Definition of economics

Economics is a social science that focuses on the production,

distribution, and consumption of goods and services, and analyses the
choices that individuals, businesses, governments, and nations make to
allocate resources.

Economics is the study of mankind in the ordinary business of life.

- Alfred Marshall

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.
- John Maynard Keynes

KEY TAKEAWAYS
 Economics is the study of how people allocate scarce resources for
production, distribution, and consumption, both individually and
collectively.
 The two branches of economics are microeconomics and
macroeconomics.
 Economics focuses on efficiency in production and exchange.
 Gross Domestic Product (GDP) and the Consumer Price Index (CPI) are
widely used economic indicators.

Understanding Economics
Assuming humans have unlimited wants within a world of limited means,
economists analyze how resources are allocated for production, distribution,
and consumption.

The study of microeconomics focuses on the choices of individuals and

businesses, and macroeconomics concentrates on the behaviour of the economy
as a whole, on an aggregate level.
Microeconomics
Microeconomics studies how individual consumers and firms make decisions
to allocate resources. Whether a single person, a household, or a business,
economists may analyze how these entities respond to changes in price and
why they demand what they do at particular price levels.

Microeconomics analyses how and why goods are valued differently, how
individuals make financial decisions, and how they trade, coordinate, and
cooperate.

Within the dynamics of supply and demand, the costs of producing goods and
services, and how labour is divided and allocated, microeconomics studies how
businesses are organized and how individuals approach uncertainty and risk in
their decision-making.

Macroeconomics
Macroeconomics is the branch of economics that studies the behavior and
performance of an economy as a whole. Its primary focus is the
recurrent economic cycles and broad economic growth and development.

It focuses on foreign trade, government fiscal and monetary policy,

unemployment rates, the level of inflation, interest rates, the growth of total
production output, and business cycles that result in expansions, booms,
recessions, and depressions. 

Using aggregate indicators, economists use macroeconomic models to help

formulate economic policies and strategies.

Improving Your Financial Decision-Making with

Economics
The study of economics may help you make wiser financial decisions. By
understanding the basic economic concepts, you may save money, increase your
income, and improve your overall financial health.
To make that possible, here’s how you can use economics to better your
financial decision-making.

APPLY ECONOMICS IN YOUR FINANCIAL

DECISIONS
Like most things, the more informed you are, the more you’ll be able to make
wiser decisions. Thus, be updated with the economic issues that impact your
financial decisions every day. Make use of every economic knowledge to
manage your money, make smart purchasing choices, explore investment
options, and understand the economy’s conditions.
A study of economics will help you understand how our money system works.
This may help you maximize your income. If you understand the principles of
compound interest, your money will grow faster than with simple interest or no
interest. If you understand the principles of the stock market, you might make
wise investment decisions. If you understand how credit works, you might be
able to avoid debt or keep the debt payments low. If you understand how to
make a budget and stick to it, you may be more able to avoid debt. Economics
will teach how to analyze the costs and benefits of any decision you have to
make.

Opportunity Costs Concept

Opportunity cost is a concept used in economics to help determine the cost of a
particular action or choice. At the most basic level, the opportunity cost of
doing something is the cost of not doing the most (economically) beneficial
alternative.

For example,
it is Saturday morning and you are going to drive to your friend’s
house for a morning session of Call of Duty. The cost of doing this might
appear to simply be the cost of gas to get there and any marginal wear and tear
on the car. However, economically the cost is more than that – it also includes
the benefit of the most productive activity forgone. Depending on your
circumstances, that might have been picking up the breakfast shift at the local
café, or putting time into that start up idea you have been working on. Whatever
the case may be, you have unconsciously placed a higher value on time spent
playing games then the alternative and, in many cases, that is a tangible value
(the café example).

Explicit and Implicit Cost

An explicit cost is the clearly stated costs that a business incurs. For example,
employee wages, inputs, utility bills, and rent, among others. These are the
costs which are stated on the businesses balance sheet.
By contrast, implicit costs are those which occur, but are not seen. In other
words, these are the costs that are not directly linked to an expenditure.
For example,
For example, a factory may close down for the day in order for its
machines to be serviced. The explicit cost to repair the machines is
₹ 80,000. However, the factory has lost a whole day’s output which has cost
it 800,000 in lost production. This indirect cost is known as the implicit cost.  

Time Perspective
The economic concepts of the long run and the short run have become part of
everyday language. Managerial economists are also concerned with the short-
run and long-run effects of decisions on revenues as well as on costs. The actual
problem in decision-making is to maintain the right balance between the long-
run and short-run considerations. A decision may be made on the basis of short-
run considerations, but may in the course of time offer long-run repercussions,
which make it more or less profitable than it appeared at first.

The principle of time perspective may be stated as under:

“A decision should take into account both the short-run and long-run effects
on revenues and costs and maintain the right balance between the long-run
and short-run perspectives.”
For example,

Suppose there is a firm with a temporary idle capacity. An order for 5000 units
comes to management’s attention. The customer is willing to pay Rs 4/- unit or
Rs.20000/- for the whole lot but not more. The short run incremental cost
(ignoring the fixed cost) is only Rs.3/-. Therefore, the contribution to overhead
and profit is Rs.1/- per unit (Rs.5000/- for the lot) Analysis: From the above
example the following long run repercussion of the order is to be taken into
account:
1. If the management commits itself with too much of business at
lower price or with a small contribution it will not have sufficient
capacity to take up business with higher contribution.
2. If the other customers come to know about this low price, they may
demand a similar low price. Such customers may complain of being
treated unfairly and feel discriminated against.
In the above example it is therefore important to give due consideration to the
time perspectives. “a decision should take into account both the short run
and long run effects on revenues and costs and maintain the right balance
between long run and short run perspective”.
Scarcity
In economics, scarcity refers to the limited resources we have. For example,
this can come in the form of physical goods such as gold, oil, or land – or, it
can come in the form of money, labour, and capital.
“Scarcity is based upon two factors: the scarcity of our own
resources, and that of the resources we want to buy.”

For example,
A customer would like a bottle of water, their value is much higher
if they cannot get another for miles around. To demonstrate, the value of
water is much higher to a person stuck in the middle of the desert than in the
comfort of their home. In short, the scarcity of the product can increase the
value to the customer.

CONCLUSION
economic laws are formed on the basis of certain assumptions. The
assumptions may not be real. For example, achievement of maximum profits
is an important assumption in Economics. On the basis of this assumption,
Economics analyses how a firm produces maximum level of output and at
what price it sells its goods. But in reality, business firm does not always aim
at achieving maximum profits. So, it is necessary to achieve co-ordination
between the economic laws (based on simple assumption) and real behaviour
of a business firm.

References