ECONOMIC SYSTEM

1. Economics
Introduction:
Economics is the way people make their living. It is study of how society copes with problems of society.
History:
• 1st
couple was even not free of this problem
• Early people knew the working of demand and supply
• They recognise the importance of saving and investment
• Trade caravan transported goods to all places.
ARYIANS
• Arians migrated from central Asia to India to avail abandon resources of it .
• Barter economics change to money economics.
• Hazrat Yousaf A.S was appointed finance minister in Egypt ; store wheat for famine , controlled
law and order .
• Hazrat Umar gave the concept of welfare state
• Shershah Suri invested in infrastructure; roads .
• Communication with fast horses, pigeons etc.
• Land revenue system introduced by Mughals.
• Holy Quran discussed issues related to trade , business contract , payment of wages ,
inheritance equality, hoarding and speculation.
Definition:
There is no single definition which all economist agrees.
Adam Smith (1776)
He recognised it as a separate subject. Defined it as
“ It is as science of wealth. It deals with production, consumption, distribution and exchange of wealth.”
Professor Marshal ( 1890)
He came out with different views of economics. He looked at economics as the study of human material
welfare . He defined it as
“ Economics is the study of mankind in ordinary business of life , how to get income and use it. It
examines the material aspects of human being “
Marshal view make economics a social study of general human behaviour.

2. Lionel Robbin (1932)
He challenged the welfare view of economic science. According to him neither wealth nor welfare
provide basis of economic studies. It is scarcity of resources around which economics revolve. He
defined it as
“ Economics is science which studies human behaviour as a relationship between ends and scarce means
which have alternate uses “
Ends (wants) -unlimited different preference. Desire to get something which provide utility.
Means (resources) – limited alternate uses
Factors of production
• Land
• Labour
• Capital
• Entrepreneur
Ends types
GOODS
Material, Tangible
o Consumer goods Vs producer good
o Free good Vs Economic good
o Public good Vs Private good
o Necessities, comforts, luxuries
SERVICES
Actions ; non-material ; non - tangible
o Education
o Health
o Transport
o Communication
o Processing
o Storage
o Administrative
o Social
o Religious
o Recreation
o Civil

3. UTILITY:
• It is power of a good or service to satisfy human want.
• It is the satisfaction a person gets by use of goods and services.
SCARCITY:
Scarcity is situation where available resources are insufficient to produce all good and services people
wish to have .
ECONOMIC PROBLEM:
These problems arise when resources are scarce in comparison with human wants.
Paul Samuelson (1970)
He defined economics as;
“ Economics is the study how societies use scarce resources to produce valuable goods and services and
distribute them among different individuals” .
So , economics is study of management to scarce resources.
Modern definition
“Economics is social science which deals with production, distribution and consumption of goods and
services in a country and study the behaviour of different economic agents and interaction between
them”
Economic agents:
• Household
• Business firm
• Non-profit organisation (public, private)
• Government
It still not cover different aspects of economics like planning, development, international trade etc.
FOUR KEY ECONOMIC QUESTIONS
1. What to produce (allocation of resources)
2. How to produce (choosing method of production)
3. How much to produce
4. For whom to produce ( dist4 of national income)

4. ECONOMIC SYSTEM
An economic system provides a framework in which decision about ownership, control and use of country
resources take place.
An economic system refers to laws, rules, customs, institutions and practices that determine how a
society uses its scarce resources (human material) .
BASIS OF ECONOMIC SYSTEM:
• Who owns resources?
• Freedom of choices and enterprise
• Who make four economic decision
• How prices are fixed
• Role of government
Four types of economic system prevail in world.
1. CAPITALISM
o It is private ownership of economic resources
o Government control on economic activities is minimal
o Freedom in choices of production, Consumption, business
o Price act as signal of production
o Market economy
o Highly efficient in production
o Inefficient in equitable distribution of wealth
o Exploitation
2. SOCIALISM
o Resources are owned by government
o Direct government control who makes 4 economic decision
o Less freedom of choices
o Command economy
o Efficient in distribution of wealth
o No existence in world now
3. MIXED ECONOMY
o Most common in world
o Combine features of capitalism and socialism
o Prices determined by forces of demand and supply
o Government has indirect control
4. ISLAMIC ECONOMIC SYSTEM
o Mixed economy
o Blend of material and spiritual consideration
o System of prices and market
o Freedom of choice but legitimate
o Zakat and ushur payments

5. o Interest free trade and banking
o State welfare policies
o State responsibility to eliminate exploitation, non- Islamic practices etc.
Branches of Economics
Economics is a vast subject having much branches and sub- branches. Two main are
Micro- Economics:
It is the study of how small economic unit i.e., household, business firms and other institutions made
decisions and interest in market.
Macroeconomics:
It is study of the sectors of economy and a whole like national income, money, banking, public finance
international trade etc.
Positive economics Normative economics
1. Deals with facts and their
relationship
1. Deals with value judgement and
person opinion
2. How the things are 2. How it should be
3. Observe economy 3. Desired economy
4. Objective and verifiable feels 4. Subjective statements based on
opinion

6. PRICE DETERMINATION
Price:
It is defined as monetary representation of the value of commodity or the value of commodity
expressed in terms of money is called price .
Why things have price ?
o Usefulness
o Transferable
o Scarcity
Components of price
1. Cost
2. Profit
Types of cost :
o Fixed
o Variable
o Opportunity
o Social
o Political
Process of price determination
Every price is determined by forces of demand and supply.
Demand: It refers to quantity of commodity which people are ready to buy at certain price.
Price has inverse relationship with demand.
Supply : It refers to the quantity of commodity which is offered for sale by producer at certain price.
Price has direct relationship with supply.

7. LAW OF DEMAND
o Free market Economic system is based on prices
o It is forces of demand and supply that make market worth
o It is effective desire
o Demand in schedule showing inverse relationship between price and quantity bought.
Law of demand:
“ If other things don’t change, people will buy more of good when it’s price fall and less of good when it’s
price rises”.
Demand curve :
“ When the inverse relationship between price and quantity demanded is shown in graph , it is called
demand curve”.
Other things are ,
1. Income of the buyer
2. Taste of the buyer
3. Prices of other goods (substitutes)
4. Buyers exception about future income/ prices
Exceptions
o -------- goods
o Hoarding due to war , emergency
o Commodity in ---- symbol
Demand schedule
Price of eggs Daily demand
40 7
60 6
80 5
100 4
120 3
Market demand schedule
Price of milk Individual demand MD
A B C Total
Rs 80/ liter 4 0 2 6
Rs 60/ liter 6 2 3 11
Rs 40/ liter 8 4 4 16

8. Elasticity of demand
“It measures the effect of change in price on quantity demanded”.
1. Elastic demand 2. Inelastic demand
LAW OF SUPPLY
Supply is the quantity of product offered for sale at certain price.
Stock is total quantity available in market.
Reserve price:
This is minimum price below which seller will not b ready to sell any quantity.
Time period and supply
o Market period supply ---------- day to day
o Short period supply -------------- supply meet with industry placed
o Long period supply --------------- supply meet with size of place or more units are installed
Law of supply:
“ Other things remaining constant when the price of commodity rises quantity supplied also rises and
falls when price falls”.
Other things include;
• Cost of production. ~wages, taxes, petrol price
• Production technology
• Floods and war
• Law and order situation
THEORY OF CONSUMER BEHAVIOUR
• Production and consumption of goods and services in important activities of economy
• Consumption means use of goods and services for satisfaction of wants
• Consumer behaviour means behaviour of the people with regard to selection, purchase,
consume of goods and services
• He decides what to consume, make preferences, choose which is more desirable,
considering prices in the market.

9. Two Approaches
1. Utility approach
2. Indifference curve approach
Law of diminishing marginal utility:
If other things remain equal, a successive unit of commodity consumed, the marginal utility of consumer
diminished.
ASSUMPTIONS:
1. Nature of commodity not changed
2. Consumer taste , behaviour not change
3. Income of consumer
4. Suitable unit
5. Continuous consumption
THE THEORY OF CONSUMERS BEHAVIOUR SAYS:
“ In order to get maximum possible utility out of income, a consumer should spend the amount in such a
way that per rupee marginal utility of all commodities purchased become equal . Total utility is
maximum when following equation holds;
MUA/ PA = MUB/ PB ................... MUN/PN
INDIFFERENCE CURVE APPROACH:
Indifference curve analysis is approach to study consumers behaviour that require no numerical
measure of utility.
Indifference curve is a graph which shows all combinations of two goods which have same satisfaction.
Combinations Unit of food Unit of cloth
A 1 15
B 2 10
C 3 7
D 4 5
E 5 4
Apples MU TU
1 10 10
2 8 18
3 6 24
4 4 28
5 2 30
6 0 30
7 -2 28

10. THREE CHARACTERISTICS
• The indifference curve is sloped downward
• Convex to the origin
• Don’t intersect each other
BUDGET LINE
It shows all combination of two goods X and Y having same cost.
“The consumer can get maximum utility by consuming two products at a point where higher indifference
curve is tangent to its budget line”.
A
B
C
D
E
0
2
4
6
8
10
12
14
16
1 2 3 4 5
Series 1
Series 1
0
10
20
30
40
1 2 3 4
Series 1
Series 1

11. FACTORS OF PRODUCTION
App things required to produce and service are called factors of production. They are grouped as
Primary Factors:
1. Land
2. Labour
Secondary Factors:
3. Capital
4. Entrepreneur
These factors are also called inputs or productive resources. The production capacity of country depends
upon the quantity and quality of their resources along with degree of specialisation, state of technology.
LAND: is all God gifted natural resources.
LABOUR: Labour is any physical or mental effort of human being for some monetary reward. It
comprises physical energy, manual skills and mental ability applied by humans for production of goods
and services.
CAPITAL: It is all man-made things which help in production of goods and services. Money is not a
capital. It makes task easier and quicker.
ENTREPRENEUR: Entrepreneur is a person or group of persons who plan and undertake
production process. All other factors are hired by entrepreneur and entrepreneur itself is not hired.

12. 1. LAND(NATURAL RESOURCES)
All God gifted natural resources soil, minerals, forest, lake, mountains, deserts, river, sea, air, climate,
fishery, wildlife etc. It is primary factor as all economic activities can take place on it .
CHARACTERISTICS:
• Gift of nature
• Fixed quantity
• Permanent
• Immovable
• Differ in value due to ---- and location
• Passive factor
• Productivity can be increased
• Need conservation
PRODUCTIVITY OF LAND:
It depends on;
I. Natural factors ~ location, fertility
II. Human factors ~ quality and quantity of labour
III. Use of capital ~ tools , fertilizer
IV. Ownership of land ~ small, absentee
V. Means of transport
VI. Entrepreneur
EXTENSIVE CULTIVATION VS INTENSIVE CULTIVATION
Extensive cultivation: Increasing agri production by bringing or land under cultivation.
Intensive cultivation: Increasing agri production by using more labour and capital on existing land.

13. 2. HUMAN RESOURCES ( LABOUR)
Human resources mean all work--- along with its education, training, experience and motivation for
work.
LABOUR: It is physical or mental work undertaken for monetary reward.
• Any activity which is undertaken as pleasure hobby or happiest not labour.
CHARACTERISTICS:
I. It is perishable
II. Can’t be separated from labourer
III. Less mobile
IV. Weak bargaining power
V. Difficult to measure it’s role in cost of production
VI. Active factor
VII. Dual role ~ producer/ consumer
EFFICIENCY:
• More output units/ time
• Saving time
• Produce quality produced
• Less mistake
• Less use of raw material
FACTORS AFFECTING EFFICIENCY:
I. Personal:
• Good health
• Intelligent
• Education training
• Standard of living
• Honest , disciplined
• Inheritable characters
• ------
II. Working condition:
• Working environment ~ calm , -------
• Rest and refresh mind
• Division of labour
• Better machines, equipment
• High wage rate , social security, insurance
• Chances of promotion, bonus (reward)

14. III. Social and political:
• Social condition no biasness
• Political stability
• Peace and justice
IV. Employer and employee relationship
MALTHUS THEORY OF POPULATION
“By nature, human food increases in slow arithmetical ratio while man himself increase by quick
geometric ratio “
Malthus gave this theory in 1798 study population conditions and increase in population in England. He
gave two checks to control population;
i. Preventive check by men
ii. Positive checks by nature ~ flood, disease, famine
POPULATION RELATED TERMS
i. Size
ii. Composition
iii. Distribution
iv. Density
v. Growth rate
vi. Labour force
vii. Dependency ratio

15. UNEMPLOYMENT
One of the two rising problems; unemployment – inflation
Unemployment is a situation where an able bodied person seek a job but unable to find on current wage
rate.
TYPES :
• Open unemployment
• Voluntarily unemployed
• Under employment
• Disguised unemployment
• Seasonal unemployment ( Agri seasons)
• Cyclic unemployment ( recession, COVID)
• Structural unemployment ( introduction of new technologies)
• Frictional unemployment ( small percentage change of job , finding job after education)
CAUSES REMEDIES
• Poverty • Population control
• Rapid population growth • Industrial development
• Less savings, investment • Labour intensive technologies
• Industrialization • Self- employment
• Imbalance education • Professional and technical education
• Bias attitude • Diversification in Agri world
• Government policies • Cottage industries

16. 3. CAPITAL RESOURCES
All man made resources which are used in production of goods and services are called capital i.e.
building, road, machinery, tools, etc.
• Essential part
• Make production process easier, faster and raise productivity of land and labour
CHARACTERISTICS:
i. Result of human labour
ii. Passive factor
iii. Depreciable
iv. More mobile
v. Are producer goods ( not consumer )
vi. Create when saving is invested
FORMS :
1. Fixed Vs working capital
2. Sunk Vs floating capital
3. Physical Vs human capital
4. Money Vs real capital
5. Private Vs public capital
FUNCTIONS:
• Purchase raw material, land etc.
• Construction building, road
• Pay wages
• Transport
• Publicity , marketing
• Display centres
PRODUCTIVITY OF CAPITAL:
• Good combination of factors
• Quality of labour
• Proper use of capital
• Quality of raw material
• Better technology
• Research and development
• Repair and maintenance
• Good management

17. 5. ENTREPRENEUR/ ORGANISATION
It is an individual or group of individuals who bring together the other 3 factors to make production
possible. He is a person or organisation who ;
1. Plan (4 key decisions)
2. Hire other factors
3. Perform construction
4. Make purchases
5. Sale and publicity
6. Supervise and manage
7. Risk bearer
TYPES:
• Sole enterprise
• Partnership
• Cooperative society
• Joint stock company
• State enterprise
• MNCs
TYPE I : SOLE ENTERPRISE
• Old
• Simple
• Common
• Good management
• Freedom
TYPE II : PARTNERSHIP
“ When two or more members join to run a business “
° May be relative, friends , common profession colleague
Types ;
➢ Working partners
➢ Sleeping partners
➢ Partner without capital

18. TYPE III : JOINT STOCK COMPANY
“ When large number of people join to start a business by investing capital”
• Most modern form
• Huge capital required for start of business
• 7- 10 persons ~ plan , submit to registrar JSC
• Two documents
➢ Memorandum of association ; Name, business, Name of director, Total capital
➢ Articles of memorandum ; By laws about shareholder meeting, election of members,
terms and conditions of services etc.
• JSC are collectively called COOPERATE SECTOR
• Capital is Authorised capital, Issued capital, subscribed capital, paid up capital
• Run by board of directors , Company Secretary
TYPE IV: STATE ENTERPRISE
“State enterprise are those companies run by state both industrial and commercial” (PUBLIC SECTOR)
Example: WAPDA , PIA , OGDC, RAILWAY etc.
Purpose: Social welfare, development of heavy industry, social equality, controlling prices .
TYPE V : COOPERATIVE SOCIETY
It’s principles are :
• Members from same locality
• Volunteer membership
• Democratically controlled
• Common economic objective
• Self managed

19. TYPE VI : MNCs OR TRANSLATIONAL CORPORATION TNC
• Operate in more than one country
• Head office in one country usually DC
• Selling billion of dollars goods and services
• Million of employees around the world
• 25000 TNC are working in world
• Encourage global competition
• Have important role in Eco- development
• Fill four gaps
➢ Investment
➢ Technology
➢ Revenue
➢ Employment
• ICI , BATA, SONY, SUZUKI , NESTLE , PEPSI , SHELL , CALTAX , IBM , MICROSOFT, SAMSUNG ETC.