Concepts of Economics

From WikiEducator

Unit 1 Basic Concepts of Economics

By Tasrun Jahan

Chapter Outline

Introduction Learning Objectives Nature and Scope of Economics Definition of economics Scope of economics Importance of the study of economics Microeconomics vs. Macroeconomics Basic economic problem Three problems of economic organization Economic system Let's Sum Up Key points Glossary Practice test

Introduction

There is no end of people wants. When one or two wants is satisfied, more new wants are felt successively. But the means or resources are limited. People do not get sufficient resources which are needed to satisfy the unlimited wants. So the resources are always scarce in relation to the wants of the individuals, state or the government. Under this situation we have to choose the more urgent wants. Economics is an idea which make a relationship between scarce means and unlimited wants.

In this chapter our concern is with some basic preliminary concepts:(1) Importance or consequance of the study of economics(2) Subjectmatters of economics (3)The basic problem of a economy.

Learning Objectives After reading this chapter, you are expected to learn about:

Describe the nature of economics;

Distinguish between microeconomics & macroeconomics; and

State the basic problem of an economy.

Nature and Scope of Economics

People are confronted with innumerable wants from the cradle to the grave. If one want is satisfied, other wants emerge in succession. To satisfy these wants people are engaged in different activities in the society. But the means are limited in relation to unlimited wants. So people are constantly striving to satisfy unlimited wants with limited means. The science of Economics has emerged as a discipline to discuss how people are engaged in different activities to earn money and how do they endeavor to satisfy unlimited wants with limited means. The knowledge of economics is indispensable to know about how best to solve the manifold economic problems by the proper utilization of resources in the society.

Definition of economics

The English term ‘Economics’ is derived from the Greek word ‘Oikonomia’. Its meaning is ‘household management’. Economics was first read in ancient Greece. Aristotle, the Greek Philosopher termed Economics as a science of ‘household management’. But with the change of time and progress of civilization, the economic condition of man changes. As a result, an evolutionary change in the definition of Economics is noticed. Towards the end of the eighteenth century Adam Smith, the celebrated English Economist and the father of Economics, termed Economics as the ‘Science of Wealth’. According to him, “Economics is a science that enquires into the nature and causes of the wealth of nations”. In other words, how wealth is produced and how it is used, are the subject-matter of economics. In the subsequent period Alfred Marshall defined Economics by saying, ‘Economics is a study mankind in the ordinary business of life’. In other words, according to Marshall, Economics studies not only the wealth but also the activities centering the wealth. In modern times more realistic definitions have been given to economics. In social life human wants are unlimited, but the means to satisfy those wants are scarce. Economics studies how to use the limited resources to satisfy the unlimited wants of men. In the words of Lionel Robins, the modern economist, ‘Economics is a science which studies human behavior as relationship between ends and scarce means which have alternatives uses’. So, Economics as a social science studies how people perform economic activities and how they try to satisfy unlimited wants by the proper use of limited resources. Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people.

Scope of economics

Economics is a social science. The subject matter of economics deals with the analysis of economic problems of people in the society and the satisfaction of their wants. With the evolutionary changes of the society and its civilization, the subject matter scope of economics has expanded.Scope of economics is discussed below:

As social science economics deals with the economic activities of human being. One person day to day money earning and money spending activities constitute the subject matter of economics. For example, parents’ affection and nursing service for their children are not the subject matter of economics. Resources are needed to satisfy people's wants. So, the availability of resources and their use are important subject matter of economics. Adam Smith has termed economics as the “Science of Wealth”. People's wants are unlimited. But the resources to satisfy the wants are scarce. Economics discusses how men can get the maximum satisfaction by using the scarce means to satisfy wants on the basis of priority. So, as subject matter of economics, the scarcity of resources is considered very important. People's wants are related to production, exchange, distribution and consumption. Again, currency, banking system, public finance, trade etc is also parts of economic activities. Economics discuss these issues also. Besides, how economic development of the country is achieved through the means of economic planning is also included in the subject matter of economics. Economics discusses the economic problems and economic activities and indicates proper solution to these problems. Economics also discuses about the value judgment of human actions and behavior.

Importance of the study of economics

In modern times the importance of the study of economics is infinite. It is not only provides us knowledge, but also helps to solve the different problems in real life. The importance of economics in different areas of human life is discussed below:

In the daily life of people: People are confronted with manifold wants in their daily life. But the resources to satisfy those wants are limited. By studying economics we can know the use of limited resources to satisfy alternative wants on the basis of priority.

In the proper use of resources: We can learn about the use of resources with the knowledge of economics. Study of economics helps us to understand about how to produce the maximum output by the proper use of limited resources.

In state management: The knowledge of economics is indispensable to manage the economic and development activities of a state. For this reason the politicians and the govt. officers need to have proper knowledge of the currency system, banking system, tax system, industrial and trade policy, budgeting etc. The knowledge of economics helps in managing the state affairs.

To social workers: Economic causes lie at the roots of maximum social problems. The social workers need to have knowledge of economics to diagnose and solve the problems of poverty, unemployment, illiteracy, excessive growth of population, lack of housing and medical facilities etc.

To the labor leaders: The leaders of the workers should have the knowledge of economics for improving their bargaining capacity in respect of the formation of trade unions, the increase of wage and other benefits, the improvement of their working conditions etc. In economic planning: It is necessary to have sound knowledge of the economic problems and the available resources for the formulation and implementation of economic plans for the country. For this reason the knowledge of economics is indispensable.

Acquisition of knowledge of international issues: The knowledge of economics is necessary to know and understand the socio economic events of different countries, international relationship, commerce etc.

Activity Discuss about the neccessity of economics in your daily life with your mother.

Microeconomics Vs. Macroeconomics

Economic analysis is divided into two main branches: microeconomics and macroeconomics. These two branches are important for scarcity problem.

Greek word Micro means ‘small’. Microeconomics is the study of decisions of people and business and the interaction of those decisions in markets. The goal of microeconomics is to explain the prices and quantities of individual goods and services. Microeconomics also studies the effects of government regulation and taxes on the prices and quantities of individual goods and services.

Example:

Microeconomics studies the factors that determine the prices and quantities of a product (say cement) of cement factory.

On the other hand, Macro means ‘big’. Macroeconomics is the study of the national Economy as well as global Economy and the way that a Economic system work. The goal of macroeconomics is to explain general price level, national income, employment, production. Macroeconomics also studies the effects of Government actions-taxes, spending and the deficit –on total incomes and price level.

Example:

Macroeconomics studies the forces that determine the average cost of living , the total value of production in a country.

Activity Classify the following topics as relating to Microeconomics or Macroeconomics.

a) A family’s decision about how much income to save.

b) The effect of government tax on import.

c) The impact of national savings on economic growth.

d) A firm’s decision about how many workers to hire.

Basic economic problem

In the previous section we have learned about the scarce means of a economy and the unlimited wants of people.Because an economy’s production is limited by its resources and technological knowledge, every society, no matter how rich or poor, makes choices; between health care and yachts, between highways and tanks, between education and restaurant meals.That means every society must have a way of determining what goods are produced, how these goods are made, and for whom these goods are produced.

The three problems of economic organization

Every society must have to determine what goods are produced, how these goods are made, and for whom these goods are produced. These three fundamental questions of economic organization- what,how and for whom are as crucial today as they were at the dawn of human civilization. Now we know details about them.

What goods are produced and in what quantities? A society must determine how much of each of the many possible goods and services it will make, and when they will be produced. Will we produce paddy or jute in our field? A few high-breed paddy or much more local paddy will be produced? will we use scarce resources to produce manu consumption goods? will we produce fewer consumption goods and more investment goods. Every society has to face this type of questions or problem. We may call this problem as problem of choice.

How are goods produced? A society must determine who will do the production,with what resources, and and what production techniques they will use.Is electricity genereted from natural gas, coal, or solar power. These problem is called to be technological problem.

For whom are goods produced? One key task for an society is to decide who gets to eat the fruit of the economic efforts. Or, how is the national product divided among different households? Are many people poor or rich? Do high incomes go to teacher, doctor, businessman or landlords? These type of problem is called to be problem of distribution.

Proper Utilization of Resources

In every society the resources are scarce in relation to demand. The scarce resources should be utilized in such a way as to maximize the welfare of the society. In production, resources should be employed in such a way that they give maximum output at a minimum cost. This is called the proper utilization of resources. Proper utilization of resources is neccessary for solving the economic problems of the society. Even in personal life, scarce resources should be used for meeting the neccessaries of high priority in order to get the highest satisfaction.

Economic System

One key task for Economics is to study & explain the different ways that a society can answer the questions what,how and for whom. Different societies are organised through alternative economic systems and econmic studies the different machanasim that a society can use to allocate its scarce resources. Different type of Economic systems prevail in different countries of the world. They economy economy economy.

Market Economy: A market economy is one in which indivuals and private firms make the major decessions about production and consumption. In this market consumer are soverein. Firms produce the commodity that yield the highest profit. From here you can get answer of the question what. Firms use the techniques of production which are least costly.From here you can get answer of the question how. Consumption is determined by individuals'decisions about how to spend the wages and property ownership. We get the answer of question for whom.Like United States most of the democratic coutries, most economic questions are solved by the market.

Example:

In the united State of America most economic questions are solved by the market. Hence their economic system can be treated as Market Economy.

Command Economy: A command is one in which the government makes all decisions about production and distribution. Soviet Union during most of this century, the government owns most of the means of production (land and capitl);it also owns and directs the operations of enterprise in most industries; it is the employer of most workers and tells them how to do thier jobs; and the governmentin a command economy decides how the output of the society is tobe divided among different goods and services. In this economy, the government answers the major economic questions through its ownership of resources and its power to enforce decisions.

Example:

During the most of the 20th century Soviet Union is operated by Command Economy.

Mixed Economy:In recent time no contemporary society falls completely into either market economy or command economy. Rather all exeption of two or three societies are mixed economies with element of market and command. Like market economy, here the private ownership of property, earning of profit and individual initiativa prevail. But, there is also govt. control over the economic activities at the private level.Besides, some large scale and basic industries and important commercial venture are run in the public sector.

Example:

Though most decisions in the USA,UK and Japan are made in the marketplace but the government plays an important role in modifying the functioning of the market.Mixed Economy also exsists in Bangladesh where both market and government plays role simultaneously in production, distribution, consumption etc.

Self-Assessment Questions (SAQs) - 1 Multiple Choice Questions 1. Pepole's want is-

(a) more

(b) limited

(c) unlimited

(d) few

2. The subject matter of economics is-

(a) to ensure economic progress of the people

(b) to run business

(c) to try to satisfy unlimited wants with limited means

(d) too mobilize resources and to use them

3.Under command economic activities are guided by

(a) the automatic price system

(b) govt. planning

(c) the freedom of consumers

(d) competition

Results

Key Points

The key points of this chapter are as follows:

Economics

Economic System

Employment

Macroeconomics

Market economy

Microeconomics

Mixed economy

Glossary

Market Economy: an economy in which- what, how and for whom these questions concerning resource allocation are primarily determined by supply and demand in markets.

Price Level: an indicator of how high or low prices are in agiven year compared to prices in a certain base period.

Scarcity: the limited nature of society's resources.

What, How and for Whom: the three fundamental problems of economic organization.

Practice Test

Short type question

1. What is economics?

2. What is scarcity?

3. Why we read economics?

4. Define mixed economy?

Essay type question

1. What is the difference between Microeconomics & Macroeconomics?

2. What are the basic economic problem? Describe them.

3. Explain the economic system.

Answers to SAQs

Answers

1.(c)

2.(c)

3.(b)

References and Further Readings

Economics,18th Edition, Paul a. Samuelson and William D. Nordhaus, McGraw Hill Book Co. New york, 2001. Microeconomics, 4th Edition, David N. Hyman, McGraw-Hill Companies, Inc., 1989.

1.1 Defining Economics – Principles of Macroeconomics

All choices mean that one alternative is selected over another. Selecting among alternatives involves three ideas central to economics: scarcity, choice, and opportunity cost.

Scarcity

Our resources are limited. At any one time, we have only so much land, so many factories, so much oil, so many people. But our wants, our desires for the things that we can produce with those resources, are unlimited. We would always like more and better housing, more and better education—more and better of practically everything.

If our resources were also unlimited, we could say yes to each of our wants—and there would be no economics. Because our resources are limited, we cannot say yes to everything. To say yes to one thing requires that we say no to another. Whether we like it or not, we must make choices.

Our unlimited wants are continually colliding with the limits of our resources, forcing us to pick some activities and to reject others. Scarcity is the condition of having to choose among alternatives. A scarce good is one for which the choice of one alternative use of the good requires that another be given up.

Consider a parcel of land. The parcel presents us with several alternative uses. We could build a house on it. We could put a gas station on it. We could create a small park on it. We could leave the land undeveloped in order to be able to make a decision later as to how it should be used.

Suppose we have decided the land should be used for housing. Should it be a large and expensive house or several modest ones? Suppose it is to be a large and expensive house. Who should live in the house? If the Lees live in it, the Nguyens cannot. There are alternative uses of the land both in the sense of the type of use and also in the sense of who gets to use it. The fact that land is scarce means that society must make choices concerning its use.

Virtually everything is scarce. Consider the air we breathe, which is available in huge quantity at no charge to us. Could it possibly be scarce?

The test of whether air is scarce is whether it has alternative uses. What uses can we make of the air? We breathe it. We pollute it when we drive our cars, heat our houses, or operate our factories. In effect, one use of the air is as a garbage dump. We certainly need the air to breathe. But just as certainly, we choose to dump garbage in it. Those two uses are clearly alternatives to each other. The more garbage we dump in the air, the less desirable—and healthy—it will be to breathe. If we decide we want to breathe cleaner air, we must limit the activities that generate pollution. Air is a scarce good because it has alternative uses.

Not all goods, however, confront us with such choices. A free good is one for which the choice of one use does not require that we give up another. One example of a free good is gravity. The fact that gravity is holding you to the earth does not mean that your neighbor is forced to drift up into space! One person’s use of gravity is not an alternative to another person’s use.

There are not many free goods. Outer space, for example, was a free good when the only use we made of it was to gaze at it. But now, our use of space has reached the point where one use can be an alternative to another. Conflicts have already arisen over the allocation of orbital slots for communications satellites. Thus, even parts of outer space are scarce. Space will surely become scarcer as we find new ways to use it. Scarcity characterizes virtually everything. Consequently, the scope of economics is wide indeed.

Concept 9: Economic Systems

Beginner

All economies must answer basic questions like what goods and services to produce, how to produce these goods and services, and how to distribute the goods and services – using their scarce resources. The answers to these questions depend on the economic system that is in place.

In a pure market economy, the basic economic questions are answered by private individuals and businesses freely interacting over time. Private property is protected, and competition and negotiation are encouraged.

In a pure command economy, the basic economic questions are answered by the government, which owns the productive resources and handles distribution of goods and services.

These two descriptions represent extreme ends of a spectrum. In reality, most modern economies are mixed economies -- combinations of market and command with some cultural traditions sprinkled in as well. Nations can slide along this spectrum as different leaders are elected or different social and economic goals become important. These goals are described in Concept 10 - Economic and Social Goals.