Market Economy It is an economic system in which all the means of production are owned and controlled by private individuals for profit. The government is not supposed to interfere in the management of economic affairs under this system. It is also known as free economy, capitalism. Features of Market Economy (i) The ownership of private property (ii) Freedom of enterprise (iii) Profit is the main objective of this type of economy. (iv) Inequalities of income (v) Competition among the firms
1. Market Economy It is an economic system in which all the
means of production are owned and controlled by private individuals
for profit. The government is not supposed to interfere in the
management of economic affairs under this system. It is also known
as free economy, capitalism. Features of Market Economy (i) The
ownership of private property (ii) Freedom of enterprise (iii)
Profit is the main objective of this type of economy. (iv)
Inequalities of income (v) Competition among the firms
2. Planned Economy In this economy, the material means of
production i.e. factories, capital, mines etc. are owned by the
whole community represented by the state. All members are entitled
to get benefit from the planned production. Features of Planned
Economy (i) collective ownership means of production. (ii) There is
a central authority to set socio-economic goals. (iii) Equitable
distribution of income is seen. (iv) Price mechanism exist in the
socialist economy.
3. Mixed Economy In a mixed economy the aim is to develop a
system which tries to include the best features of both the planned
and the market economies. It appreciates the advantages of private
enterprises and private property with their emphasis on
self-interest and profit motive. Advantages of Mixed Economy (i) It
secures the merits of both capitalism and socialism. (ii) It
protects individual freedom. Under the system, individuals have the
freedom of consumption, choice of occupation, freedom of enterprise
and freedom of expression. (iii) Reducing the inequalities of
wealth and class struggle is one of the aims of mixed economy. (iv)
It helps developing countries to have rapid and balanced economic
development.
4. Basic Economic Problem Every individual has to face an
economic problem. Human wants are unlimited but the economic
resources to satisfy these wants are limited and have alternative
uses. Since resources are limited, the individual has to chose
between alternative uses of available resources. This is known as
economic problem or the problem of choice. Economic problem arises
from the scarcity of resources relative to human wants.
5. Central Problems of an Economy What to Produce? Every
society has to decide which goods are to be produced & in what
quantities. Whether more guns should be produced or more bread
should be produced, more consumer goods such bread will be produced
or whether more capital goods be produced like machines etc. How to
produced? There are various alternative techniques of producing a
commodity. There are two techniques of production like Labour
Intensive Techniques and Capital Intensive Techniques for whom to
produced? Another important decision which a society has to take is
for whom to produce. The society can not satisfy all 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 share of different people in the national cake of
goods and services.
6. Production Possibility Curve (PPC) Production Possibility
Curve graphically represents the various combination of two
commodities that an economy can produce with a given amount of
resources assuming that the resources are fully employed and more
efficiently used and the technology remains constant. Assumption of
PPC (i) Two goods are used in production. (ii) Resources are
neither unemployed nor underemployed. (iii) Technology does not
change.
7. Schedule of PPC Possibilities Cloth (meter) Wheat (quintal)
MOC A 0 15 - B 1 14 1 C 2 12 2 D 3 9 3 E 4 5 4 F 5 0 5
9. Properties of PPC PPC slopes downward because more
production of one good is associated with less of other. It is due
to fuller and efficient utilization of the given resources,
production of both the goods cannot be increased simultaneously.
PPC becomes concave to the point of origin. Its main reason is
increasing marginal opportunity cost. Resources are specific
use.
10. Marginal Opportunity Cost (MOC) MOC for a commodity is the
amount of other goods which has to be given up in order to produce
an additional unit of that commodity. MOC is the rate at which
output of good-Y is to be sacrificed for every additional unit of
good-X. It refers to the slope of PPC. = =
11. Utility It is the most satisfying power of a commodity. In
other words, utility is the amount of satisfaction which a consumer
derives from the consumption of a good. There are two types of
utility (i) Marginal Utility & (ii) Total Utility Marginal
Utility (MU) It is the additional utility derived from the
consumption of an additional unit a commodity. = MUn = TUn TUn-1
Total Utility (TU) It is the sum total of all the utilities derived
by a consumer from all the units of a commodity consumed. It is the
sum total of the marginal utilities of various units of a
commodity, = 1 + 2 + 3 + + =
12. UNITS OF GOOD MU TU 1 20 20 2 15 35 3 10 45 4 5 50 5 0 50 6
-5 45
13. -10 0 10 20 30 40 50 60 0 1 2 3 4 5 6 7
TotalUtility&MarginalUtility Units of a Commodity
14. Relationship between MU & TU (i) When MU is positive,
TU increases. (ii) When MU is zero, TU is maximum. (iii) When MU is
negative, TU diminishes.
15. Law of Diminishing Marginal Utility (LDMU) It is psychology
of human beings that more and more units of a commodity is consumed
successive, its level of satisfaction will diminish. That is called
Law of Diminishing Marginal Utility. This is generally applied for
all normal goods and services. Basic Assumption of LDMU (I) Only
standard units are used in consumption. (II) Consumption is
continuous. (III) No change in taste and preference of the
consumer.
16. Consumers Equilibrium It refers to a situation in which a
consumer gets maximum satisfaction and he has no tendency to bring
about change in his pattern of consumption. One Commodity Case
Condition of Consumers equilibrium - Consumers equilibrium with
respect to purchase of one good is attained when the marginal
utility of the good is equal to its price. = Marginal utility of
money remains constant. Law of diminishing marginal utility holds
good. Two Commodities Case Condition of Consumers Equilibrium =
Marginal utility of money remains constant. It applies law of
diminishing marginal utility of goods.
18. Graphical Presentation of Consumers Equilbrium
Utilityofgoodsandmoney Units of commodity Chart Title
19. Indifference Curve Analysis (ICA) A very popular
alternative and more realistic method of explaining consumers
demand is the Indifference Curve analysis. This approach to
consumer behavior is based on consumer preferences. It believes
that human satisfaction being a psychological phenomenon cannot be
measured quantitatively in monetary termed as was attempted in
Marshalls utility analysis. In this approach, it is felt that it is
much easier and scientifically more sound to order preferences than
to measure them in terms of money.
20. Assumption of ICA (i) Consumer is rational & possesses
full information about all the relevant aspects of economic
environment in which he lives. (ii) consumer is capable of ranking
all conceivable combinations of goods according to the satisfaction
they yield. (iii) He has a consistent consumption pattern
behavior.
21. Indifference Curve An indifference curve is a curve which
represents all those combinations of goods which give same
satisfaction to the consumer. Since all the combinations on an
indifference curve give equal satisfaction to the consumer, the
consumer is indifferent among them. In other words, since all the
combinations provide same level of satisfaction the consumer
prefers them equally and does not mind which combination he
gets.
22. Indifference Schedule Combination Apples Oranges MRS A 1 10
B 2 7 3 C 3 5 2 D 4 4 1
