1. What is Economics?

• Economics studies how individuals, firms and societies choose to use scarce resources to produce goods and services and distribute them for consumption among competing users.
• It explains choices made under conditions of scarcity — when wants exceed the means to satisfy them.
• Economics asks: What to produce? How to produce? For whom to produce? — the central allocation questions every economy faces.
• Two broad branches:
• Microeconomics: analysis of individual agents (households, firms) and markets.
• Macroeconomics: study of aggregate variables (national income, inflation, unemployment, growth).
• Economics uses both positive (what is) and normative (what ought to be) statements — positive for description and analysis; normative for value-based prescriptions.

2. A Simple Economy — Key Building Blocks

• A simple economy model helps us focus on essential economic processes without unnecessary complications.
• Main actors in a simple closed economy:
• Households: supply factors of production (labour, capital, land, entrepreneurship) and demand goods and services for consumption.
• Firms: combine factors to produce goods and services and supply them to the market.
• Government: may be included to collect taxes and provide public goods — in simplest models government can be omitted.
• Three basic economic activities tie the actors together:
1. Production: converting inputs into outputs using technology and organization.
2. Exchange (market): buying and selling goods, services, and factors via markets.
3. Consumption: final use of goods and services to satisfy wants.
• In the simplest circular flow model (two-sector): households provide factors → firms pay factor incomes → firms produce goods → households buy goods; money flows in opposite direction.

3. Central Problems of an Economy

• Scarcity of resources makes it impossible to produce everything people want — society must make choices. These lead to three central problems common to all economies:
1. What to produce?
   • Decide the combination of goods and services (consumer vs capital goods; healthcare vs defence; present consumption vs future investment).
   • Choice influenced by resource endowments, technology, preferences, and policy priorities.
2. How to produce?
   • Decide the production technique: labour-intensive or capital-intensive; level of technology; environmental and social constraints.
   • Trade-offs: labour-intensive may provide more employment; capital-intensive may be more productive per worker.
3. For whom to produce?
   • Decide how goods and services are distributed — who gets how much. Distribution mechanisms: market prices, government transfers, rationing, or mixed methods.
   • Equity vs efficiency trade-off: markets may be efficient but produce unequal outcomes; governments may redistribute at cost of distortions.
• Every economic system addresses these problems differently — through markets, planning, or a blend of both.

4. Types of Economic Systems

• Different systems allocate resources differently. Major types:
• Market Economy (Capitalist): Decisions about production and distribution are mainly determined by market forces — prices, private ownership, profit motive.
• Planned Economy (Command): Central authority (state) decides what, how and for whom — common in socialist/command systems.
• Mixed Economy: Elements of market and planning coexist — most modern economies are mixed with private markets plus government intervention.
• Each system has strengths and weaknesses:
• Market: efficient resource allocation, innovation incentives, but may generate inequality and ignore externalities.
• Planned: can focus on equity and strategic goals, but may suffer from information problems, inefficiency and lack of incentives.
• Mixed: aims to combine efficiency with social objectives; policy design matters.

5. The Market Economy — How It Answers the Central Problems

• What to produce? — determined by consumer preferences expressed through demand and profit signals guiding firms.
• How to produce? — firms choose techniques to minimize cost and maximize profit; market competition rewards efficient methods.
• For whom? — distribution occurs mainly by ability to pay (income) which depends on factor ownership and market wages; government may redistribute via taxes/transfers.
• Key mechanisms in markets:
• Prices coordinate decisions of buyers and sellers.
• Profit and loss provide incentives and signals about which activities are valued.
• Private property and contracts secure incentives for investment and exchange.
• Markets are not perfect: failures arise from public goods, externalities, imperfect information and market power — these justify government roles.

6. Positive and Normative Economics

• Positive economics describes and explains economic phenomena — it is testable and fact-based (e.g., “Increase in fuel price reduces demand”).
• Normative economics involves value judgments and policy prescriptions (e.g., “Fuel subsidies should be removed to save government money”).
• Students must distinguish the two: economists can provide positive analysis (effects, trade-offs) and then offer normative policy options with stated value judgments.
• Policy debates often mix positive facts with normative opinions — clarity helps separate empirical evidence from ethical choices.

7. Microeconomics and Macroeconomics

• Microeconomics: focuses on small units — individual consumers, firms, industries, markets. Core topics: demand & supply, price formation, production, costs, market structures.
• Macroeconomics: deals with aggregate outcomes — national income, unemployment, inflation, money supply, fiscal and monetary policy, economic growth.
• Link between micro and macro:
• Micro foundations underpin macro models (e.g., aggregate consumption is sum of individual consumption decisions).
• Macro policies (tax cuts, interest rate changes) influence microeconomic behaviour of households and firms.
• Both approaches are complementary — understanding individual choices helps explain aggregate behaviour and vice versa.

8. Plan of the Book — What You Will Learn

• The book introduces microeconomic concepts first (demand, supply, market structures, production, costs) and then uses them to build macro ideas (aggregate demand, national income, money, banking, public finance).
• Focus areas for Class 11:
• Basic economic concepts and problems.
• Consumer behaviour and demand.
• Production, costs and firms’ supply decisions.
• Forms of market and price determination.
• Introductory macroeconomic ideas — national income and basic indicators (in later chapters).
• Approach: conceptual clarity, diagrams, numerical problems and real-world examples to link theory with application.

9. Important Terms — Quick Reference

10. Short Examples & Applications

• Opportunity cost example: If a farmer uses land to grow wheat worth ₹50,000 instead of sugarcane worth ₹70,000, opportunity cost = ₹70,000 − ₹50,000 = ₹20,000.
• Market signalling: Rising price of tomatoes sends signal to farmers to plant more tomatoes next season.
• Policy illustration: Government subsidy on solar panels shifts production possibilities and affects firms’ investment decisions.

11. Study Tips for This Chapter

• Memorise definitions of key terms (scarcity, opportunity cost, micro/macro, positive/normative).
• Understand and be able to explain the three central problems with examples.
• Practice drawing simple circular-flow diagrams and labelling flows of goods and money.
• Be prepared to discuss pros and cons of market vs planned vs mixed economies using short points.
• Link theoretical ideas to current events (e.g., policy debates about subsidy removal, minimum wages) to show application.

12. Practice Questions (With Short Answers)

1. Q: Define scarcity.
   A: Scarcity means limited resources relative to unlimited wants; choices are necessary.
2. Q: What is opportunity cost? Give an example.
   A: Opportunity cost is the value of the next best alternative foregone; e.g., spending ₹10,000 on a laptop instead of a short course — course forgone is opportunity cost.
3. Q: List the three central problems of an economy.
   A: What to produce, how to produce, for whom to produce.
4. Q: How does a market economy decide ‘what to produce’?
   A: By consumer demand and profit signals guiding producers’ choices.
5. Q: Distinguish positive and normative economics.
   A: Positive describes facts and cause-effect; normative prescribes policies based on value judgments.