Economics and Economy

 

Economics and Economy

 

Economy is derived by two words one Okios which literally means “Household” and other one is Nemein which literally means “Management”. Together it means “ Management of household ”.

 

Each household likes to so utilize its wealth as to satisfy most of its wants or to maximize its satisfaction .Likewise, a producer tries to maximize his profits by allocating his scarce resources to the production of different goods and services. At the level of economy as a whole, maximization of satisfaction implies maximization of social welfare. Thus, it is to achieve the objective of maximization of satisfaction at the individual level, maximization of profit at the level of a producer, and maximization of social welfare at the level of economy as a whole (Through allocation of scarce means to alternative uses) that we need to study economics.

 

What is economics ?

Economics is science of human  behaviour concerned with the allocation of scarce means in such a way where ,

1.       Consumer should get the maximum level of satisfaction

2.       Producer should get the maximum level of profit

3.       Society should get the maximum level of social welfare

 

What is scarcity ?

Lets understand this term with example , like we all went to a market to buy onions but the onions are not available in the entire market, but the demand is more . This is scarcity when  the situation come where the demand is more than the supply.

 

Scarcity increases price increases :

When supply decreases and demand increases and availability of that commodity is not there in the entire market, but there are some dealers

who hoard the supplies and creates an enormous demand in the market. And when  consumer is ready to pay higher price for that than the actual market rate then, producer gives goods to them. This is also called hoarding of goods . They purchase things in large quantity and creates the scarcity in the market for the same, and when the demand rises then they sold these goods at the higher price. This is how they earn profit by hoarding the supplies.

 

Choice and its Problem :

Choice refers to the process of selection from available  limited alternatives. And, the problem of choice occurs because of the following reasons :

a)       Unlimited wants of consumers/Human

b)       Limited Resources

c)        Alternative uses of these resources

 

And, all these three situations are interlinked with each other and thus, responsible for the problem of choice. Like , Human wants are unlimited but the resources utilized to fulfill these wants are limited only and in these limited resources their are many alternatives. Thus, consumer is confused to choose which will be the best option for him/her and can provide them with the greater level of satisfaction and hence, cause the problem of choice.

 

Macroeconomics and Microeconomics :

As the name suggests, Micro (Origin from the word mikros)  means small and Macro (Origin from the word makros ) means large. Microeconomics studies the economic activities from an individual point of view while Macroeconomics studies the economic activities at the level as a whole from the country point of view.

 

 

Microeconomics is further divided into two economy :

l  Positive Economy

l  Normative Economy

 

Positive Economy :

v  Positive economy deals with the economic issues related to present, past and future .

v  Statements of positive economy can be verified

v  Based on facts and figures.

v  Positive economy does not involve value judgement.

 

Normative Economy :

v  Normative economy deals with the opinions of the economists to the issues related to the economic issues.

v  Statements of normative economy cannot be verified

v  Based on opinions of the economists.

v  Normative economy involves value judgement.

 

What is Economy ?

Economy is the system where the people of a particular area earn their living.

An individual himself is not capable of producing all goods and services which he needs for the satisfaction of wants. He depends upon others.  If you are teacher then students are dependent on you for education, if you are doctor then patients are dependent on you for their treatment and so on.

Thus, mutual interdependence and exchange is the essence of economic activity. Mutual interdependence leads to exchange. Accordingly, we can say that mutual interdependence and exchange are the core elements of an economy.

 

Economy are of two types :

1.       Simple Economy

2.       Complex economy

 

Simple Economy - A simple economy is the one in which the degree of mutual interdependence and exchange is moderate.

 

Complex Economy -  A simple economy is the one in which the degree of mutual interdependence and exchange is High.

Types of economy :

v  Centrally planned / controlled Economy

v  Free economy/ Market Economy

v  Mixed Economy

 

Centrally planned / controlled Economy :

v  It is an economy where the economic activities are controlled by the government or some authority.

v  Economic decisions are driven by the motive of social welfare.

v  In this type of economy, the consumer is not sovereign.

v  Public sector dominates the economic activity.

 

Free economy/ Market Economy :

v  It is an economy where the economic activities are controlled by the market forces.

v  Economic decisions are driven by the motive of earning profit.

v  In this type of economy, the consumer is sovereign.

v  Private sector dominates the economic activity.

 

Mixed Economy :

v  It is an economy where the economic activities are controlled by the market forces and government as well.

v  Economic decisions are driven by the motive of social welfare and profit as well.

v  In this type of economy, the consumer is sovereign.

v  Private sector and Public sector dominates the economic activity.

 

Vital Components of Economy :

l  Theory of Demand or Consumer theory

l  Theory of Supply or producer theory

l  Theory of price

 

Theory of Demand or Consumer theory :

According to this, Theory states that how consumer should utilize his income so that he/she can get maximum level of satisfaction in less amount paid.

 

Theory of Supply or producer theory :

According to this, Theory states that how producer should use the resources so that he/she could maximize the level of profit in less cost .

Theory of price :

According to this, Theory states that at what rate the goods will be sold in the market with the help of market forces (Demand and  Supply).