Introduction to Economics

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What is Economics?

Economics is a social science that studies how individuals, government, firms and nations make choices on allocating scarce resources to satisfy their unlimited wants. Economics is divided into two parts:

•  Micro Economics
•  Macro Economic

Microeconomics       

It is the part of economic theory, which studies the behavior of individual units of an economy e.g.: Individual income, Individual output, Group of income, Price of goods, etc.

Main tools of microeconomics are:

• Demand
•  Supply

Macroeconomics: It is the part of economic theory, which studies the behavior of aggregate of the economy as a whole. E.g. : National income, GDP, Poverty, etc.

Main tools of macroeconomics are:

• Aggregate Demand
• Aggregate Supply

 Interdependence of Micro and Macro economics

Micro depends on macro:

•  Law of demand came into existence from the analysis of the behavior of a group of people.
• Price of a commodity is influenced by the general price level prevailing in the economy.

Macro depends on micro:

• National income of a country is nothing but the sum total of income of individual units of the economy.
• Aggregate demand depends on demand of individual household of the economy.

  Difference between Microeconomics and Macroeconomics  

Basis	Microeconomics	Macroeconomics
Meaning	It is that part of economic theory, which studies the behavior of individual units.	It is that part of economic theory, which studies the behavior of the economy as a whole.
Tools	Demand and Supply.	Aggregate demand and Aggregate supply.
Example	Individual income, Individual output.	National Income, National output.
Scope	Narrow scope.	Very wide scope.
Parameter	The basic parameter of microeconomics is price-decisions are taken on the basis of price.	The basic parameter of macroeconomics is income-decisions are taken on the basis of income and employment.

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Economy and Economic Problem

Define an economy?

An economy is a system by which people get living to satisfy their wants through the process of production, consumption, exchange and investment.      

How does economy function?

Economy function means process of economic activities and this process has the three components:

• Consumption:  Those goods and services which are purchased or owned or produced for the satisfaction of wants and need is called consumption.
•  Investment: Those goods and services which are needed to undertake production activities is called investment.
• Exchange: It is the system of selling goods for money and then using that money to obtain other goods.

These three elements if work simultaneously in the economy is called functioning of an economy.

Resources (Factor of Production)

Those goods and services which are needed to carry out the production activities are called resources and they are LAND, LABOR, CAPITAL and ENTREPRENEURES. 

Optimum use of resources

It means the resources must be used in such a manner that it gives maximum output at a minimum cost with maximum welfare of the society.

Root cause of economic problems

Scarcity: It is defined when the demand of resources is greater than their supply.

Types of Economy

Economy classified as:

• Free enterprise economy or market economy (Capitalist economy): The capitalist or free enterprise economy is the oldest form of economy, earlier economists supported the policy of leave free. They advocated minimum government intervention in the economic activities. Here means of production are privately owned and economic activities are guided by self-interest and profit motive. 
• Centrally planned economy (Socialist economy): In the socialist or centrally planned economies all the productive resources are owned and controlled by the government in the overall interest of the society. A central planning authority takes the decisions. Here means of production are owned by the whole community.
• Mixed economy: A mixed economy combines the best features of capitalism and socialism. Thus mixed economy has some elements of both capitalist as well as socialist economy. The public and private sector co-exist in mixed economies.

Why does economic problem arise (causes of economic problem)

Scarcity is the root cause of all economic problems and there are three other reasons for all economic problems:

• Human wants are unlimited: It is the basic fact of nature that human wants are unlimited. It grows with income and some wants are even lasting like food, clothing, shelter, etc.
• Limited resources: Every economy has limited resources in the form of land, labor, capital and entrepreneurs. The all are needed for producing goods and services. E.g.: India has surplus labor but lacks in capital, where as USA has surplus capital but lacks in labor.
• Alternative use of resources: It means the resources can be used for many purpose but one resource can be used only for one purpose at a time. E.g.: A piece of land can be used for farming, housing or gardening but it can only be used for one purpose at a point of time.   

Central Problem of an Economy

There are three central problem of an economy:

• What to produce and in what quantity: This problem is concerned with the choice between goods and services to be produced and the quantity to be produced of each selected commodity because an economy has a millions of commodities to produce:a.  Defense goods (tank, guns, etc.) v/s Civilians goods (parks, roads, etc.) b. Luxury goods (car, mobile, etc) v/s Necessity goods (cycle, radio, etc.) c. Consumer goods (rice, wheat, etc) v/s Capital goods (machines etc.).

For e.g.: The problem before the finance minister is that out of given resources, how much to allocate to defense and how much to the civilians goods.

• How to produce: This problem is concerned with the technique of production to be used for producing goods and services. Technique of production is of two types:

a. Labor intensive technique: In this, goods are produced by using more labor and less machines. It ensures social welfare, for e.g.: India.

b.  Capital intensive technique: In this, goods are produced by using more machines and less labor. It ensures efficiency, e.g. USA.

For e.g. : The problem before the businessman and the planning commission is to employ more labor or to employ more capital in production activities.

• For whom to produce (problem of distribution): This problem is concerned with the distribution of income among various factors of production. This problem is also concerned whether to produce goods- more for poor and less for rich or vice-versa because all goods and services cannot be produced for everyone. If we produce goods for rich, who have capacity to buy, then poor will suffer from starvation. On the other hand, if we produce for the poor for the sake of social justice, then we will have to consider, do they have resources.

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