Economy-

Any place or religion which has a set of rules and which has institutions to implement those rules
is called an economy.
Economic Activities-
All those which create value and which can be measured are economic activities.
It indicates production (Converting raw materials into finished product} of goods and services
(Value addition through abstract services), consumption (utilization), exchange (market) and
distribution.
Two types of non- economic activities-
i. Illegal activity
ii. Production of services for self-consumption
Economics-
 It is the study of making choices in the presence of scarcity.
[Scarcity- Availability of a commodity or a service is lesser than its requirement]
 The problem of choice arises because resources are limited but desires are unlimited.
Central problems of an economy-
Problems of choice that arises in every economy. They are of three types.
i. What to produce- It considers not only which commodity to produce but also in what
amount.
ii. How to produce- It considers which technology to choose in production and the type
of raw material to choose.
e.g.- Whether to produce by labor intensive technology or capital-intensive
technology.
iii. For whom to produce- It refers to the distribution of goods and services produced in
the economy i.e., how people are earning income, how resources are distributed, how
govt. is giving subsidy etc.
Opportunity Cost-
 The cost of sacrificing the next best or second best alternative to choose the best
alternative is called opportunity cost.
 If government provides free service to people, then opportunity cost of this free service is
transferred from beneficiary to tax payer.
Production Possibility Curve (PPC) –
Production possibility curve represents all combinations of two commodities that an
economy can produce using all its resources at a given level of technology.
 It is downward sloping because to produce more units of one commodity the economy will
have to sacrifice units of other commodity, because resources are limited.
The slope of PPC is called marginal opportunity cost, i.e amount of one commodity that
needs to be sacrificed to produce extra units of another economy.

Food
A
Production Possibility Curve
K

C
Cloth
Clothes Food Opportunity
Cost
0 100 -
1 90 10 Marginal Opportunity Cost-
2 70 20 To produce one more unit.
3 40 30
4 0 40

Concave to Origin Because of increasing marginal opportunity cost.

i. All the points on the PPC like A, B, C represent full and most efficient utilization of
resources.
ii. Any point inside the PPC (k) represents underutilization or inefficient utilization of
resources.
iii. Any event which results in increasing resources or improvement in technology will
increase production capacity of both the commodities and therefore PPC shifts to the
right & similarly any event which results in worsening in technology will decrease
production capacity of both the commodities & PPC shifts to the left.
Positive Economics-
The field of economics which studies “what is” i.e., the factual e.g.: - India’s GDP is $ 3.1
trillion – Positive, India’s poverty rate is 23% of population – Positive
Normative Economics-
The field of economics which studies “What ought to be” e.g.- India should make policies to
remove poverty.

Lecture-2
Demand-
Quantity of a commodity that an individual is willing to purchase at a given price at a given point
of time.
Law of demand-
If price increases – Qd decreases All other factors affecting demand,
If price decreases – Qd increases remains constant.

Price

Quantity of Demand
Other factors affecting demand-
k