What is economics?

Economics is the study of how to allocate scarce resources to satisfy the needs and wants of the
economic agents most efficiently. It is a social science subject which deals with economic
behavior of the people. Economics has close relationship with several other subject areas such as
behavioral science, mathematics, political science etc. Economic models and analysis can be
applied to many other fields such as Finance, Management, Business, Law, Education etc.
Basic economic concepts

Scarcity: It is the problem of human beings have unlimited needs and wants in a limited
world of resources.
Opportunity cost: The loss of potential gain from other alternatives when one alternative
is made. In other words, it is the cost of forgone opportunities. If we make one decision to
gain some thing, we have to sacrifice another alternative. For example, if some one going
to university he may have to sacrifice doing a full time job. Thus opportunity cost of
attending university is forgone job opportunity.
Need: Need is something you must have. It is a necessity to live in the society. One
example is Food because without having sufficient food you cannot live in the world.
Want: Want is something you would like to have. But it is not a necessity to live in the
society. One example is car because even though you like to have a car it is not necessary
to have a car to live in the society.
Economic agents: It is an actor or decision maker in the society.
Resources: It can be anything that uses to produce commodities in order to satisfy human
needs and wants. There are four main types of resources;
1. Land: All natural resources such as soil, water, air etc. are considered as land.
2. Labor: Physical or mental ability of the human beings are considered as labor.
These physical or mental abilities may inherit by born or can acquire through
education.
3. Capital: All manmade resources and money that are used in the business process
considered as capital.
4. Entrepreneurship: It is the special human ability that use in effective
organization of the resources like land, labor and capital while undertaking risk
and uncertainty.
Commodity: It is a good or service that can be used to satisfy human wants.
Factors: Factors are inputs that need to produce a commodity.
Household: Household is the party which consumes commodity produced by firms.
Firms: Firms are the one who produce goods and services
Market: Market is a place where buyers and sellers meet and exchange their products or
factors. There are several types of markets.
1. Commodity market: It is where producers sell their good and services to
consumers. For instance, in the food market, households buy foods from food
producers.
2. Factor market: It is the place that people sell their labor and capital to the firms
which require labor and capital to produce their goods and services. Good
examples are labor market and stock market.

Economic institutions: They are formal laws, common practices and organizations in a
society that affect the economy. Economic institutions are differed from country to
country or region to region in some cases.

Microeconomics and Macroeconomics

The study of economics can be divided in to two major levels. They are microeconomics and
macroeconomics.

Microeconomics: Microeconomics is the study of how individual household or firms

make decisions on allocation of resources, setting up prices of goods and services etc. It
also takes in to account of how government taxes and regulations affect the households
and firms.
Macroeconomics: Macroeconomics is the study of economy as a whole not just a
specific companies or individuals. It can be considered as the combined effect of every
individual choice on the overall economy. Macroeconomics considers country or nation
wide phenomena such as national income, unemployment, interest rates, inflation etc.

Types of Economic Systems

There are three main types of economic systems based on the fundamental economic problem of
unlimited wants and needs in a limited resource environment. They are,
1. Market System: The allocation of resources is the outcome of independent
decisions made by consumers and producers in the society. These economic
agents are acting through the markets of commodity, labor, capital etc. The
allocation of resources and distribution of national income is determined by the
invisible hand called price system. United States is considered as a country that
practice about to close market economic system.
2. Command (planned) System: Some central authority makes most decision to
determine the economic behavior of the country. Usually government or an
authority decides what to produce, how much to produce, for whom to produce in
a country. For examples, most Middle Eastern countries still under monarchies
and countries that practice socialism are function through command or planned
economic system.
3. Mixed System: In this system both market and command system determines the
economic behavior of the society. In current world, most countries have been
practicing this system.
Managerial Decision Making
Managers need to take business decisions more effectively as economic, political, social
environment has been changing rapidly in modern days. Therefore, success of the business

manager depends on how they anticipate the changes and how to cope those changes more
efficiently and effectively.
What is business economics?
Business economics is the application of economics theories, models and analysis in to real
business environment to make managerial decisions more efficiently and effectively. Business
economics utilizes both micro and macro economic theories as business decisions are affected by
both micro and macro level environment. The scope of the business economics is wide. Business
economics can be applied to make following business decisions.

Determination of prices of product

Estimation of cost of product
Estimation of product demand
Planning of production schedule
Profit estimation and planning
Analysis of market structures

Business economics has close relationship with other disciplines such as economics, statistics,
mathematics, operations research, accounting, finance etc.