Basic concepts in economics

 Basic concepts in Economics

ECONOMICS

• Sociology deals with all aspects of society.
•  But economics deals only  with the economic aspects of a society.
•  It studies human behaviour in relation to scarce means and unlimited wants. 
• Adam Smith (1723-90) defined economics as follows :“Economics is the science of wealth”.
•  According to Samuelson:

 “Economics is a social science concerned chiefly  with the way society chooses to employ its resources, which have alternative uses, to produce goods and services for present and future consumption”.

• Henry Smith- “Economics is the study of how in a civilized society one obtains the share of what other people have produced and of how the total product of society changes and is determined”                         

 

   Micro economics and macro economics

• Economic theory can be broadly divided into micro economics and macroeconomics. The term micro means small and macro means large.

• In microeconomics, we deal with problems such as the output of a single firm or industry, price of a single commodity and spending on goods by a single household.
  

•  Macroeconomics studies the economic system as a whole.

• In it,we get a complete picture of the working of the economy. It is a study of the relations between broad economic aggregates such as total employment, saving and investment.

Economics and Sociology

• Sociology is the science of society

• Sociology deals with all aspects of society.
•  But economics deals only with the economic aspects of a society.
•  It studies human behaviour in relation to scarce means and unlimited wants.
•  For a student of sociology, social institutions like marriage, religion, political institutions and economic conditions are all important subjects for study. 
•  But in economics, we are interested in them only to the extent that they affect the economic life of a society. 
•  And we cannot properly understand the economic conditions of a society without considering its sociological aspects.

Basic concepts of economics

Wealth

• Generally it refers to money

• But in economics, It refers to those scarce goods which satisfy our wants and which have money value.

• Wealth may be classified into a) personal wealth (individual wealth) b) social wealth (collective wealth), c) national wealth (a + b) and d) cosmopolitan wealth (e.g. ocean).

Goods

• Anything that satisfies a human want can be considered as “good”
•  Goods : 1) free goods and 2) economic goods
•  Goods may be further classified into (1) consumers goods and(2) producers goods.
•  Consumer goods satisfy our needs directly. Eg: vegetables, houses, car etc
•  Product goods satisfy our needs indirectly. Eg: machines that are used to make machines ( machines used for making car)

Scarcity and Choice

• Scarcity means that people want more than is available.

• Scarcity limits us both as individuals and as a society.

• As individuals, limited income (and time and ability) keep us from doing and having all that we might like.
•  As a society, limited resources (such as manpower, machinery, and natural resources) fix a maximum on the amount of goods and services that can be produced.
• Scarcity requires choice. 
•  People must choose which of their desires they will satisfy and which they will leave unsatisfied. 
•  When we, either as individuals or as a society, choose more of something, scarcity forces us to take less of something else.
  

Basic economic problems

They are
1. What to produce and in what quantities ?
     Food or weapons; if so, in what quantities ?
     Is it more food and less weapons or vice versa ?
2. How shall goods be produced?
    Electricity from thermal power or from hydro        power ?
3. For whom shall the goods be produced ?
    A few rich and many poor or most people in modest comfort?

• These three basic problems are interdependent.
•  The society must make proper choice about them in order to meet the development aspirations of people satisfactorily.
•  The nature of a particular choice in a particular society depends on its specific economic system.
  
• income
• There are two kinds of income – (1) money income (Money income is also known as nominal income.) and (2) Real Income (Real income refers to the command of a person over actual commodities and services.
• But the standard of living of people of a country depends on their real income
• Real income depends upon the purchasing power of money and that in turn depends on the price level.
  

Value

• The term “value” refers to the exchange qualities of a good
•  Value is of two kinds (1) value–in–use and (2) value–in– exchange.
•  Although air, rain and sunshine have value–in–use, they do not have value–in–exchange. 
•  In economics, we are interested only in those goods which have value–in–exchange.
•  For a good to have value– in–exchange, it must possess utility, it must be scarce in relation to demand and it must be possible for us to exchange it.

Price
When value is expressed in money, it is called price. Generally,economists make no distinction between value and price.
Market
According to Benham, “Market is any area over which the buyers and sellers are in close touch with one another either directly or through dealers, that prices obtainable in one part of market affect the prices paid in other parts”.

• There are markets for things other than commodities. Thus there are labour markets, foreign exchange market etc

Opportunity cost

• What is given up when taking an action or making a choice.For eg:
  

Opportunity cost for individuals

Opportunity cost and society
 

• All production carries an opportunity cost

-To produce more of one thing must shift resources away from producing something else

Production Possibilities Frontiers (PPF)

--Curve showing all combinations of two goods that can be produced with resources and technology available
--Society’s choices are limited to points on or inside the PPF
--Next slide shows the PPF model to understand the opportunity cost we must pay for improved health care: