ba LLB 1st-semester economics notes pdf
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present upon you B.A. LL.B.first semester,(paper IV) Economics-I (code: BL-104) notes.
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What is an Economic Problem? Discuss the scope of Economic Theory.
Ans. The Economic Problem Scarcity and Choice Economic theory enunciate the laws and principles which govern the functioning of an economy and its various parts. An economy exists because of two basic facts.
First, human wants for goods and services are unlimited, and secondly, productive resources with which to produce goods and services are scarce. With our wants being virtually unlimited and resources scarce, we cannot satisfy all our wants and desires by producing everything we want.
That being the case, a society has to decide how to use its scarce resources to obtain the maximum possible satisfaction of its members. It is this basic problem of scarcity that gives rise to many of the economic problems which have long been the concern of economists.
Since it is not possible to satisfy all wants with the limited means of production, every society must decide some way of selecting those wants which are to be satisfied. The necessity for economizing arises therefore from the fact that we have limited productive resources such as land, raw materials, skilled manpower, capital equipment, etc. at our disposal.
These resources being found in limited quantities (the quantity may however increase over time), the goods they can produce are alsó limited. Goods are thus scarce because productive resources are scarce. Since the resources are limited in relation to our wants, we should get the most out of what we have.
Thus society is faced with the problem of choice-choice among the vast array of wants that are to be satisfied. If it is decided to use more resources in one line of production, then resources must be withdrawn from the production of some other goods.
The scarcity of resources, therefore, compels us to choose among the different channels of production to which resources are too devoted. In other words, we have the problem of allocating scarce resources so as to achieve the greatest possible satisfaction of wants. This is economic. It is also called the economizing Problem.
Since all wants cannot be satisfied due to scarcity of resources we face the problem of choice – choice among multiple wants that are to be satisfied. If it is decided to use more resources in one line of production, some resources must be withdrawn from another commodity. Thus, the problem of choice from the viewpoint of society as a whole
refers to which goods and in what quantities are to be produced and productive resources allocated for their production accordingly so as to achieve the greatest possible satisfaction of the people. An eminent English economist Lord Robbins defines economics in terms of this basic economic problem.
According to him, “Economics is a science which studies human behavior as a relationship between ends and scarce resources which have alternative uses. “ Here ends refer to wants which are considered to be unlimited.
The scarcity of resources also compels us to decide how the different goods should be produced, that is, what production methods should be chosen for the production of goods so as to make the best possible use of the available resources.
If the resources were unlimited, the problem of how goods should be produced would not have arisen. This Is because with unlimited resources it would not matter which method, efficient or inefficient, was employed for the production of goods.
Further, due to the scarcity of resources goods cannot be produced in abundant quantities to satisfy all wants of all the people of society. This raises another problem of choice, namely, who should get how much from the national output.
This means how the national product is distributed among various members of society. Thus, the problem of scarcity gives rise to some problems generally known as basic economic problems which a society has to solve so as to promote the material well-being of its people.
These basic economic problems relate to what commodities are to be produced, how they are to be produced, how the national product is to be distributed among the people, and how much to provide for future growth. It is with regard to these problems of resource allocation, the choice of production methods, distribution, and economic growth, which have their roots in a scarcity of resources, that economists have been asking questions from time to time and providing answers for them.
Besides, economists have also been raising questions about the efficiency of the resource allocation for the production of goods and their distribution among the people. This question of economic efficiency is aimed at knowing whether or not a particular pattern of production and distribution ensures maximum social welfare.
The Scope of Economic Theory and Basic Economic Problems
There has been a lot of controversy among economists about the scope of economic theory or its subject matter. The subject matter of economics or economic theory has been variously defined. According to Adam Smith, economics enquires into the nature and causes of the wealth of nations. According to Ricardo, economics studies “how the produce of the earth is distributed”, that is, economics deals with the distribution of income and wealth.
According to Marshall, economics is a study of mankind in the ordinary business of life and examines that part of individual and social action which is connected with material requisites
of well-being. A.C. Pigou says, “economics studies that part of social welfare which can be brought directly or indirectly into a relationship with the measuring rod of money.”
Great confusion has been created about the true nature and scope of economics because of these numerous and conflicting definitions of economics. J. N. Keynes was right when he said, “Political economy is said to have strangled itself with definitions.”
In view of the present author, the subject matter of the science of economics has grown so wide and vast that it is extremely difficult to put it in a “nutshell” of a definition. It is because of this fact that modern economists have now stopped discussing the proper way of defining economics.
In fact, they think any attempt to define economics is a useless and futile exercise. They are of the view that what economics is about can be better explained by pointing out the various issues and questions with which economists are concerned. It is because of the difficulties in putting the whole subject matter of economics in the definition of a few words that Jacob Viner has given a pragmatic definition of economics.
According to him, Economics is what economists do.” In other words, what economics is, can be better understood by what economists do and what they have been doing. That is to say, what type of questions economists ask and have been asking and what answers they have provided for them. The following are the main questions that have been asked by economists from time to time. It is to be noted that all these fundamental questions arise because of the basic problem of scarcity confronting an economy.
1. What goods are produced and in what quantities by the productive resources which the economy possesses.
2. How are the different goods produced? That is, what production methods are employed for the production of various goods and services.
3. How is the total output of goods and services of a society distributed among its people?
4. Are the use of productive resources economically efficient?
5. Whether all available productive resources with society are being fully utilized, or are some of them lying unemployed and unutilized?
6. Is the economy’s productive capacity increasing, declining, or remaining static over time?
All economies whether they be capitalist, socialist, or mixed, must make a decision about the mentioned six questions. order change six that.
Economics theory studies how these decisions are arrived at in various societies. It is to be noted that economic theory has been mainly evolved and developed in the framework of capitalist institutions where the free-market mechanism plays a dominant role in solving the above basic problems.
Therefore, mainstream economic theory assumes a free market system and explains how the above six problems are solved by it and with what degree of efficiency.
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