Introduction to Economics PDF

C HA P T ER 1 Introduction told this subject is mainly around Studying this chapter should enable you to: what Alfred Marshall (one of the know what the...

C HA P T ER 1 Introduction told this subject is mainly around Studying this chapter should enable you to: what Alfred Marshall (one of the know what the subject of founders of modern economics) called economics is about; “the study of man in the ordinary understand how economics is business of life”. Let us understand linked with the study of economic activities in consumption, what that means. production and distribution; When you buy goods (you may understand why knowledge of want to satisfy your own personal statistics can help in describing needs or those of your family or those consumption, production and distribution; of any other person to whom you want lear n about some uses of to make a gift) you are called statistics in the understanding of a consumer. economic activities. When you sell goods to make a profit for yourself (you may be 1. WHY ECONOMICS? a shopkeeper), you are called a seller. You have, perhaps, already had When you produce goods (you may Economics as a subject for your earlier be a farmer or a manufacturing classes at school. You might have been company),or provide services (you may 2024-25  2 STATISTICS FOR ECONOMICS be a doctor, porter, taxi driver or In real life we cannot be as lucky as transporter of goods) you are called a Aladdin. Though, like him we have producer. unlimited wants, we do not have a When you are in a job, working for magic lamp. Take, for example, the some other person, and you get paid pocket money that you get to spend. If for it (you may be employed by you had more of it then you could have somebody who pays you wages or a purchased almost all the things you salary), you are called an employee. wanted. But since your pocket money When you employ somebody, giving is limited, you have to choose only them a wage, you are an employer. those things that you want the most. This is a basic teaching of Economics. In all these cases you will be called gainfully employed in an economic Activities activity. Economic activities are ones that are undertaken for a monetary Can you think for yourself of gain. This is what economists mean by some other examples where a person with a given income has ordinary business of life. to choose which things and in what quantities he or she can Activities buy at the prices that are being List different activities of the charged (called the current members of your family. Would prices)? you call them economic What will happen if the current activities? Give reasons. prices go up? Do you consider yourself a Scarcity is the root of all economic consumer? Why? problems. Had there been no scarcity, there would have been no economic We cannot get something for problem. And you would not have nothing studied Economics either. In our daily life, we face various forms of scarcity. If you ever heard the story of Aladdin The long queues at railway booking and his Magic Lamp, you would agree counters, crowded buses and trains, that Aladdin was a lucky guy. shortage of essential commodities, the Whenever and whatever he wanted, he rush to get a ticket to watch a new film, just had to rub his magic lamp and a etc., are all manifestations of scarcity. genie appeared to fulfill his wish. When We face scarcity because the things that he wanted a palace to live in, the genie satisfy our wants are limited in instantly made one for him. When he availability. Can you think of some wanted expensive gifts to bring to the more instances of scarcity? king when asking for his daughter’s The resources which the producers hand, he got them at the bat of an have are limited and also have eyelid. alternative uses. Take the case of food 2024-25 INTRODUCTION 3 that you eat every day. It satisfies your activities of various kinds. For this, you want of nourishment. Farmers need to know reliable facts about all employed in agriculture raise crops that the diverse economic activities like produce your food. At any point of production, consumption and time, the resources in agriculture like distribution. Economics is often land, labour, water, fertiliser, etc., are discussed in three parts: consumption, given. All these resources have production and distribution. alternative uses. The same resources We want to know how the consumer can be used in the production of non- decides, given his income and many food crops such as rubber, cotton, jute alternative goods to choose from, what etc. Thus, alternative uses of resources to buy when he knows the prices. This give rise to the problem of choice is the study of Consumption. between different commodities that We also want to know how the can be produced by those resources. producer, similarly, chooses what and how to produce for the market. This is Activities the study of Production. Identify your wants. How many Finally, we want to know how the of them can you fulfill? How national income or the total income many of them are unfulfilled? arising from what has been produced Why you are unable to fulfill them? in the country (called the Gross What are the different kinds of Domestic Product or GDP) is scarcity that you face in your distributed thr ough wages (and daily life? Identify their causes. salaries), profits and interest (We will leave aside her e income from Consumption, Production and international trade and investment). Distribution This is the study of Distribution. If you thought about it, you might Besides these three conventional have realised that Economics involves divisions of the study of Economics the study of man engaged in economic about which we want to know all the facts, moder n economics has to include some of the basic problems facing the country for special studies. For example, you might want to know why or to what extent some households in our society have the capacity to earn much more than others. You may want to know how many people in the country are really poor, how many are middle-class, how many are relatively rich and so on. You 2024-25  4 STATISTICS FOR ECONOMICS may want to know how many are Would you now agree with the illiterate, who will not get jobs, requiring following definition of economics that education, how many are highly many economists use? educated and will have the best job “Economics is the study of how opportunities and so on. In other people and society choose to employ words, you may want to know more scarce resources that could have facts in terms of numbers that would alter native uses in order to answer questions about poverty and produce various commodities that disparity in society. If you do not like satisfy their wants and to the continuance of poverty and gross distribute them for consumption disparity and want to do something among various persons and about the ills of society you will need groups in society.” to know the facts about all these things before you can ask for appropriate 2. STATISTICS IN ECONOMICS actions by the government. If you know In the previous section you were told the facts it may also be possible to plan about certain special studies that your own life better. Similarly, you hear concern the basic problems facing a of — some of you may even have country. These studies required that we experienced disasters like Tsunami, know more about economic facts. Such earthquakes, the bird flu — dangers threatening our country and so on that economic facts are also known as affect man’s ‘ordinary business of life’ economic data. enormously. Economists can look at The purpose of collecting data these things provided they know how about these economic problems is to to collect and put together the facts understand and explain these about what these disasters cost problems in terms of the various causes systematically and correctly. You may behind them. In other words, we try to perhaps think about it and ask analyse them. For example, when we yourselves whether it is right that analyse the hardships of poverty, we modern economics now includes try to explain it in terms of the various learning the basic skills involved in factors such as unemployment, low making useful studies for measuring productivity of people, backward poverty, how incomes are distributed, technology, etc. how earning opportunities are related But, what purpose does the to your education, how environmental analysis of poverty serve unless we are disasters affect our lives and so on? able to find ways to mitigate it. We may, Obviously, if you think along these therefore, also try to find those lines, you will also appreciate why we measures that help solve an economic needed Statistics (which is the study of problem. In Economics, such numbers relating to selected facts in a measures are known as policies. systematic form) to be added to all So, do you realise, then, that no modern courses of modern economics. analysis of an economic problem would 2024-25 INTRODUCTION 5 be possible without data on various worse; sick/ healthy/ more healthy; factors underlying an economic unskilled/ skilled/ highly skilled, etc.). problem? And, that, in such a situation, Such qualitative information or no policies can be formulated to solve it. statistics is often used in Economics If yes, then you have, to a large extent, and other social sciences and collected understood the basic relationship and stored systematically like between Economics and Statistics. quantitative information (on prices, incomes, taxes paid, etc.), whether for 3. WHAT IS STATISTICS? a single person or a group of persons. At this stage you are probably ready You will study in the subsequent to know more about Statistics. You chapters that statistics involves might very well want to know what the collection of data. The next step is to subject ‘Statistics’ is all about. present the data in tabular, Statistics deals with the collection, diagrammatic and graphic forms. The analysis, interpretation and presentation data, then, are summarised by of numerical data. It is a branch of calculating various numerical indices, mathematics and also used in the such as mean, variance, standard disciplines such as accounting, deviation, etc., that represent the broad economics, management, physics, characteristics of the collected set of finance, psychology and sociology. information. Finally, the data are Here we are concerned with data analysed and interpreted. from the field of Economics. Most Economics data are quantitative. For Activities example, a statement in Economics like Think of two examples of “the production of rice in India has qualitative and quantitative increased from 39.58 million tonnes in data. 1974–75 to 106.5 million tonnes in Which of the following would 2013–14, is a quantitative data. give you qualitative data; In addition to quantitative data, beauty, intelligence, income Economics also uses qualitative data. earned, marks in a subject, The chief characteristic of such ability to sing, learning skills? information is that they describe attributes of a single person or a group of persons that is important to record 4. WHAT STATISTICS DOES? as accurately as possible even though Statistics is an indispensable tool for they cannot be measured in an economist that helps him to quantitative terms. Take, for example, understand an economic problem. ‘gender’ that distinguishes a person as Using its various methods, effort is man/woman or boy/girl. It is often made to find the causes behind it with possible (and useful) to state the the help of qualitative and quantitative information about an attribute of a facts of an economic problem. Once the person in terms of degrees (like better/ causes of the problem are identified, it 2024-25  6 STATISTICS FOR ECONOMICS is easier to formulate certain policies consumption expenditure increase to tackle it. when the average income increases? Or, But there is more to Statistics. It what happens to the general price level enables an economist to present when the government expenditure economic facts in a precise and definite increases? Such questions can only be form that helps in proper answered if any relationship exists comprehension of what is stated. When between the various economic factors economic facts are expressed in that have been stated above. Whether statistical terms, they become exact. such relationships exist or not can be Exact facts are more convincing than easily verified by applying statistical vague statements. For instance, methods to their data. In some cases saying that with precise figures, 310 the economist might assume certain people died in the recent earthquake relationships between them and like in Kashmir, is more factual and, thus, to test whether the assumption she/he a statistical data. Whereas, saying made about the relationship is valid or hundreds of people died, is not. not. The economist can do this only by Statistics also helps in condensing using statistical techniques. mass data into a few numerical In another instance, the economist measures (such as mean, variance might be interested in predicting the etc., about which you will learn later). changes in one economic factor due These numerical measures help to to the changes in another factor. For summarise data. For example, it example, she/he might be interested would be impossible for you to in knowing the impact of today’s remember the incomes of all the investment on the national income in people in a data if the number of future. Such an exercise cannot be people is very large. Yet, one can undertaken without the knowledge of remember easily a summary figure like Statistics. the average income that is obtained Sometimes, formulation of plans statistically. In this way, Statistics and policies requires the knowledge of summarises and presents a future trends. For example, an meaningful overall information about economic planner has to decide in 2017 a mass of data. how much the economy should Quite often, Statistics is used in produce in 2020. In other words, one finding relationships between different must know what could be the expected economic factors. An economist may level of consumption in 2020 in order be interested in finding out what to decide the production plan of the happens to the demand for a economy for 2020. In this situation, commodity when its price increases one might make subjective judgement or decreases? Or, would the supply of based on the guess about consumption a commodity be affected by the changes in 2020. Alternatively, one might use in its own price? Or, would the statistical tools to predict consumption 2024-25 INTRODUCTION 7 in 2020. That could be based on the checking the problem of ever-growing data of consumption of past years or population. of recent years obtained by surveys. In economic policies, Statistics Thus, statistical methods help plays a vital role in decision making. formulate appropriate economic For example, in the present time of policies that solve economic problems. rising global oil prices, it might be necessary to decide how much oil India 5. CONCLUSION should import in 2025. The decision to import would depend on the Today, we increasingly use Statistics expected domestic production of oil and to analyse serious economic problems the likely demand for oil in 2025. such as rising prices, growing Without the use of Statistics, it cannot population, unemployment, poverty be determined what the expected etc., to find measures that can solve domestic production of oil and the such problems. Further, it also helps likely demand for it would be. Thus, to evaluate the impact of such policies the decision to import oil cannot be made in solving the economic problems. For unless we know the actual requirement example, it can be ascertained easily of oil. This vital information that helps to using statistical techniques whether the make the decision to import oil can only policy of family planning is effective in be obtained statistically. Statistical methods are no substitute for common sense! There is an interesting story which is told to make fun of statistics. It is said that a family of four persons (husband, wife and two children) once set out to cross a river. The father knew the average depth of the river. So, he calculated the average height of his family members. Since the average height of his family members was greater than the average depth of the river, he thought they could cross safely. Consequently, some members of the family (children) drowned while crossing the river. Does the fault lie with the statistical method of calculating averages or with the misuse of the averages? 2024-25 8 STATISTICS FOR ECONOMICS Recap Our wants are unlimited but the resources used in the production of goods that satisfy our wants are limited and scarce. Scarcity is the root of all economic problems. Resources have alternative uses. Purchase of goods by consumers to satisfy their various needs is Consumption. Manufacture of goods by producers for the market is Production. Division of the national income into wages, profits, rents and interests is Distribution. Statistics finds economic relationships using data and verifies them. Statistical tools are used in prediction of future trends. Statistical methods help analyse economic problems and formulate policies to solve them. EXERCISES 1. Mark the following statements as true or false. (i) Statistics can only deal with quantitative data. (ii) Statistics solves economic problems. (iii) Statistics is of no use to Economics without data. 2. Make a list of activities in a bus stand or a market place. How many of them are economic activities? 3. ‘The Government and policy makers use statistical data to formulate suitable policies of economic development’. Illustrate with two examples. 4. “You have unlimited wants and limited resources to satisfy them.” Explain this statement by giving two examples. 5. How will you choose the wants to be satisfied? 6. What are your reasons for studying Economics? 7. Statistical methods are no substitute for common sense. Comment with examples from your daily life. 2024-25