Economics Class

Economics: Basic Concepts and Terms

What is economics?
The science which describes human behavior as a relationship between given ends and scarce means which have alternative uses ----- Lionel Robbins

This definition of economics emphasis upon scarcity of means i.e. resources. Resources include land, manpower, capital,   time, technology, skill, etc. “Given ends” refers to various targets or end products to be achieved by use of these resources. Resources have alternative uses, therefore, optimum allocation of scarce resources has to be made among various uses so as to satisfy human wants in the most efficient manner and avoiding wastage of resources.
There are other ways of defining economics also.
 It is a social science dealing with-
  - production,consumption,distribution and management of goods and services.
  - problem of allocation of resources so as to meet human wants in an optimum manner.

What is micro economics?
Micro means ‘small’. Micro economics is the study of a firm, individual, individual prices, etc. i.e. it focuses on various parts of the economy.

Micro economics is the study of particular firms, particular households, individual prices, wages, income, individual industries, particular commodities – K. E. Boulding

Therefore, in micro economics the focus in on study of individual units of the economy rather than studying the aggregates.


What is macro economics?
Macro means ‘large’. Macro economics is the study of aggregate concepts of the economy, like it deal with national income, national output, general price level, etc.

Macro economics is the study of relationship between broad economic aggregates – R. G. D. Allen

Macro economics is the study of the nature, relationship and behavior of aggregates and average of economic quantity – Meyers

Therefore, macro economics deals with economic affairs in large.

What is the scope of macro economics?
Professor Lipsey lists out major economic problems coming under macro economics. Macro economics is the study of-

v  Problems relating to allocation of resources. ( problem of choice between production of consumer goods and capital goods)
v  Problems relating to fluctuation of price level.
v  Problems relating to fluctuation of wages.
v  Problems relating to rate of growth.
v  Problems relating to employment.
v  Problems relating to international trade.
v  Problems relating to monetary policy.
v  Problems relating to fiscal policy.

Discuss the importance of macro economics?
Macro economics is an integral part of modern economics. Its importance can be discussed under following heads:

·         Understanding complex nature of the economic system- modern economic system is complex and complicated. So, to understand the behavior pattern of aggregates such as savings, national output, national income, etc., study of macro economics is important.

·         Need in formulation of economic policies- government is interested in promoting economic growth and stability. Government deals not with individual savings but group savings, thereby establishing the importance of macro economics.

·         Needed for economics growth and stability- modern economics stress on economic growth and stability. The theory of economics fluctuations can be understood and severity of the fluctuations can be controlled only with help of macro economics.

·         Needed for understanding micro economics- no micro economics law can be framed without studying aggregates. Example: theory of firms could not formulated without analyzing the behavior pattern of several individual firms.

·         Understanding effects of inflation and deflation- Keynes considers that inflation and deflation are harmful to the society and macro economics takes effective steps to control them.

·         Highlight importance of national income- macro economics has brought forward the importance of study of national income. It is the study of national income that gives an idea about the standard of living of different countries of the world.

·         Promotion of economics welfare- macro economics reveals not only the glaring inequalities of wealth within an economy but has shown the differences in the standard of living. Thus it helps adopt steps to promote economic welfare.

What is demand?
The desire to acquire a commodity backed by the ability and willingness to pay for it constitutes demand in economics. For example: all those consumers who are desirous of buying a car as well as have the ability to pay for it and are willing to pay for it will constitute demand for that car.

Demand function can be expressed as

D= F (P, Y, Pr, T)

Where D is quantity demanded of the product, which is a function of P is the price of the product, Y is the income of the consumer, Pr is the price of related goods, and T is the taste of the consumer.


What is the law of demand?
Law of demand states the inverse relationship between quantity demanded and price of the product, other factors effecting demand remaining constant. This means that when price per unit of a commodity decreases, its quantity demanded increases, with the assumption that other factors affecting demand remain constant.




What is a subsistence economy?

It is an economic system in which production is carried out largely for self- consumption. The farmer produces primarily for his own and his family’s consumption. There is barter system of exchange; therefore goods do not carry any price tag. Payment for goods is made in kind and goods have a local market, money is not in use. Competition in the market is absent.

What is a market economy?
It is an economic system where production is carried out mainly for sale in market to earn profit. All goods and services are sold in national and international market. Here goods and services carry a price tag. Money has an important role to play here as it acts as a store of value, a medium of exchange, etc. Also there is stiff competition and rivalry in the market among different producers.

What do you mean by commercialization of agriculture?
Commercialization of agriculture means production of cash crops rather than food crops. Production is carried out for sale in the market than for merely self- consumption.


What do you mean by monopoly power?
When a commodity has no substitute and there is a single supplier of that commodity in the market, the supplier enjoys full control over the commodity i.e. he enjoys monopoly power.

Such a supplier has full control over the commodity’s supply and price.


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