What is Economics
When the monthly salary comes, mother first decides: how much for groceries, school fee, travel and savings. Needs are many but money is limited; so a choice has to be made. This is the root of economics.
Economics is the study of how to meet the unlimited needs of people by using limited resources (time, money, labour, land) wisely. The activities of production, distribution and consumption of goods and services in a region form that region’s economy.
Key idea 1 : It begins at home — Managing a family’s income and expenditure is economic planning. The word ‘economics’ comes from the Greek ‘oikonomia’ meaning ‘household management’. So there is much similarity between family management and economics.
Key idea 2 : Unlimited needs, limited resources — Human needs keep growing but resources are few and can be put to different uses. So we must decide which need comes first. According to Lionel Robbins, economics is the science that studies human behaviour as a relation between needs and scarce alternative-use resources.
Key idea 3 : From home to the world — As we manage a family’s finances, villages, cities, states, countries and the world also have to manage their economy. We use economics in farming, trade, finance, administration, law and daily life.
- Easy : Monthly income ₹18,000, spending ₹19,500. Balance? — ₹1,500 deficit (minus).
- Medium : To cut spending what do you reduce first? — The less necessary (e.g. recreation).
- Exam-type : Meaning of ‘oikonomia’? — Household management.
In the figure: Needs, resources and choice.
Many needs + few resources = choice = economics.
Economics is not only the study of money; use of time, labour and land is also part of it.
Memory clue: Home → village → country → world. Memory clue: "As the home, so the world".
Spot the difference
| Level | What is managed | Example |
|---|---|---|
| Family | Income and expenses | Home budget |
| Country | Production, distribution, consumption | Budget of the nation |
Practice questions
- 1What is economics?
- 2From which word does ‘economics’ come and what does it mean?
- 3What conflict is there between needs and resources?
- 4What is an economy?
- 5Explain: ‘Economy begins at home’.
- 6Where is economics used?
- 7Write your family’s monthly spending and say which spending can be cut.
- 8Give one example of using time as a resource.
Show answers (try them yourself first)
- 1Study of meeting unlimited needs with limited resources.
- 2Greek ‘oikonomia’; household management.
- 3Needs unlimited and resources limited.
- 4Production, distribution and consumption of goods and services of a region.
- 5Family is the first unit of economy and its principles apply to the country too.
- 6Farming, trade, finance, administration, law and daily life.
- 7The student writes own spending and picks the less necessary one.
- 8E.g. dividing daily time between study and play.
Types of Economy
In one place a festival committee collects money and takes group decisions, elsewhere each shopkeeper decides looking at his own profit. Types of economy depend on who takes economic decisions.
By who owns and manages the means of production there are three types of economy: capitalistic, socialistic and mixed.
Key idea 1 : Capitalistic economy — Ownership and management of means of production are with private persons. The main aim is maximum profit. As per the textbook Germany, Japan and the USA are examples.
Key idea 2 : Socialistic economy — Means of production are under the control of society as a whole, i.e. the government. The main aim is social welfare. As per the textbook China and Russia are mentioned in this type.
Key idea 3 : Mixed economy — Private and public sectors exist together and a balance is kept between profit and social welfare. India, Sweden and the UK are mentioned in the textbook in this type. Today in practice most countries’ economies show a blend of these types.
- Easy : Aim is profit and owners private; type? — Capitalistic.
- Medium : Means of production with the government; type? — Socialistic.
- Exam-type : Both private and government sectors; type? — Mixed.
In the figure: Three types of economy.
Private = profit; government = welfare; mixed = both.
No country is purely of one type; the textbook examples show only the main trend.
Memory clue: Private-State-Mixed. Memory clue: "Private profit, State welfare, Mixed both".
Spot the difference
| Type | Ownership | Main aim |
|---|---|---|
| Capitalistic | Private persons | Maximum profit |
| Socialistic | Society / government | Social welfare |
| Mixed | Private + public | Balance of profit and welfare |
Practice questions
- 1Which are the types of economy?
- 2State the features of a capitalistic economy.
- 3What is the main aim of a socialistic economy?
- 4What is a mixed economy?
- 5Explain: India’s economy is of the mixed type.
- 6How do countries fall into three groups on the basis of economy?
- 7State the difference between the private and public sector.
- 8Write one private and one government service in your area.
Show answers (try them yourself first)
- 1Capitalistic, socialistic, mixed.
- 2Private ownership and maximum profit.
- 3Social welfare.
- 4One with private and public sectors together.
- 5Because India has both private and government sectors.
- 6By who owns means of production.
- 7Private = owned by individuals; public = by the government.
- 8E.g. private clinic and government school.
Factors Affecting an Economy and Globalisation
In a region with plenty of water and fertile land farming does well and jobs grow. But where there is only desert people need to find other occupations. So place and resources shape an economy.
Area and natural resources, population, occupations and political sovereignty are the main factors affecting an economy. Joining an economy with the world is globalisation.
Key idea 1 : Four main factors — (1) Geographical area and natural resources: size of country and availability of minerals, water, land. (2) Population: number of workers and consumers. (3) Occupations: state of farming, industry and services. (4) Political sovereignty: the country’s right to take its own economic decisions.
Key idea 2 : What is globalisation — Globalisation means building a world economy. Natural resources, profit, services, capital, labour and technology flow freely across country borders. A country’s economy is joined to the world economy.
Key idea 3 : Features of globalisation — There is free trade and restrictions on investment are removed. Recent economic policies are moving economies towards globalisation. So events in one country show effects in others too.
- Easy : What two roles does a large population play? — Workers and consumers.
- Medium : A country’s right to take its own economic decisions? — Political sovereignty.
- Exam-type : Free flow of capital and technology across borders? — Globalisation.
In the figure: Four factors affecting an economy.
Area-Population-Occupation-Sovereignty.
Globalisation is not only trade of goods; capital, labour, technology and services also cross borders.
Memory clue: Four factors: area, people, work, rule. Memory clue: "Land-People-Work-Rule".
Spot the difference
| Factor | Meaning | Example |
|---|---|---|
| Area and resources | Land, minerals, water | Fertile plain |
| Population | Workers and consumers | Big market |
| Sovereignty | Own decisions | Economic policies |
Practice questions
- 1State the factors affecting an economy.
- 2How does population affect the economy?
- 3What is political sovereignty?
- 4What is globalisation?
- 5Which things move freely across borders in globalisation?
- 6Why is the world economy called ‘borderless’?
- 7How can natural resources strengthen an economy?
- 8Write one advantage and one difficulty of globalisation.
Show answers (try them yourself first)
- 1Area and resources, population, occupations, political sovereignty.
- 2Supplies workers and consumers of goods.
- 3A country’s right to take its own economic decisions.
- 4Building a world economy and joining a country’s economy to it.
- 5Resources, profit, services, capital, labour, technology.
- 6Because borders do not obstruct its flows.
- 7Minerals, water, land support industry and farming.
- 8Advantage: more choice; difficulty: competition for local industries.
Functions of an Economy
While planning a school trip we decide: where to go, how much money, how to cut cost, how everyone gets equal benefit and what to keep for next year. A country has similar functions.
Every country’s economy is different but its main functions are similar. The goal of an economy is to balance limited resources with unlimited needs.
Key idea 1 : What and how much to produce — It is decided what goods or services are produced and in what quantity, and for whom. Production cost is kept as low as possible.
Key idea 2 : Fair distribution — National income is distributed on the principle of social and economic justice, so that all income does not gather with only a few.
Key idea 3 : Provision for the future — Proper provision is made for future economic needs. That is why savings, investment and development projects are planned. Adam Smith is known as the father of economics; he wrote ‘Wealth of Nations’ in 1776.
- Easy : Keeping production cost low is which function? — Production planning.
- Medium : Income reaching all fairly is which function? — Distribution.
- Exam-type : Planning savings and investment is which function? — Provision for the future.
In the figure: Four functions of an economy.
Adam Smith’s book ‘The Wealth of Nations’ was published in 1776 and he is called the father of economics. (As per the textbook; check with the book)
What-how-whom-future: production, cost, distribution, future.
The work of an economy is not just earning profit; it is balancing resources and needs.
Memory clue: What, how much, for whom, future. Memory clue: "What, how much, for whom, next".
Spot the difference
| Function | Aim | Example |
|---|---|---|
| Deciding production | Goods as per need | Grain, clothes |
| Distribution | Fair sharing | Subsidy, wages |
| Provision for future | Future needs | Savings, investment |
Practice questions
- 1State the main functions of an economy.
- 2Why is it necessary to keep production cost low?
- 3What is meant by ‘justice’ in distribution?
- 4Why must provision be made for the future?
- 5How does an economy balance resources and needs?
- 6For what is Adam Smith known?
- 7If you were finance minister of an agrarian country write a five-point programme for development.
- 8Prepare an income-expense account of your family.
Show answers (try them yourself first)
- 1Deciding production, keeping cost low, fair distribution, provision for the future.
- 2Because resources are limited and goods are cheaper.
- 3Everyone getting a fair share socially and economically.
- 4Because future needs and difficulties come.
- 5By deciding what to produce and for whom.
- 6As the father of economics.
- 7Irrigation, market, credit, storage, education.
- 8The student lists income, expenses and savings.