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.
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.
𝑀𝑂𝐶 =
𝐿𝑜𝑠𝑠
𝐺𝑎𝑖𝑛
𝑀𝑂𝐶 =
∆𝑌
∆𝑋
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.
𝑀𝑈 =
∆𝑇𝑈
∆𝑄
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,
𝑇𝑈 = 𝑀𝑈1 + 𝑀𝑈2 + 𝑀𝑈3 + ⋯ + 𝑀𝑈𝑛
𝑇𝑈 = ∑𝑀𝑈
12. UNITS OF GOOD MU TU
1 20 20
2 15 35
3 10 45
4 5 50
5 0 50
6 -5 45
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. Consumer’s 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 Consumer’s equilibrium
- Consumer’s equilibrium with
respect to purchase of one good is
attained when the marginal utility of
the good is equal to its price.
𝑀𝑈𝑚 =
𝑀𝑈𝑥
𝑃𝑥
Marginal utility of money remains
constant.
Law of diminishing marginal utility
holds good.
Two Commodities Case
Condition of Consumer’s
Equilibrium
𝑀𝑈𝑥
𝑃𝑥
=
𝑀𝑈𝑦
𝑃𝑦
Marginal utility of money remains
constant.
It applies law of diminishing
marginal utility of goods.
18. Graphical Presentation of Consumer’s
Equilbrium
Utilityofgoodsandmoney
Units of commodity
Chart Title
19. Indifference Curve Analysis (ICA)
A very popular alternative and more realistic method of explaining consumer’s
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 Marshall’s 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.
