Essay Type Questions
Because the resources are scarce, all wants cannot be satisfied.
Therefore, human beings have to decide that for the satisfaction of which wants
the resources should be used and which wants should be left unfulfilled. It
should be noted that means or resources here refer to natural productive
resources, man-made capital goods, consumer goods, money and time available
with man, etc. If the means or resources were unlimited, then we would have
obtained goods in the desired quantities because in that state of affairs goods
would have been free goods. But in actual life, we cannot obtain goods freely
or without price. We have to pay a price for them and make efforts to obtain
them.
Resources or means have various alternative uses. In other
words, the resources can be put to various uses. For instance, coal can be used
as a fuel for the production of industrial goods, it can be used for running
trains, it can be used for domestic cooking purposes and for so m.any other
purposes. Likewise, monetary resources can be utilized for the production of
essential consumer goods, for the production of capital goods and so many other
goods. It has to be decided how the resources have to be allocated among
different uses. The man or society has, therefore, to choose the uses for which
resources have to be employed. If the resources had a single use only, the
question of choice would not have arisen at all. In the case of single use of
resources, they would have been employed for the uses for which they are meant.
It is because of the various alternatives uses of the scarce resources that we
have to decide about the best allocation of resources.
Thus, economic problem is the problem of scarcity and economics
is the logic of choice. It is a challenge to scarcity. It tells us how man can
use the best choice tackling the problem of scarcity of resources.
(i) What to produce : Every society has to decide which
goods are to be produced and in what quantities. Whether more guns should be
produced or more butter should be produced; or whether more capital goods like
machines, equipments, dams etc., will be produced or more consumer goods such
as bread will be produced. Not only the society has to decide about what goods
are to be produced, but it has also to decide in what quantities these goods
would be produced. In a nutshell, a society must decide how much wheat, how
many hospitals, how many schools, how many machines, how many metres of cloth,
etc. have to be produced.
(ii) How to produce : There are various alternative
techniques of producing a commodity. For example, cotton cloth can be produced
with either handlooms or power looms or automatic looms. Production with
fyandlooms involves use of more labour and production while automatic loom
involves use of more machines and capital. A society has to decide whether it
will produce cotton cloth using labour-intensive techniques or
capital-intensive techniques. Likewise, for all goods and services, it has to
decide whether to use labour intensive techniques or capital-intensive techniques.
Obviously, the choice would depend on the availability of different factors of
production (i.e., labour and capital) and their relative prices. It is in the
society’s interest to use those techniques of production that make best use of
the available resources.
(iii) For whom to produce : Another important decision which
a society has to take is for whom to produce. The society cannot satisfy all
the wants of all the people. Therefore, it has to decide who should get how
much of the total output of goods and services. In other words, it has to
decide about the share of different people in the national cake of goods and
services.
(iv) What provision should be made for economic growth : A society
would not like to use all its scarce resources for current consumption only.
This is because if it uses all the resources for current consumption and no
provision is made for future production, the society of the people would remain
stagnant, and in the future, the level of living may decline. Therefore, a society
has to decide how much savings and investment (i.e. how much sacrifice of
current consumption) should be made for future progress.
Production Possibility Curve (PPC) : A
production possibility curve is a curve which shows the various alternative
production possibilities which can be produced with given resources and
techniques of production. We know that there is a maximum limit which can be
produced with given resources and techniques of production. In this situation,
if we want to increase the production of a particular commodity, then we will
have to reduce the production of some other commodity. This is why, production
possibility curve is also known as Transformation Curve.
In Order to Understand PPC, Let Us Assume That There are Two Types of Goods – Wheat and Mustard which are to be produced. We also assume that
1. There is a given amount of productive resources and they remain fixed
2. Resources are neither unemployed nor underemployed and
3. Technology does not change. Now consider the following table:
Table 1 : Alternative Production Possibilities
|
Production |
Mustard |
Wheat |
Marginal Opportunity Cost |
|
A |
0 |
30 |
– |
|
B |
1 |
28 |
2 |
|
C |
2 |
24 |
4 |
|
D |
3 |
18 |
6 |
|
E |
4 |
10 |
8 |
|
F |
5 |
0 |
10 |
The above table shows various production possibilities between
wheat and mustard. If all the given resources are employed for the production
of wheat, 30 thousand quintals of wheat are produced. On the other hand, if all
the resources are employed for the production of mustard, 5 thousand quintals
of mustard are made. But these two are extreme production possibilities such as
B, C, D and E. With production possibility B, the economy can produce with
given resources one thousand quintals of mustard and 28 thousand quintals of
wheat and with production possibility C, it can produce 2 thousand quintals of
mustard and 24 thousand quintals of wheat. Thus, as the economy is moving from
one possibility to another, it takes away some resources from wheat and put
them in the production of mustard. Since resources are limited and we have assumed
that they are fully employed, the economy has to give up something of one good
to obtain some more of the other.
In the context of PPC, since, there are only two goods,
therefore opportunity cost of producing one good is in terms of sacrifice made
of the other good. In table 1, we have found opportunity cost of producing
additional units of mustard in terms of wheat. Thus, as the economy moves from
possibility A to possibility B, it has to give up one thousand quintals of wheat
in order to have one thousand quintals of mustard. Thus, first thousand
quintals of mustard have the opportunity cost of one thousand quintal wheat to
the economy. But as we step up, and move further from B to C, extra two
thousand quintals of wheat have to be foregone for producing extra one thousand
quintals of mustard. In other words, opportunity cost goes on increasing as we
have more of mustard and less of wheat. It is this principle of increasing
opportunity cost that makes the PPG concave to the origin.
If opportunity cost constant, PPC would be a straight line. But
generally, we get increasing opportunity costs. This is because a given
resource is suitable more for the production of wheat than mustard. As we
increase the production of mustard, resources which are less productive in the
production of mustard would have to be pushed in it. Thus, more units of that
resource would be required to produce mustard. In other words, greater
sacrifice would have to be made in terms of production of wheat for every extra
production of mustard. This laws holds good if we move from A to F or from F to
A on the PPC.
|
Basis of Difference |
Micro-economics |
Macro-economics |
|
1. Sphere |
Micro-economics studies individual units,
i.e. person, firm, family, industry, etc. and their problems. |
Macro-economics studies total consumption,
total investment total national income, etc. on total economy level. |
|
2. Assumption |
In micro-economic studies, all
macro-variables are taken to be constant. |
In macro-economic studies, all
micro-variables are taken to be constant. |
|
3. Objective |
Its main objective is the best (optimum)
distribution of resources. |
Its main objective is the complete
utilisation and development of resources. |
|
4. Main problem |
Its main problem is price determination. |
Its main problem is determination of income
and employment. |
|
5. Tool |
Its tool is demand and supply. |
Its main tool is the total demand and total
supply of the economy. |
|
6. Change |
Micro-changes can occur in constancy of
macro-factors. |
The stability of macro-factors is not
affected by changes in structure of micro-factors. |
|
7. Contradiction |
Savings are beneficial for micro-levels. |
Savings are not beneficial for
macro-levels. |
|
8. Relationship |
Micro-economics is related to an individual
firm or industry and its production and determination of price. |
Macro-economics is related to the total
production and general price level determination in total economy. |
To understand, let us take the law of demand. It explains the
cause and effect relationship between price and demand for a commodity. It
says, given other things to be constant, as price rises, the demand decreases.
Similarly, like science, it is capable of being measured, the measurement is in
terms of money. It has its own methodology of study (induction and deduction)
and it forecasts the future market conditions with the help of various
statistical and non-statistical tools.
Economics is an art. Art is nothing but practice of knowledge.
Where science teaches us to know, art teaches us to do. Unlike science which is
theoretical, art is practical. If we analyse. Economics, we find that it has
the features of an art also. Its various branches — consumption, production and
public finance, etc. provide practical solutions to various economic problems.
It helps in solving various economic problems which we fiice in our day-to-day
life.
Thus, Economics is both a science and an art. It is science in
its methodology and art in its application. Study of the problem of
unemployment is science but framing suitable policies for reducing the extent
of unemployment is an art.
Micro-economics and macro-economics, these two terms have now
become of general use in economics.
Micro-Economics : It studies the economic
behaviour of individual economic units and individual economic variables. The
unit of study in micro-economics is the part of the economy, such as individual
households, firms and industries. Thus, the study of economic behaviour of the
households, firms and industries forms the subject matter of micro economics.
In other words, micro economics is a microscopic study of the economy. For
example, microeconomics is concerned with how the individual consumer
distributes his income among various products and services so as to maximize
utility. Micro-economics also seeks to explain how the individual firms
determine the sale price of the product, how much to produce, what amount of
product will maximize its profit, how to minimize the cost of production.
Macro-Economics : Macro economics is the study of
the economy as a whole. The unit of study in macro economics is the entire
economy rather than a part of it, and it deals with the problems faced by the
entire economy. Thus, macro economics deals with the functioning of the economy
as a whole. For example, macro economics seeks to explain how the economy’s
total output of goods and services and total employment of resources are
determined and what explains the fluctuations in the level of output and
employment. Macro economics explains why sometimes economy is operating at
near-about full employment, and why, at other times, there is high degree of
unemployment; why sometimes there is full utilization, of the economy’s
productive capacity, and why, at other times, there is under-utilization of the
economy’s productive capacity.
The key features of the of welfare definition of economics are
given below:
(i) Study of Mankind : Marshall laid primary emphasis on
the study of mankind. There is no doubt he emphasizes both humankind and wealth
in his definition. He has agreed with the classical economists that economics
is concerned with money because money is essential for money. Money provides
means for survival, comfort and happiness. But he believed that money is not
everything, rather it is only a means for human welfare. Thus, it is the study
of human being which is central to the study of economics.
(ii) Study of Simple Business of Life :
Economics is a study of simple business of life. The general business of life
is concerned about income-earning and income- expenditure activities of
mankind. Economics studies how people take advantage of their livelihood resources
and how they spend them for the satisfaction of their welfare.
(iii) Study of Material Welfare : Marshall emphasized on
physical welfare as the primary concern of economics. According to him,
economics is not related to total human welfare, but is related to physical
welfare, that is, the part of human welfare that is related to money. Economics
studies those activities which are closest to the “physical needs of receipt
and welfare that they are connected to”.
(iv) Emphasis on the Things Needed for Welfare : Even the
need for welfare substances is also emphasized. Obviously, physical things like
food, clothing and shelter are very important economic objectives. The material
needs are very basic needs that must be fulfilled before thinking about any other
needs.
(v) Exclusion of Non-Economic Activities : Marshall
has limited the scope of economics to those forces and activities which are
eligible for measurement in terms of money. That is why the political, social,
cultural and religious activities of humans are excluded from the scope of
economics because they are not subject to be measured in terms of money.
The criticism of the definition of welfare is given below:
(i) Economics is Considered to be Just a Social Science : Marshall
has been criticized for treating economics as a social science rather than a
human science. As a Society member, he studies the work of people living in
organized communities, while a human may be living in a community or be a
member of an organized community, and he may also be living in isolation.
(ii) Unethical Classification of Activities: The
criticism of Robbins is that the difference between economic and non-economic
activities is unscientific, rational and misleading because all human
activities have an economic aspect.
(iii) Only Materialistic Aspect: Robbins has criticized the
definition of welfare saying that it includes only material things in its
scope. It does not include non-material things like doctors, lawyers, teachers,
etc. in its class. They do not have, any place ^ in services. However, these
services meet our urgent needs and thus promote welfare.
(iv) Restricted Area of Economics : Robbins
has also criticized the definition of welfare because it restricts the scope of
study of economics. Economics studies many activities that minimize financial
well-being, many things like alcohol, cigarette and gun do not promote economic
welfare.
(v) The Ambiguous Concept of Material Welfare : The
definition of welfare is also under criticism on the basis that physical well-being
cannot be measured quantitatively. Welfare is a subjective thing. It is mental
in nature, it is related to the mental make-up of a person. It varies according
to time, place and person. In this way, welfare cannot be measured in objective
terms.
(i) Problems of Shortage : It is rooted in all those
combinations of those objects which are beyond the likelihood of productivity,
such as the combination given by point D in the figures given in combination.
Production possibilities obtain points outside the range of combinations that
cannot be obtained because adequate resources are not available to produce.
This is the only point in or within the probability curve of productipn, which
are attainable, i.e. combination, which can be produced with available
resources.
(ii) Problem of Choice : This indicates the need to choose
from the available points on the production potential curve, such as the
combination between combination A and B.
(iii) What is to be Created : The problem of production
of two goods from any point on the production possibility is the problem of
what to produce. Different points on the curve represent different combinations
of two objects. Thus, if the society chooses combination A, it shows that it
has decided to produce more guns and less butter. On the other hand, if it
chooses combination B, it shows that more butter will be produced. At what
point should either product be produced, depends on the taste and preferences
of the people in the economy.
(iv) Problems of Full and Efficient Use of Resources : If all
resources are used fully and efficiently, then the production possibility curve
will be operative at some points. But if the economy is producing any
combination within the probability curve of its production, such as point C, it
would mean that some of its resources remain unutilised and only some of its
resources are used in production. Through efficient and full use of resources,
the economy can move beyond C and go to any point on the production prospect
curve. For example, by transferring B, forgoing one or more units of butter can
produce more guns.
Thus, in positive economics, we obtain proposals, principles and
laws in pursuance of some rules of logic. These principles, law and
propositions explain the relationship between cause and effect in economic
forms. In positive micro economics, we are largely concerned with the
determination of relative prices and allocation between different commodities.
In positive macro-economics, we are widely worried about how national income
and employment levels, total consumption and general level of investment and
prices are determined. In these parts of positive economics, what should be the
value, what the savings rate should be, what resources should be allocated and
what the distribution of income should be.
Considering the perception of maximizing profits, this question,
according to the question of what is, and what should be, in the scope of
economics of norms, positive economics states that monopoly will determine a
price which is equal to marginal cost with marginal revenue. The question is
whether the price should be decided so that maximum social welfare can be
achieved outside the scope of positive economics.
It is generally agreed that economics is both a positive and an
ideal science. Economists believe that absolute neutrality between the ends is
neither appropriate nor desirable. This is not possible because in many cases
economists suggest ways to achieve some financial objectives. They advocate
various policies for increasing employment, reducing inflation and so on. While
making these suggestions, they are making a price decision.
|
Micro economics |
Macro economics |
|
(i) Micro economics studies economic
relationships or economic problems at the level of an individual, an
individual firm, an individual household or an individual consumer. |
Macro economics studies economic
relationships or economic problems at the level of the economy as a whole. |
|
(ii) Micro economics is basically concerned
with determination of output and price for an individual firm or industry. Accordingly,
micro economics is briefly referred to as the theory of price. |
Macro economics is basically concerned with
determination of aggregate output and general price level in the economy as a
whole. Accordingly, macro economics is briefly referred to as the theory of
income and employment. |
|
(iii) Study of micro economics assumes that
macro variables remain constant, e.g., it is assumed that aggregate output is
given while we are studying determination of output and price of an
individual firm or industry. |
Study of macro economics assumes that micro
variables remain constant, e.g., it is assumed that distribution of income
remains constant when we are studying the determination of aggregate output
and income level. |
|
(iv) Market mechanism plays a significant
role in the context of micro economic problems, like the problem of product
pricing Or factor pricing. |
Government plays a significant role in the
context of macro economic problems like the problems of unemployment, poverty
and inflation. |
|
Capitalist
Economy |
Socialist
Economy |
|
(i)
Economic resources are owned by private individuals. The right to own private
property exists. |
All
economic resources are owned by the State. The right to own private property
is absent. |
|
(ii)
Producers, resources owners and consumers are free to take economic decisions
relating to production, allocation of resources and consumption respectively. |
There is
loss of economic freedom with regard to consumers’ choice and allocation of
resources by individuals. |
|
(iii)
Price mechanism is allowed to operate freely. |
Price
mechanism is not allowed to operate freely. |
|
(iv)
Pricing or market mechanism is the basic coordinating mechanism. All economic
decisions are taken through pricing mechanism. |
Planning
takes the place of market mechanism. All important economic decisions are
taken by the central planning authority. |
|
(v)
Maximization of profit is the principal objective of producers. |
Maximization
of social welfare is the chief motivating force behind all economic
activities. |
|
(vi)
Competition is an essential part of a capitalistic economy. |
Competition
of all types is eliminated in a socialistic economy. |
|
(vii)Minimum
intervention by the government. |
State
regulated economy. |
|
(viii)
Concentration of economic power in the hands of the capitalist class. |
Concentration
of economic and political power in the hands of the government. |
|
(ix)
There exist large inequalities in the distribution of income and wealth. |
It is
based on the principle of egalitarianism. |
|
(x)
There exists class struggle among various groups. |
It aims
at establishing a classless society. |
(i) Proper Allocation of Resources : Economic
planning ensures that economic resources of the economy are used in the best
possible way.
(ii) Economic Stability : A mixed economy ensures economic
stability. It tries to avoid fluctuations in the economy through planning and
state regulation. It eliminates over¬production and under-production.
(iii) Advantages of the Market System : The
system of mixed economy has all the advantages of both capitalist and socialist
economies. It retains most of the institutions of capitalist economy by
maintaining private property, inheritance rights, competition, profit motive,
value system, independence of enterprise, private initiative, etc.
(iv) Rapid Economic Growth : From the perspective of the
underdeveloped economies, the mixed economy pattern is important because it
ensures faster economic growth. Mixed economy uses combined resources and
energy of private resources and public communes to promote economic resources,
achieved with social justice.
(v) Check the Concentration of Economic Power : A mixed
economy is capable of examining the concentration of economic power: Monopoly
control of industries and their exploitative tendencies are barred. Also, the
inequality of government’s income is kept in check through the use of
progressive taxation.
Demerits of a Mixed Economy
A mixed economy suffers from various shortcomings. The main
drawbacks of mixed economy are given below:
(i) Conflict Between the Two Regions : One of
the serious setbacks of mixed economy is that there can be a competition
bitterness and non-co-operation between private and public sectors. In the case
of mistrust and non-cooperation, the mixed economy may not work correctly.
(ii) Short term Nature : A mixed economy runs the risk of
being short-lived. It cannot continue for a long time. During this time, each
of the two areas could try to expand at the cost of each other. If the public
sector extends to such an extent that it is able to acquire the private sector,
the mixed economy can become a socialist economy.
(iii) Inadequate Operations : The risk of a mixed economy
being driven in an inefficient way always esists. Due to excessive regulation
and control of the government, the private sector has not been able to function
effectively. On the other hand, the government sector is not working
efficiently due to lack of initiatives from the bureaucrats and lack of
responsibility.
(iv)Poor Performance of the Public Sector : In the
mixed economy, the record of poor performance of the public sector makes the
economic system suffer from inertia, inefficiency and red tapism. Experience of
Indian economy testifies to this fact.
(v) Excessive Rules : A mixed economy is highly likely
to give rise to a system of controls and rules. The government wants to
regulate private sector by applying excessive control, licensing system, monetary
and fiscal control. These excessive controls can be inconvenient, rigid and can
promote economic inefficiency.
Characteristics of Production Possibility Curve
Production possibility curve has two characteristics:
(i) The Production Possibility Curve Slopes Downwards to Right: The
possibility curve of the downward side yield indicates that the economy should
drop some quantities of a good to achieve an additional amount of other good,
assuming that resources have been given and used in the most effective way.
Thus, when we go from combination B to C, the economy needs to give up 2
thousand guns to produce 1 million kg of extra butter. The reason for this is
that additional resources are required to produce extra butter, which must be
transferred from the production of guns.
The reason for the increasing opportunity cost (real cost) is
that resources are not equally efficient in the production of all goods.
Therefore, as we transform more and more resources from the production of guns
to the production of butter, we have to draw those resources which are more
suited to the production of guns. Therefore, the quantity of guns sacrificed
will increase.
Market Economy : The market economy is an independent
economy; it means that the producers are free to make decisions, on what basis
do they make their decisions on ‘how and for whom?’ Yes, it is based on the
value system. Producers choose to produce goods in which the prices are
relatively high because they are interested in maximizing their revenue, they
would like to adopt the production technology or would like to use those
inputs, whose the price is relatively low. Because they are interested in
reducing their costs. They will produce goods, and services for those buyers
who are ready to provide them the maximum possible value, because they are
interested in maximizing their profits.
Centrally Planned Economy : Decision relating to a centrally
planned economy, is made by some central authority appointed by the government
of the country, on ‘what, how and for whom’? and not on the basis of price
mechanism.
All decisions are taken into account to maximize social welfare,
and contrary to the market economy, maximization of profit is not considered.
Those goods and services will be produced which the central authority (or
government) finds most useful for the society. That technology of production
will be adopted which is socially most useful. For example, in case of collective
unemployment, labour-intensive technology will be given preference (rather than
capital intensive technology) so that unemployment is low. Goods will be
produced preferably for those residents who suffer from hunger or starvation,
even when it involves incurring loss in production it.
Mixed Economy : Mixed economy combines the good qualities and
avoids the flaws of market economy and centrally organized economies. Decision
on the basis of price mechanism as well as on ‘what, how and for whom’ ? the
goods are to be produced is based on social considerations. Such a situation
can be described as the condition of ‘regulated price system’. In some areas of
production, the producers are free to make their own decisions, while in other
areas, decisions are taken entirely on the basis of social considerations. For
example, In India, growers are free to produce cloth or steel to maximize their
profits. But post and telegraph services are the monopoly of the government.
The government provides these services at a nominal rate so that the poorest
can afford them.
Unlike, economic growth, it is difficult to give a precise
definition of economic development. Economic development is multi-dimensional
in nature. Economists have defined economic development differently, depending
upon which aspect of economic development they want to emphasize – output,
distribution of income, standard of living, etc.
Economic development is the process whereby the real per capita
income of a country increases over a long period of time, along with reduction
of poverty, inequality and unemployment. It includes increase in income,
reduction in economic inequality, improvement in material welfare, eradication
of poverty, reduction of unemployment along with elimination of illiteracy,
disease and early death.
Difference Between Economic Growth and Economic Development
The distinction between economic growth and economic development
can be made on the following bases:
(i) Economic growth is a narrow concept, while economic
development is a more comprehensive term. Economic development denotes growth
plus change.
(ii) Economic growth refers to more output, resulting from use
of more inputs and greater efficiency of inputs. Economic development goes
beyond this to include composition of output, allocation of resources to
different sectors of the economy like agriculture, industry, and bringing about
structural changes.
(iii) Economic growth involves a rise in income. Economic
development, on the other hand, involves not only rise in income, but also
reduction of poverty, inequality of income and unemployment. .
(iv) Economic growth is defined strictly in terms of economic
indicator, i.e., income. Economic development involves not only economic
indicators, but also non-economic indicators like literacy, health services,
etc.
(v) Economic growth is entirely a quantitative concept. Economic
development involves not only quantitative, but many qualitative changes as
well.
(vi) Economic growth is easier to realize. It is possible to
increase output and income by using larger quantity of inputs and increasing
their efficiency. The process of economic development is far more extensive. It
involves a whole lot of changes in the society- changes in the social
structure, attitudes, institutions as well as acceleration of economic growth,
eradication of poverty and reduction of income inequalities. Therefore,
attainment of economic development is a more difficult task.
(vii) Economic growth relates to the problems faced by the
developed countries, while economic development relates to the problems faced
by the present day developing countries.
(viii) Economic growth differs from economic development in
terms of degree of involvement and intervention by the government. Economic
growth does not require much of government intervention. However, economic
development demands active involvement of the government. The government in the
developing countries are expected to assume an active responsibility for
promoting economic development.
Short Answer
Inductive Method : The inductive method derives
economic theories on the basis of observations and experiment. In this method,
detailed data is collected with regard to a certain economic phenomenon.
Normative Economics
1. Economics as a normative science is concerned with what ‘ought to be’.
2. Normative economics deals primarily with economic goals of a society and the policies adopted to achieve certain goals.
Yes, this problem arises in every economy because this problem
is not only related to the individual, but it is also related to large society,
large industries and government.
Marginal utility is the additional utility which results from a
unit increase in consumption. According to Prof. Boulding, “The marginal
utility is the utility which results from a unit increase in consumption.”
In essence, the cost of production of an object is that quantity
of other items which we have to sacrifice.
Example : A carpenter, in one day, can make either one table or
2 chairs. The opportunity cost of 1 table = 2 chairs which can be made instead
of a table.
Capitalist Economy
(i) It has right of private property, means that productive
factors such as land, factories, machinery, mines, etc. are under private
ownership. The owners of these factors are free to use them in the manner in
which’ they like. The government may, however, put some restrictions for the benefit
of the society in general.
(ii) It comprises freedom of enterprise, means that everybody
engages in any economic activity which they like.
(iii) It allows freedom of choice to the consumer, means people
in a capitalist economy are free to spend their income as they like. This is
known as Consumer Sovereignty.
(iv) It is a profit-motive economy which forces or induces
people to work and produce.
(v) In this economy, competition prevails among sellers to sell
their goods and among buyers to obtain goods to satisfy their wants. Advertisement,
price-cutting, discounts, etc. are very common methods of competition in a
capitalist economy.
Socialist Economy
(i) It possesses collective ownership of means of production,
except small farms, workshops and trading-firms which may remain in private
hands. As a result of social ownership, profit-motive and self-interest are not
the driving force of economic activity as it is in the case of market economy.
(ii) It has central authority to establish and accomplish
socio-economic goals; that is why it is called Centrally Planned Economy. Major
economic decisions, such as what to produce, when and how much to produce, etc.
are taken by the central authority.
(iii) In this economy, freedom from hunger is guaranteed but
consumers’ sovereignty gets restricted by selective production of goods. The
range of choice is limited by planned production. However, within that range,
an individual is free to choose what he likes most.
(iv) A relative equality of income is an important feature of
this economy. Among other things, differences are narrowed down by lack of
opportunities to accumulate private capital. Educational and other facilities
are enjoyed more or less equally; thus the basic causes of inequalities are
removed.
(v) Pricing mechanism exists in a socialist economy but it has
only a secondary role, e.g., to secure disposal of accumulated stocks. Since
allocation of productive resources is done according to a pre-determined plan,
the pricing mechanism loses its predominant role in economic decisions.
(ii) Public Sector : Industries in this sector are not primarily
profit-oriented but are set up by the state for the welfare of the community.
(iii) Joint Sector : A sector in which both the government and
the private enterprises have equal access, and join hands to produce a
commodity, leading to the establishment of joint sector.
Secondly, a mixed economy is a planned economy, i.e., an economy
in which the government has a clear and definite economic plan.
Thirdly, in a mixed economy, balanced regional development is
expected.
Fourthly, in a mixed economy, a dual system of pricing exists.
Very Short Answer Type Questions
The later main thinkers related to economics are: Mahatma
Gandhi, Jawaharlal Nehru, Ram Manohar Lohiya, Prof. J. K. Mehta, Pandit Deen
Dayal Upadhyay and Amartya Sen.
The points given on the production possibility curve indicate
that the use of resources is being done efficiently.
1.
What to produce?
2.
How to produce?
Multiple Choice Questions
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