Class 12 Economics Index Terms Part I, Chapter 1: Introduction

Learn CBSE Economics Index Terms for Class 12, Part 1, Chapter 1 Introduction

1. Simple Economy – A simple economy means that everything is based on a limited amount of resources. In a simple economy, humans can only consume a limited amount of goods and services per day and lifetime.

A simple economy refers to a situation when all economic forces are perfectly balanced. A simple economy is an economy with few, if any, market failures and no externalities. A simple market economy is one in which goods and services are produced by free pricing mechanisms, where there are no or few barriers to entry.

2. Consumption – The meaning of consumption in economics is the purchase and use of goods and services that individuals make from what they earn. Consumption is the process of acquiring goods and services. It can be a function of demand and supply. The main purpose of consumption is to use all that one has, in order to proceed with production.

Consumption is the final stage in the production and distribution of goods, services, and assets. It is preceded by production and trade, followed by disposal or destruction of the goods or assets.

3. Market Economy – The term “Market Economy” refers to a system in which the production, distribution, and consumption of goods are organised through the process of markets. A market economy is an economic system in which markets play the primary role in allocating resources among competing economic agents.

The term market economy is used in economics to describe the economic system characterised by the existence of a free and open market. This refers to the role of consumers and producers in allocating resources among themselves and therefore applying general economic theory to economies that produce goods or services and support commerce from cradle to grave.

The market economy refers to the form of economy that is built on the principles of free competition, private property, and the rule of law. By contrast, a planned or centrally planned economy utilises governmental direction and control over economic activities to achieve many goals.

4. Positive Economics – Positive economics is a method of studying economic problems, with an emphasis on finding positive solutions. It is based on research in behavioural economics and aims to make economic models more realistic by introducing human behaviour into them. Positive economics helps one to understand the complexities of human behaviour, both within organisations and society as a whole. It seeks to find solutions that benefit not only the individual but also society at large.

Positive economics is the study of how to create and enable economically prosperous societies. It informs government policies on the design of tax-benefit systems, regulatory frameworks, trade agreements, financial market rules and regimes, competition policies, and related reforms in both developed and developing countries.

Positive economics is an interdisciplinary field concerned with an allocative analysis of the economy as a whole. Positive economics focuses on the social dimension of production decisions and on broader changes to the system through which goods are produced, distributed, and consumed.

5. Normative Economics – Normative economics is a study of the economic principles and practices considered to be ethical, just, and efficient. It is related to economic, philosophical, political, and legal issues.

Normative economics follows the principles of a normative system of human action. For instance, it will try to explain a given economic system in terms of its process, rules, institutions and practices. It also tries to explain how people should behave in given situations. This is different from descriptive economics, which focuses on reality, including data and facts about how things function and how people behave, according to the various theories that are formed on these facts.

The goal of normative economics is to create an objective and comprehensive theory of the optimal behaviour of individuals, firms, and markets. It works by determining how people would behave in particular situations if they fully understood their situation and all relevant information.

In normative economics, economists explain a social problem by defining and developing a means to solve it that is considered the best way to achieve their goal.

6. Micro Economics – Microeconomics is a branch of economics that deals with the individual decisions of consumers and firms. The focus is on small-scale behaviour and is primarily used for understanding consumer and producer behaviour related to price, profit, loss, supply, and demand.

Microeconomics is the study of the individual decision-making process in the behaviour of household businesses, nonprofits, and government. Microeconomics is an economic field that deals with a limited group of decision-makers. These decision makers take actions to maximise their own personal utility and minimise the interaction costs such as transaction costs, search costs, and generation of externalities.

Microeconomics is the study of individual economic decisions, such as those made by consumers, producers, and businesses. These decisions involve “interactions among economic agents, including households and firms, who exchange goods and services in markets.”

7. Macroeconomics – Macroeconomics describes the relationships between all of the different parts of the economy and how they interact with each other. Macroeconomics is more widely used than microeconomics in everyday life because it describes how the overall economy works.

Macroeconomics is the study of the economy as a whole. This can be thought of as the study of how an economy works “at the level of individuals, firms, and markets operating in the short term” versus “how these same economic processes affect society at large.” The focus of macroeconomic analysis is usually on economics ‘in general,’ not just one particular industry or sector.

Macroeconomics can be defined as the study of how to aggregate economies, such as nations and regions, respond to changes in their economic environment through the aggregate variables that describe their behaviour.

Macroeconomics is the study of the economy as a whole. It involves the examination of basic economic concepts such as inflation, unemployment and economic growth. Macroeconomics also examines how these factors affect countries differently and contribute to differences in development around the world.

8. Production – Production is a central concept in economics because it covers the various stages through which goods are produced and sold. It refers to both the method of production, as well as, the goods that are produced.

Production refers to the effort and activities used in the creation of goods and services that satisfy the needs and desires of society. In economics, it can be defined in terms of the labour, time, energy, materials, and other resources used in producing goods and services that have a market demand. It includes all work done by firms as well as by households.

Production is a process by which goods are brought into being. Production involves the transformation of inputs, raw materials, and energy into outputs, such as furniture, garments, food, and energy sources.

The production function shows the relationship between inputs and outputs. Productive activities produce goods and services; nonproductive activities include things such as social services and environmental cleanup.

9. Exchange – The meaning of exchange in economics is all about exchange and the basic principles, like supply and demand, that govern it. Once one understands what gives rise to particular economic phenomena or develops them in a particular way, then one will be able to recognise the other examples when they occur elsewhere in daily life.

The meaning of exchange in economics is the act of moving one commodity or good for another. There are two main factors that impact the value of an exchange: demand and supply. The exchange of goods and services is at the heart of economics. Exchange means an institutional arrangement for two or more parties to trade in order to accomplish their individual and joint objectives.

Exchange is the trading of one good and service for another good and service. In economics, people deal with an equilibrium. This means that when two people wish to buy something from each other, their systems will equal out until one person is willing to sell at a price that after all costs can be made back, and still be profitable. The only way one can find this to happen consistently is when the buyer and seller know each other well, and they are able to create trust between each other.

10. Scarcity – The term scarce means that something is unavailable or in limited supply. Scarcity is used to describe an economic model in which there is limited availability of resources; therefore, prices can rise.

Scarcity is the theory that scarcity implies the demand for goods will be low because only a limited number of goods can be produced. Scarcity refers to the condition in which there is limited availability of something. For instance, the supply of resources is limited, and therefore the price of that resource increases.

Scarcity is the perception of some lack of resources, which can lead to a series of perceptions, including an increased need for the resource and a lowered ability to provide it.

11. Production Possibility – In business, a production possibility curve (PPC) is made to evaluate the performance of a manufacturing system when two commodities are manufactured together. The management utilises this graph to plan the perfect proportion of goods to produce in order to reduce wastage and costs while maximising profits.

It is a graphical representation of all the possible combinations of two goods that can be produced by the optimum (fuller) utilisation of available resources and the given technology.

It gives us the maximum limit of goods and services that could be produced. So, it is also known as the production possibility boundary or production possibility frontier (PPF).

12. Opportunity Cost – Opportunity cost is defined as those values or benefits that are lost by a business, business owners, or organisations when they choose one option or an alternative option over another option in the course of making business decisions.

In simple words, it can be said to be the value that is lost when a business is choosing between two or more alternatives. From an investor’s perspective, opportunity cost will always mean that the investment choices made will carry immediate loss or gain in the future.

Opportunity costs can be viewed as a trade-off. Trade-offs happen in decision making when one option is chosen over another option. Opportunity costs sum up the total cost for that trade-off.

For example, a certain kind of bamboo can be used to produce both paper and furniture. If the business takes a decision to consider using bamboo for furniture, then the society has to forego the number of bamboo that could have been used for manufacturing paper.

13. Market – A market can be characterised as where a couple of parties can meet, which will expedite the trading of products and services. The parties involved in the market activities are the sellers and the buyers. A market is an actual structure like a retail outlet, where the dealers and purchasers can meet eye to eye, or in a virtual structure, like an internet-based market, where there is the truancy of direct, actual contact between the purchasers and vendors.

A market is described as the total sum of all the purchasers and sellers in the area or region being considered. The area may be the earth, country, region, state, or city. The worth, expense, and cost of traded items are according to the supply and demand forces of a market. The market can be a virtual or a physical entity. Perfect and incomplete or can be domestic or international.

14. Market Economy – In the market economy, all economic pursuits are organised and function through the market. It is different from a centrally planned economy. A market, as learned in economics, is an enterprise that arranges the free interaction of people pursuing their economic pursuits.

In other words, a market is a set of classifications that are arranged such that the economic representatives can freely exchange their funds or products with each other. It is significant to make a note that the word market used in economics is completely distinct from the common apprehension of a market. It has nothing to do with the forum, as we might think.

For purchasing and selling goods, people may or may not meet each other in an authentic location. Interaction between purchasers and sellers can happen in a diversity of conditions and locations, such as a village or a bazaar in a town; instead, buyers and sellers can interact through the internet or telephone and manage the exchange of goods. The arrangements that let people freely purchase and sell goods are the expounding aspects of a market.

15. Centrally Planned Economy – Centrally planned economy is referred to as that type of economy or economic system where the important decisions regarding how to produce, what to produce, and for whom to produce are taken by a central authority which is generally the government that makes the decisions regarding the manufacturing and distribution of products.

Centrally planned economies are also known as command economies, where the prices are controlled by a centrally managed bureaucracy. The theory behind a centrally planned economy is that the government will take control of the means of production and run the economy with fair distribution to all.

For instance, if it is found that a product that is vital for the growth and well-being of the economy, health service, or education is not manufactured in a sufficient amount, the government might attempt to persuade people to produce the requisite amount of that product, or the government can take the hold and manufacture those goods and services.

In a distinct reference, if people in the economy get a small amount of share of the goods and services manufactured in the economy, then the government might interfere and attempt to acquire a fair and equitable allocation of the goods and services for all.

16. Mixed Economy – The mixed economy is an economic system in which both the state and private sector direct the economy, reflecting characteristics of both market economies and planned economies.

Mixed economic systems have characteristics of both the command and the market economic system. For this purpose, mixed economic systems are also known as dual economic systems. However, there is no sincere method to determine a mixed system. Sometimes, the word represents a market system beneath the strict administrative control in certain sections of the economy.

17. Positive Analysis – Positive economics analysis is a part of economics that contemplates the explanation and elucidation of economic occurrence. It concentrates on certainty and cause-and-effect behavioural association and incorporates the development and trial of an economics thesis.

It is the study of economics grounded on intentional analysis. Today, most economists concentrate on the positive economic analysis, which follows what is and what has been materialising in an economy as the rationality for any statement about the upcoming days. Positive economics stands in contradiction to normative economics, which uses value discernment.

Positive economic analysis refers to the analysis in which we study what is or how an economic problem is solved by analysing various positive statements and mechanisms. These are factual statements and describe what was, what is and what would be. These statements can be tested, proven, or disproven and do not involve personal value judgments. For example, if someone says that it is raining outside, then the truth of this statement can be verified. It deals with actual or realistic situations.

Positive economic analysis is confined to the study of cause and effect relationships. In other words, it states “what is.” It relates to what the facts are, were, or will be about various economic phenomena in economics. For instance, it deals with the analysis of questions like “what are the causes of unemployment?”.

18. Normative Analysis – Normative economic analysis is an outlook on economics that contemplates normative or ideologically dictatorial discernment towards economic enhancement, statements, investment projects, and framework. Disparate to positive economics, which depends on intentional data analysis, normative economics decisively solicitude itself with value discernment and statements of “what has to be rather than certitude based on cause-and-effect declarations.”

Normative economics manifests ideological judgement about what may be the outcome in an economic pursuit if public policy changes are made.

Normative economic analysis is concerned with what ‘ought to be’. It examines real economic events from moral and ethical angles, and judges whether certain economic events are desirable or undesirable. For instance, it deals with the analysis of questions like what the price of foodgrains should be.

Normative economic analysis refers to the analysis in which we study whether a particular mechanism is desirable or not. In this analysis, we study what ought to be the desired situation or in what ways the economic problems should be solved. In other words, it is concerned with what should be and what should not be, and what is desirable and what is not. In normative economic analysis, we come across normative statements that cannot be tested as they involve personal value judgments. It deals with idealistic situations and is based on ethics. An example of a normative statement could be, ‘Central Government’ should not stop providing minimum support prices to the farmers.

We hope that the offered Economics Index Terms for Class 12 with respect to Part 1 Chapter 1: Introduction will help you.

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