Economics Revision Sheet for Students of Determination - Quiz 1 PDF

ECONOMICS REVISION SHEET FOR Students Of Determination -QUIZ 1 TOPICS FOR QUIZ 1 1. DEFINITION AND SCOPE OF ECONOMICS 2. BASIC ECONOMIC PROBLEM AND SOLUTIONS 3. LAW OF DEMAND DETERMINANTS OF DEMAND 4. LAW OF SUPPLY AND DETERMINANTS OF SUPPLY 1.DEFINITION AND SCOPE OF ECONOMICS M...

ECONOMICS REVISION SHEET FOR Students Of Determination -QUIZ 1 TOPICS FOR QUIZ 1 1. DEFINITION AND SCOPE OF ECONOMICS 2. BASIC ECONOMIC PROBLEM AND SOLUTIONS 3. LAW OF DEMAND DETERMINANTS OF DEMAND 4. LAW OF SUPPLY AND DETERMINANTS OF SUPPLY 1.DEFINITION AND SCOPE OF ECONOMICS Meaning Of Economics Economics is the study of how individuals, businesses, and governments make choices about allocating limited resources to satisfy their unlimited wants and needs. The word "economics" is derived from the Greek word "oikonomia," which means "household management" or "management of the household." DEFINITION OF ECONOMICS There are several definitions of economics by prominent economists, each highlighting different aspects of the field. Here are a few well-known ones: Adam Smith: Often referred to as the "father of economics," Adam Smith defined economics in terms of wealth creation and management. In his seminal work, The Wealth of Nations (1776), he described economics as "an inquiry into the nature and causes of the wealth of nations," focusing on how nations achieve prosperity and manage resources. Nature of Economics Social Science: Economics is a social science that studies human behavior and interactions in the context of scarcity and resource allocation. Deals with Scarcity: It focuses on how limited resources are allocated to meet unlimited human wants. Involves Choice and Decision-Making: Economics examines how individuals and societies make choices about using their resources to satisfy their needs. Branches of Economics Aspect Microeconomics Macroeconomics Large-scale (entire Focus Small-scale (individuals, businesses) economy) Prices, costs, and decision-making Overall economic growth, Key Concerns by individuals and firms inflation, unemployment How the government’s How a bakery decides the price of Example policies affect the national its bread unemployment rate What is the significance of economics in everyday life? Significance in Everyday Life: Economics helps individuals and societies make informed decisions about resource allocation, budgeting, and understanding market dynamics, which impact daily choices like spending, saving, and investing. Scope of Economics Microeconomics: The study of individual economic units like consumers, firms, and markets, focusing on how they make decisions and interact. Macroeconomics: The study of the economy as a whole, looking at broad issues like inflation, unemployment, economic growth, and monetary policies. Positive Economics: Describes and explains economic phenomena without making judgments, focusing on "what is”. 2. BASIC ECONOMIC PROBLEM AND SOLUTIONS Basic Economic Problem 1.What to produce? This problem refers to the decisions regarding the selection of different commodities and the quantities that need to be produced. Labor, land, machines, capital, equipment, tools and natural resources are limited. So, it is not possible to fulfil society’s every demand. Therefore, it is important to decide what goods and services are required to be produced and in what quantity. 2. How to Produce? This problem is about the choice of techniques that need to be adopted and used in the production of goods and services. The two majorly-used techniques are- 1)LIT or Labour-Intensive Techniques Labour-Intensive: Focuses heavily on labour with minimal capital 2)CIT or Capital -Intensive Techniques Capital-Intensive: Focuses heavily on capital with minimal labour. 3.For Whom to Produce? One of the most crucial problems of the economy is to decide which commodities shall be produced for which sections of society. For instance, essential goods and services are in demand from all sections of society, but only certain sections of society have a demand for luxury commodities. SOLUTION TO ECONOMIC PROBLEM The basic economic problem is how to allocate limited resources to meet unlimited wants and needs. Different economic systems address this problem in various ways: 1.Capitalist Economy: Market Mechanism: In capitalism, the allocation of resources is primarily determined by market forces. Supply and demand influence production, pricing, and distribution. Producers and consumers make decisions based on their self-interest, which ideally leads to efficient resource allocation. 2. Socialist Economy Central Planning: In socialism, the government or central authority typically makes decisions about resource allocation. Central planning involves setting production goals, determining the distribution of goods, and controlling prices. 3. Mixed Economy: Combination of Market and Planning: A mixed economy incorporates elements of both capitalism and socialism. Markets and private enterprises operate alongside government intervention and planning. Balanced Approach: The government may regulate or intervene in certain sectors to correct market failures, provide public goods, and address social welfare, while still allowing market forces to drive most economic activities. Economy Characteristics Examples Type - Private ownership of resources and businesses - Market-driven decisions United States, Capitalist - Minimal government intervention Australia - Profit motive - Public or collective ownership of resources and businesses - Central planning Cuba, North Socialist - Focus on equitable distribution Korea - Extensive government control - Combination of private and public ownership Sweden, France, Mixed - Market-driven decisions with government intervention most modern - Blend of capitalist and socialist principles economies 4. LAW OF DEMAND DETERMINANTS OF DEMAND Definition of Demand Demand is a desire backed by willingness to pay and capacity to pay Law of Demand The law of demand states that other factors being constant (cetris peribus), price and quantity demand of any good and service are inversely related to each other. When the price of a product increases, the demand for the same product will fall. Demand function Demand function is a mathematical relationship between price and quantity demanded, all other things remaining the same. A typical demand function is given by: Qd=f(P) where Qd is quantity demanded and P is price of the commodity DEMAND CURVE 1. Individual Demand Curve 2. Market Demand Curve An individual demand schedule is a list of the various quantities of a commodity, which an individual consumer purchases at various levels of prices in the market. A demand schedule states the relationship between price and quantity demanded in a table form. Table 2.1 Individual household demand for orange per week Combinations A B C D E Price per kg 5 4 3 2 1 Quantity demand/week 5 7 9 11 13 DEMAND CURVE Demand curve is a graphical representation of the relationship between different quantities of a commodity demanded by an individual at different prices per time period. GRAPH ANALYSIS In the above diagram prices of oranges are given on OY axis and quantity demanded on OX axis. For example, when the price per kilogram is AED 1 the quantity demanded is 13 kilograms. From the above figure you may notice that as the price declines quantity demanded increases and vice-versa 6. LAW OF SUPPLY AND DETERMINANTS OF SUPPLY Supply indicates various quantities of a product that sellers (producers) are willing and able to provide at different prices in a given period of time, other things remaining unchanged. The law of supply The law of supply: states that, ceteris paribus, as the price of a product increases, quantity supplied of the product increases, and as price decreases, quantity supplied decreases. It tells us there is a positive relationship between price and quantity supplied. SUPPLY FUNCTION The supply of a commodity can be briefly expressed in the following functional relationship: S = f(P), where S is quantity supplied and P is the price of the commodity Supply schedule A supply schedule is a tabular statement that states the different quantities of a commodity offered for sale at different prices. Table 2.3: an individual seller’s supply schedule for butter SUPPLY CURVE A supply curve conveys the same information as a supply schedule. But it shows the information graphically rather than in a tabular form In this diagram the quantities of oranges are measured along X axis and prices along Y axis. The supply curve slopes upward as we go from the left to the right. This means, as the price rises, more is offered for sale and vice-versa.