in different
market forms.
This division covers trade and
commerce. Consumption is
possible only if the produced
commodity is placed in the hands
of the consumer.
DISTRIBUTION
Production is the result of the
coordination of factors of
production. Since a commodity is
produced with the efforts of
land, labour, capital and
organization, the produced
wealth has to be distributed
among the cooperating factors.
The reward for factors of
production is studied in this
division under rent, wages,
interest and profit. Distribution
studies about the pricing of
factors of production.
INTERNATIONAL ECONOMICS
In the modern world, no country
can grow in isolation. Every
country is having links with the
other countries through foreign
capital, investment (foreign
direct investment) and
international trade.
PUBLIC ECONOMICS (PUBLIC
FINANCE)
Public finance is concerned with
the income or revenue raising
and expenditure incurring
activities of the public authorities
and with the adjustment of the
one with the other.
The scope of Public Finance
covers Public expenditure, Public
revenue, Public debt, Financial
administration and federal
Finance.
DEVELOPMENTAL ECONOMICS
The countries have been
classified into developed,
developing and under developed
on the criteria of Per Capita
Income, Human Development
Index and Happiness Index.
The Development Economics
deals with features of developed
nations, obstacles for
development, Economic and
Non-economic factors
influencing development, various
growth models and strategies.
HEALTH ECONOMICS
Health Economics is an area of
applied economics.
It covers health indicators,
preventive and curative
measures, medical research and
education, Rural Health Mission,
Drug Price control, Neo natal
care, Maternity and Child health,
Budgetary allocation for health
etc.
ENVIRONMENTAL ECONOMICS
Depletion of natural resources
stock and pollution result from
rapid economic development.
Hence the need for the study of
Environmental Economics which
analyse the inter relationship
between economy and
environment.
Environmental Economics is a
study of inter disciplinary tools
for the problems of ecology,
economy and environment
UNEMPLOYMENT
Meaning of Full Employment
Full employment refers to a
situation in which every able
bodied person who is willing to
work at the prevailing wage rate,
is employed.
In other words full employment
means that persons who are
willing to work and able to work
must have employment or a job;
Unemployment and its types
Unemployment is problem faced
when
there are people, who are willing
to work and able to work but
cannot find suitable jobs.
While formulating policies to
solve the problem of
unemployment in India for
instance, we need to distinguish
between the nature of
unemployment in rural areas and
in urban areas in India.
India’s rural economy has both
unemployment and
underemployment. The major
feature of rural unemployment is
the existence of unemployment
in the form of disguised
unemployment and seasonal
unemployment.
In India, frictional, structural and
open unemployment exist in
urban areas. Due to urbanization,
a large number of people move
from rural areas to urban areas.
This migration from rural to
urban areas increases the size of
labour force in urban areas and
adds to the already unemployed
labour force.
1. Cyclical Unemployment
exists during the downturn phase
of trade cycle in the economy. In
a business cycle during the
period of recession and
depression, income and output
fall leading to widespread
unemployment.
It is caused by deficiency of
effective demand.
Cyclical unemployment can be
cured by public investment or
expansionary monetary policy.
2. Seasonal Unemployment
This type of unemployment
occurs during certain seasons of
the year.
In agriculture and agro based
industries like sugar,production
activities are carried out only in
some seasons.
These industries offer
employment only during that
season in a year. Therefore
people may remain unemployed
during the off season.
Seasonal unemployment
happens from demand side also;
for example ice cream industry,
holiday resorts etc.
3. Frictional Unemployment
(Temporary Unemployment)
Arises due to imbalance
between supply of labour and
demand for labour. This is
because of immobility of labour,
lack of necessary skills, break
down of machinery, shortage of
raw materials etc. The persons
who lose jobs and in search of
jobs are also included under
frictional unemployment.
4. Educated Unemployment
Sometimes educated people are
underemployed or unemployed
when qualification does not
match the job. Faulty education
system, lack of employable skills,
mass student turnout and
preference for white collar jobs
are highly responsible for
educated unemployment in
India.
5. Technical Unemployment
Modern technology being capital
intensive requires less labourers
and contributes to technological
unemployment. Now a days,
invention and innovations lead to
the adoption of new techniques
there by the existing workers are
retrenched. Labour saving
devices are responsible for
technological unemployment.
6. Structural Unemployment
Structural unemployment is due
to drastic change in the structure
of the society.
Lack of demand for the product
or shift in demand to other
products cause this type of
unemployment.
For example rise in demand for
mobile phones has adversely
affected the demand for
cameras, tape recorders etc.
7. Disguised Unemployment
Disguised unemployment occurs
when more people are there
than what is actually required.
Even if some workers are
withdrawn, production does not
suffer.
This type of unemployment is
found in agriculture.
in this situation, marginal
productivity of labour is zero or
less or negative.