GENERAL ECONOMICS

Unit-I :
WHAT IS ECONOMICS?
The term “Economics” is derived from the Ancient Greek word
“OIKONOMIA” which means (oikos means “Household”; and, Nomos means
“Management”) then the Greeks called the term as “Polis”. Then the classical
and Neo-classical economists developed it into “Political Economy”. The
modern Economist is renamed as (the late 19th century by Alfred Marshal)
“Economics”.
The science of Economics was born with the publication of Adam Smith’s
book, “An Enquiry into the Nature and Causes of Wealth of Nations” published
in 1776.
Economics is a science which deals with human beings, how they earn
money and how they spend it. To understand the meaning, nature and scope of
economics. It is imperative to analyse the definition of economics.
Economics is the social science that studies the production, distribution,
and consumption of goods and services. It focuses on how individuals,
businesses, and governments make decisions about allocating scarce resources.
In simpler terms, economics is about understanding how people make
choices in a world where resources are limited. It helps us answer questions like:
* How are goods and services produced?
* How are they distributed?
* How do people decide what to consume?
* What factors influence economic growth and development?
Economics can be divided into two main branches:
* Microeconomics: This branch focuses on the behaviour of individuals,
households, and firms. It studies topics like supply and demand, market
structures, and consumer behaviour.
 * Macroeconomics: This branch focuses on the economy as a whole. It
examines topics like inflation, unemployment, economic growth, and
government policy.
Economics has a wide range of applications, from understanding the impact
of government policies to analysing the behaviour of financial markets. It is a
fundamental tool for understanding the world around us.
DEFINITIONS OF ECONOMICS,
Different Definitions
In this chapter, let us discuss the Four important definitions of economics.
They are as follows.
1. Wealth Definition.
2. Welfare Definition.
3. Scarcity Definition. And
4. Growth Definition.
1. Wealth Definition or Adam Smith's Definitions or Classical View.
Definition Adam Smith (1723-1790), the father of economics, in his book
“An Inquiry into the Nature and Causes of Wealth of Nations” published in
1776, defined economics us,
The Science of Wealth.
Explanation
According to Adam Smith, economics was regarded as a science which
studied the production and consumption of wealth. It deals with acquisition,
accumulation, and expenditure of wealth. It is for this reason this definition is
called “Wealth Definition”.
1. Among his followers, J.P. Say, defined economics as the study of the
laws which governs wealth”.
2. F.A. Walker defined Economics as “the body of knowledge with relates
of wealth
 3. B. Price defined economics as “all or agreed that it. Concerned with
wealth”.
4. J.E. Cairnes Defined “Economics deals with phenomena of wealth”.
Criticism
1. The popular meaning of wealth is abundance of money. So many
people thought economics teaches public how to amass money. So
Carlyle and Ruskin condemned economics as it is preaches. “Mammon
Worship”. i.e., Worship the God of Wealth or riches. Hence, they called
it Gospel of Mammon. Thus, economics has been called a “Dismal
Science”, “Immoral Science”, and “Bastard Science”, a science of
getting rich.
2. According to Adam Smith, the meaning of the term wealth is not clear.
In those days, wealth means only material goods like gold, land, etc. It
did not include. Immaterial goods like services of doctors, engineers,
lawyers, teachers etc.
3. The definition explains wealth. It ignores the most important aspects
Economics, namely welfare. Therefore, this definition is incomplete.
4. According to Adam Smith, wealth is the end, but Robinson criticised
the view. According to Robinson, wealth is not the end, but only a
means to the end welfare.
2. Welfare Definition or Alfred Marshall's Definition or Neo-Classical View.
Introduction
Alfred Marshall (1842-1924) was the first Economist who shifted the
embassies from wealth to welfare, in his book “Principles of Economics”
published in 1890. According to him, wealth is not end, but only a means to the
end human welfare. Marshall puts it, economics is, on the one side, a study of
wealth and on the other, more important side, a part of the study of men.
Definition
According to Marshall, “Political economy or Economics is a study of mankind
in the ordinary business of life; it examines that part of Individual and social
action, which is most closely connected with the attainment and with the use of
material requisites of well-being”.
Implication
1. Firstly, Marshall accepts the view that economic studies about wealth.
But he doesn't agree with the view that it studies about wealth alone.
According to him, economics is related to wealth gating and wealth
using activities.
2. Secondly, economics is a social science. It is concerned with the
economic aspects of social life.
Criticism
1. According to Alfred Marshall, human welfare depends on material
goods only. He ignores the non-material goods like the services of
doctors, lawyers, engineers etc. Hence Robins criticised that
Marshall’s definitions of economics is too narrow and unscientific.
2. Professor Lionel Robins also objected the use of the word welfare. He
says that there are some economic activities which do not promote
welfare at all but regarded as economic activity. For example,
Manufacture and sale of alcoholic drinks and a cigarette or economic
activities, but they do not promote human welfare.
3. The welfare definition is also objected that the welfare connected be
quantitatively measured. Welfare means the sense of well-being.
Hence, it is not possible to measure
4. According to this definition. Economics is purely a social science, but
it has nothing to do with the problems of those individuals who are cut
off from the society.
3. Scarcity Definition or Robbins’ Definition
The Scarcity Definition of Economics, proposed by Lionel Robbins in
his influential essay An Essay on the Nature and Significance of Economic
Science (1932), represents a more modern and comprehensive view of
economics compared to earlier definitions like those of Adam Smith and Alfred
Marshall. Robbins moved away from wealth and welfare-focused views and
instead defined economics as the study of human behaviour in relation to scarce
resources and unlimited wants.
Definition
According to Robbins, Economics is the science that studies human
behaviour as a relationship between ends (wants) and scarce means
(resources) which have alternative uses. This definition shifts the focus of
economics toward understanding how limited resources are allocated to satisfy
unlimited human desires.
Criticism
1. Robbins fails to explain fully the nature of “ends” and the difficulties
associated with it.
2. Robbins defines that Economics is neutral between ends is unwarranted,
but economics is not with materials but with human behaviour.
3. Robbins definition of economics is micro analysis. It is concerned with
individual behaviour, but our economic problems are related to social
rather than individual behaviour.
4. Scarcity definition fails to analyse the causes of general unemployment of
resources.
5. This definition offers no solution to the problem of underdeveloped
countries.
6. Robbins gives more importance to scarcity of resources, but the problem
is not scarcity, but how to overcome this scarcity i.e., To attain economic
 development. Hence modern economics is growth oriented not scarcity
oriented.
4. Growth Definition: Samuelson (Modern Era)
Paul Samuelson published a book "An Introductory Analysis" in 1948. He
defines Economics as “the study of how men and society choose, with or without
the use of money, to employ scarce productive resources which could have
alternative uses, to produce various commodities over time, and distribute them
for consumption, now and in the future among various people and groups of
society”.
The major implications of this definition are as follows:
• Like Robbins, Samuelson states that the means are scarce in relation to
unlimited ends and that such means could be put to alternative uses.
• Samuelson makes his definition dynamic by including the element of time
in it. Therefore, his definition covers the theory of economic growth.
• Samuelson’s definition is applicable also in a barter economy, where
money is not used.
• His definition covers various aspects like production, distribution and
consumption.
• Samuelson treats Economics as a social science, whereas Robbins regards
it as a science of individual behaviour.
SCOPE OF ECONOMICS
The Scope of a subject means the extent of a particular subject. In that
aspect, economics includes the following:
1. Subject Matter of Economics
2. Economics is a Science or Art
3. Pure Science or Applied Science
4. Positive Science or Normative Science
5. Economics is a Social Science
1. Subject Matter of Economics
Man, a bundle of desires. In order to satisfy our wants, we make efforts to
earn money. Thus, wants forces us to do some work. Work undertaken for
earning money is called Economic Activity’. Wants are the fundamental basis of
our economic life. Thus “wants efforts, satisfaction” are the subject matter of
Economics. The subject matter of Economics is divided into following five parts.
• Consumption
Under consumption, we study human wants and how wants are
satisfied. The chief laws of consumption, are the Law of Diminishing
Marginal Utility, the Law of Equi-Marginal Utility, the Law of Demand,
the Law of Consumer Surplus, etc.
• Production
In production, we study how the four factors of production, namely
land, labour, capital, and organization, cooperate and jointly produce
goods. The Chief Law of Protection are the Laws of Returns Theories of
Population, Division of Labor, Localization of Industries etc.
• Exchange.
Exchange means supply of produced goods to us under exchange, we
study the problems involved in the process of buying and selling such
those relating to markets, value, money, credit, banking, etc.
• Distribution
In Distribution, we study how the national income is distributed
among the four factors of production in such a way rent to landlords, wage
to labourers, profit to entrepreneurs and interest to capitalists.
• Public finance.
In recent years, Public Finance regarded as another branch of
Economics. Public Finance studies. Revenue and expenditure of the
Government. It is concerned with the study of problems relating to public
revenue, public expenditure, Public Debt etc.
2. Economics is a Science or Art?
The English Economists of the classical school like Smith, Senior,
Mill and Ricardo held the view that Economics is science.
Economics as a Science
1. A science is a systematized body of knowledge about a particular branch
of universe. It is a body of generalizations, principles and laws which
explains the casual relationship between cause and effect. Judged by this
standard, economics is undoubtedly science, because it is a systematised
body of knowledge about economic activities of human beings, i.e., how
man earns his money and how he spent it.
2. Poincare says, “a science is built upon facts as a house is built of stones”.
Applying this definition to Economics, we find that Economics is a
science because, it is built upon facts examined and systematised by
Economists.
3. Another character of a science is that “its phenomena should be
amenable to measurements”. Economic phenomena are measured by the
economists by measuring rod money. Since Economics satisfied all the
above three tests of a science, Economics is regarded as a science.
Economics as an Art
The Economists of continent, Europe, Germany and India consider
Economics is an art. According to J.M. Keynes, “an art is a system of rules for
the attainment of a given end”. Applying this definition of Art to Economics, we
find that Economics is on Art.
Art is also defined as, a collection or body of rules for the execution of
external works”. Applying this definition of Art to Economics, we find that
Economics is an Art
Conclusion.
So, we can say that Economics is not only a science, but also an Art. Like
a coin, it has both. ‘Science’ and ‘Art’.
3. Pure Science or Applied Science
Pure Science
A pure science is one which gives theoretical information, but no practical
guidance to solve problems. In the words of Prof. Bye, “Pure science furnaces
the tools with which. Applied science works”. Applying this definition of pure
science to Economics, English Economists held the view that economics is a
pure science.
Applied Science
An applied science provides theoretical knowledge and guidance to solve
practical problems. In recent years, applied economics has received greater
attention at the hands of modern Economists and there have been several
publications on Applied Economics both in UK and U.S.A.
Conclusion
Thus, modern Economists regarded more on applied science rather than a
mere pure science.
4. Positive Science or Normative Science
Economics is a Positive science
Almost all English classical economists like Senior and JS Mill held the view
that Economics is a Positive Science. A Positive Science is a science which
explain things as they are i.e., “what it is” and not “what ought to be”. They said
that economics should not explain rightness or wrongness of things. Senior
thought that Economics not tell even a single word of advice. This means, that
Economics is not a concerned with moral or ethical considerations. All the
English Economists recorded Economics as a Positive Science because of the
following reasons.
Firstly, If the Economics is regarded as a “Normative Science”, ethical
considerations will enter into Economics.
Secondly, if Economics is treated as a “Normative Science”, Economics will
be forced pass moral judgements.
Economics is a Normative Science
Challenging the views of the classical school Marshall, Pigou, Hawtrey,
Fresher and Macific argued that Economics is not a Positive Science but a
“Normative Science”, because it is concerned with “human welfare”. Hawtrey
consider that Economics as a Normative Science because it explains “how things
should be” i.e., “what ought to be”, naturally, Economics is associated with
another science, i.e., Ethics. It tells us how we should behave. Economists
suggest a policy measures to the governments. It explains the rightness or
wrongness of things.
If Economics is considered to be a Positive Science, it will become a mere
“Value Theory”. But Fresher says that economics is something more than a mere
Value Theory.
So, we may conclude that Economics is not only a Positive Science, but
also a Normative Science.
5. Economics is a Social Science:
Economics is a social science because it studies about human wants and
how wants are satisfied. It studies about man’s as a member of the society. It
explains men's economic activities of consumption. Production, exchange and
distribution of wealth. As long as Economic studies the social aspect of men's
action, It is a social science,
All social science are interrelated with each other. Since Economics is a
social science, it is closely related with other social science like sociology,
politics. History, Jurisprudence, Ethics, etc. Hence, in this topic, let us discuss
the relationship between Economics and other social sciences.
• Economics and Sociology
Economics is a general science of the society which studies origin
and development of the society. Sociology is called as “Parent
Science”, because it deals with all aspects of the society, namely,
social, Political, economic, historical aspects, etc. Socially teaches
 “something of everything” of men, while Economics teaches
everything of something of man.
Economics deals with only one aspect of human beings, namely
economic aspects. Therefore, sociology is like a General Medical
part. Practitioner, whereas Economics is like a specialist.
• Economics and politics
There is a close relationship between economics and politics. In the
beginning Economics was only a branch of politics. That is why it
was called “Political Economy”. it shows the close relationship
between these two subjects. Politics is a social science which studies
about the State and Government. It explains the organization
functions and administration of the State and the Government.
Economic conditions of any country depends upon the political
conditions of that country. If a country is ruled by another, the
economic development will be very low.
• Economics and History
History is the record of the past events, including economic events.
In economics, we use historical data to frame economic laws. Sir
John. Secley has summed up the relationship between these two
sciences by the following couplet:
“Economics without History has no root.
History without Economics has no fruit”.
• Economics and Ethics
Ethics is a science of ‘Morality’, whereas Economics is a science of
‘welfare’. However, both studies about the same man. Ethics aims at
promoting moral welfare. Whereas Economics aims at promoting
material welfare. For example, ethics tells ‘honesty is the best policy’.
It also tells us that gambling, drinking and stealing are anti-social
activities. Economics tells us how men earns his money and how he
spends it, but we do not satisfy our wants by stealing.
 • Economics and Jurisprudence
Jurisprudence is the science of law. The economic development of a
country depends upon the laws of the country also. Economic
activities must be carried on according to the laws of a country. Goat
laws promote economic development, and bad laws are obstacles to
economic development.
3. BASIC CONCEPTS
Human wants
• UNLIMITED
• COMPETITIVE
• COMPLEMENTARY
• VARIABLE
• GRADABLE
• RECURRING
Classification of wants
NECESSARIES
• Basic Needs
• Food
• Water
• Shelter
• Clothing
Comforts
• Fan
• Air conditioner
Luxuries
• Gold
• building
4. Micro and Macro Economics
Economics is studied mainly two branches as follows:
❖ Micro Economics
❖ Macro Economics
Objectives:
• Understand the meaning and concept of Macro and Micro economics.
• Explain the Macro and Micro aspects of pricing of education.
• Differentiate between Macro and Micro analysis of economy.
Introduction:
 Economics is divided into two different categories: Microeconomics and
Macroeconomics. Microeconomics is the study of individuals and business
decisions, while Macroeconomics looks at the decisions of countries and
governments.
• While these two branches of economics appear to be different, they are
actually interdependent and complement one another. Many overlapping
issues exist between the two fields.
• Microeconomics studies individuals and business decisions, while
macroeconomics the decisions made by countries and governments.
• Microeconomics focuses on supply and demand, and other forces that
determine price levels, making it a bottom-up approach.
• Macroeconomics takes a top-down approach and looks at the economy as
a whole, trying to determine its course and nature.
• Investors can use microeconomics in their investment decisions, while
macroeconomics is an analytical tool mainly used to craft economic and
fiscal policy.
Micro Economics
Definition
• Microeconomics is the study of individuals, households and firms’
behaviour in decisions making and allocation of resources. It generally
applies to markets of goods and services and deals with individual and
economic issues.
• Microeconomics is a branch of economics that studies the behaviour of
individuals and firms in making decisions regarding the allocation of
scarce resources and the interactions among these individuals and firms.
Concept of Micro Economics
• Microeconomic study deals with what choices people make, what factors
influence their choices and how their decisions affect the goods markets
by affecting the price, the supply and demand.
• One goal of microeconomics is to the market mechanisms that establish
relative price among goods and services and allocate limited resources
among alternative uses. Microeconomics shows condition under which
free markets lead to desirable allocations.
• It also analyses market failure, where markets fail to produce efficient
results.
• While microeconomics focuses on firms and individuals,
macroeconomics focuses on the sum total of economic activity, dealing
with the issues of growth, inflation, and unemployment and with national
policies relating to these issue.
• Microeconomics also deals with the effects of economic policies (such as
changing taxation levels) on microeconomic behaviour and thus on the
aforementioned aspects of the economy. Modern macroeconomics
theories has been built upon micro foundation i.e. based upon basic
assumptions about micro-level behaviour.
Micro Economics
Micro Economics studies the behaviour of small individual factors in an
economy.
It mainly focuses on
• Individual consumer satisfaction
• Market demand for the product of an individual producer.
• It study the equilibrium of firm & industry
Scope of Micro Economics
• Are the resources in the country fully utilized or not?
• What should be produced & in what quantity? (Theory of value)
• The problem of selecting technique of production. (Theory of production)
• How the goods & services produced are distributed? (Theory of
distribution)
• How effectively the resources are allocated? (Economics of welfare)
 • Whether the capacity of the economy to produce goods & services is
growing or is static? (theories of economic growth)
Importance of Micro Economics
• Allocation of resources
• The distribution of national income
• Consideration of welfare
• Importance of applied field of economics
Limitation of Micro Economics
• It always thinks of individual factors of production or individual consumer
so it may not be always true on aggregate levels.
• Its result or conclusions are always on certain assumption.
• The aggregate analysis or the overall approach to any economic problem
is beyond the reach of it.
Macro Economics
Definition
• Macroeconomics is a part of economic study which analyses the economy
as a whole. It is the average of the entire economy and does not study any
individual unit or a firm. It studies the national income, total employment,
aggregate demand and supply etc.
• Macroeconomics is the study of the performance, structure, behaviour and
decision-making of an economy as a whole. It focus on the national,
regional, and global scales to maximize national income and provide
national economic growth.
Concept of Macroeconomics
• The term ‘Macro’ has been derived from a Greek word ‘Macros’ meaning
‘large’. Thus, Macro- economics is the study and analysis of an economy
as a whole.
• The study of the performance, structures behaviour and decision making
of an economy as a whole, rather than individual markets.
 • Macroeconomists focus on the national, regional and global scales
• For most macroeconomists the purpose of this discipline is to maximize
national income and provide national economic growth.
• This growth further increases utility and improve standard of living for
the economy’s participants.
Macro Economics involves the study of
• The behaviour of an economic system as a whole
• Aggregate and average covering the entire economy
• Behaviour of large aggregators such as – total employment, national
product, national income, price- levels etc.
Macro Economics deals with problems such as:
• Unemployment in the country
• Inflation/ deflation
• Economic growth
• International trade
• National output
• National expenditure
• Level of saving & investment
Scope of Macro Economics:
• The scope of Macro Economics lies in the study of analysis of the
following:
• Theory of employment
• Theory of income
• Theory of price level
• Theory of growth
• Theory of distribution
• Theory of national income
Nature of Macro Economics
 • It is a study of national aggregates
• It studies economic growth
• It ignores individual differences between aggregates
Importance of Macro Economics
• It never neglect the relationship between demand & supply as in case of
micro- economic analysis.
• It always gives the complete picture about the economy as whole hence it
helps to understand working of the whole economy.
• Macro- economic has increased the utility of economics.
• It can be used for the development of micro- economic theories
• It helps in formulation of economic policies.
• It studies and analyses growth and development in an economy.
Difference Between Micro Economics and Macro Economics
Content Micro Economics Macro Economics

Meaning it studies individuals units It studies the economy as a

of an economy whole
It studies individual It studies national
economic unit such as: Aggregate such as:
Fields of study a consumer, a firm, a national income, national
household, an industry output, general price level,
a commodity et level of employment etc.
it deals with micro It deals with problems at a
problems such as macro level like problems
Problems determination of: price of of
commodity, a factor of employment, trade cycles,
production, satisfaction of international trade,
a consumer etc. economic growth etc.
It is based on It is based on aggregation
disaggregation of units. It of units It does not
Nature considers individual consider individual
differences between differences between
different units aggregates
 Maximize utility Maximize Full employment Price
Objectives profits Minimize costs stability Economic growth
Static analysis i.e. Favourable balance of
payment situation
Does not explain the time Dynamic analysis i.e. it is
element Equilibrium based on time lags, rates
Methodology conditions are measured at of change, past and
a particular period expected values of
variables.

5. Choice
In economics, choice refers to the decision-making process individuals,
businesses, and governments face when determining how to allocate limited
resources to satisfy their various needs and wants. Since resources (like time,
money, and labour) are scarce, we cannot have everything we desire, so we must
make choices about how to use those resources most effectively.
Key Aspects of Choice:
Trade-off
• Trade-off is a fundamental economic concept that refers to the need to give
up something in order to obtain something else. It's the idea that resources
are limited, so choosing one option means forgoing another.
• Examples of trade-offs:
• Time: If you spend more time studying, you have less time to spend with
friends or pursue hobbies.
• Money: If you buy a new car, you may have less money to save for a
vacation or invest in your future.
• Goods: If you decide to buy a larger house, you may have less money to
spend on other things like clothing or entertainment.
Scarcity
• Definition: Scarcity refers to the fundamental economic problem of having
limited resources to meet unlimited wants and needs.
 • Example: There is only a limited amount of oil on Earth, but people and
industries demand a lot of it for energy, transportation, and other purposes.
Opportunity Cost
• Definition: Opportunity cost is the value of the next best alternative that
must be given up when making a decision.
• Example: If you decide to spend $10 on a movie ticket, the opportunity
cost might be the meal you could have bought instead.
6. Types of Economic Systems
An economy might be designed to depend exclusively either on the market
or on government to make the three fundamental decisions of what, how and
for whom. The economic system can be broadly categorized into
1) Traditional Economy
• Ancient Communism
• Slavery/Slavarism
• Feudalism
2) Capitalism (Market Economy)
3) Socialism (Command Economy)
4) Mixed economy.
1.Traditional Economy
• Ancient Communism
Ancient communism refers to the primitive communist societies that
existed in ancient times, where resources were shared communally and there was
no private property or social classes. Characteristics of ancient communism
include:
1. Shared resources: Land, food, and other essential resources were shared
among the community.
2. No private property: Individuals did not own property, and resources were not
accumulated for personal gain.
3. Collective labour: People worked together to hunt, gather, and farm.
4. Shared responsibilities: Caring for children, elderly, and vulnerable members
of society was a collective responsibility.
5. Egalitarianism: Social equality and lack of hierarchy or classes.
Examples of ancient communist societies include:
1. Indigenous cultures (e.g., Native American tribes)
2. Ancient Greek city-states (e.g., Sparta)
3. Early Christian communities (e.g., Acts 2:44-45)
4. African communal societies (e.g., Igbo and Yoruba)
Ancient communism was often based on kinship, shared culture, and mutual aid.
While these societies were not without conflicts or inequalities, they demonstrate
that alternative forms of social organization have existed throughout human
history.
Keep in mind that ancient communism differed from modern communism,
which emerged in the 19th century as a response to industrialization and
capitalism.
• Slavery (Slavarism)
Slavery is a system where people are treated as property and are forced to
work against their will, often under the threat of violence or other forms of
exploitation. Slaves are deprived of their freedom, autonomy, and human rights,
and are often subjected to inhumane treatment, abuse, and degradation.
Slavery can take many forms, including:
1. Chattel slavery: Where people are owned as personal property and are bought
and sold like commodities.
2. Debt bondage: Where people are forced to work to pay off debts or other
obligations.
3. Forced labor: Where people are coerced into working against their will, often
under the threat of violence or other penalties.
4. Human trafficking: Where people are recruited, transported, or harbored for
the purpose of exploitation, often through deception or coercion.
 Slavery is a violation of human rights and is considered a crime against
humanity. It is estimated that there are still millions of people trapped in modern
forms of slavery around the world, including forced labor, human trafficking,
and other forms of exploitation.
Slaverism, on the other hand, refers to the ideology or practice of
supporting or justifying slavery. It involves the belief that certain groups of
people are inferior or can be treated as property, and that slavery is a legitimate
or acceptable institution. Slaverism is a morally reprehensible and discredited
ideology that has been used to justify some of the most horrific human rights
abuses in history.
• Feudalism
Feudalism was a social and economic system that emerged in Europe
during the Middle Ages (roughly 9th-15th centuries). It was characterized by:
1. Decentralized power: Local lords and vassals held power, rather than a
strong central government.
2. Hierarchical structure: Society was divided into three estates:
- Nobility (lords and vassals)
- Clergy (church leaders)
- Commoners (peasants and serfs)
3. Land ownership: Lords owned the land, while peasants and serfs worked
it in exchange for protection and housing.
4. Obligations and dependencies: Vassals owed loyalty and military service
to lords, while peasants and serfs owed labor and goods to lords and vassals.
5. Self-sufficiency: Manors (local estates) aimed to be self-sufficient, with
their own agriculture, crafts, and services.
6. Limited social mobility: People were born into their roles, with little
chance to move up the social ladder.
 Feudalism evolved over time, eventually giving way to more centralized
monarchies and the rise of nation-states. Its legacy can still be seen in modern
social and economic structures.
2. Capitalism (Market Economy)
Capitalism is the most prominent in our current global economic system.
Its main characteristic is that it most means of production and property are
privately owned by individuals and companies the government has a limited role
in such an economy so a capitalist economy is a liberal economy.
Ex; USA, UK, Germany, Japan, Singapore all are classic examples of capitalist
economies.
Main Features of Capitalist Economy
• Right to Private Property
• Price Mechanism
• Profit Motive
• Freedom of Enterprise
• Free market
• Minimum intervention by state
• Exploitation of resources
Merits:
• Incentive:
The Profit motive induces them to invest money even in those industry which
involves great rises.
• Efficient utilization of resources:
Due to competition minimum the cost becomes essential. In order to minimize
the cost producers attempt to utilize factors of production in the best possible
manner.
• Rapid economic growth:
The Capitalist system helps in rapid economic growth due to incentive and
initiative. Rapid economic growth enables people to enjoy a high standard of
living.
• Capital formation:
People have the incentive to save money and invest it in order to earn larger
incomes in future due to Private property and inheritance. High rates of Public
savings and investment lead to a higher rate of capital formation in the country.
• Flexibility and Adaptability:
It is a dynamic system and can be adapted to the changing environment.
• Democratic nature:
People enjoy full freedom under competitive market, entrepreneurs introduce
new products new techniques of production and distribution and other
improvements.
Demerits:
• Concentration of economic power:
Right to private property and the law of inheritance result in the concentration
of wealth in a few hands and subsequent leads to extreme inequalities to the
incomes of the people.
• Economic Instability:
Capitalism does not provide stability of the price level. Free working of market
mechanism results in business cycle wherein business booms are followed by
business depression.
• Social waste:
Cut throat competition among business firm’s results in unnecessary expenditure
on advertising and human resources of the nation.
• Rise of monopoly:
Big business and Giant Corporation dominates the country economy in the
capitalist system.
• Social discrimination:
Capitalism leads to the division of the society into two classes haves (rich) and
haves not (poor).
3. Socialism (Command Economy)
Socialist means the system under which Economic System is controlled and
regulated by the government so as to ensure welfare and equal opportunity to the
people in a society. The idea of socialism is first introduced by Karl Marx and
Fredric Engles in their book, ‘The Communist Manifesto’. The word socialism
means ‘all things to all men’. According to Samuelson, “Socialism refers to the
government ownership of the means of production, planning by the government
and income distribution”. It was followed in the erstwhile Soviet Union. Russia,
China, Vietnam, Poland and Cuba are the examples of socialist economies.
Main Features of Socialist Economy
• Collective Ownership
• Economic, Social and Political Equality
• Economic Planning
• No Competition
• Positive Role of Government
• Work and Wages According to Ability and Needs
• Maximum Social Welfare
Merits:
• Social Justice:
Under socialism, there is a just and equitable distribution of national income.
• Economic stability:
The problems of over production under production, idle capacity because
business cycles are eliminated because the central planning authority takes all
major economic decisions.
• Higher economic growth:
Economic planning facilities optimum utilization of resources there by leading
to rapid economic growth.
• Absence of class struggle:
On account of state ownership of productive resources and social distribution of
income, there is no struggle between haves and have notes.
Demerits:
• Concentration of economic power in the state:
Both economic and political. Power is concentrated in the hands.
• Lack of Incentives and Initiative:
In a socialist economy, People do not have incentive for hard work, enterprise
and efficiency.
• Loss of occupational freedom:
In a Socialist economy, People do not enjoy full freedom to choose occupation
and employment of their looking.
• Inefficiency and low productivity:
Bureaucracy in the functioning of state –owned enterprises lead to low
productivity.
• Corruption:
There is great possibility of growth of corruption in a socialist economy.
4. Mixed Economy
It is neither pure capitalism nor pure socialism but a mixture of the two. In
this system, we find the characteristics of both capitalism and socialism. Both
private enterprises and public enterprises operate mixed economy. The
government intervenes to regulate private enterprises in several ways. Generally,
the basic and heavy industries like industries producing defense equipments,
atomic power, heavy engineering goods etc. are put in the public sector. On the
other hand, the consumer goods industries, small and cottage industries,
agriculture etc. are assigned to the private sector. It is realized that in the under
developed countries, like India, economic development cannot be achieved at
the desired rate of growth without any active government help and guidance.
Hence, the government in such countries actively participates in economic
 activities in order to minimize the evils of capitalism and to accelerate economic
growth.
In capitalistic economy, the entrepreneurs utilize the available resources
efficiently, as they have strong initiative to earn profit. But the free functioning
of private enterprises results in extreme inequalities of income and wealth. In
socialistic economy, the inequalities in income and wealth get reduced to the
minimum and the national income is more equitably distributed. But the
socialistic economy suffers from the problem of lack of private initiative that
results in the lack of inventive ability and enterprising spirit and ultimately these
lead to inefficient use of available resources. The mixed economy aims at
achieving the goals of both capitalism and socialism (i.e., efficient use of
resources and equitable distribution of income and wealth) and at the same time,
it emphasizes on the reduction of evils of capitalism and socialism. Examble:
India, UK, France and Brazil Is the great example for the mixed economy system
in around world
Main Features of Mixed Economy
• Coexistence of All Sectors
• Cooperative Sector
• Freedom and Control
• Economic Planning
• Social Welfare
• Price Mechanism and Controlled Price
• Control of Monopoly Power
Merits:
• Individual freedom:
Mixed economy provides adequate freedom to individuals.
• Rapid economic growth:
Central planning and market mechanism together helps in the rational allocation
of resources.
 • Social welfare:
Government undertakes policies and programmer for the welfare of the public.
Demerits:
• Economic Instability:
Sometimes, violent fluctuations occur in the level of economic activity due to the
fracture of market mechanism.
• Lack of freedom:
A mixed economy is a semi-controlled economy producers. Workers and
consumers all get freedom of choice but subject to some constraints.
• Inefficiency:
When there are too many regulations and controls, Private sector cannot function
very efficiently.

Reference Books
• Dr. S. Sankaran, Micro Economics, Margham Publications, Chennai, 2000.
• M.L. Jhingan, Micro Economic Theory, Vrinda Publications Ltd., New
Delhi, 2002.
• HL AHUJA (2018) Advanced Economic Theory S.Chand & Co
• Misra and Puri, Advanced Micro Economics Himalaya Publishing House,
Mumbai, 1996.