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Economic Theory
HIGHER SECONDARY- SECOND YEAR

Untouchability is a sin·
Untouchability is a crime
Untouchability is inhuman

·TAMILNADU TEXTBOOK AND
EDUCATIONAL SERVICES CORPORATION
College Road, Chennai- 600 006.

ii

CONTENTS
Page No

1

Nature and Scope ofEconomics

2

Basic Economic Problems

33

3

Theory of Consumer Behaviour

47

4

Demand and Supply

77

5

Equilibrium Price

103

6

Production

117

7

Cost and Revenue

143

8

Market Structure and Pricing

161

9

Marginal Productivity Theory of Distribution

183

10 Simple Theory oflncome Determination

205

11

229

Monetary Policy

12 Fiscal Policy

247

iii

Chapter 1

Nature and Scope of Economics
Introduction
Economics is a social science which deals with human wants and their satisfaction. It is mainly concerned with the way in which a society chooses to employ its scarce resources which have alternative uses, for the production of goods for present and future consumption.
Political economy is another name for economics. “Polis” in Greek means a State. The early writers used the term “Political Economy” for the management of the State. A person who runs a family is expected to make the best use of the income of the household. Similarly, the
State is expected to get the maximum benefit for the society. Hence the term “Political Economy”.
The existence of human wants is the starting point of all economic activity in the world. Unless we make efforts, we cannot satisfy wants.
Hence, wants, efforts and satisfaction form the circle of economics.
We may say economics is the science of wants. But in the real world, the means which satisfy our wants are limited, that is, there is scarcity of the means which satisfy our wants. Time and money are limited. And land, labour and capital which are used in

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