APPLIED ECONOMICS

ADDITIONAL NOTES

LESSON 1
 APPLIED ECONOMICS
ADDITIONAL NOTES

LESSON 2

What to Produce?

Animated depiction of types of products

 APPLIED ECONOMICS
ADDITIONAL NOTES

There are different needs of every human in the society, considering that it is
decided which goods and services are to be produced and in what quantity are
they required in the society. As the resources are scarce, the production of one
means sacrificing another. Production has to be done in a way that maximum
satisfaction is achieved by society by looking into what is more important than
another.

For example, the construction of a hospital can be done by giving up a highway.

A public park or a school can be built on the same land, one has to decide what
needs to be built by studying which is a more important need of the area.

There are different types of needs in society. Goods are of different categories
from consumer goods, capital goods to civil goods or war goods. Keeping in mind
the requirement of each their quantity is decided.

How to Produce?

Animated depiction showing different ways of production

This refers to different aspects of production from selecting which raw
materials to be used, what technique of production has to be adopted, and where
these goods would be produced. How means deciding the manner in which the goods
are produced largely deals with deciding what amount of labor would be involved.
There is a capital-intensive technique where more machinery is used and then
there is labor intensive technique where more manpower is used.

Goods can be produced in-house or made in a foreign land. In-house production

means employment generation whereas foreign land production means goods produced
at a lesser price. All these aspects need to be seen keeping in mind their
effect on society.

For example, the production of textiles can be done either by handloom or

machine-based. The method which gives more output with lesser cost getting
involved is chosen. In a country like India where there is an abundance of labor
handloom can be chosen whereas in countries like the USA where the labour cost
is high machine-based production is preferred.
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ADDITIONAL NOTES

For Whom to Produce?

An animated depiction of For Whom to Produce with example

This involves deciding who is the end consumer of the goods or services that are
produced. Every good produced is made for a specific section of society as every
product cannot satisfy all the sections of society due to difference in the
paying capacity of the consumer. Inequality in the distribution of income can be
noticed in society because of which there is a difference in the paying capacity
of the consumer.

For example, the production of graded rice is for people with higher paying
capacity and the production of non-graded rice is for lower-income people.
Luxury goods and services are for people with high income.

The distribution of final goods and services is equal to the distribution of

income among the factors of production( land, labour, capital,
entrepreneurship). This has two aspects:
Personal Distribution: This refers to the distribution of income by a different
group of individuals in society.
Functional Distribution: This refers to the distribution of income among
different factors of production.
 APPLIED ECONOMICS
ADDITIONAL NOTES

What is an Economic System?

An economic system is a means by which societies or governments
organize and distribute available resources, services, and goods across
a geographic region or country. Economic systems regulate the factors
of production, including land, capital, labor, and physical resources.
An economic system encompasses many institutions, agencies,
entities, decision-making processes, and patterns of consumption that
comprise the economic structure of a given community.

Types of Economic Systems

There are many types of economies around the world. Each has its own
distinguishing characteristics, although they all share some basic
features. Each economy functions based on a unique set of conditions
and assumptions. Economic systems can be categorized into four main
types: traditional economies, command economies, mixed economies, and
market economies.

1. Traditional economic system

The traditional economic system is based on goods, services, and work,

all of which follow certain established trends. It relies a lot on
people, and there is very little division of labor or specialization.
In essence, the traditional economy is very basic and the most ancient
of the four types.
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ADDITIONAL NOTES

Some parts of the world still function with a traditional economic

system. It is commonly found in rural settings in second and third
world nations, where economic activities are predominantly farming or
other traditional income-generating activities.

There are usually very few resources to share in communities with

traditional economic systems. Either few resources occur naturally in
the region or access to them is restricted in some way. Thus, the
traditional system, unlike the other three, lacks the potential to
generate a surplus. Nevertheless, precisely because of its primitive
nature, the traditional economic system is highly sustainable. In
addition, due to its small output, there is very little wastage
compared to the other three systems.

2. Command economic system

In a command system, there is a dominant centralized authority –

usually the government – that controls a significant portion of the
economic structure. Also known as a planned system, the command
economic system is common in communist societies since production
decisions are the preserve of the government.

If an economy enjoys access to many resources, chances are that it may

lean towards a command economic structure. In such a case, the
government comes in and exercises control over the resources. Ideally,
centralized control covers valuable resources such as gold or oil. The
people regulate other less important sectors of the economy, such as
agriculture.

In theory, the command system works very well as long as the central
authority exercises control with the general population’s best
interests in mind. However, that rarely seems to be the case. Command
economies are rigid compared to other systems. They react slowly to
change because power is centralized. That makes them vulnerable to
economic crises or emergencies, as they cannot quickly adjust to
changing conditions.

3. Capitalist or Market economic system

Market economic systems are based on the concept of free markets. In

other words, there is very little government interference. The
government exercises little control over resources, and it does not
interfere with important segments of the economy. Instead, regulation
comes from the people and the relationship between supply and demand.

The market economic system is mostly theoretical. That is to say, a

pure market system doesn’t really exist. Why? Well, all economic
systems are subject to some kind of interference from a central
authority. For instance, most governments enact laws that regulate fair
trade and monopolies.
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ADDITIONAL NOTES

From a theoretical point of view, a market economy facilitates

substantial growth. Arguably, growth is highest under a market economic
system.

A market economy’s greatest downside is that it allows private entities

to amass a lot of economic power, particularly those who own resources
of great value. The distribution of resources is not equitable because
those who succeed economically control most of them.

4. Mixed system

Mixed systems combine the characteristics of the market and command

economic systems. For this reason, mixed systems are also known as dual
systems. Sometimes the term is used to describe a market system under
strict regulatory control.

Many countries in the developed western hemisphere follow a mixed

system. Most industries are private, while the rest, composed primarily
of public services, are under the control of the government.

Mixed systems are the norm globally. Supposedly, a mixed system

combines the best features of market and command systems. However,
practically speaking, mixed economies face the challenge of finding the
right balance between free markets and government control. Governments
tend to exert much more control than is necessary.

Economic systems are grouped into traditional, command, market, and

mixed systems. Traditional systems focus on the basics of goods,
services, and work, and they are influenced by traditions and beliefs.
A centralized authority influences command systems, while a market
system is under the control of forces of demand and supply. Lastly,
mixed economies are a combination of command and market systems.
END OF LESSON
 APPLIED ECONOMICS
ADDITIONAL NOTES

LESSON 3
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ADDITIONAL NOTES
APPLIED ECONOMICS
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LESSON 4
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ADDITIONAL NOTES
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LESSON 5