Definition of Economics
Economics, a social science, deals with the production, distribution, and consumption of goods and services. It studies how society allocates resources in order to achieve growth with maximum human satisfaction. The word ‘economics’ comes from two Greek words, ‘eco’ meaning home and ‘nomos’ meaning accounts.
Economics is the study of choice under conditions of scarcity.
Adam Smith, the father of economics, in his book “An inquiry into nature and causes of wealth of nations”, mentioned economics as the science of wealth”
Definition of Economics by famous economists
Adam Smith – “Economics is the science of wealth. It makes inquiries into the factors that determine the wealth and growth of a nation.”
Alfred Marshall: “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. Thus, it is on one side a study of wealth; and on the other, and more important side, a part of the study of man.”
John Maynard Keynes – “The theory of economics is a method rather than a doctrine, an apparatus of mind, a technique of thinking, which helps its possessor to draw correct conclusions.”
Lionel Robbins – “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”
Types of Economics
Economics is mainly divided into Microeconomics and Macroeconomics –the division is based on the extent.
Micro means small and macro means large, they are Greek words. Microeconomics takes bottom-up approach to analyze economy, macroeconomics takes a top-down approach.
Econometrics is considered to be the third area of economics that seeks to apply statistical and mathematical methods to economic analysis.
Microeconomics is the study of the choices and behaviors of individual consumers, businesses, and governments. It includes;
- Health sector economics
- Economics on education
- Environmental and natural resource economics
- Industrial organizations
- Urban/regional economics
- Labour and demographics
Private sector microeconomists focus on businesses maximizing profits, reduce costs or establish prices.
Public sector microeconomists might analyze the costs and benefits of government programs or policies (e.g. transportation, health care, environment).
What will be the trend of the price structure of onion? or What can be the growth of the automobile industry in a country? The answers to these two questions can be answered from the perspective of microeconomics.
Macroeconomics is concerned with the aggregate performance of the entire economic system. The topics it covers are;
2. Exchange rates
3. International investment
4. Growth and development
5. Foreign aid
|Monetary economics:||1. Money|
2. Central banking and policy
3. Interest rates
4. Credit markets
• The Relationship Between Savings and Investment
• The Cost of Living and Inflation
• Interest Rates and What Influences Them
• Recession, Unemployment, and Economic Growth
• Money and Banks
• The Federal Reserve System and Monetary Policy
• Government Taxation, Spending, and Fiscal Policy
Macroeconomists attempt to forecast the effects of large
scale unemployment, economic growth, inflation, productivity,
For example, Instead of focusing on employment in a particular industry, macroeconomics considers employment as a whole including all industries.
Nature of Economics
Economics is an art as well as a science. It is art because different theories, concepts, terms are explained using graphs, diagrams, tables, equations and it helps to define the situation and condition in which the laws, theories can be applied.
Economics as science seeks to explain various theories and laws. Some theories of economics are universal like the universal scientific theorem – law of demand, the law of diminishing marginal utility. Those two concept fits in every situation, so universal.
Then another question arises, whether economics is a positive or normative science.
Positive science tells what actually it is. On the other hand, normative science distincts between good and bad depending on ethics and beliefs of people rather than on scientific laws and principles.
Consider few terms, “growth creates pollution or growth gets rid of pollution, are positive statements, they are the assertion of facts that can be tested. Here no moral or ethical point of view works. That is why Robbins called economics a positive science.
Price goods, service costs, fares all are important terms of economics. At a certain level, people start thinking what is the current price or value of a product or service and what should be or ought to be from an ethical point of view. As ethics works, economics can be called normative science. So, economics is both positive and normative science.
Why study Economics?
You may think, what is the Importance of studying Economics? Here is the answer.
Prepare for upcomming changing world
Economics works in personal life as well as professional life. It enables us to understand, government policies, business, changing technologies, current trends, markest. So, it becomes easier for someone to forecast what threat is coming, what opportunity going to prevail, and what needs to be banned.
Economics in everyday life
In our daily lives, we make choices at our homes and in the marketplace, how much to spend and save, how to allocate our savings between different kinds of financial assets. We cannot answer such questions without having a proper understanding of economics.
Economics helps to understand how to make choices, how to interact in society, what steps elected representatives should take, and what to stop.
Economics is about a different way of thinking and looking at the world. You can apply the economic way of thinking to almost everything, not just to business or finance and such.
The widespread poverty, misery, and crises in many parts of the world are strong reminders that understanding economic and social laws can make an enormous contribution to the welfare of people.
Popular Economic terms
The full form of GDP is Gross Domestic Product. It is the value of all final goods and services produced within the boundary of a nation during one year period.
GDP is calculated by adding national private consumption, gross investment, government spending, and trade balance (export minus import). It will be better to under the terms used in the concept, ‘gross’ means the same thing in economics and commerce, as total means in mathematics. ‘Domestic’ means all economic activities done within the boundary of a nation/country and by its own capital. ‘Product’, the term used to define goods and services together.
It is a quantitative concept and its volume incidences the internal strength of the economy. But it does not say anything about qualitative aspects of the goods and services.
Resources have the potential to produce goods and services that are valued by society.
The production and distribution of goods and services requires the
use of economic resources called factors of production.
|Land||Natural resources are used in the production of goods and services. Land includes mines, national parks, deserts, fisheries, and forests as well|
as agricultural land
|Labor||Work effort that is used in the production of goods and services. This refers to the services of human beings who bring not only their time and effort to the economy but also their skills.|
|Capital||Physical capital means capital goods, either stocks of goods or machinery and equipment.|
|Entrepreneurship||This is the bringing together of land, labor, and capital into productive units.|
Capitalism is often thought of as an economic system in which private sectors own and control property in accord with their interests and demand and supply freely set prices in markets in a way that can serve the best interests of society. The essential feature of capitalism is the motive to make a profit.
As Adam Smith, the 18th-century philosopher and father of modern economics said: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”
Consumer Price Index (CPI)
A price index is a measure of the proportionate, or percentage, changes in a set of prices over time. A consumer price index (CPI) measures changes in the prices of goods and services that households consume.
Foreign Direct Investment
An investment by a company based in one country, in an actual operating business, including real physical capital assets (like buildings, machinery, and equipment), located in another country.
FAQ on Economics
The part of a nation’s balance of payments that deals with merchandise (or visible) imports or exports. When “Invisibles” or
services are included, the total accounting for imports and exports of goods and services is called the balance on the current account.
A tax the burden of which cannot be easily shifted or passed on to some other person by the person on whom it is levied. Personal income, inheritance, and poll taxes are examples of direct taxes.
Working capital refers to the actual physical inventory of raw materials and goods-in-production, or it may refer to the financial resources required on a normal basis to pay for those things.
Sale and purchase of currencies. Persons planning to travel to foreign countries may order from their local bank the currencies of those countries, or they may exchange their US dollars for the local currencies upon arrival at any airport, bank, or FOREX location. Foreign exchange rate—Number of units of foreign currency that trade for a unit of the domestic currency.