MP3-IE-19-01

TOPICSUnit-1: Basics of Economics

ECONOMICS: An Introduction THE BASICS OF MARKET EQUILIBRIUM FOUR BASIC MARKET STRUCTURES CONCEPT OF ELASTICITY MOBILIZATION OF RESOURCES

Unit-2: Overview of Indian Economy

INDIAN ECONOMY IN PRE- INDEPENDENCE PERIODIMPACT OF BRITISH RULE ON INDIAN ECONOMYPOST-INDEPENDENCE INDIA INDIAN PLANNING: OBJECTIVE, ACHIEVEMENT & FAILUREPHASES ECONOMIC DEVELOPMENT IN INDIA

INDIANECONOMY

PART-1

Contents

UNIT - 1 BASICS OF ECONOMICS

ECONOMICS:1. An Introduction 7

THE BASICS OF MARKET EQUILIBRIUM 2. 9

FOUR BASIC MARKET STRUCTURES 13. 3

CONCEPT OF ELASTICITY 14. 6

MOBILIZATION OF RESOURCES 25. 1

UNIT - 2 OVERVIEW OF INDIAN ECONOMY

INDIAN ECONOMY IN PRE-INDEPENDENCE PERIOD 31. 0APPENDIX:1. The Theory of Drain .................................................... 33

IMPACT OF BRITISH RULE ON INDIAN ECONOMY 32. 5Colonial Economic Policy in India1. .................................................. 35Main Causes of India’s Agricultural Stagnation during the 2. Colonial Period ...............................................................................36Poverty and Famines in India3. ........................................................ 37Deindustrialisation of India4. ........................................................... 38Demography of India under British Rule5. ..................................... 39Occupational Structure of India6. .................................................... 40Major Challenges at Independence7. .............................................. 40Summary of Conditions at the time of Independence8. ............... 41

POST-INDEPENDENCE INDIA 43. 5Issues in Development1. ................................................................... 45Agriculture2. ....................................................................................... 46Industry3. ............................................................................................ 50APPENDIX: Salient Features of Indian Economy4. ......................... 53

INDIAN PLANNING: 4. OBJECTIVE, ACHIEVEMENT & FAILURE 55Overview of Indian Planning1. ......................................................... 55Planning History2. .............................................................................. 57Appendix: Summary of Objectives & Success of Different Five 3. Year Plans in India .........................................................................62

First Plan (1951-56)i. ..................................................................62Second Plan (1956-61)ii. .............................................................63Third Plan (1961-66)iii. .................................................................64Fourth Plan (1969-74)iv. ..............................................................64Fifth Plan (1974-79)v. ..................................................................65Sixth Plan (1980-85)vi. .................................................................65Seventh Plan (1985-90)vii. ............................................................66Eighth Plan (1992-97)viii. ..............................................................66Ninth Plan (1997-2002)ix. ............................................................67Tenth Five Year Plan (2002-2007)x. ...........................................68Eleventh Five Year Plan (2007-12)xi. ..........................................68Twelfth Five Year Plan (Fyp-12) 2012-17xii. ................................68

PHASES ECONOMIC DEVELOPMEN5. T IN INDIA 70Nehruvian Socialist Economy1. ........................................................ 70Infl ation in India2. ............................................................................. 74Agriculture Development since Independence3. ........................... 75Changing Agrarian Economy Since Independence4. ..................... 77Industrial Development & Progress After Independence5. .......... 79Foreign Trade Policy of India Since Independence6. ..................... 83

BASICS OF ECONOMICS

UNIT

1

INDIAN ECONOMY

6 www.iasscore.in

CHAPTER 1

ECONOMICSAN INTRODUCTION

Choice is a fundamental part of everyday life. The science that studies how people choose - economics - is indispensable if you really want to understand human beings both as individuals and as members of larger organisations.Economics is the science that studies how people and societies make decisions that allow them to get the most out of their limited resources. Because every country, every business and every person deals with constraints and limitations, economics is literally everywhere. For example, you could be doing something else right now instead of reading this book: exercising, watching a fi lm or talking with a friend. The only reason for you to be reading this book is that doing so is the best possible use of your very limited time.

Five Key Econ6s

Society’s wants are unlimited, but all resources are limited (scarcity). Due to scarcity, choices must be made. Every choice has a cost (a trade-off). Everyone’s goal is to make choices that maximize their satisfaction. Everyone acts in their own “self interest.” Everyone acts rationally by comparing the marginal costs and marginal benefi ts (in economics the term marginal = additional “Thinking on the margin”, or Marginal Analysis involves making decisions based on the additional benefi t vs. the additional cost) of every choice Real-life situations can be explained and analyzed through simplifi ed models and graphs.

Micro Economics Study of small economic units such as individuals, fi rms, and industries (competitive markets, labor markets, personal decision making, etc.)Macro Economics Study of the large economy as a whole or in its basic subdivisions (National Economic Growth, Government Spending, Infl ation, Unemployment, etc.)

Long Run v/s Short Run

The long run is not defi ned as a specifi c period of time, but is instead defi ned as the time horizon needed for a producer to have fl exibility over all relevant production decisions. Most businesses make decisions not only about how many workers to employ at any given point in time but also about what scale of an operation (i.e. size of factory, offi ce, etc.) to put together and what production processes to use. Therefore, the long run is defi ned as the time horizon necessary to not only change the number of workers but also to scale the size of the factory up or down and alter production processes as desired.In contrast, economists defi ne the short run as the time horizon over which the scale of operation is fi xed and the only available business decision is the number of workers to employ. The logic is that, even taking various labor laws as given, it’s usually easier to hire and fi re workers than it is to signifi cantly change a major production process or move to a new size of factory or offi ce. (One reason for this likely

INDIAN ECONOMY

7www.iasscore.in

has to do with long-term leases and missing such.) As such, the short run and the long run with respect to production decisions can be summarized as follows:

Short run: Quantity of labor is variable but quantity of capital and production processes are fi xed (i.e. taken as given)Long run: Quantity of labor, quantity of capital, and production processes are all variable (i.e. changeable)In summary, the short run and the long run in terms of cost can be summarized as follows:

Short run: Fixed costs are already paid and are unrecoverable (i.e. “sunk”)Long run: Fixed costs have yet to be decided on and paid, and are thus not truly “fi xed”

The two defi nitions of the short run and the long run so far are really just two ways of saying the same thing, since a fi rm doesn’t incur any fi xed costs until it chooses a quantity of capital (i.e. scale of production) and a production process.

The Short Run Versus the Long Run in Market Entry and Exit

Continuing the preceding cost logic, we can defi ne the short run versus the long tun in terms of market dynamics. In the short run, fi rms have already chosen whether to be in business and at what scale and technology of production. As such, the number of fi rms in an industry is fi xed in the short run, and the fi rms in the market are just deciding how much, if anything, to produce. In the long run, fi rms have the fl exibility to fully enter or exit an industry, since they can choose whether or not to incur or renew the up-front fi xed costs of getting into or staying in an industry in the long run.We can differentiate between the short run and the long run with regard to market dynamics as follows:

Short run: The number of fi rms in an industry is fi xed (even though fi rms can “shut down” and produce a quantity of zero)Long run: The number of fi rms in an industry is variable since fi rms can enter and exit

Microeconomic Implications of the Short Run Versus the Long Run The distinction between the short run and the long run has a number of implications for differences in market behavior, which can be summarized as follows:

The Short Run: Firms will produce if the market price at least covers variable costs, sincefi xed costs have already been paid and, as such, don’t enter the decision-making process.Firms’ economic profi ts can be positive, negative or zero.

The Long Run: Firms will enter a market if the market price is high enough to result inpositive economic profi t. Firms will exit a market if the market price is low enough to result in negative economic profi t. If all fi rms have the same costs, fi rm profi ts will be zero in the long run in a competitive market. (Those fi rms that have lower costs can maintain positive economic profi t, even in the long run.)

The distinction between the short run and the long run is also important to understand from a macroeconomic perspective. In macroeconomics, the short run is generally defi ned as the time horizon over which the wages and prices of other inputs to production are “sticky,” or infl exible, and the long run is defi ned as the period of time over which these input prices have time to adjust. The reasoning is that output prices (i.e. stuff sold to consumers) are more fl exible than input prices (i.e. prices of stuff used to make more stuff) because the latter is more constrained by long-term contracts and social factors and such. In particular, wages are thought to be especially sticky in a downward direction since workers tend to get very upset when an employer tries to reduce their wages, even when general defl ation in the economy is present and the stuff that the workers buy is getting cheaper as well.The distinction between the short run and the long run in macroeconomics is important because many macroeconomic models conclude that the tools of monetary and fi scal policy have real effects on the economy (i.e. affect production and employment) only in the short run and, in the long run, only affect nominal variables such as prices and nominal interest rates and have no effect on real economic quantities.

**********