Economics studies how individual governments, firms and nations make their choices on allocating scarce resources to satisfy their unlimited wants.
In academic sense it is the branch of knowledge concerned with the production, consumption and transfer of wealth.
Adam smith is regarded as the father of economics; he defines it as the science related to the laws of production, distribution and exchange.
Some terms of economics –
Investment.
Accumulation of newly produced physical entities such as factories, machinery, houses and goods inventories.
Production
Act of creating output, goods or services which has value and contributes to the utility of individuals.
Distribution
Making a product or service available for use or consumption using direct means of using indirect means.
Consumption
Amount used in a particular time period.
Two major approaches in economics –
Classical.
As per this approach economists believe that market functions very well and will quickly react to any changes in equilibrium and that a Laissez-fair government policy works best.
Keynesian.
Economist’s gives believe that markets reacts very slowly to changes in equilibrium and that active government intervention is sometimes the best method to get the economy back into the equilibrium.
The two chief branches of economics –
Micro economics.
Studies economic activities at a micro level.
Concerned about how demand and supply interact in individual markets for goods and services.
Examines the economic behavior of individual actors such as consumers, businessmen, and households etc to understand how decisions are made in the face of scarcity and what effects they have.
Macro economics.
Concerned with how the overall economy works.
Studies things as employment, gross domestic product and inflation.
Studies economy as a whole and its feature like national income, employment, poverty, balance of payments and inflation.
Law of demand –
There is inverse relation between price and demand.
Provided the condition that other things remain constant.
When demand and supply both increases – equilibrium price and quantity will increase.
If increase in demand > increase in supply – price will increase and equilibrium quantity will also increase.
If increase in supply > increase in demand – price will fall but the equilibrium quantity will be increased.
Marginal revenue –
= Change in total revenue / Change in output quantity
It can remain constant if follows the law of diminishing returns.
It slows down as the output level increases.
Law of diminishing / Diminishing returns / Principle of diminishing marginal productivity –
If one input in the production of commodity is increased while all other inputs are held fixed, a point will eventually be reached at which additions of the input yields progressively smaller or diminishing, increases in output.
Law of diminishing marginal returns –
Means that productivity of variable input declines as more is used in short run production, holding one or more input fixed.
This law has a direct bearing on market supply, the supply price and the law of supply.
Marginal utility –
Of a good or service is the gain from an increase or loss from a decrease in consumption.
Law of diminishing marginal utility.
The first unit of consumption yields more utility then second and subsequent unit, with a continued reduction for greater amounts.
The law of diminishing marginal utility is similar to the law of diminishing marginal returns i.e the marginal returns (extra output gained by adding an extra unit) decreases.
Perfect competition / Pure competition –
Describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. As its conditions are strict, there are few if any perfectly competitive markets.
Monopoly is a market structure where there is only one producer seller for a product.
Oligopoly is a market structure where there are only a few firms that make up an industry.
Equilibrium in perfect competition –
Is the point where market demands will be equal to the market supply.
A firm’s price will be determined at this point.
In a short run – equilibrium will be affected by demand.
In a long run – both demand and supply of a product will affect the equilibrium in perfect competition.
A firm will receive only normal profit in the long run at the equilibrium point.