Building Blocks in Economics: The Problem of Choice: Class 9 Social Science · Chapter 8

Imagine you have ₹500 of birthday money. A pair of basic wireless earphones costs about that much, and so does a cricket bat. You cannot buy both, so you have to pick one. Small decisions like this are where economics begins.

This chapter is built around three guiding questions:

1. What is economics about?
2. Which basic questions does every economy have to answer?
3. How do different economic systems answer those questions?

8.1 The Big Questions

Once you start looking, you find choices everywhere. Here are five, made by very different people:

• A student has one free evening before a test. Revise, or go to a cousin's wedding function?
• A school has one computer lab and 600 students. Which classes get the lab, and for how many periods a week?
• A farmer in Vidarbha must pick a crop for the monsoon season: cotton, soybean or tur (pigeon pea). The answer depends on the soil, the rain she expects and the price at the mandi.
• A bakery owner wants to bake twice as many buns. Should she buy a bigger oven or hire two more bakers?
• A city government has money for one big project this year. A new metro line, or more classrooms in its schools?

What do these five have in common? Each is an economic choice: a decision about how to use something that is limited, such as money, time, land, machines or workers. Individuals and households make such choices every day. So do enterprises (firms and businesses) and governments, often on a much larger scale.

Why do we have to choose at all? Start with what people want. A few things keep us alive and safe: food, clean water, clothing and a roof over our heads. These are our needs. Everything beyond them, such as a gaming console, a second pair of sports shoes or dinner at a restaurant, makes life more comfortable or more fun. These are our wants.

Needs are fairly fixed, but wants have no finish line. Picture a family in a hot town. First they buy a ceiling fan. A few summers later they want a cooler, and after that an air conditioner. Each want that is met makes room for a new one (Fig. 8.1). Wants also shift with age, income, fashion and new technology: your grandparents may once have dreamt of owning a radio, while you may be hoping for a faster phone.

The line between a need and a want is not always sharp. For a delivery rider, a smartphone is a need, because without it there is no work. For a student who already has a phone, a newer model is a want. So we judge an item by the purpose it serves for a particular person.

Most needs and wants are met by buying goods and services in a market. A market is any arrangement in which buyers and sellers meet to trade. It can be a physical place, such as a weekly haat, a sabzi mandi or a mall, or a virtual one, such as a shopping app on a phone.

8.2 Choices and Limited Resources

Think about everything that goes into a plate of rice: a field, water, seed, a farmer's hard work, a tractor or a pair of bullocks, and the know-how of when to sow. Whatever is used up in producing goods and services is a resource. Some resources come from nature, such as fertile soil, river water, coal and sunlight. Others are made by people, such as tools, machines, roads and buildings. In Grade 8 you sorted such inputs into four factors of production: land, labour, capital and technology.

Here is the catch: every one of these resources is limited. A village has only so much land, and a family has only so many rupees each month. Nobody gets more than 24 hours in a day. Wants, as we saw, are unlimited. When wants are greater than the resources available to satisfy them, we face scarcity.

Scarcity does not mean that something is rare. Bricks are common, yet a builder still has only a limited number for all the walls she would like to build. Scarcity means there is not enough for every use we would like to make of a resource.

Most resources can be put to several uses, so scarcity forces us to pick. Think of an empty two-acre plot in a growing town (Fig. 8.2). It could become a playground, a hospital, a market or a block of flats, but not all four at once. The same puzzle turns up at every scale, from a family's monthly salary to a nation's budget. In each case the people deciding look for the option that does the most good.

8.2.1 Opportunity cost

Every choice has a hidden price tag. Say Aman has a free Sunday afternoon. He could play football with friends, help at his uncle's shop for ₹150, or watch a film at home. He likes football most, so he plays. What did football really cost him? Not the whole list of other options, because he could only have done one of them anyway. It cost him the best option he gave up: say, the ₹150 he could have earned at the shop.

Economists call this the opportunity cost of a choice. It can be counted in money, in goods, in time or in benefits lost. Thinking about it leads to better decisions: a choice is worth making only if what you gain is worth more than the best thing you give up.

8.2.2 The production possibility curve

Economists use a simple graph to show scarcity, choice and opportunity cost together. Meet Kavita, who farms 5 acres in Madhya Pradesh. In the kharif (monsoon) season she can grow soybean, maize or a mix of the two. Her land, water, seed and family labour are fixed. If she uses all of them fully and well, she can produce the combinations in Table 8.2. (A quintal, written q, is 100 kg, the unit used in Indian grain markets.)

Plot each combination with soybean on the x-axis and maize on the y-axis, then join the points. The result is a downward-sloping curve that bows outwards (Fig. 8.3). It is called the production possibility curve (PPC). Its slope tells the story of the trade-off: to get more soybean, Kavita must accept less maize.

Read the table from A towards F. Going from A to B, 4 more quintals of soybean cost Kavita only 2 quintals of maize. Going from E to F, the same 4 quintals of soybean cost her 18 quintals of maize. Why does the price rise? At first she switches the patches that suit soybean best. Later she must give up her best maize land too, so each extra quintal of soybean costs more maize. That is why the curve bends outwards.

Every point on the curve uses all her resources fully, with nothing wasted. A point inside the curve, such as 6 q of soybean and 25 q of maize, means some land or labour is lying idle or being used badly. A point outside the curve, such as 16 q of soybean and 40 q of maize, cannot be reached with her present land and methods. Planners in businesses and ministries use the same picture: map out what is achievable first, then pick a point on the frontier.

8.3 What Does Economics Deal With?

The word economics has a homely origin. It comes from the ancient Greek word oikonomia, which joins oikos, meaning a household, and nemein, meaning to manage (Fig. 8.5). At its root, then, economics means running a household well: deciding what to spend, what to save and who gets what.

A country is like a household with millions of members. Its land, water, forests, factories and skilled people could each be used in many ways, and whichever use is picked touches jobs, incomes and health across the nation. So planning is not only a family's job: firms and governments must also weigh how to use what they have.

Put simply, economics is the study of choice under scarcity. It asks how people, firms and governments decide to use what they have, so that as many needs and wants as possible are met. Economists also look at how these decision-makers are linked inside an economy. A shopper, a factory, a bank and a tax office are all economic entities, and what one of them does affects the others, as the next example shows.

Follow a ₹40 plate of samosas to see how they are linked. You pay the shopkeeper. He pays wages to his cook and buys potatoes, flour and oil from farmers and traders. He keeps part of his earnings in a bank, which lends that money to someone opening a new shop. The government collects taxes on many such incomes and sales, and spends them on roads and schools. Economists ask questions about chains like this one. Why did potatoes cost more this month? Will the cook earn more if new shops open nearby? Who ends up with most of the earnings? Should the shopkeeper borrow to buy a bigger fryer, or train a second cook? And how would a new tax, or cheaper imported oil, change all of this?

8.3.1 Decisions need data

Would you trust a cricket captain who picks the team without looking at anyone's scores? Economic decisions are similar: they work best when they rest on data, the facts and figures collected for study. A common way to gather data is a survey. The same questions are put to a carefully chosen group of households or firms, and the answers are added up.

Each decision-maker uses data in its own way. A household that writes down its income and spending can see what it can afford (Example). A government first estimates its tax income, then decides how much can go to roads, hospitals, schools and welfare schemes. A company checks which products are selling and what new technology can do before launching anything new. The plan that comes out of such thinking is a policy: a course of action that a government, organisation or person decides to follow.

Economists bring the same habits to bigger questions. Before advising on a new scheme, an economist asks three things. What are the options? What would each one cost in terms of what is given up? What is likely to happen next? To answer, they dig into household surveys, the Union Budget, the yearly Economic Survey and the annual accounts that companies publish. The numbers can warn of trouble ahead and point to openings worth taking.

8.3.2 What economists do

Because every organisation faces choices, economists work in many places (Fig. 8.6). Some advise governments on policy, such as how much tax to collect or how to spend on welfare. Some work in finance, helping banks and investors decide where money can be put to good use. Some do research and teaching in universities and institutes, tracking trends and training new economists. Others work as business consultants, helping a firm grow or cut waste: for example, a dairy cooperative planning a new milk-chilling plant.

8.4 Key Questions in Economics

Put unlimited wants on one side and limited resources on the other, and something has to give (Fig. 8.7). The gap between them is scarcity, and scarcity forces choices. Whether we look at a village, a company or a whole country, those choices come down to three key questions:

• What to produce? Which goods and services, and how much of each?
• How to produce? With which methods, machines, workers and technology?
• For whom to produce? Who will get the goods and services, and how will they be shared?

8.4.1 What to Produce and for Whom?

Start with 'what'. No economy can make unlimited amounts of everything, so each year it effectively settles on a shopping list for itself: more of some goods and services, less of others. Making more of one thing usually means making less of another, so opportunity cost appears again. Often there is a twist of time: what pays well today may cost a great deal tomorrow.

Take a hill village whose panchayat looks after a patch of common forest (Two uses for one forest). Cutting and selling the timber would bring in a large sum this year. Keeping the trees standing earns less at once. Year after year, though, it protects the springs that feed the village taps, gives fodder and firewood, and draws visitors who pay for homestays. If the panchayat sells the timber, its opportunity cost is all those future benefits. Choices like this weigh short-term gain against long-term sustainability, and companies, consumers and governments face them all the time.

Now 'for whom'. A good is useful only if it reaches the people it was made for. Buyers are far from alike: a schoolchild, a milk seller and a weekend racer want very different things and can pay very different amounts. So producers choose the group they mean to serve and design for it. Bicycles show this well (Table 8.4).

Notice how the buyer shapes the materials. A vegetable seller's cycle is built of heavy steel because it must carry loads and stay cheap, while a racing cycle uses a light alloy that costs more. So a cycle company does its homework first: it studies its buyers' tastes, their budgets and the likely size of each market. Only then does it commit steel, rubber and workers, so that scarce resources are not spent on goods nobody wants. Governments face 'for whom' choices too: for example, when they decide which families should get food grains at subsidised prices.

8.4.2 How to Produce?

Two bakeries can make the same bread in very different ways. One has six bakers kneading dough by hand; the other has one supervisor watching a kneading machine and a conveyor oven. Choosing between such methods is the 'how' question. Each method is like a recipe that mixes the four factors of production in different amounts (Fig. 8.8).

When a method uses many workers and few machines, it is labour-intensive. Plucking tea, hand-block printing of fabric, building houses and moulding bricks by hand work this way in much of India. When a method uses many machines and fewer workers, it is capital-intensive. An oil refinery, a cement plant or a bottling plant runs on huge machines watched over by a smaller number of trained staff.

Which method is right? There is no single answer. It depends on several things:

• Relative cost. If workers are plentiful and wages low, labour-intensive methods are cheaper. If machines are affordable or workers scarce, machines win.
• Technology available. Advanced machines help only if they can be bought, run and repaired nearby.
• Nature of the product. Made-to-order or artistic goods need skilled hands; standard goods made by the thousand suit machines.
• Laws and government policy. Labour laws, safety rules and incentives for new machinery all change the costs.

A furniture maker shows how this works. A workshop carving wooden doors for a heritage hotel needs skilled carpenters, because every piece is different. A factory turning out thousands of identical study tables uses computer-controlled cutting machines. If machines become cheaper, or skilled carpenters become hard to find, more firms move towards machines.

8.5 Economic Systems and How Choices are Made

Every economy must answer the three key questions, but not every economy answers them in the same way. The answers depend on who owns the resources, such as land, factories and banks, and who has the power to decide how they are used. The set of arrangements that decides how goods and services are produced, shared out and used is called a country's economic system.

Think of it as a question of who decides (Fig. 8.9). At one end, the government decides almost everything. At the other, millions of buyers and sellers decide through markets. Real countries sit somewhere along this line. We look at three kinds: planned, market and mixed.

8.5.1 Planned Economy

Imagine one government office deciding how many bicycles, shoes and tonnes of wheat the whole country will make next year. The same office picks the factory for each item, fixes its price and decides who may buy it. That, in short, is a planned economy. The deciding body is usually a planning commission, and the plan can be carried out directly because the state owns most farms, factories, banks, railways and buses.

Supporters of planning argued that it lets a country steer its resources towards goals it chooses, such as building heavy industry quickly. The system has costs, though. Private businesses are few, and they need government permits and licences for almost everything they make. Factories aim to hit the planners' targets, not to please buyers. With few rivals, a firm gains little by making better, cheaper or newer products, so improvement is slow. The former Soviet Union (until 1991), North Korea and Cuba are well-known examples.

8.5.2 Market Economy

Walk down a busy market street and count the phone shops: each one is trying to win your money. Nobody ordered them to open, set their prices or choose their stock. In a market economy, such decisions are made by private owners responding to demand and supply: what buyers want and can pay for, and what sellers are willing to make. Individuals and companies own most of the land, shops and factories, and they produce in the hope of earning a profit.

The government's job is a little like a traffic police officer's: it keeps the roads safe and enforces the rules, but it does not tell anyone where to drive. It maintains law and order, protects property and provides public goods and basic infrastructure such as roads, but it leaves prices and output to buyers and sellers. Rivalry between many sellers pushes each one to offer better quality, lower prices or something new. The United States, Japan and Hong Kong are often given as examples, although governments there still do a great deal, from running schools to regulating banks.

8.5.3 Mixed Economy

A mixed economy takes something from each of the two systems. Markets decide much of what is made, but the government also owns enterprises, writes rules and provides services. In India, for example, private carmakers and software firms work alongside large public sector enterprises such as the State Bank of India and NTPC, and the government-run Indian Railways.

The two sides share the work (Fig. 8.10). The market brings profit-seeking firms, competition and innovation. The government provides public goods, such as street lights, public parks and police patrols, which serve everyone and which private firms have little reason to supply. It also runs welfare schemes, makes sure firms compete fairly, guards consumers against cheating and unsafe goods, and requires firms and offices to make key information public.

Look closely and almost every real economy turns out to be mixed; what differs is the balance between the two sides. India (after 1991), China (after 1978), Germany and Sweden are commonly described as mixed economies, and even market-led countries such as the United States and Singapore have a large government role. Table 8.5 sums up the three systems.

Remember the ₹500 at the start of this chapter? Choosing between the bat and the earphones was a tiny version of what every family, firm and government does daily: weighing what is gained against what is given up. When millions of such choices add up, a country has settled what it makes, how it makes it and who gets it. Its economic system decides who has the final say. The next chapter zooms in on the tool that markets use to bring all these choices together: price.