What is Economics?
Economics is the social science that analyse the production, distribution, trade and consumption of goods and services and their management through measurable variables. Economics is applied in almost every area and field of society, such as business, finance and government, education, health, law, politics, religion, science and many more. The term ‘Economics’ can also be related to the word ‘economic’ which means using the minimum of time or resources to arrive at an optimum output or desired results. Economics, in principle may be applied to any problem that involves choice from limited options i.e. when one needs to choose the best amongst the limited available lot. Thus ‘choice’ and ‘scarcity’ forms the basic core of the economics as a subject.
Definitions of Economics:
- One of the initial and most famous definitions of economics was given by Thomas Carlyle, who termed it the "dismal science” in the early 19th century.
- Alfred Marshall defined economics as "a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing. Thus it is on one side a study of wealth; and on the other, and more important side, a part of the study of man."
- In simpler forms, it can also be said that Economics is the social science that studies how people choose to use limited or scarce resources in attempting to satisfy their unending wants and needs.
Derivation:
The derivation of the term ‘economics’ can be traced back to the Ancient Greek οá¼°κονομία (oikonomia) which means, "management of a household, administration".
Essence of Economics:
The essence of the subject is to improve the efficiency of an economy, well realising and analysing the scarcity of resources and then working towards organising the society for the most efficient use of these resources. The core of economics lies in the fact that resources are scarce and limited. How to distribute these limited resources in the most efficient and impartial way is a principal concern of economists.
Economics can be broadly classified into two main branches:
- Microeconomics: This category examines the behaviour of basic elements in the economy, including individual markets and agents (such as consumers and firms, buyers and sellers). Micro-economics, which deals with individual agents, such as households and businesses. Microeconomics, which examines the economic behaviour of individual actors such as businesses, households, and individuals, with a view to understand decision making in the face of scarcity and the allocation consequences of these decisions.
- Macroeconomics: It addresses issues affecting an entire economy, including unemployment, inflation, economic growth, and monetary and fiscal policy. Macro-economics, which considers the economy as a whole (including inflation, unemployment, industrial production, and the role of government). Macroeconomics, which examines an economy as a whole with a view to understanding the interaction between economic aggregates such as national income, employment and inflation.
Also, there can be various other classifications based upon the different empirical and usage factors involved. Some more categories are:
- Positive economics and Normative economics
- Economic theory and Applied economics
- Mainstream economics and Heterodox (unorthodox) economics
- Rational economics and Behavioural economics
Some more branches or sub-disciplines or sub-fields of Economics are:
- Agricultural economics
- Business economics
- Capital economics
- Development economics
- Ecological economics
- Energy economics
- Environmental economics
- Financial economics
- Health economics
- Home economics
- Industrial economics
- International economics
- Labour economics
- Managerial economics
- Public economics
- Welfare economics
Economic Assumptions:
Supply and Demand:
The model graph given below describes how prices vary as a result of a balance between product availability and demand. The graph depicts an increase in demand from D1 to D2 along with the consequent increase in price and quantity required to reach a new equilibrium point on the supply curve (S).
The Law of Demand states that, in general, price and quantity demanded in a given market are inversely related. That is, the higher the price of a product, the less of it people would be prepared to buy of it (other things unchanged). As the price of a commodity falls, consumers move toward it from relatively more expensive goods (the substitution effect).
Supply is the relation between the price of a good and the quantity available for sale at that price. It may be represented as a table or graph relating price and quantity supplied. Supply is typically represented as a directly-proportional relation between price and quantity supplied (other things unchanged). That is, the higher the price at which the good can be sold, the more of it producers will supply, as in the figure.
Market Equilibrium occurs where quantity supplied equals quantity demanded. At a price below equilibrium, there is a shortage of quantity supplied compared to quantity demanded. At a price above equilibrium, there is a surplus of quantity supplied compared to quantity demanded. This pushes the price down. This price-quantity adjustment mechanism causes the market to approach an equilibrium point, a point at which there is no longer any impetus to change. This theoretical point of stability is defined as the point where producers are prepared to sell exactly the same quantity of goods as the consumers want to buy.
Demand-and-supply analysis is used to explain the behaviour of perfectly competitive markets, but as a standard of comparison it can be extended to any type of market.
Price:
The oldest and most commonly used measurable value to measure the flow of supply and demand is price, or the going rate of exchange between buyers and sellers in a market. Price theory, therefore, charts the movement of measurable quantities over time, and the relationship between price and other measurable variables. In Adam Smith's Wealth of Nations, this was the trade-off between price and convenience. A great deal of economic theory is based around prices and the theory of supply and demand. In economic theory, the most efficient form of communication comes about when changes to an economy occur through price, such as when too much supply leads to lower prices, and too much demand leads to higher prices.
Exchange rates are determined by the relative supply and demand of different currencies — an important issue in international trade.
Scarcity:
Scarcity means shortage or insufficiency. If production of one good increases, production of the other good decreases, an inverse relationship. This is because increasing output of one good requires transferring inputs to it from production of the other good, decreasing the latter. At one point there is a trade-off between the two goods. It measures what an additional unit of one good cost in units forgone of the other good, an example of a real opportunity cost.
Economics is sometimes called the study of scarcity because economic activity would not exist if scarcity did not force people to make choices.
When there is scarcity and choice, there are costs. The cost of any choice is the option or options that a person gives up. Most of economics is based on the simple idea that people make choices by comparing the benefits of option A with the benefits of option B (and all other options that are available) and choosing the one with the highest benefit. Alternatively, one can view the cost of choosing option A as the sacrifice involved in rejecting option B, and then say that one chooses option A when the benefits of A outweigh the costs of choosing A (which are the benefits one loses when one rejects option B).
Marginalism:
Marginalism became increasingly important in economic theory in the late 19th century, and is a tool which is used to analyze how economic systems will react. In marginalist economic theory, the price level is determined by the marginal cost and marginal utility. Marginal cost of production divides costs into "fixed" costs which must be paid regardless of how many of a commodity are produced, and "variable costs". The marginal cost is the variable cost of the last unit, plus the percentage of fixed costs. Marginalism states that when the profit from the next unit will be zero, that unit will not be produced. Marginal utility is how much more happiness or use a person receives from a purchase in contrast with buying less.
Value:
It could be argued that beneath an economic theory is a theory of value. Value can be defined as the underlying activity which economics describes and measures. It is what is "really" happening.
The "labour theory of value" argues that a good or service is worth the labour that it takes to produce. For most, this value determines a commodity's price. "Market theory" argues that there is no "value" separate from price, that the market incorporates all available information into price, and that so long as markets are open, that price and the value are one and the same.
Production, Cost and Efficiency:
In microeconomics, production is the conversion of inputs into outputs. It is an economic process that uses inputs to create a commodity for exchange or direct use. Production is a flow and thus a rate of output per period of time.
Opportunity Cost refers to the economic cost of production: the value of the next best opportunity foregone. Choices must be made between desirable yet mutually exclusive actions. It has been described as expressing "the basic relationship between scarcity and choice. The opportunity cost of an activity is an element in ensuring that scarce resources are used efficiently, such that the cost is weighed against the value of that activity in deciding on more or less of it. Opportunity costs are not restricted to monetary or financial costs but could be measured by the real cost of output forgone, leisure, or anything else that provides the alternative benefit.
Economic Efficiency describes how well a system generates desired output with a given set of inputs and available technology. Efficiency is improved if more output is generated without changing inputs, or in other words, the amount of "waste" is reduced. A widely-accepted general standard is Pareto efficiency, which is reached when no further change can make someone better off without making someone else worse off.
Public Goods are goods which are undersupplied in a typical market. The defining features are that people can consume public goods without having to pay for them and that more than one person can consume the good at the same time.
Public Finance is the field of economics that deals with budgeting the revenues and expenditures of a public sector entity, usually government. The subject addresses such matters as tax incidence (who really pays a particular tax), cost-benefit analysis of government programs, effects on economic efficiency and income distribution of different kinds of spending and taxes, and fiscal politics.
Money is a means of final payment for goods in most price system economies and the unit of account in which prices are typically stated. It includes currency held by the nonbank public and checkable deposits. It has been described as a social convention, like language, useful to one largely because it is useful to others.
As a medium of exchange, money facilitates trade. Its economic function can be contrasted with barter (non-monetary exchange). Money can reduce the transaction cost of exchange because of its ready acceptability. Then it is less costly for the seller to accept money in exchange, rather than what the buyer produces.
