Introduction to Economics Class 11 Notes

Economics is the social science that studies how people use scarce resources to satisfy unlimited wants. Because wants are unlimited while resources are limited, every economic act is a choice, and the choice produces the cost that economics measures.The subject is studied in two branches. Microeconomics studies the behaviour of individual units, a consumer, a firm, a market. Macroeconomics studies the economy as a whole, the national income, the general price level and total employment. The two branches answer different questions with the same underlying scarcity.

• Scarcity: resources — land, labour, capital — fall short of wants, so choice is unavoidable.
• Microeconomics: the single consumer choosing a basket, the single firm choosing output, the single market fixing a price.
• Macroeconomics: the whole economy — national income, unemployment, inflation, growth.
• Positive economics: statements of fact that can be tested, such as 'the price of wheat rose this year'.
• Normative economics: statements of value or policy, such as 'the government should raise the support price', which carry a recommendation.

Statistics is used in two different senses and the examiner asks for the distinction almost every year. The two senses are the object and the instrument, and confusing them loses a whole mark.

• Plural sense: statistics are numerical facts — the figures themselves, such as the index of industrial production, the wholesale price index or the number of schools in a district, gathered in a systematic manner.
• Singular sense: statistics is a science — the method of collecting, organising, presenting, analysing and interpreting numerical data to reach conclusions.
• A word about the adjective: statistical data share three marks — they are numeric, they are aggregates of facts (not one isolated figure), and they are expressed in units such as rupees, metres or persons.
• Reliability test: data are statistic, in the scientific sense, only when they are affected to a fair degree by a multiplicity of factors and are capable of numerical expression.

Statistics serves economics in six standard ways, and a question asking for the functions of statistics expects the list with one line of meaning each. The list is short enough to memorise as a unit.

• Condensation and presentation: a huge mass of figures is reduced into tables, averages and diagrams that are easy to read, such as presenting a crore of census records as one table.
• Comparison: statistics brings two sets of facts side by side, such as the exports of this year and last year, or the per capita income of two states, so that differences become visible.
• Forecasting: on the basis of past data, statistics forecasts the future, such as the monsoon, the harvest or the demand for a good.
• Policy formulation: data draw the roadmap for policy, such as using a nutrition survey to frame a food-subsidy scheme.
• Testing hypotheses: statistics verifies general propositions, such as whether price and demand are inversely related.
• Framing of economic theorems: relationships such as those between income and consumption are established from statistical evidence.

Modern economics is largely statistical because economic problems are stated in numbers — price, income, output, employment. The importance is that every branch of economics handles quantitative facts, and statistics is the only tool for doing so.

• Measuring economic size: national income, per capita income and the cost of living are statistical constructs.
• Establishing relationships: the demand function between price and quantity, and the consumption function between income and spending, are built on correlation and regression.
• Quantifying aggregates: macroeconomics rests on aggregate demand, aggregate supply and employment, all measured statistically.
• Feeding policy: planning, budgeting and the framing of schemes all require data.
• Business decisions: the entrepreneur uses statistics for production planning, pricing and market assessment.
• Testing economic laws: the law of demand and the law of diminishing returns are verified statistically.

Statistics is powerful but bounded. The limitations are worth a question on their own and they also guard answers elsewhere, because an examiner who asks for a limitation is looking for the reason a figure cannot tell the whole story.

• Studies aggregates only: statistics cannot isolate individuals — it says the average income is Rs. 50,000, never what a particular family earns.
• Not for qualitative facts: honesty, intelligence, beauty and love are not capable of numerical expression, so statistics has nothing to say about them.
• Results are true only on average: the conclusion holds for the mass, not for every case, so an average hides wide disparity.
• Must be handled by trained persons: a layperson, applying methods wrongly, reaches wrong conclusions.
• Can be misused: figures can be manipulated to prove almost anything, which is why 'statistics' is distrusted in one-liners.
• Cannot study individuals in isolation: a single case, such as one bankrupt firm, is not a subject for statistical study.

Before a number can be treated as data, three features must be present, and the criteria decide whether a given set of facts is usable in a study.

• Numeric expression: only facts that can be counted or measured enter statistics.
• Aggregate of facts: a single figure is not data; the collection must be made of a number of related observations.
• Affected by multiplicity of factors: the facts under study are influenced by many forces, from climate to policy, which is why they vary.
• Adequate standard of accuracy: the data must be collected with care so the conclusions drawn from them are dependable.
• Systematic collection: the figures must be gathered, organised and presented in an orderly way, not haphazardly.