INTRODUCTION TO ECONOMICS

Definition OF Economics
According to Alfred Marshall Economics is the study

of mankind in the ordinary business of life, it examines that part of individual and social action which is mostly connected with the attainment and with the use of the material requisites of well being. Explanation- Economics is the study of mans actions in the ordinary business of life, it inquires as to how he gets his income and how he utilizes it. Thus on one hand it is study of wealth and on other it is the study of man.

Definition OF Economics
Lionel Robbins has defined it more precisely as

Economics is the science which studies human behavior as a relationship between ends(wants) and scarce means which have alternative uses Or in simpler words Economics is the science of choice in face of unlimited ends(wants) and scarce resources that have alternative uses.

Definition OF Industrial Economics

Industrial economics is a distinctive branch of

economics which deals with the economic problems of firms and industries, and their relationship with society. It is concerned with the working, growth and structures of the industrial sector (firms and industries) of the country, management and organization of the industries and problems and prospects of industrial growth.

Distinction
Micro Economics 1.It deals with individual economic units 2. Micro Economics studies the problems of individual economic units such as a firm, an industry, a consumer etc. 3. Micro Economic studies the problems of price determination, resource allocation etc. 4.It tackles demand and supply of particular good. 5. While formulating economic theories, Micro Economics assumes that other things remain constant. 6. The main determinant of Micro Economics is price. Macro Economics 1.It deals with the whole economies with its aggregate. 2. Macro Economics studies economic problems relating to an economy viz., National Income, Total Savings etc. 3. Macro Economics studies the problems of economic growth, employment and income determination etc. 4.It tackles aggregate demand and supply of the whole economy. 5.In Macro Economics economic variables are mutually interrelated independently. 6.In Micro Economics economic variables are mutually interrelated independently.

Problem of Choice /Scarcity of Resources in Economics

1.Human wants, desires and aspirations are

limitless and endless -The history of human civilization shows us that human desire to consume more and more of better and better goods and services has been increasing continuously. For example housing need has risen from a hut to a luxury palace and if possible house in space. Also need for means of transportation has risen from horse, bullock cart to supersonic jet planes.

Problem of Choice /Scarcity of Resources in Economics (Continued)

Human wants are endless and goes on increasing due to following reasons Peoples insatiable desire to raise their standard of living. Human tendency to accumulate things beyond their present need. Increase in knowledge about inventions and innovations of new goods and services. Multiplicative nature of some want. For example buying car creates want for many things like petrol, cleaning, parking, maintenance, insurance etc. Biological need like food, water are repetitive. Imitative and Competitive nature of human beings creating need due to demonstration and band wagon effects. Effect of Advertisement and Social media in modern time create new kinds of wants.

Problem of Choice /Scarcity of Resources in Economics (Continued)

-Another important feature of human wants is that

they are gradable and can be arranged in order of priority. Also priority of wants vary from person to person and from time to time for same person. For example some wants have to be satisfied as and when they arise (e.g. food, clothes and shelter) and some can be postponed e.g. purchase of car. Also while satisfying some wants gives a greater satisfaction than others.

Problem of Choice /Scarcity of Resources in Economics (Continued)

2.Resources are scarce. The need for making choice between the various goods that people want to consume arises because resources that are available to the people at any point of time for satisfying their wants are scarce and limited. Resources can be classified as follows a. Natural Resources like cultivable land, lakes, rivers, minerals, wild life, forest and rainfall b. Human Resources like manpower, human energy, skills, talent, labor. c. Man made resources like machinery, equipments, technology, tools, building, capital etc d. Entrepreneurship- The ability, knowledge and talent to put land, labor and capital in process of production and ability and willingness to assume risk. e. Time.

Problem of Choice /Scarcity of Resources in Economics (Continued)

All these resources are scarce in relation to demand for

resources. This is the mother of all economic problems. If the resources were unlimited like human wants there would be no economic problem and perhaps no economics as a subject. It these scarcity of resources in relation to human wants that forces people to make choices. Also the problem of making choice arises because resources have alternative uses and alternative uses have different returns or earnings. For example a building can be used to set up a shopping center, business office, a public school, a hospital or for residential purpose. Thus economics studies the process of making choices between alternative uses

Problem of Choice /Scarcity of Resources in Economics (Continued)

3.People are gain maximizers One of the important aspect of human nature that leads to choice making behavior is that most people aim at maximizing their gains from the use of limited resources and this behavior is considered as a part of rational economic behavior by economics. As consumers they want to maximize their utility or satisfaction and as producers they want to maximize their profit. If the people were not gain maximizers the problem of choice making will not arise. Consumers will not be bothered as to what to consume and how much to consume and producers will not be bothered as to what to produce, how much to produce and how to produce.

Economy & Model/Players of Economy(Continued)

Economy refers to the conditions under which goods are

produced in a country and the manner in which people are gainfully employed. An economy is a social organism in which people act, interact, cooperate and compete in process of production and consumption to make their living. Types/Kinds of Economy/Economic systems 1.Free enterprise economies 2.Government controlled /Command/Socialist economies 3.Mixed Economies.

Economy & Model/Players of Economy(Continued)

Model/Players of an Economy1.Households- They play two important rolesFunctions a. They supply all the factors of production like land, labor and capital to the firms which constitute the production sector. b. They consume all the goods and services produced by business firms. 2.Business Firms -like firms, farms, factories and shops engaged in production and distribution of goods and servicesFunctions They hire or buy factors of production from the households and transform them into final goods and services. They supply all the goods and services to the households, the consumers.

Economy & Model/Players of Economy(Continued)

3.GovernmentFunctions It acquires its monetary resources through taxes on the income of households and the firms. It uses this to buy the requisite resources like manpower and material from households and firms to perform its functions. To make transfer payments to both households and firms in the form of age old pensions, dearness allowance, subsidies, government grants.
4.Foreign sector It performs exports and imports of goods and services. 5.Financial Sector- Banks, financial institutions, pension funds & mutual funds. They collect savings from the households and firms and make it available to households and firms on interest.

Types of Economy
Free Enterprise economy/ Free Economy/ Capitalist EconomyAn economy where there is least interference by the Government or any external force and where production and employment are controlled by private entrepreneurs is a free economy or capitalist economy. Characteristics Private Ownership-Means of production are privately owned by the people with legal rights to acquire and possess them. Private Gains as Motivating Force- Private gains are main motivating and guiding force for carrying out economic activities. Freedom of Choice- Consumers have the freedom of choice to consume what they want and producers have freedom to produce what they want. Freedom of Occupational Choice- Factor owners are free to use their resources in any legal business or occupation of their choice. Free Competition- There exists a high degree of competition in both commodity, factor and product markets. Goods and services reach to those who have purchasing power. Least Interference by Government- There is least interference by Government or any external force and primary role of Government is ensure free working of economy by removing obstacles to free competition.

Types of Economy
Government controlled /Command/Socialist economies An economy where the Government is the owner of the means of production and people are employed as per Governments prescription is called Socialist economy. Example- Cuba, Poland, Former USSR. Characteristics Means of production are owned by Government and private ownership of factors is not allowed. Social welfare is made the guiding factor for economic activities and private gains and motivations are eliminated. Freedom of choice for consumers and society is curbed to what society can afford for all. The decision on what to produce and how to produce are taken by Government. The role of market forces and competition is eliminated by law

Types of Economy
Mixed Economy An economy which is a mix of socialist and capitalist economies characteristics is called Mixed Economy. Most economies in the world today are Mixed economies and one can hardly find many examples of pure free economies. There are two different types of Mixed economies Mixed Capitalist Economies-Government plays a significant role in preserving capitalist mode of production and ensuring competition in factor and product markets. USA, UK, Germany, France & Japan. Mixed Socialist Economies- Government control and regulate the private sector eg. India, China Characteristics In such economies the Government retains the ownership and control over important basic industries which are essential for the survival and growth of

the economy and the rest of the industries are open to private sector under the overall governance of the industrial and trade policies of Government. Both the Public and Private sector exist side by side so that win -win situation emerges where in plus points of both kinds add up while disadvantages are neutralized