Meaning of Economics
There are many
definitions of Economics; No one has ever succeeded in neatly defining the
scope of economics. Many have agreed with Alfred Marshall, leading 19th-century
English economist, that economics is “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”—ignoring
the fact that sociologists, psychologists, and anthropologists frequently study
exactly the same phenomena.
Another definition of Economics says: Economics is the social
science that studies the production, distribution,
and consumption of goods
and services. The term economics comes from the
Greek
for oikos
(house) and nomos (custom or law), hence "rules of
the house(hold)."
Another defined Economics as the social science that examines how people choose to
use limited or scarce resources in attempting to satisfy their unlimited wants.
A definition that captures much of modern economics is that of Lionel Robbins in a 1932 essay: "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses." Scarcity means that available resources are insufficient to satisfy all wants and needs. Absent scarcity and alternative uses of available resources, there is no economic problem. The subject thus defined involves the study of choices as they are affected by incentives and resources.
A definition that captures much of modern economics is that of Lionel Robbins in a 1932 essay: "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses." Scarcity means that available resources are insufficient to satisfy all wants and needs. Absent scarcity and alternative uses of available resources, there is no economic problem. The subject thus defined involves the study of choices as they are affected by incentives and resources.
Generally, economics deals with the production of
goods, distribution of goods and consumption of goods.
Key words from the
above definitions are:
Ø Human behavior
Ø Scarcity
Ø Choice
Ø Wants and needs
Areas
of economics
Areas
of economics may be classified in various ways, but an economy is usually
analyzed by use of microeconomics or macroeconomics.
Microeconomics
Microeconomics
examines the economic behavior of agents (including
individuals and firms) and their interactions through individual markets, given
scarcity and government regulation. A
given market might be for a product,
say fresh corn, or a factor of production,
say bricklaying. The theory considers of quantity
demanded by buyers and quantity
supplied by sellers at each possible price per unit. It weaves
these together to describe how the market may reach equilibrium as to price and
quantity or respond to market changes over time. This is broadly termed demand-and-supply
analysis. Market structures, such as perfect competition and monopoly, are examined
as to implications for behavior and economic efficiency.
Analysis often proceeds from the simplifying assumption that behavior in other
markets remains unchanged, that is, partial-equilibrium
analysis. General-equilibrium
theory allows for changes in different markets and aggregates across all markets, including their
movements and interactions toward equilibrium.
Generally
specific areas of micro economics are:
- Economic reasoning
- Economic insight – concerned as if
economics is a science or an art.
- Economic terminologies
Macroeconomics
Macroeconomics
examines the economy as a whole "top down" to explain broad
aggregates and their interactions. Such aggregates include national
income and output, the unemployment
rate, and price inflation and
sub aggregates like total consumption and investment spending and their
components. It also studies effects of monetary
policy and fiscal
policy.
Related
fields, other distinctions, and classifications
International
economics
International
trade studies the determinants of the flow of goods and services across
international boundaries. International finance is
a macroeconomic field which examines the flow of capital across
international borders, and the effects of these movements on exchange rates.
Increased trade in goods, services and capital between countries is a major
effect of contemporary globalization.
Labour economics
Labour
economics seeks to understand the functioning of the market and dynamics for labour. Labour markets function
through the interaction of workers and employers. Labour economics looks at the
suppliers of labour services (workers), the demanders of labour services
(employers), and attempts to understand the resulting patterns of wages and
other labour income and of employment and unemployment, Practical uses include
assisting the formulation of full employment of
policies.
Managerial economics
Managerial
economics applies microeconomic analysis
to specific decisions in business firms or other management units. It draws
heavily from quantitative methods such as operations research and
programming and from statistical methods such as regression analysis in
the absence of certainty and perfect knowledge. A unifying theme is the attempt
to optimize business
decisions, including unit-cost minimization and profit maximization, given the
firm's objectives and constraints imposed by technology and market conditions.
Public finance
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.
Welfare economics
Welfare
economics is a branch of economics that uses microeconomic techniques
to simultaneously determine the allocative efficiency
within an economy and the income distribution associated
with it. It attempts to measure social welfare by
examining the economic activities of the individuals that comprise society.
A short Historical development of economics
The effective birth of
economics as a separate discipline may be traced to the year 1776, when the
Scottish philosopher Adam Smith published An
Inquiry into the Nature and Causes of the Wealth of Nations.
There was, of course, economics before Smith: the Greeks made significant
contributions, as did the medieval scholastics, and from the 15th to the 18th
century an enormous amount of pamphlet literature discussed and developed the
implications of economic nationalism (a body of thought now known as mercantilism). It was
Smith, however, who wrote the first full-scale treatise on economics and, by
his magisterial influence, founded what later generations were to call the
“English school of classical political economy,” known today as classical economics
The Importance
of Economics
I would suggest the main importance of economics is helping society decide the optimal allocation of our limited resources.
In particular economics is important in these areas:
How
to manage the macro economy.
Economists can advise governments how to manage the economy and avoid inflation and unemployment. Both hyper inflation and mass unemployment can be devastating for society. Economists argue that both can be avoided through careful economic policies.
However, the problem is that economists may often disagree on the best solution to these problems. For example, at the start of the great depression in 1930, leading economists in the UK Treasury suggested that theUK
The Great Depression led to John Maynard Keynes developing his general theory of Employment, income and money, arguing that classical economics had the wrong approach for dealing with depressions. Keynes argued that the economy needed to expansionary fiscal policy.
Economists can advise governments how to manage the economy and avoid inflation and unemployment. Both hyper inflation and mass unemployment can be devastating for society. Economists argue that both can be avoided through careful economic policies.
However, the problem is that economists may often disagree on the best solution to these problems. For example, at the start of the great depression in 1930, leading economists in the UK Treasury suggested that the
The Great Depression led to John Maynard Keynes developing his general theory of Employment, income and money, arguing that classical economics had the wrong approach for dealing with depressions. Keynes argued that the economy needed to expansionary fiscal policy.
Overcoming
Market Failure.
Generally it is considered that free markets offer a better solution than a planned economy (Communist) However, free markets invariable lead to problems such as the over production of negative externalities (pollution) and underproduction of goods with positive externalities (education, health care, public transport). An economist can suggest policies to overcome these market failures.
Note: these policies are often politically unpopular and may not get implemented, but they show possible solutions to social problems. For example:
Generally it is considered that free markets offer a better solution than a planned economy (Communist) However, free markets invariable lead to problems such as the over production of negative externalities (pollution) and underproduction of goods with positive externalities (education, health care, public transport). An economist can suggest policies to overcome these market failures.
Note: these policies are often politically unpopular and may not get implemented, but they show possible solutions to social problems. For example:
Efficiency
Another area where economists have a role to play is in improving efficiency. For example economists may suggest supply side policies to improve the efficiency of an economy.
Another area where economists have a role to play is in improving efficiency. For example economists may suggest supply side policies to improve the efficiency of an economy.
Individual Economics.
Economics is also important for an individual. For example, every decision we take involves an opportunity cost - which is more valuable working overtime or having more leisure time?
Economics is also important for an individual. For example, every decision we take involves an opportunity cost - which is more valuable working overtime or having more leisure time?
Future Issues in Economics
Economics is constantly evolving. For example, in the future economic issues will involve:
Economics is constantly evolving. For example, in the future economic issues will involve:
- How to deal / combat global
warming.
- Does globalization help or
hinder developing countries.
- How best to eradicate poverty in developing countries.
Economic
problem
The economic problem, sometimes called the fundamental economic problem, is one of the fundamental economic theories in the
operation of any economy. It asserts that
there is scarcity, that the
finite resources available are insufficient to satisfy all human wants. The problem then becomes how to
determine what is to be produced and how the factors
of production (such as capital
and labour)
are to be allocated. Economics
revolves around methods and possibilities of solving the economic problem.
Overview
The economic problem is most simply
explained by the question "How do we satisfy unlimited wants with limited
resources?" The premise of the model of the economic problem is that human
wants are constant and infinite due to the constantly changing demands (often
closely related to changing demographics)
of the population. However, resources in the world to satisfy human wants are
always limited to the amount of natural resources or human resources (human
capital) available. The economic problem, and methods to curb it, revolves
around the idea of choice in prioritizing which wants can be fulfilled first.
Due to scarcity that is why we are having economic and social problems such as:
·
Unemployment
·
Poverty
·
Income inequalities
·
Global financial crisis
etc
·
Economic reasoning
Economics
as a contemporary discipline relies on rigorous styles of argument. Objectives
include formulating theories that are simpler, more fruitful, and more reliable
in their explanatory power than other theories. Often
analysis begins with a simple model to isolate
relations of a variable to be explained. Complications may be impounded in a ceteris paribus
("other things equal") assumption. For example, the quantity theory of money
hypothesizes a positive relationship between the price level and the money supply, ceteris paribus. The theory
can be tested using economic data, such as a
price index for GDP and a measure of the money supply, say
currency plus bank deposits. Econometric methods can allow for the influence of
competing explanations and attempt to adjust for noise from other variables in
the absence of a controlled experiment. More recently, the use of experimental methods in economics
has greatly expanded, challenging a historically-noted differentiating feature
of some natural sciences from
economics. Generally,
the basic fundamental basics in economic reasoning are costs and choices. In cost note that nothing is free in this
world and in scarcity depends on the alternatives.
Economics is NOT Natural Science!
(It is technology of Social Science.)
(It is technology of Social Science.)
Science is a process of formulating models that
predict outcomes in a natural system under certain conditions,
and then testing them to see if the future predictions agree. However, the goal
is to find how the model is inadequately representing the natural system. When
the model is refuted, it is adjusted to form a new model from what is learned
about the system. Since there is an underlying system that is being
approximated by the models, there is an "objective reality" (exists
independently of human conceptualization) to be described by conceptual models.
The models evolve representations of the relationships and features that are
defined by the system. Models are useful to humans. Models are respected when
they better reflect the nature of the system.
Since
Descartes we have approached the task of developing models as if the systems
were mechanical. This means that the properties of one part are inherent in its
composition and individual properties, unaffected by the surroundings. We can
study the whole system a part at a time, assemble what we have learned into a
more comprehensive model. The more extensive the parts and the quality of the
model's components, the better model should become.
As
complex systems have been recognized and are being studied, we are beginning to
appreciate that both living and physical systems are not well approximated by
Cartesian approaches. A model composed of parts that are independently
describable is inadequate because the system has extensive interactions
among the components. Therefore, the features of a part of the system
are partly determined by the components, and partly determined by the
conditions surrounding the components. That is, the components have properties
that partly depend on the context in which they exist. To understand responses
we need to consider the entire system at once.
Nevertheless,
the reality of science is a physical universe with underlying determinable
properties. Only our approach to study reflects the difference between
Cartesian science and complex systems. In complex systems, the system evolves
and there is an "arrow of time" that prevents
"retro-dictions" (predicting the conditions in the past that led to
present states) and long range pre-dictions are impossible.
On
the other hand
economics is an artifact of human imagination, and the agreement among certain
humans who "play the games" together -- thereby it is a social
technology. There is no underlying physical reality other than what is
identified by the players to be components. Granted, the interactions within
the system may be complex, and the economic properties are determined by what
people study. Nevertheless, in the economic properties are determined by
and limited only by the beliefs of the "players." To build
economic models one must assume certain features, and the models become part of
the generators of the results. Since they are not inherently tied to the
physical and biological realities, they may fail arbitrarily as the physical
and biological world view of humans change -- or as people believe the physical
and biological world exists. Economics in large part reflects human belief
systems. When physical and biological constraints become seriously constrained
for humans, economics becomes irrelevant. The game ends.
Positive and Normative
Economics
Positive
economics
Positive economics is the branch of economics
that concerns the description and explanation of economic phenomena. It focuses
on facts and cause-and-effect relationships and includes the development and
testing of economics
theories.
Positive economics as science concerns
analysis of economic behavior.
Positive economics as such avoids economic value judgements. For
example, a positive economic theory
might describe how money
supply growth affects inflation, but it does
not provide any instruction on what policy ought to be followed.
Still, positive economics is commonly
deemed necessary for the ranking of economic policies or outcomes as to
acceptability, which is normative
economics. Positive economics is sometimes defined as the economics
of "what is",
To illustrate, an example of a positive economic
statement is as follows:
- The price of milk has risen from $3 a gallon to $5 a gallon in the
past five years.
This is a positive statement because
it can be proven true or false by comparison against real world data. In this
case, the statement focuses on facts.
Normative
economics
Normative economics is the branch of economics
that incorporates value
judgments (that is, normative
judgements) about what the economy ought to be like or what particular policy actions ought to be recommended to
achieve a desirable goal. Normative economics looks at the desirability of
certain aspects of the economy. It underlies expressions of support for
particular economic policies.
It is common to distinguish normative
economics ("what ought to be" in economic matters) from positive
economics ("what is"). But many normative (value)
judgments are held conditionally, to be given up if facts or knowledge of facts
changes, so that a change of values may be purely scientific. This undermines
the common distinction. But Sen distinguishes basic (normative) judgments,
which do not depend on such knowledge, from nonbasic judgments, which
do. He finds it interesting to note that "no judgments are demonstrably
basic" while some value judgments may be shown to be nonbasic. This leaves
open the possibility of fruitful scientific discussion of value judgments.
To illustrate, an example of a
normative economic statement is as follows:
- The price of milk should be $6 a gallon to give dairy farmers a higher
living standard and to save the family farm.
This
is a normative statement because it depends on value judgments and cannot be
proven true or false by comparison against real world data. This specific
statement makes the judgment that farmers need a higher living standard and
that family farms need to be saved. Consumers who purchase more expensive milk
products might argue otherwise.
SOME IMPORTANT ECONOMIC TERMS
WANTS
Any human desire is
known as want or end.
Wants differ in
different places and times, wants can be basic wants or secondary wants
- Basic wants – Are those which are
necessary for human existence e.g. fresh air, food, clothes,
accommodation.
- Secondary wants – These wants which are not
very essential fro survival of human beings but satisfaction of these
wants improve s the standard of living and human being feel more
comfortable and happy e.g. TV, jewellery, cars etc.
Characteristics of Wants
- Wants are unlimited in number
- Particular wants can be fully satisfied
e.g. food
- Wants are alternative ( or competitive)
- Wants are complimentary
- Wants vary in urgency and intensity
- Wants are felt again and again
GOODS
A good is any thing
that satisfies human want and that has exchange value. It may be a commodity such as clothes or
service such as electricity.
Types of Goods:
Free goods and Economic goods
Free goods are those
things which are free in nature example air, these goods have utility but no
value. Economic goods are those which are
scarce when compared to human wants and needs human efforts to acquire, example
food.
Consumer/ goods and Producers’ goods
Consumer goods are
directly for consumption by consumer and producer goods are the one which helps
to produce consumer goods, example machinery.
Perishable goods and Durable goods
Perishable goods are
the ones which can not stay longer example tomatoes and durable goods are the
one which do not perish within a short period of time example furniture.
Material goods and Non material goods
Material goods are the
tangible goods example car and non material good are the one which can not be
touched example the service of a doctor.
WEALTH
In economics, wealth
means all those goods which posses the following four qualities:
- Utility
- Scarcity
- Money value
- Capability of being transferred
Also wealth may be of three kinds:
- Business wealth
- Personal wealth
- Social wealth – known as collective wealth
eg roads dams etc
Economic law
These are facts of
economics found correct and applicable.
They are the statements of scientific truth regarding the allocation of
scarce resources means to unlimited ends.
It is a general
statement of which expresses a relationship of cause and effect between any
economic phenomena. The statement of an
economic law is often prepared by the phrase “other things remain constant”.
SCARCITY
Scarcity
means that people want more than is available. Scarcity limits us both as
individuals and as a society. As individuals, limited income (and time and
ability) keep us from doing and having all that we might like. As a society,
limited resources (such as manpower, machinery, and natural resources) fix a
maximum on the amount of goods and services that can be produced.
Scarcity
requires choice. People must
choose which of their desires they will satisfy and which they will leave
unsatisfied. When we, either as individuals or as a society, choose more of
something, scarcity forces us to take less of something else. Economics is
sometimes called the study of scarcity because economic activity would not
exist if scarcity did not force people to make choices.
Law of scarcity
Law of scarcity states
that economic resources are scarce this means that there are never enough at
any given time to produce all things that people want. Scarce resources can be increased it at all
only through effort and sacrifice.
Economics person
Economic person is a
man or woman who always acts rationally in the sense of trying to maximize his
or her self interest or private benefit.
CHOICE
Due to scarcity of resources,
all economic decisions involve CHOICE in terms of what to produce, How to
produce and Who will receive the output that produced. So there are three Fundamental choices and
referred to as WHAT, HOW, and for WHOM.
What to Produce
Referred to as the
problem of product mix since society can not have all the product it desires,
it must choose what output is going to be
produced from its scarce resources.
How to Produce
Referred to as the
problem of factor combination. Whatever
goods and services society choose can usually be produced in a variety of ways:
- Capital Intensive – Uses large
amount of capital relative to labour.
- Labor Intensive – Uses large
amount of labour relative to capital
For whom to produce
Referred to the problem
of distribution since society can not have all the output it desires there must
be some mechanism for distributing the limited amount of goods and services
that it produced among consumers who in general desire more.
There are different mechanisms available:
- Physical rationing – In this all consumers
receive the same amount of goods and services for every member of the
family.
- To allocate output through the market –
This allow consumers to buy whatever they can afford.
OR
Examples
A person who invests $10,000 in a stock denies herself or himself the interest that could have
accrued by leaving the $10,000 in a bank account instead.
The opportunity cost of the decision to invest in stock is the value of the
interest.
A person who sells stock for $10,000
denies himself or herself the opportunity to sell the stock for a higher price
in the future, inheriting an opportunity cost equal to future price minus sale
price.
An organization that invests $1
million in acquiring a new asset instead of spending that money on maintaining
its existing asset portfolio incurs the increased risk of failure of its
existing assets. The opportunity cost of the decision to acquire a new asset is
the financial security that comes from the organization's spending the money on
maintaining its existing asset portfolio.
Production-Possibility
Frontier (Curve)
The PPF shows the various combinations of goods that an economy
can produce when its resources are fully employed. It is a diagrammatic or graphical
representation of the problem of choice.
OR
A production-possibility frontier (PPF) or
"transformation curve" is
a graph that shows the different rates of production of two goods that an
individual or group can efficiently produce with limited productive resources.
The PPF shows the maximum obtainable amount of one commodity for any given
amount of another commodity or composite of all other
commodities, given the society's technology and the
amount of factors
of production available.
Consider
the case of an island economy that produces only two goods: wine and grain. In
a given period of time, the islanders may choose to produce only wine, only
grain, or a combination of the two according to the following table:
Production Possibility Table
|
Wine
(thousands of bottles) |
Grain
(thousands of bushels) |
|
0
|
15
|
|
5
|
14
|
|
9
|
12
|
|
12
|
9
|
|
14
|
5
|
|
15
|
0
|
Production Possibility Frontier
The PPF shows all efficient
combinations of output for this island economy when the factors of production
are used to their full potential. The economy could choose to operate at less
than capacity somewhere inside the curve, for example at point a, but
such a combination of goods would be less than what the economy is capable of
producing. A combination outside the curve such as point b is not
possible since the output level would exceed the capacity of the economy.
The
shape of this production possibility frontier illustrates the principle of increasing
cost. As more of one product is produced, increasingly larger amounts of
the other product must be given up. In this example, some factors of production
are suited to producing both wine and grain, but as the production of one of
these commodities increases, resources better suited to production of the other
must be diverted. Experienced wine producers are not necessarily efficient
grain producers, and grain producers are not necessarily efficient wine
producers, so the opportunity cost
increases as one moves toward either extreme on the curve of production
possibilities.
Suppose
a new technique was discovered that allowed the wine producers to double their
output for a given level of resources. Further suppose that this technique
could not be applied to grain production. The
impact on the production possibilities is shown in the following diagram:
Shifted Production Possibility Frontier
In the above diagram, the new technique
results in wine production that is double its previous level for any level of
grain production.
Finally, if the two products
are very similar to one another, the production possibility frontier may be
shaped more like a straight line. Consider the situation in which only wine is
produced. Let's assume that two brands of wine are produced, Brand A and Brand
B, and that these two brands use the same grapes and production process,
differing only in the name on the label. The same factors of production can
produce either product (brand) equally efficiently. The production possibility
frontier then would appear as follows:
PPF for Very Similar Products
Note that
to increase production of Brand A from 0 to 3000 bottles, the production of
Brand B must be decreased by 3000 bottles. This opportunity cost remains the
same even at the other extreme, where increasing the production of Brand A from
12,000 to 15,000 bottles still requires that of Brand B to be decreased by 3000
bottles. Because the two products are almost identical in this case and can be
produced equally efficiently using the same resources, the opportunity cost of
producing one over the other remains constant between the two extremes of
production possibilities.
USES OF PPF or PPC
- The PPF illustrate the micro economic
issues of Choice and opportunity
costs. If choose to produce one of
item, you have to sacrifice the production of the other. The fact that to produce more of one
good involves producing less of the other is illustrated by downward
sloping of the nature of the curve.
PPF illustrate the
phenomenon of increasing opportunity costs- it means that producing more of one good involve
sacrifice over increasing amounts of the other this is due to the fact that
different factors of production have different properties.
Graphically it is
because of opportunity costs increases, the PPC is bowed outward than being a straight line.
- Resources under
utilization
illustrated by the point within the PPF
in which case it means that the economy is producing less or both
goods that it could possibly produce either because some resources are not
being used or because it is not using the most efficient methods of
production possible or a combination of the two.
- Economic growth is illustrated by
the outward shift of the PPC; this is due to discovery of new materials,
technological advancement, investment in new plant and machinery which
will increase the stock of capital, also through education and training in
which case labour become more productive.
ECONOMIC SYSTEM
Economic system is the institutional arrangement where by
human and natural resources of an economy cooperate with each other to produce
goods and services.
OR
Economic system is the system of production,
distribution
and consumption
of goods
and services
of an economy. Alternatively,
it is the set of of principles and techniques by which problems of economics are addressed,
such as the economic
problem of scarcity through allocation of finite productive
resources. The economic system is composed of people and institutions, including their relationships
to productive resources, such as through the convention
of property. Examples of
contemporary economic systems include capitalist systems, socialist
systems, and mixed economies.
The main objective of
economic system is to utilize the resources of the country in such a way that
production of goods and services out of available resources may be
maximized. Economic system is comprised
of Capitalism, Socialism, and Mixed economy.
The Basic tasks of every economic system
- To determine what goods and services are
required and how much of each and where (in which regions of the country
and in what manner they could best be produced).
- To allocate the aggregate or total amount
of goods and services produced.
- Replacement of capital stock used up in
the course of production e.g building, equipments.
- To decide how to distribute its total
material benefits (the national income among the various members of the
society in the form of wages, interest payment, rents, and profits.
Types and Features of Economic System
Economic system can be
classified in terms of the mechanism which is used to solve the economic
problems of allocating scarce resources amongst competing uses. i.e. the market
mechanism or planning mechanism and in terms of who owns the means of
production, private individual or the state. The economic system includes:
The Command / Centrally Planned /Socialist
Economy
It is an economy system
in which all decisions about what, how much, where and for whom to produce
would be taken by central planning authority which issues all commands and
directives for all the household and producers in the society.
This economy is based
on the public ownership of all productive resources and complete replacement of
the market prices mechanism by the central planning authority of all economic
activities. Examples are Soviet union , Albania , Bulgaria ,
the Germany
The characteristics of this economy:
- Limited private ownership
- Cooperative
ownership
– this covers mostly rural and non rural economic works such as
production, trade etc.
- State ownership –major means of
production including land.
Advantages
of socialist economy
- Unemployment and inflation were officially
not existed
- Social security and welfare
- It assures social justice
- Better allocation of resources through
planning
- Improving productive efficiency
- Economic growth and improving living
standard without fluctuating economic activities brought about by the
business cycle in western market and mixed economies.
Disadvantages of Socialist Economy
- Bureaucratic running of the economic
machinery
- No successful in business
- Misallocation of resources (no price
mechanism)
- Loss of personal liberty
- Failure to bring about economic equality
- Loss of consumer sovereignty
- Lack of incentives to hard work and self
improvement
The break of Command Economy
Strictly economic
disadvantages of central planning including poor investment decision and slow
growth of output per worker, persisted shortage and poor quality of consumer
goods and many food stuffs, the failure and partial reform s to improve the
central planning system and unfavourable economic performance in comparison to
both the nature market and mixed economies in western Europe and south anti
communist Asia.
Capitalism Economy
Capitalism is a system
of economic organization characterized by private ownership of means of
production and distribution (such as land, factories, rail etc) and their
operation is for profit under predominantly competitive competitions.
It is the economic
system based on the private ownership of productive resources in which goods
and services are allocated through the operation of free market.
Basic Features of Capitalism economy
- Economic freedom
- Freedom of choice by consumer
- Class conflict –society divided into
classes for those who have and those who don’t have.
- Profit motive
- Economic inequalities
- Private property
- Self interest-The invisible hand
- Economic individualism-Laissez faire
- Competition or free market
Mixed economy
In the real world no
country now days has economy which is exclusively based on private enterprises
or collectionism. All economies are
mixed economies, some are planning of production undertaken by government
directly or through its international industries and great part is left to
private enterprises.
The government
undertake the provision of essential services as roads, water etc and also
provide the frame work of law and regulations to check harmful effects of
private enterprises.
Salient Features of Mixed Economy
Both public and private
sector exist and function together. It
operates both by price system and government activities. The government adopts necessary measures to
regulate and influence the private sector so that it may function for the
interest of the nation rather than the exclusively in the interest of the
private enterprises. The government
protects the weaker sections of the society especially labour that it saves
from exploitation by the capitalist and also government take necessary steps in
reduction of the inequalities of income wealth.
Questions with Answers
- Outline any three assumptions taken into
account when analysing economic issues by using PPF.
- Choice should be made between two goods
- Resources factors of production are fully
employed.
- The supply of resources and state of the
technology are fixed.
- How does PPF illustrate:
- Increasing
opportunity cost – Because the PPF is bowed outward.
- Economic growth – By the points
outside the PPF or by shifting of the PPF out ward.
- Efficient
resources use
– By all points along the PPF.
- Briefly explain the reasons for economic
growth
- Increasing in investments of plants and
machinery.
- Discovery of new raw materials
- Technological advancement
- Education and training. etc
- Briefly explain the reasons for economic
shrink.
- Some resources are not being employed
- Not using the most efficient methods of
production possible
- Combination of all. Etc
- Why does more production of one good lead
to sacrifice of ever increasing
amount of the other.
- It is because economic resources differ
in quality and hence are not perfectly adoptable to alternative
uses. It is due to the fact that
different factors of production have different properties. Example fertile land is more suitable
for crops than the factory and unskilled farm workers are more adaptable
to agriculture than to manufacturing.
Questions For Concentration
- Define Economics and discuss the nature of
economic problems.
- Discuss the scope of economics.
- What are human wants? Discuss the
characteristics and types of human wants.
- Write short notes on the following:
a)
Scarcity
b)
Choice
c)
Wealth
d)
Utility
e)
Opportunity cost
- What do you mean by goods? Discuss various
types of goods
- What is economic system? Discuss various
kinds of economic system.
- Distinguish between micro economics and
macro economics.
- What does the economics mean when say the
consumer is rational?
- ‘Economics is the science of choice’
Discuss.
- Scarcity is a mother of all economic
problems. Discuss.
- What is micro economics? Explain the
subject matter which is studied in microeconomics.
- What is production possibility curve? What
assumptions are made while drawing it? And why is generally concave
towards the origin?
- What is opportunity cost of a commodity?
And why does it increase when more of it is produced?
- Explain what is theory? How theories
differ from principles and laws?
- Why a production possibility frontier
(PPF) is negatively sloped? And why is it bowed out?
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