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INTRODUCTION TO ECONOMICS

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Definition OF EconomicsAccording to Alfred Marshall Economics is the study

of mankind in the ordinary business of life, itexamines that part of individual and social actionwhich is mostly connected with the attainment andwith the use of the material requisites of well being.

Explanation- Economics is the study of mans actions

in the ordinary business of life, it inquires as to howhe gets his income and how he utilizes it. Thus on onehand it is study of wealth and on other it is the study ofman.

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Definition OF Economics Lionel Robbins has defined it more precisely as

Economics is the science which studies humanbehavior as a relationship between ends(wants) andscarce means which have alternative uses

Or in simpler words Economics is the science of choicein face of unlimited ends(wants) and scarce resources

that have alternative uses.

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Definition OF Industrial Economics Industrial economics is a distinctive branch of

economics which deals with the economic problems offirms and industries, and their relationship withsociety.

It is concerned with the working, growth andstructures of the industrial sector (firms and

industries) of the country, management andorganization of the industries and problems andprospects of industrial growth.

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DistinctionMicro Economics 1.It deals with individual

economic units 2. Micro Economics studies the

problems of individualeconomic units such as a firm,

an industry, a consumer etc. 3. Micro Economic studies the

problems of pricedetermination, resourceallocation etc.

4.It tackles demand and supply

of particular good. 5. While formulating economictheories, Micro Economicsassumes that other thingsremain constant.

6. The main determinant ofMicro Economics is price.

Macro Economics 1.It deals with the whole

economies with its aggregate. 2. Macro Economics studies

economic problems relating toan economy viz., National

Income, Total Savings etc. 3. Macro Economics studies the

problems of economic growth,employment and incomedetermination etc.

4.It tackles aggregate demand

and supply of the wholeeconomy. 5.In Macro Economics economic

variables are mutually inter-related independently.

6.In Micro Economics economicvariables are mutually inter-related independently.

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Problem of Choice /Scarcity of Resources in

Economics 1.Human wants, desires and aspirations are

limitless and endless-

-The history of human civilization shows us thathuman desire to consume more and more of betterand better goods and services has been increasingcontinuously.

For example housing need has risen from a hut to aluxury palace and if possible house in space. Also needfor means of transportation has risen from horse,bullock cart to supersonic jet planes.

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Economics (Continued)Human wants are endless and goes on increasing due to

following reasons- Peoples insatiable desire to raise their standard of living. Human tendency to accumulate things beyond their present

need. Increase in knowledge about inventions and innovations of new

goods and services. Multiplicative nature of some want. For example buying car

creates want for many things like petrol, cleaning, parking,

maintenance, insurance etc. Biological need like food, water are repetitive. Imitative and Competitive nature of human beings creating need

due to demonstration and band wagon effects. Effect of Advertisement and Social media in modern time create

new kinds of wants.

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Economics (Continued) -Another important feature of human wants is that

they are gradable and can be arranged in order ofpriority. Also priority of wants vary from person toperson and from time to time for same person. Forexample some wants have to be satisfied as and whenthey arise (e.g. food, clothes and shelter) and some canbe postponed e.g. purchase of car. Also while satisfyingsome wants gives a greater satisfaction than others.

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Economics (Continued)2.Resources are scarce. The need for making choice between the various goods that people

want to consume arises because resources that are available to thepeople at any point of time for satisfying their wants are scarce and

limited. Resources can be classified as follows- a. Natural Resources like cultivable land, lakes, rivers, minerals, wild

life, forest and rainfall b. Human Resources like manpower, human energy, skills, talent,

labor.

c. Man made resources like machinery, equipments, technology,tools, building, capital etc d. Entrepreneurship- The ability, knowledge and talent to put land,

labor and capital in process of production and ability and willingness toassume risk.

e. Time.

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Economics (Continued) All these resources are scarce in relation to demand for

resources. This is the mother of all economic problems. Ifthe resources were unlimited like human wants there

would be no economic problem and perhaps no economicsas a subject. It these scarcity of resources in relation tohuman wants that forces people to make choices.

Also the problem of making choice arises becauseresources have alternative uses and alternative uses havedifferent returns or earnings. For example a building can be

used to set up a shopping center, business office, a publicschool, a hospital or for residential purpose. Thuseconomics studies the process of making choices betweenalternative uses

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Economics (Continued)3.People are gain maximizers

One of the important aspect of human nature that leads tochoice making behavior is that most people aim at maximizing

their gains from the use of limited resources and this behavior isconsidered as a part of rational economic behavior by economics.

As consumers they want to maximize their utility or satisfactionand as producers they want to maximize their profit. If thepeople were not gain maximizers the problem of choice making

will not arise. Consumers will not be bothered as to what toconsume and how much to consume and producers will not bebothered as to what to produce, how much to produce and howto produce.

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Economy & Model/Players of

Economy(Continued) Economy refers to the conditions under which goods are

produced in a country and the manner in which people aregainfully employed.

An economy is a social organism in which people act,interact, cooperate and compete in process of productionand consumption to make their living.

Types/Kinds of Economy/Economic systems-

1.Free enterprise economies

2.Government controlled /Command/Socialist economies

3.Mixed Economies.

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Economy(Continued)Model/Players of an Economy-1.Households- They play two important roles-Functions

a. They supply all the factors of production like land, labor andcapital to the firms which constitute the production sector. b. They consume all the goods and services produced by business

firms.2.Business Firms -like firms, farms, factories and shops engaged

in production and distribution of goods and services-

Functions They hire or buy factors of production from the households and

transform them into final goods and services. They supply all the goods and services to the households, the

consumers.

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Economy(Continued)3.Government-Functions- It acquires its monetary resources through taxes on the income of

households and the firms.

It uses this to buy the requisite resources like manpower and materialfrom households and firms to perform its functions.

To make transfer payments to both households and firms in the formof age old pensions, dearness allowance, subsidies, government grants.

4.Foreign sector- It performs exports and imports of goods and services.

5.Financial Sector- Banks, financial institutions, pension funds &mutual funds.

They collect savings from the households and firms and make it

available to households and firms on interest.

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Types of Economy

Free Enterprise economy/ Free Economy/ Capitalist Economy-An economy where there is least interference by the Government or anyexternal force and where production and employment are controlled by privateentrepreneurs is a free economy or capitalist economy.

Characteristics- Private Ownership-Means of production are privately owned by the people

with legal rights to acquire and possess them.

Private Gains as Motivating Force- Private gains are main motivating andguiding force for carrying out economic activities.

Freedom of Choice- Consumers have the freedom of choice to consume whatthey want and producers have freedom to produce what they want.

Freedom of Occupational Choice- Factor owners are free to use theirresources in any legal business or occupation of their choice.

Free Competition- There exists a high degree of competition in bothcommodity, factor and product markets. Goods and services reach to thosewho have purchasing power.

Least Interference by Government- There is least interference byGovernment or any external force and primary role of Government is ensurefree working of economy by removing obstacles to free competition.

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Types of Economy

Government controlled /Command/Socialist economies An economy where the Government is the owner of the means of

production and people are employed as per Governmentsprescription is called Socialist economy. Example- Cuba, Poland,Former USSR.

Characteristics- Means of production are owned by Government and private

ownership of factors is not allowed.

Social welfare is made the guiding factor for economic activitiesand private gains and motivations are eliminated.

Freedom of choice for consumers and society is curbed to whatsociety can afford for all.

The decision on what to produce and how to produce are takenby Government.

The role of market forces and competition is eliminated by law

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Types of Economy

Mixed Economy- An economy which is a mix of socialist and capitalist economies characteristicsis called Mixed Economy.

Most economies in the world today are Mixed economies and one can hardlyfind many examples of pure free economies.

There are two different types of Mixed economies- Mixed Capitalist Economies-Government plays a significant role in

preserving capitalist mode of production and ensuring competition in factorand product markets. USA, UK, Germany, France & Japan.

Mixed Socialist Economies- Government control and regulate the privatesector eg. India, China

Characteristics- In such economies the Government retains the ownership and control over

important basic industries which are essential for the survival and growth ofthe economy and the rest of the industries are open to private sector under theoverall governance of the industrial and trade policies of Government.

Both the Public and Private sector exist side by side so that win -win situationemerges where in plus points of both kinds add up while disadvantages areneutralized

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