Economics

Economic Concepts Basic Economics Economics is defined as the study of how we manage our scarce resources. Microeconomics is the study of the decisions of individuals, households, and businesses in specific markets, whereas macroeconomics is the study of the overall functioning of an economy such as basic economic growth, unemployment, or inflation. Scarcity in microeconomics is not the same as poverty. It arises from the assumption of very large (or infinite) wants or desires, and the fact that resources to obtain goods and services are limited. wants exceed resources necessary to obtain them therefore we must make choices every choice leads to a cost

Wants (aka Ends) In economics, a want is something that is desired. It is said that people have unlimited wants, but limited resources. Thus, people cannot have everything they want and must look for the best alternatives which they can afford. Wants are often distinguished from needs. A need is something that is necessary for survival (such as food and shelter), whereas a want is simply something that a person would like to have. Some economists have rejected this distinction and maintain that all of these are simply wants, with varying levels of importance. By this viewpoint, wants and needs can be understood as examples of the overall concept of demand. Utility is the word used to describe the pleasure or satisfaction or benefit derived by a person from consuming goods.

Scarcity of Resources Scarcity of resources refers to the limitations in fulfilling each and every want of a person because of deficiency of resources needed to fulfill a want. The basic economic problem which arises from people having unlimited wants while there are and always will be limited resources. Because of scarcity, various economic decisions must be made to allocate resources efficiently. If there were no limitation or scarcity of resources then no economic problem would have arisen.

Microeconomics (aka Price Theory) Microeconomic theory studies the behavior of individual decision - the making units such as consumers, resource owners and business firms.

Pros. Microeconomics helps in the formulation of economic policies calculated to promote efficiency in production and welfare of the masses. It tells us how the prices and the factors of production are to be determined. Helps in making an individual economy efficient. Micro-economy reveals how free enterprise economy works without central control. Study of welfare economy. Cons. But it also suffers from certain limitations. It cannot give idea of the functioning economy as a whole. An individual might me flourishing whereas the economy as a whole may be languishing. It assumes full employment which is a rare phenomena, inducing errors.

Macroeconomics (aka Theory of Income and Employment) In macroeconomics we study how aggregates and averages of entire national/international economy as a whole are determined and what causes them to fluctuate, how it grows. Macroeconomics in not merely adding or multiplying what happens to individuals, it is far more complicated then that. For example, In times of depression, savings in times of depression by an individual might be beneficial to him but for economy as a whole it will be harden. It is also referred to as Growth Theory. Pros. It is helpful in understanding complicated functioning of an economic system. It gives bird's eye view of economic world, not of an individual. It regulates aggregate employment and national income. Cons. Individual is ignored altogether. Increasing national saving at the expense of an individual is not a wise policy. Macroeconomic analysis overlooks individual differences. For example, average price level might be stable but food price hike will strangle the poor.

Need for integration of Micro and Macroeconomies What is true for a part of a economy might not be true for the economy as a whole, and what is true for the economy as a whole might not be true for a part. It is therefore very essential to integrate the two approaches. Ignoring one and exclusively concentrating on other generally leads to wrong explanation but also to inappropriate and disastrous remedial measures.

Major Issues in Economics 1.

What to produce which goods in what quantity

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Allocation of scarce resources

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How to produce production techniques

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For whom to produce

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Problems of efficiency and growth for further growth and development of the economy

Nature of economics It is a science and yet it cannot predict future facts like physics and chemistry can. We cannot fully understand people's present actions nor can predict future intentions. In Economics everything depends on everything else. Change in fashion can utterly change in demands and upsets economists' calculations. Role of an economist is of an expert who can say what consequences are likely to follow certain actions. It is said that function of an economist is merely to explore and explain not to advocate and condemn. An economist can give the light not the fruit, and it is for fruit that people turn to economics. Economics has no voice. It is up to Government or individuals to determine what they want to have. When that is settled economist will come in and suggest how best to achieve those end with minimum expenditure of recourses. Economics is primarily study of man, not of wealth. But it studies welfare of man in terms of his economic prosperity.

Applicability of Economic Laws. Modern economic opinion is inclines to the view that they are good approximations and useful guide to the economic events and serve as a basis for formulation of economic policies, considering varying local conditions. Given the conditions under which economic laws are true, the conclusion to which they point are inescapable. Ceteris paribus refers to the concept that law will hold good if there are no changes taking place in economic phenomenom.

Basic assumptions in Economics There are three broad types of assumptions. Rational behavior. Consumers, labors, and entrepreneurs seeking maximum profit. Unchanged tastes. Tastes of consumers remain unaltered for fairly long periods of time. Competitive market. That there are large number of buyers and sellers and

that nothing influences the price. Another thing that is assumed lies at the basis of economic analysis is Concept of Equilibrium. It is the point where consumer and entrepreneur at maximum possible satisfaction, at this point no change in policy is required.

Theory of Demand Utility Analysis of Demand Basics Theory of demand seeks to establish relationship between the quantity demanded of a commodity and its price. The marginal utility analysis explains the consumer's demand for a commodity to be as inverse of the quantity demanded and price. This is how when price falls demand extends.

Marginal Utility Marginal utility is the satisfaction gained from consuming one unit of a good or the satisfaction forgone by consuming one less. If someone eat six apples and then eats a seventh, total utility will refer to satisfaction he received from eating seven apples while marginal utility will refer to utility received from eating seventh apple after already eating six.

Assumptions of Marginal Utility Analysis Marginal utility analysis is criticized on the unrealistic assumptions. Following are the main points. 1.

Cardinal Measurement of Utility Marginal Utility Analysis assumes that want for a commodity can be measured and assigned precise number such as 1,2,3... That is, it is assumed that utility is quantifiable entity.

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Utilities are independent Satisfaction derived by consumption of one good is independent from satisfaction derived by consumption of another good.

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Constant Marginal Utility of Money Unlike utility of other goods utility of money is constant.

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Introspection Marginal Utility Analysis assumes that from one's own experience it is possible to draw inference about another person, i.e. normally people think in same way.

Law of Diminishing Marginal Utility Charpman said, "The more we have a thing the less we want additional increments of it, or the more we want not to have additional increments of it."

In Marshall's words, "The additional benefits which a person derives from a given increase in his stock of thing diminishes with every increase in stock that he already has."

This is because; Even though human wants in aggregate are unlimited, yet a particular want can be almost satisfied. Goods are imperfect substitutes for one another. Different commodities satisfy different wants. Cons. Suitable units One spoon of water cannot satisfy thirst Suitable Time Utility of second meal in an hour would obviously be less Unchanged tastes Normal Persons Considering Introspection, person should be a normal one with tastes like other, should no be abnormal Rare Collections The more you have antiques, the more you have satisfaction, utility will not diminish Change in other people's stocks Your rival losses his coin collection, your satisfaction for your coins will increase. Complementary Possessions Carriage without horse has low utility, with horse it gives more satisfaction. Not applicable to money Utility of money does not diminish.