Evolution, Thoughts and Basic Principles Of Economics
The basic concept of economics originated in the Greek system when the heads of the family devised a system of managing their income to suffice their familyâs wants and needs. Society is like a family, with the head of the societies making strategies to meet the growing needs and wants of their members. Economics, at its most practical definition, is the study of manâs intelligent management of the limited resources at his disposal, to meet his growing needs and wants (Samuelson and Nordhaus, 1998) or in other words, it is a social science which deals with the management and efficient use of limited/scarce resources to satisfy the everlasting, ever-growing needs and wants of the society at large.
Economics deals with two realities. One is the unlimited human wants and needs and the other is the limited resources to satisfy those wants and needs. Wants are economically defined as desires not necessary for the survival of the human beings or things that a person does not really require to support the basics necessities of life. needs are essential to support the basic necessities of life like food, clothing, shelter and other requirements to fulfill the minimum requirements to lead life of the human beings (Mankiw, 1997). Cars, cellular phones, computers, bigger houses and even "money" are regarded as wants since a person is able to live without them. If the basic needs are satisfied, the secondary needs i.e. wants are surfaced in life and these wants are unlimited in nature. The second reality is that there is scarcity of resources. Scarcity means that the resources needed to satisfy the needs and wants are limited (OâConner and Faille, 2000). The materials such as iron, cotton and wood, out of which cars, clothes and houses are made of will diminish in time and the same goes for food. With these two realities, economics could be defined as studying man's ingenuity in dealing with his unlimited needs and wants subject to the constraints of the limited resources he has (Barber, 2002).
Apart from the above, there are some other principles which are regarded as vitally important in the development of economics (Baumol and Blinder, 1999). Different kinds of trade off faced by the society in between different choices to which the productive resources should be put have a large implication in the development of economics. Whether guns will be produced against butter or vice versa is one of the central thought of the economists. Trade off between efficiency and equity is also another principle on which the evolution of economic thought depends. How optimally the scarce resources could be utilized and how the produced staffs could be equitably distributed lies at the heart of the economics (Koutsoyiannis, 1985). The state welfare, if concentrated upon by the government, will cost the efficiency of the productive system as it will hurt the profit motive of the producers.
As there are trade offs, there will be comparison of cost while choosing the best alternative. However direct cost is not always possible to measure precisely and hence the concept of opportunity cost is regarded as one of the important elements that affects the economic decision making (Andrew Abel and Ben Bernanke, 2005). The opportunity cost is defined as the benefit foregone for sacrificing the next best alternative.
Concept of marginal cost vs. marginal benefit, concept of marginal utility, marginal productivity play vital role in deciding the course of the economic activity of individual households and firms (Parkin, 2000). A rational decision maker be a consumer of commodity or a producer, will always compare the marginal benefits derived from, either consuming or producing, one extra unit of product with the marginal cost of purchasing/producing the product. If the producer finds that the marginal cost of producing the product is less than that of the marginal revenue offered by the product, the producer will produce, subject to other factors relevant for the decision (Utility and Demand, n.d.).
Economics is actually a social science. Like any other social science discipline, Economics studies man and the society as a whole but it takes on a different approach as it focuses on manâs struggle to satisfy his basic needs (Nicholson and Snyder, 2008).
As a science, Economics utilizes the systematic method of collecting facts and analyzing the data collected to come up with accurate result. This purpose, presenting factual information is referred to as Positive Economics (Mankiw, 2005). Being a positive science it is always neutral between ends like other streams of science. According to Robbins, as a positive science, economics does not extend any judgment as to what ends should be achieved by utilizing what means, rather it only tells how an end could be achieved by utilizing the given means. Questions like how the inflation could be curbed is dealt in by the positive economics, but which one should be given priority by the government, curbing inflation or unemployment by utilizing the given means, is not the concern of the economists who advocated economics as a positive science (Robbins, 2007). If in case a dispute arises over positive economics, it can be settled by reviewing the factual information provided. Positive economics can be either true or false. The laws of demand, law of marginal utility and marginal productivity theory are some of the key principles which prove this and represent facts in economic life (Utility and Demand, n.d).
When economists deal with what should be, or judgments or prescriptions are suggested, it is referred to as Normative Economics. Questions like which should be given more importance by the government, curbing inflation or unemployment, will belong to the field of normative economics (Samuelson and Nordhaus, 1998). When economics is a normative one, it provides value judgment as to which end should be achieved by utilizing the scarce resources and economists act as policymakers rather than as scientists who only formulates various economic laws to solve the economic problem.
Studying society in an economic perspective is broad in scope that is why Economics is divided into two branches: Macroeconomics, which takes in consideration the whole economy of a country and how it operates on the whole and Microeconomics, which is focused on the economic behavior of individual economic units like individual households, individual firm or business (Samuelson and Nordhaus, 1998).
How an individual household decide how much to consume at what price, how a firm decide how much to produce and how much to supply at what price, the demand and supply functions faced by an individual producer, theory of demand and supply at the individual level, the production functions faced by an individual firm are all concerns of microeconomics (Koutsoyiannis, 1985).
On the other hand national income, aggregate demand and supply of the economy as a whole, inflation, theory of unemployment, fiscal and monetary policy of the governments, are some of the topics those are dealt in macroeconomics (Garrison, 2001).
Another part of Economics is International Economics but this generally comes under Macroeconomics. In it, the international affairs are considered from an economics perspective and most of the trade is determined by study and analysis, feasibility, demand of import, exchange rates etc.
Regardless of the scope of study, economists answer three basic economic problems viz. what to produce, how to produce and lastly, for whom to produce? Answering these questions basically means proper allocation of resources and this implies that choices must be made at some points in Economics (Barber, 2002). For the first question, choosing what to produce, the individual or society as a whole initially decides what specific things to produce. It means choosing, from among the alternatives, which needs to be produced first and in what quantity, as all wants and needs of the society cannot be addressed given the limited productive resources. The second question, how to produce, is concerned on how the limited resources can be best utilized for production so that the profit is maximized, the quality of the product is maintained and the consumer is satisfied. This is concerned with the choice of alternative techniques of production (Garrison, 2001). Lastly, for whom to produce, it is directed to the recipient of the goods being produced. Given the scarcity of resources means also limited output and as such, it must be identified who should benefit from the goods being produced and how the goods will be distributed to ensure an equitable distribution of the produced products within the society (Parkin, 2000).
The basic problems as discussed above are answered by different economic systems in different ways. Broadly there are two types of systems to deal with the central problems of economics; capitalistic systems and socialistic systems. Socialistic systems are those where the owners are many and that there is a co-operative society working together for economic growth on the whole while a capitalistic system which advocates the production and distribution of commodities through free market mechanism (Garrison, 2001). The economy is characterized by the private ownership of the resources of production and is guided by the profit motive involving the freedom of choice about what to produce and how to produce by the producers. This system signifies a minimal involvement of the government and the market equilibrium is determined by the free market forces of demand and supply (Craven, 1984). Socialist economy is characterized by ownership of means of production by the State and the presence of a central planning authority to decide over the production and distribution of the commodities. Social welfare and the absence of free market mechanism in conducting the economic activities and prohibiting the capital accumulation by the private owners are at the heart of the socialistic economy (Garrison, 2001).
At the micro level, economics tend to explain and work on the relationship between buyer and seller. Buyers are people with a particular demand for a product or service to satisfy their needs and sellers are the producers who tend to produce such product and supply it in a given period of time. This demand and supply configures the price of the product (Economics: Avery short Introduction, 2007).
Consider a market where people have demand for dairy products. This demand will. If the supply is enough to satisfy the demand then it's an equilibrium which will determine a normal price of these dairy products. The supply has to be maintained with the demand or else the low supply and high demand will increase the prices. As people consume more units of these products, their level of satisfaction goes up (marginal utility decreases) and they tend to buy less. Before long, the supply increases compared to the demand and prices eventually come down due to this. In this case most producers decrease the supply even if the resources are abundant and at times, the government intervenes to control prices (Baumol and Blinder, 1999).
Macroeconomics on the other hand, works on the whole economy of the country. This includes factors such as input and output of the whole economy, unemployment rate, and inflation rate, fiscal and monetary policies. In macroeconomics aggregate demand for a product is the amount the buyers of the whole of the society are ready to buy at a given price while aggregate supply is the total quantity which production firms are able to produce and supply at that price in a given period of time. Government makes policies and laws to control the prices in the economy (Mankiw, 2005). It is done by the help of fiscal and monetary policies.
For instance consider a developing economy where the government wants to curb inflation and increase employment opportunities for the masses. To increase employment the government will change its fiscal policy and increase its investment. The government will initiate new growth projects while reducing its unnecessary spending to keep the money flow in the economic system. People will get jobs and their living standards will improve. To works things more smoothly, the government will encourage the private sector to increase its production rate. To do so it will reduce the tax rates (Andrew Abel and Ben Bernanke, 2005). At the same time it is very important to construct a very wise monetary policy via central bank to avoid potential conflicts between the fiscal and monetary policies.
It is not possible to describe economics within few words completely, but the basic thoughts and the principles along with the basic problems as well as the various economic systems to answer those basic questions have been discussed in brief to develop an idea about the evolution of economics as one of the most important discipline in human civilization (Parkin, 2005). In fact the whole human civilization is, knowingly or unknowingly, performing various economic activities, in order to satisfy the unlimited want by utilizing the scarce resources at their disposal. The activities could be production of goods and services or the demand of the consumers to consume/utilize those goods and services (Parkin, 2005). Various economic agents, starting from the private producers to national government are exercising various policies be it the technique of production or monetary or fiscal policies to optimally utilize the productive resources towards the development of the nation as well as the economic and social welfare of the human society at large.
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