Wednesday, November 12, 2008 Markets Production possibilities, opportunity cost In microeconomics, production is the conversion of inputs into outputs. It is an economic process that uses resources to create a commodity that is suitable for exchange. This can include manufacturing, storing, shipping, and packaging. Some economists define production broadly as all economic activity other than consumption. They see every commercial activity other than the final purchase as some form of production. Production is a process, and as such it occurs through time and space. Because it is a flow concept, production is measured as a "rate of output per period of time". There are three aspects to production processes, including the quantity of the commodity produced, the form of the good created and the temporal and spatial distribution of the commodity produced. Opportunity cost expresses the idea that for every choice, the true economic cost is the next best opportunity. Choices must be made between desirable yet mutually exclusive actions. It has been described as expressing "the basic relationship between scarcity and choice." The notion of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently. Thus, opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone, lost time, pleasure or any other benefit that provides utility should also be considered. Factors of production The inputs or resources used in the production process are called factors of production. Possible inputs are typically grouped into six categories. These factors are: Raw materials Machinary Labour services Capital Goods Land Enterprise In the short-run, as opposed to the long-run, at least one of these factors of production is fixed. Examples include major pieces of equipment, suitable factory space, and key managerial personnel. A variable factor of production is one whose usage rate can be changed easily. Examples include electrical power consumption, transportation services, and most raw material inputs. In the "long-run", all of these factors of production can be adjusted by management. In the short run, a firm's "scale of operations" determines the maximum number of outputs that can be produced, but in the long run, there are no scale limitations. Long-run and short-run changes play an important part in economic models. Economic efficiency Economic efficiency describes how well a system generates the maximum desired output a with a given set of inputs and available technology. Efficiency is improved if more output is generated without changing inputs, or in other words, the amount of "friction" or "waste" is reduced. Economists look for Pareto efficiency, which is reached when a change cannot make someone better off without making someone else worse off. Economic efficiency is used to refer to a number of related concepts. A system can be called economically efficient if: No one can be made better off without making someone else worse off. More output cannot be obtained without increasing the amount of inputs. Production ensures the lowest possible per unit cost. These definitions of efficiency are not exactly equivalent. However, they are all encompassed by the idea that nothing more can be achieved given the resources available. Specialization, division of labour, and gains from trade Specialization is considered key to economic efficiency because different individuals or countries have different comparative advantages. While one country may have an absolute advantage in every area over other countries, it could nonetheless specialize in the area which it has a relative comparative advantage, and thereby gain from trading with countries which have no absolute advantages. For example, a country may specialize in the production of high-tech knowledge products, as developed countries do, and trade with developing nations for goods produced in factories, where labor is cheap and plentiful. According to theory, in this way more total products and utility can be achieved than if countries produced their own high-tech and low-tech products. The theory of comparative advantage is largely the basis for the typical economist's belief in the benefits of free trade. This concept applies to individuals, farms, manufacturers, service providers, and economies. Among each of these production systems, there may be: a corresponding division of labour with each worker having a distinct occupation or doing a specialized task as part of the production effort, correspondingly different types of capital equipment and differentiated land uses Adam Smith's Wealth of Nations (1776) discusses the benefits of the division of labour. Smith noted that an individual should invest a resource, for example, land or labour, so as to earn the highest possible return on it. Consequently, all uses of the resource should yield an equal rate of return (adjusted for the relative riskiness of each enterprise). Otherwise reallocation would result. This idea, wrote George Stigler, is the central proposition of economic theory, and is today called the marginal productivity theory of income distribution. French economist Turgot had made the same point in 1766. In more general terms, it is theorized that market incentives, including prices of outputs and productive inputs, select the allocation of factors of production by comparative advantage, that is, so that (relatively) low-cost inputs are employed to keep down the opportunity cost of a given type of output. In the process, aggregate output increases as a by productor by design.Such specialization of production creates opportunities for gains from trade whereby resource owners benefit from trade in the sale of one type of output for other, more highly-valued goods. A measure of gains from trade is the increased output (formally, the sum of increased consumer surplus and producer profits) from specialization in production and resulting trade Posted by Economics at 9:28 PM No comments: Post a Comment Newer Post Older Post Home Subscribe to: Post Comments (Atom) free counter Followers Blog Archive ▼ 2008 (14) ► December (4) ▼ November (10) What is Economics ? Microeconomics Markets Supply and demand, prices and quantities Market failure Public sector Macroeconomics Inflation and monetary policy International economics International finance About Me Economics View my complete profile

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Production possibilities, opportunity cost

In microeconomics, production is the conversion of inputs into outputs. It is an economic process that uses resources to create a commodity that is suitable for exchange. This can include manufacturing, storing, shipping, and packaging. Some economists define production broadly as all economic activity other than consumption. They see every commercial activity other than the final purchase as some form of production.
Production is a process, and as such it occurs through time and space. Because it is a flow concept, production is measured as a "rate of output per period of time". There are three aspects to production processes, including the quantity of the commodity produced, the form of the good created and the temporal and spatial distribution of the commodity produced.
Opportunity cost expresses the idea that for every choice, the true economic cost is the next best opportunity. Choices must be made between desirable yet mutually exclusive actions. It has been described as expressing "the basic relationship between scarcity and choice." The notion of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently. Thus, opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone, lost time, pleasure or any other benefit that provides utility should also be considered.

Factors of production

The inputs or resources used in the production process are called factors of production. Possible inputs are typically grouped into six categories. These factors are:

• Raw materials
• Machinary
• Labour services
• Capital Goods
• Land
• Enterprise

In the short-run, as opposed to the long-run, at least one of these factors of production is fixed. Examples include major pieces of equipment, suitable factory space, and key managerial personnel. A variable factor of production is one whose usage rate can be changed easily. Examples include electrical power consumption, transportation services, and most raw material inputs. In the "long-run", all of these factors of production can be adjusted by management. In the short run, a firm's "scale of operations" determines the maximum number of outputs that can be produced, but in the long run, there are no scale limitations. Long-run and short-run changes play an important part in economic models.

Economic efficiency

Economic efficiency describes how well a system generates the maximum desired output a with a given set of inputs and available technology. Efficiency is improved if more output is generated without changing inputs, or in other words, the amount of "friction" or "waste" is reduced. Economists look for Pareto efficiency, which is reached when a change cannot make someone better off without making someone else worse off.
Economic efficiency is used to refer to a number of related concepts. A system can be called economically efficient if:

• No one can be made better off without making someone else worse off.
• More output cannot be obtained without increasing the amount of inputs.
• Production ensures the lowest possible per unit cost.

These definitions of efficiency are not exactly equivalent. However, they are all encompassed by the idea that nothing more can be achieved given the resources available.

Specialization, division of labour, and gains from trade

Specialization is considered key to economic efficiency because different individuals or countries have different comparative advantages. While one country may have an absolute advantage in every area over other countries, it could nonetheless specialize in the area which it has a relative comparative advantage, and thereby gain from trading with countries which have no absolute advantages. For example, a country may specialize in the production of high-tech knowledge products, as developed countries do, and trade with developing nations for goods produced in factories, where labor is cheap and plentiful. According to theory, in this way more total products and utility can be achieved than if countries produced their own high-tech and low-tech products. The theory of comparative advantage is largely the basis for the typical economist's belief in the benefits of free trade. This concept applies to individuals, farms, manufacturers, service providers, and economies. Among each of these production systems, there may be:

• a corresponding division of labour with each worker having a distinct occupation or doing a specialized task as part of the production effort,
• correspondingly different types of capital equipment and differentiated land uses

Adam Smith's Wealth of Nations (1776) discusses the benefits of the division of labour. Smith noted that an individual should invest a resource, for example, land or labour, so as to earn the highest possible return on it. Consequently, all uses of the resource should yield an equal rate of return (adjusted for the relative riskiness of each enterprise). Otherwise reallocation would result. This idea, wrote George Stigler, is the central proposition of economic theory, and is today called the marginal productivity theory of income distribution. French economist Turgot had made the same point in 1766.
In more general terms, it is theorized that market incentives, including prices of outputs and productive inputs, select the allocation of factors of production by comparative advantage, that is, so that (relatively) low-cost inputs are employed to keep down the opportunity cost of a given type of output. In the process, aggregate output increases as a by productor by design.Such specialization of production creates opportunities for gains from trade whereby resource owners benefit from trade in the sale of one type of output for other, more highly-valued goods. A measure of gains from trade is the increased output (formally, the sum of increased consumer surplus and producer profits) from specialization in production and resulting trade

Economics is the social science that studies the production, distribution, and consumption of goods and services. The term economics comes from the Greek for oikos (house) and nomos (custom or law), hence "rules of the house(hold)."[1]

economics-business

czwartek, 1 listopada 2007

Economics

Economics is the social science that studies the production, distribution, and consumption of goods and services. The term economics comes from the Greek for oikos (house) and nomos (custom or law), hence "rules of the house(hold)."[1]
A definition that captures much of modern economics is that of Lionel Robbins in a 1932 essay: "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses."[2] Scarcity means that available resources are insufficient to satisfy all wants and needs. Absent scarcity and alternative uses of available resources, there is no economic problem. The subject thus defined involves the study of choices as they are affected by incentives and resources.
Areas of economics may be divided or classified into various types, including:
• microeconomics and macroeconomics
• positive economics ("what is") and normative economics ("what ought to be")
• mainstream economics and heterodox economics
• fields and broader categories within economics.
One of the uses of economics is to explain how economies, as economic systems, work and what the relations are between economic players (agents) in the larger society. Methods of economic analysis have been increasingly applied to fields that involve people (officials included) making choices in a social context, such as crime,[3] education,[4] the family, health, law, politics, religion,[5] social institutions, and war.[6]
In the beginning


Adam Smith, author of The Wealth of Nations (1776), generally regarded as initiating modern economics.
Although discussions about production and distribution have a long history, economics in its modern sense is conventionally dated from the publication of Adam Smith's The Wealth of Nations in 1776.[7] In this work Smith describes the subject in these practical and exacting terms:
Political economy, considered as a branch of the science of a statesman or legislator, proposes two distinct objects: first, to supply a plentiful revenue or product for the people, or, more properly, to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services. It proposes to enrich both the people and the sovereign.
Smith referred to the subject as 'political economy', but that term was gradually replaced in general usage by 'economics' after 1870.
Areas of economics
Areas of economics may be classified in various ways, but an economy is usually analyzed by use of microeconomics or macroeconomics.
Microeconomics
Main article: Microeconomics
Microeconomics examines the economic behavior of agents (including individuals and firms) and their interactions through individual markets, given scarcity and government regulation. A given market might be for a product, say fresh corn, or the services of a factor of production, say bricklaying. The theory considers aggregates of quantity demanded by buyers and quantity supplied by sellers at each possible price per unit. It weaves these together to describe how the market may reach equilibrium as to price and quantity or respond to market changes over time. This is broadly termed demand-and-supply analysis. Market structures, such as perfect competition and monopoly, are examined as to implications for behavior and economic efficiency. Analysis often proceeds from the simplifying assumption that behavior in other markets remains unchanged, that is, partial-equilibrium analysis. General-equilibrium theory allows for changes in different markets and aggregates across all markets, including their movements and interactions toward equilibrium.[8][9]
Macroeconomics
Main article: Macroeconomics
Macroeconomics examines the economy as a whole "top down" to explain broad aggregates and their interactions. Such aggregates include national income and output, the unemployment rate, and price inflation and subaggregates like total consumption and investment spending and their components. It also studies effects of monetary policy and fiscal policy. Since at least the 1960s, macroeconomics has been characterized by further integration as to micro-based modeling of sectors, including rationality of players, efficient use of market information, and imperfect competition.[10] This has addressed a long-standing concern about inconsistent developments of the same subject.[11] Analysis also considers factors affecting the long-term level and growth of national income within a country and across countries.[12][13]
Related fields, other distinctions, and classifications
Recent developments closer to microeconomics include behavioral economics and experimental economics. Fields bordering on other social sciences include economic geography, economic history, public choice, cultural economics, and institutional economics.
Another division of the subject distinguishes two types of economics. Positive economics ("what is") seeks to explain economic phenomena or behavior. Normative economics ("what ought to be," often as to public policy) prioritizes choices and actions by some set of criteria; such priorities reflect value judgments, including selection of the criteria.
Another distinction is between mainstream economics and heterodox economics. One broad characterization describes mainstream economics as dealing with the "rationality-individualism-equilibrium nexus" and heterodox economics as defined by a "institutions-history-social structure nexus." [14]
The JEL classification codes of the Journal of Economic Literature provide a comprehensive, detailed way of classifying and searching for economics articles by subject matter. An alternative classification of often-detailed entries by mutually-exclusive categories and subcategories is The New Palgrave: A Dictionary of Economics (1987).[15]
Mathematical and quantitative methods
Economics as an academic subject often uses geometric methods, in addition to literary methods. Other general mathematical and quantitative methods are also often used for rigorous analysis of the economy or areas within economics. Such methods include the following.
Mathematical economics
Main article: Mathematical economics
Mathematical economics refers to application of mathematical methods to represent economic theory or analyze problems posed in economics. It uses such methods as calculus and matrix algebra. Expositors cite its advantage in allowing formulation and derivation of key relationships in an economic model with clarity, generality, rigor, and simplicity.[16] For example, Paul Samuelson's book Foundations of Economic Analysis (1947) identifies a common mathematical structure across multiple fields in the subject.
Econometrics
Main article: Econometrics
Econometrics applies mathematical and statistical methods to analyze data related to economic models. For example, a theory may hypothesize that a person with more education will on average earn more income than person with less education holding everything else equal. Econometric estimates can estimate the magnitude and statistical significance of the relation. Econometrics can be used to draw quantitative generalizations. These include testing or refining a theory, describing the relation of past variables, and forecasting future variables.[17]
National accounting
Main article: National accounts
National accounting is a method for summarizing economic activity of a nation. The national accounts are double-entry accounting systems that provide detailed underlying measures of such information. These include the national income and product accounts (NIPA), which provide estimates for the money value of output and income per year or quarter. NIPA allows for tracking the performance of an economy and its components through business cycles or over longer periods. Price data may permit distinguishing nominal from real amounts, that is, correcting money totals for price changes over time.[18][19] The national accounts also include measurement of the capital stock, wealth of a nation, and international capital flows.[20]
Selected fields


Chart of World GDP per capita by region over the last 2000 years. GDP per capita is a convenient summary measure of long-term economic development.
Growth economics studies factors that explain economic growth – the increase in output per capita of a country over a longer period of time. The same factors are used to explain differences in the level of output per capita between countries, Much-studied factors include the rate of investment, population growth, and technological change. These are represented in theoretical and empirical forms (as in the neoclassical growth model) and in growth accounting. At a more specific level, development economics examines economic aspects of the development process in relatively low-income countries with a focus on methods of promoting economic growth. Approaches in development economics frequently incorporate social and political factors to devise particular plans.[21][22][23][24]
Economic systems
Main article: Economic system
Economic systems is the branch of economics that studies the methods and institutions by which societies determine the ownership, direction, and allocaton of economic resources. An economic system of a society is the unit of analysis. Among contemporary systems at different ends of the organizational spectrum are socialist systems and capitalist systems, in which most production occurs in respectively state-run and private enterprises. In between are mixed economies. A common element is the interaction of economic and political influences, broadly described as political economy. Comparative economic systems studies the relative performance and behavior of different economies or systems.[25][26]
Environmental economics
Main article: Environmental economics
Environmental economics is concerned with issues related to degradation, enhancement, or preservation of the environment. In particular, public bads from production or consumption, such as air pollution, can lead to market failure. The subject considers how public policy can be used to correct such failures. Policy options include regulations that reflect cost-benefit analysis or market solutions that change incentives, such as emission fees or redefinition of property rights.[27][28]
Financial economics
Main article: Financial economics
Financial economics, often simply referred to as finance, is concerned with the allocation of financial resources in an uncertain (or risky) environment. Thus, its focus is on the operation of financial markets, the pricing of financial instruments, and the financial structure of companies.[29]
Game theory
Main article: Game theory
Game theory is a branch of applied mathematics that studies strategic interactions between agents. In strategic games, agents choose strategies that will maximize their payoff, given the strategies the other agents choose. It provides a formal modeling approach to social situations in which decision makers interact with other agents. Game theory generalizes maximization approaches developed to analyze markets such as the supply and demand model. The field dates from the 1944 classic Theory of Games and Economic Behavior by John von Neumann and Oskar Morgenstern. It has found significant applications in many areas outside economics as usually construed, including formulation of nuclear strategies, ethics, political science, and evolutionary theory.[30]
Industrial organization
Main article: Industrial organization
Industrial organization studies the strategic behavior of firms, the structure of markets and their interactions. The common market structures studied include perfect competition, monopolistic competition, various forms of oligopoly, and monopoly.[31]
Information economics
Main article: Information economics
Information economics examines how information (or a lack of it) affects economic decision-making. An important focus is the concept of information asymmetry, where one party has more or better information than the other. The existence of information asymmetry gives rise to problems such as moral hazard, and adverse selection, studied in contract theory. The economics of information has relevance in many fields, including finance, insurance, contract law, and decision-making under risk and uncertainty.
International economics
Main articles: International trade and International finance
International trade studies the determinants of the flow of goods and services across international boundaries. International finance is a macroeconomic field which examines the flow of capital across international borders, and the effects of these movements on exchange rates. Increased trade in goods, services and capital between countries is a major effect of contemporary globalization.
[edit] Labour economics
Main article: Labour economics
Labour economics seeks to understand the functioning of the market and dynamics for labour. Labour markets function through the interaction of workers and employers. Labour economics looks at the suppliers of labour services (workers), the demanders of labour services (employers), and attempts to understand the resulting patterns of wages and other labour income and of employment and unemployment, Practical uses include assisting the formulation of full employment of policies.[32]
Law and economics
Main article: Law and Economics
Law and economics, or economic analysis of law, is an approach to legal theory that applies methods of economics to law. It includes the use of economic concepts to explain the effects of laws, to assess which legal rules are economically efficient, and to predict what the legal rules will be.[33][34] A seminal article by Ronald Coase published in 1961 suggested that well-defined property rights could overcome the problems of externalities.[35]
Managerial economics
Main article: Managerial economics
Managerial economics applies microeconomic analysis to specific decisions in business firms or other management units. It draws heavily from quantitative methods such as operations research and programming and from statistical methods such as regression analysis in the absence of certainty and perfect knowledge. A unifying theme is the attempt to optimize business decisions, including unit-cost minimization and profit maximization, given the firm's objectives and constraints imposed by technology and market conditons.[36] [37]
Public finance
Main article: Public finance
Public finance is the field of economics that deals with budgeting the revenues and expenditures of a public sector entity, usually government. The subject addresses such matters as tax incidence (who really pays a particular tax), cost-benefit analysis of government programs, effects on economic efficiency and income distribution of different kinds of spending and taxes, and fiscal politics. The latter, an aspect of public choice theory, models public-sector behavior analogously to microeconomics, involving interactions of self-interested voters, politicians, and bureaucrats.[38]
Welfare economics
Main article: Welfare economics
Welfare economics is a branch of economics that uses microeconomic techniques to simultaneously determine the allocative efficiency within an economy and the income distribution associated with it. It attempts to measure social welfare by examining the economic activities of the individuals that comprise society.[39]
Economic concepts
Supply and demand
Main article: Supply and demand


The supply and demand model describes how prices vary as a result of a balance between product availability and demand. The graph depicts an increase (that is, right-shift) in demand from D1 to D2 along with the consequent increase in price and quantity required to reach a new equilibrium point on the supply curve (S).
The theory of demand and supply is an organizing principle to explain prices and quantities of goods sold and changes thereof in a market economy. In microeconomic theory, it refers to price and output determination in a perfectly competitive market. This has served as a building block for modeling other market structures and for other theoretical approaches.
For a given market of a commodity, demand shows the quantity that all prospective buyers would be prepared to purchase at each unit price of the good. Demand is often represented using a table or a graph relating price and quantity demanded (see boxed figure). Demand theory describes individual consumers as "rationally" choosing the most preferred quantity of each good, given income, prices, tastes, etc. A term for this is 'constrained utility maximization' (with income as the "constraint" on demand). Here, 'utility' refers to the (hypothesized) preference relation for individual consumers. Utility and income are then used to model hypothesized properties about the effect of a price change on the quantity demanded. The law of demand states that, in general, price and quantity demanded in a given market are inversely related. In other words, the higher the price of a product, the less of it people would be able and willing buy of it (other things unchanged). As the price of a commodity rises, overall purchasing power decreases (the income effect) and consumers move toward relatively less expensive goods (the substitution effect). Other factors can also affect demand; for example an increase in income will shift the demand curve outward relative to the origin, as in the figure.
Supply is the relation between the price of a good and the quantity available for sale from suppliers (such as producers) at that price. Supply is often represented using a table or graph relating price and quantity supplied. Producers are hypothesized to be profit-maximizers, meaning that they attempt to produce the amount of goods that will bring them the highest profit. Supply is typically represented as a directly proportional relation between price and quantity supplied (other things unchanged). In other words, the higher the price at which the good can be sold, the more of it producers will supply. The higher price makes it profitable to increase production. At a price below equilibrium, there is a shortage of quantity supplied compared to quantity demanded. This pulls the price up. At a price above equilibrium, there is a surplus of quantity supplied compared to quantity demanded. This pushes the price down. The model of supply and demand predicts that for a given supply and demand curve, price and quantity will stabilize at the price that makes quantity supplied equal to quantity demanded. This is at the intersection of the two curves in the graph above, market equilibrium.
For a given quantity of a good, the price point on the demand curve indicates the value, or marginal utility[40] to consumers for that unit of output. It measures what the consumer would be prepared to pay for the corresponding unit of the good. The price point on the supply curve measures marginal cost, the increase in total cost to the supplier for the corresponding unit of the good. The price in equilibrium is determined by supply and demand. In a perfectly competitive market, supply and demand equate cost and value at equilibrium.[41]
Demand and supply can also be used to model the distribution of income to the factors of production, including labour and capital, through factor markets. In a labour market for example, the quantity of labour employed and the price of labour (the wage rate) are modeled as set by the demand for labour (from business firms etc. for production) and supply of labour (from workers).
Demand and supply are used to explain the behavior of perfectly competitive markets, but their usefulness as a standard of performance extends to any type of market. Demand and supply can also be generalized to explain macroeconomic variables in a market economy, for example, quantity of total output and the general price level.
Prices and quantities
Main articles: Price and Prices and quantities


Even a currency has a price, its exchange rate in currency markets. Its determination by supply and demand is an important issue in international trade.
In supply-and-demand analysis, price, the going rate of exchange for a good, coordinates production and consumption quantities. Price and quantity have been described as the most directly observable characteristics of a good produced for the market.[42] Supply, demand, and market equilibrium are theoretical constructs linking price and quantity. But tracing the effects of factors predicted to change supply and demand -- and through them, price and quantity -- is a standard exercise in applied microeconomics and macroeconomics. Economic theory can specify under what circumstances price demonstrably serves as an efficient communication device to regulate quantity.[43] A real-world counterpart might attempt to measure how much variables that increase supply or demand change price and quantity.
Elementary demand-and-supply theory predicts equilibrium but not the speed of adjustment for changes of equilibrium due to a shift in demand or supply.[44] In many areas, some form of "price stickiness" is postulated to account for quantities, rather than prices, adjusting in the short run to changes on the demand side or the supply side. This includes standard analysis of the business cycle in macroeconomics. Analysis often revolves around causes of such price stickiness and their implications for reaching a hypothesized long-run equilibrium. Examples of such price stickiness in particular markets include wage rates in labour markets and posted prices in markets deviating from perfect competition.
Another area of economics considers whether markets adequately take account of all social costs and benefits. An externality is said to occur where there are significant social costs or benefits from production or consumption that are not reflected in market prices. For example, air pollution may generate a negative externality, and education may generate a positive externality (less crime, etc.). Governments often tax and otherwise restrict the sale of goods that have negative externalities and subsidize or otherwise promote the purchase of goods that have positive externalities in an effort to correct the price distortions caused by these externalities.[45]
Marginalism
Main article: Marginalism
Marginalist economic theory, such as above, describes consumers as attempting to reach a most-preferred position, subject to constraints, including income and wealth. It describes producers as attempting to maximize profits subject to their own constraints (including demand for goods produced, technology, and the price of inputs). Thus, for a consumer, at the point where marginal utility of a good, net of price, reaches zero, further increases in consumption of that good stop. Analogously, a producer compares marginal revenue against marginal cost of a good, with the difference as marginal profit. At the point where the marginal profit reaches zero, further increases in production of the good stop. For movement to equilibrium and for changes in equilibrium, behavior also changes "at the margin" -- usually more-or-less of something, rather than all-or-nothing.
Related conditions and considerations apply more generally to any type of economic system, whether market-based or not, where there is scarcity.[46] Scarcity is defined by the amount of producible or exchangeable goods, whether needed or desired, exceeding feasible production.[47] The conditions are in the form of constraints on production from finite resources available. Such resource constraints describe a menu of production possibilities. For consumers or other agents, production possibilities and scarcity are posited to imply that, even if resources are fully utilized, there are trade-offs, whether of radishes for carrots, non-work time for money income, private goods for public goods, or present consumption for future consumption. The marginalist notion of opportunity cost is a device to measure the size of the trade-off between competing alternatives. Such costs, reflected in prices of a market economy, are used for analysis of economic efficiency or for predicting responses to disturbances in a market economy. In a centrally planned economy, comparable shadow-price relations must be satisfied for the efficient use of resources in meeting production objectives.[48] At this level, marginalism can be used as a tool for modeling not only individual agents or markets but different economic systems and broad allocations of output in relation to variables that affect them.
Economic reasoning
Economics as a contemporary discipline relies on rigorous styles of argument. Objectives include formulating theories that are simpler, more fruitful, and more reliable in their explanatory power than other theories.[49] Often analysis begins with a simple model to isolate relations of a variable to be explained. Complications may be impounded in a ceteris paribus ("other things equal") assumption. For example, the quantity theory of money hypothesizes a positive relationship between the price level and the money supply, ceteris paribus. The theory can be tested using economic data, such as a price index for GDP and a measure of the money supply, say currency plus bank deposits. Econometric methods can allow for the influence of competing explanations and attempt to adjust for noise from other variables in the absence of a controlled experiment. More recently, the use of experimental methods in economics has greatly expanded, challenging a historically-noted differentiating feature of some natural sciences from economics.[50]
Expositions of reasoning within economic models often use two-dimensional graphs to represent theoretical relationships. At a higher level of generality, Paul Samuelson's treatise Foundations of Economic Analysis (1947) showed how to apply mathematical methods to examine the class of assertions called operationally meaningful theorems in economics, which are theorems that can conceivably be refuted by empirical data.[51] Such assertions permit testing of a theory.
Some reject mathematical economics. Thus, in the Austrian school of economics it is argued that anything beyond simple logic is likely unnecessary and inappropriate for economic analysis. Still, economics has undergone a thorough, cumulative formalization of concepts and methods, including for use in the hypothetico-deductive method of explaining real-world phenomena. An example of the latter is the extension of microeconomic analysis to seemingly non-economic areas, sometimes called economic imperialism.[52]
History and schools of economics
Main articles: History of economic thought and Schools of economics
Early economic thought
Formative economic writings date from ancient times, including Mesopotamian, Greek, Roman, Indian, Chinese, Persian and Arab civilizations. Notable writers include Aristotle, Chanakya, Qin Shi Huang, Thomas Aquinas, and Ibn Khaldun through the 14th century. Joseph Schumpeter credits the late scholastics of the 14th to 17th century as "coming nearer than any other group to being the 'founders' of scientific economics" as to monetary, interest, and value theory within a natural-law perspective.[53]
Two other groups, later called 'mercantilists' and 'physiocrats', more directly influenced the subsequent development of the subject. Both groups were associated with the rise of economic nationalism and modern capitalism in Europe. Mercantilism was an economic doctrine that flourished from the 16th to 18th century in a prolific pamphlet literature, whether of merchants or statesmen. It held that a nation's wealth depended on its accumulation of gold and silver. Nations without access to mines could obtain gold and silver from trade only by selling goods abroad and restricting imports other then of gold and silver. The doctrine called for importing cheap raw materials to be used in manufacturing goods, which could be exported, and for state regulation to impose protective tariffs on foreign manufactured goods and prohibit manufacturing in the colonies.[54][55]
Physiocrats, a group of 18th century French thinkers and writers, developed the idea of the economy as a circular flow of income and output. Adam Smith described their system "with all its imperfections" as "perhaps the purest approximation to the truth that has yet been published" on the subject. Pysiocrats opposed the mercantilist policy of promoting manufacturing and trade at the expense of agriculture, including import tariffs and high taxes on land, because they believed that only agricultural production generated a clear surplus over cost. Thus, agriculture was the basis of all wealth. As a reaction against copious mercantilist trade regulations, the physiocrats advocated a policy of laissez-faire, which called for minimal government intervention the economy.[56][57]
Classical economics
Main article: Classical economics
Publication of Adam Smith's The Wealth of Nations in 1776, has been described as "the effective birth of economics as a separate discipline."[58]
The book identified land, labor, and capital as the three factors of production and the major contributors to a nation's wealth. In Smith's view, the ideal economy is a self-regulating market system that automatically satisfies the economic needs of the populace.He described the market mechanism as an "invisible hand" that leads all individuals, in pursuit of their own self-interests, to produce the greatest benefit for society as a whole. Smith incorporated some of the Physiocrats' ideas, including laissez-faire, into his own economic theories, but rejected the idea that only agriculture was productive.
In his famous invisible-hand analogy, Smith argued for the seemingly paradoxical notion that competitive markets tended to advance broader social interests, although driven by narrower self-interest. The general approach that Smith helped initiate was called political economy and later classical economics. It included such notables as Thomas Malthus, David Ricardo, and John Stuart Mill writing from about 1770 to 1870. [59]
While Adam Smith emphasized the production of income, David Ricardo focused on the distribution of income among landowners, workers, and capitalists. Ricardo saw a conflict between landowners on the one hand and labor and capital on the other. He posited that the growth of population and capital, pressing against a fixed supply of land, pushes up rents and holds down wages and profits.
Thomas Robert Malthus used the idea of diminishing returns to explain low living standards. Population, he argued, tended to increase geometrically, outstripping the production of food, which increased arithmetically. The force of a rapidly growing population against a limited amount of land meant diminishing returns to labor. The result, he claimed, was chronically low wages, which prevented the standard of living for most of the population from rising above the subsistence level.
Malthus also questioned the automatic tendency of a market economy to produce full employment. He blamed unemployment upon the economy's tendency to limit its spending by saving too much, a theme that lay forgotten until John Maynard Keynes revived it in the 1930s.
Coming at the end of the Classical tradition, John Stuart Mill parted company with the earlier classical economists on the inevitability of the distribution of income produced by the market system. Mill pointed to a distinct difference between the market's two roles: allocation of resources and distribution of income. The market might be efficient in allocating resources but not in distributing income, he wrote, making it necessary for society to intervene.
Value theory was important in classical theory. Smith wrote that the "real price of every thing ... is the toil and trouble of acquiring it" as influenced by its scarcity. Smith maintained that, with rent and profit, other costs besides wages also enter the price of a commodity.[60] Other classical economists presented variations on Smith, termed the 'labour theory of value'. Classical economics focused on the tendency of markets to move to long-run equilibrium.
Marxist economics
Main article: Marxian economics


The Marxist school of economic thought comes from the work of German economist Karl Marx.
Marxist (later, Marxian) economics descends from classical economics. It derives from the work of Karl Marx. The first volume of Marx's major work, Capital, was published in German in 1867. In it, Marx focused on the labour theory of value and what he considered to be the exploitation of labour by capital. Thus, the labour theory of value, rather than simply a theory of price, was a method for measuring the exploitation of labour in a capitalist society,[61][62] although concealed by appearances of "vulgar" political economy.[63][64]
Neoclassical economics
Main article: Neoclassical economics
A body of theory later termed 'neoclassical economics' or 'marginalist economics' formed from about 1870 to 1910. The term 'economics' was popularized by neoclassical economists such as Alfred Marshall as a substitute for the earlier term 'political economy'. Neoclassical economics systematized supply and demand as joint determinants of price and quantity in market equilibrium, affecting both the allocation of output and the distribution of income. It dispensed with the labour theory of value inherited from classical economics in favor of a marginal utility theory of value on the demand side and a more general theory of costs on the supply side.[65]
In microeconomics, neoclassical economics represents incentives and costs as playing a pervasive role in shaping decision making. An immediate example of this is the consumer theory of individual demand, which isolates how prices (as costs) and income affect quantity demanded. In macroeconomics it is reflected in an early and lasting neoclassical synthesis with Keynesian macroeconomics.[66][67]
Neoclassical economics is occasionally referred as orthodox economics whether by its critics or sympathizers. Modern mainstream economics builds on neoclassical economics but with many refinements that either supplement or generalize earlier analysis, such as econometrics, game theory, analysis of market failure and imperfect competition, and the neoclassical model of economic growth for analyzing long-run variables affecting national income.
Keynesian economics
Main articles: Keynesian economics and Post-Keynesian economics


John Maynard Keynes (above, right), widely considered a towering figure in economics.
Keynesian economics derives from John Maynard Keynes, in particular his book The General Theory of Employment, Interest and Money (1936), which ushered in contemporary macroeconomics as a distinct field.[68][69] The book focused on determinants of national income in the short run when prices are relatively inflexible. Keynes attempted to explain in broad theoretical detail why high labour-market unemployment might not be self-correcting due to low "effective demand" and why even price flexibility and monetary policy might be unavailing. Such terms as "revolutionary" have been applied to the book in its impact on economic analysis.[70][71][72]
Keynesian economics has two successors. Post-Keynesian economics also concentrates on macroeconomic rigidities and adjustment processes. Research on micro foundations for their models is represented as based on real-life practices rather than simple optimizing models. It is generally associated with the University of Cambridge and the work of Joan Robinson.[73] New-Keynesian economics is also associated with developments in the Keynesian fashion. Within this group researchers tend to share with other economists the emphasis on models employing micro foundations and optimizing behavior but with a narrower focus on standard Keynesian themes such as price and wage rigidity. These are usually made to be endogenous features of the models, rather than simply assumed as in older Keynesian-style ones.
Other schools and approaches
Other well-known schools or trends of thought referring to a particular style of economics practiced at and disseminated from well-defined groups of academicians that have become known worldwide, include the Austrian School, Chicago School, the Freiburg School, the School of Lausanne and the Stockholm school.
Within macroeconomics there is, in general order of their appearance in the literature; classical economics, Keynesian economics, the neoclassical synthesis, post-Keynesian economics, monetarism, new classical economics, and supply-side economics. New alternative developments include evolutionary economics, dependency theory, and world systems theory.
Historic definitions of economics
This section extends the discussion of the definitions of Economics at the beginning of the article.
Wealth definition
Some early definitions of political economy were succinctly related to wealth, which was broadly construed. Adam Smith defined the subject as simply the "Science of wealth."[74] Smith offered another definition, "the Science relating to the laws of production, distribution and exchange."[74] Wealth was defined as the specialization of labour which allowed a nation to produce more with its supply of labour and resources. This definition divided Smith and Hume from previous definitions which defined wealth as gold. Hume argued that gold without increased activity only serves to raise prices.[75]
John Stuart Mill defined economics as "the practical science of production and distribution of wealth"; this definition was adopted by the Concise Oxford English Dictionary even though it does not include the vital role of consumption. For Mill, wealth is defined as the stock of useful things.[76]
Definitions of the subject in terms of wealth emphasize production and consumption. This emphasis was charged by critics as too narrow a focus in placing wealth to the forefront and man in the background. For example, John Ruskin referred disparagingly to political economy as "the science of getting rich"[77] and a "bastard science."[78]
Welfare definition
Broader later definitions evolved to include the study of man, human activity, and human welfare, not wealth as such. Alfred Marshall in his 1890 book Principles of Economics wrote, "Political Economy or Economics is a study of mankind in the ordinary business of Life; it examines that part of the individual and social action which is most closely connected with the attainment and with the use of material requisites of well-being."[79]
Economic theory criticisms
Is economics a science?
One of the marks of a science is the use of a scientific method and the ability to establish hypotheses and make predictions which can then be tested with data and where the results are repeatable and demonstrable to others when the same conditions are present. In a number of applied fields in economics experimentation has been conducted: this includes the sub-fields of experimental economics and consumer behavior, focused on experimentation using human subjects; and the sub-field of econometrics, focused on testing hypotheses when data are not generated via controlled experimentation. However, in a way similar to what happens in other social sciences, it may be difficult for economists to conduct certain formal experiments due to moral and practical issues involved with human subjects.
The status of the social sciences as an empirical science or even a science, has been a matter of debate since the 20th century. Some philosophers and scientists, most notably Karl Popper, have asserted that no empirical hypothesis, proposition, or theory can be considered scientific if no observation could be made which might contradict it, insisting on strict falsifiability, see Positivism dispute.[80] Critics allege that economics cannot always achieve Popperian falsifiability, but economists point to many examples of controlled experiments that do exactly this, albeit in laboratory settings.[81][82][83]
While economics has produced theories that correlate with observations of behavior in society, economics yields no natural laws or universal constants due to its reliance on non-physical arguments. This has led some critics to argue economics is not a science.[84][85] In general, economists reply that while this aspect may present serious difficulties, they do in fact test their hypotheses using statistical methods such as econometrics and data generated in the real world.[86] The field of experimental economics has seen efforts to test at least some predictions of economic theories in a simulated laboratory setting – an endeavor which earned Vernon Smith and Daniel Kahneman the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel in 2002.
Although the conventional way of connecting an economic model with the world is through econometric analysis, economist and professor Deirdre McCloskey, through what is known as the McCloskey critique, cites many examples in which professors of econometrics were able to use the same data to both prove and disprove the applicability of a model's conclusions. She argues the vast efforts expended by economists on analytical equations is essentially wasted effort. Econometricians have replied that this would be an objection to any science, and not only to economics. Critics of McCloskey's critique reply by saying, among other things, that she ignores examples where economic analysis is conclusive and that her claims are illogical. [87]
Nobel Prize laureate and philosopher Friedrich Hayek thought that economics is a social science, but argued that the propensity to imitate the procedures of physical sciences in economics leads to outright error and is decidedly unscientific since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed. [88]
Economics has been jokingly called "The dismal science". [85] Although the actual origin of this 19th century designation is disputed, it managed to become a derogatory alternative name for economics.
Criticism of assumptions
Certain models used by economists within economics have been criticized, sometimes by other economists, for their reliance on unrealistic, unobservable, or unverifiable assumptions. One response to this criticism has been that the unrealistic assumptions result from abstraction from unimportant details, and that such abstraction is necessary in a complex real world, which means that rather than unrealistic assumptions compromising the epistemic worth of economics, such assumptions are essential for economic knowledge. One study has termed this explanation the "abstractionist defense" and concluded that that this "abstractionist defense" does not invalidate the criticism of the unrealistic assumptions.[89] However, it is important to note that while one school does have a majority in the field, there is far from a consensus on all economic issues and multiple alternative fields claim to have more empirically-justified insights.
Assumptions and observations
Many criticisms of economics revolve around the belief that the fundamental claims of economics are unquestioned assumption without empirical evidence. Many economists reply giving examples of concepts that used to be considered "axioms" in economics and which have turned out to be consistent with empirical observation (see three examples below), however agreeing that these observations reveal that the original assumption was probably oversimplified.
A few examples of such concepts that according to many economists have evolved from "assumptions" to empirically-based are:
• Rationality = Self-Interest: This refers to the common axiom or belief shared by many mainstream economists that rationality implies self-interest and vice-versa. This does not, however, preclude altruism. Altruism can be viewed as a case in which the individual's self-interest includes doing good for others. Other views claim that this does not leave much room for altruism, and in fact discourages it, rather like a global prisoner's dilemma .i.e.: If "rational" people are not altruistic, then I shouldn't be altruistic either, ad infinitum. However, this "axiom" has since been subjected to multiple experiments and even altruism, when all social pressures are considered, could be modeled as a form of self-interest.[90][91]
• Well-Being = Consumption: This refers to the axiom or belief shared by some mainstream economists that human beings are happy when they consume, and unhappy when not consuming. Added to the other common assumption of insatiability, this implies human beings can never remain happy. Although this original belief is over-simplified (and perhaps not representative of most economists actual beliefs today), empirical observations have now confirmed a relationship between sense of well-being and such factors as income.[92]
• Atomism: This refers to the belief shared by some mainstream economists that human beings are atomistic, ie.their preferences are independent. This is another simplification both of the economy and of the specific beliefs of the economists. Agent-based modeling and experimental economics produce results that are indicative of this theory.
A common defense of the above axioms was that they made the problem tractable. However, after specific details of this have been observed through economics research in a variety of controlled experiments, the original assumptions have been further refined and are no longer technically "axioms" in mainstream economics.
Criticism of contradictions
Economics is a field of study with various schools and currents of thought. As a result, there exists a considerable distribution of opinions, approaches and theories. Some of these reach opposite conclusions or, due to the differences in underlying assumptions, contradict each other.[93][94][95]
Criticisms of welfare and scarcity definitions of economics
The definition of economics in terms of material being is criticized as too narrowly materialistic. It ignores, for example, the non-material aspects of the services of a doctor or a dancer. A theory of wages which ignored all those sums paid for immaterial services was incomplete. Welfare could not be quantitatively measured, because the marginal significance of money differs from rich to the poor (that is, $100 is relatively more important to the well-being of a poor person than to that of a wealthy person). Moreover, the activities of production and distribution of goods such as alcohol and tobacco may not be conducive to human welfare, but these scarce goods do satisfy innate human wants and desires.
Marxist economics still focuses on a welfare definition. In addition, several critiques of mainstream economics begin from the argument that current economic practice does not adequately measure welfare, but only monetized activity, which is an inadequate approximation of welfare.
The definition of economics in terms of scarcity suggests that resources are in finite supply while wants and needs are infinite. People therefore have to make choices. Scarcity too has its critics. It is most amenable to those who consider economics a pure science, but others object that it reduces economics merely to a valuation theory. It ignores how values are fixed, prices are determined and national income is generated.[citation needed] It also ignores unemployment and other problems arising due to abundance. This definition cannot apply to such Keynesian concerns as cyclical instability, full employment, and economic growth.
The focus on scarcity continues to dominate neoclassical economics, which, in turn, predominates in most academic economics departments. It has been criticized in recent years from a variety of quarters, including institutional economics and evolutionary economics and surplus economics.
Criticism in other topics
Criticism on several topics in economics can be found elsewhere, in both general and specialized literature. See, for example: general equilibrium, Pareto efficiency, marginalism, behavioral finance, behavioral economics, feminist economics, Keynesian economics, monetarism, neoclassical economics, endogenous growth theory, exogenous growth model, comparative advantage, Kuznets curve, Laffer curve, economic sociology, agent-based computational economics, Homo economicus, rational choice theory, rational egoism, public choice theory, Heckscher-Ohlin model, Harrod-Domar model, quantity theory of money, et al..
Economics and politics
Some economists, like John Stuart Mill or Leon Walras, have maintained that the production of wealth should not be tied to its distribution. The former is in the field of "applied economics" while the latter belongs to "social economics" and is largely a matter of power and politics.[96]
Economics per se, as a social science, do not stand on the political acts of any government or other decision-making organization, however, many policymakers or individuals holding highly ranked positions that can influence other people's lives are known for arbitrarily use a plethora of economic theory concepts and rhetoric as vehicles to legitimize agendas and value systems, and do not limit their remarks to matters relevant to their responsibilities.[97] The close relation of economic theory and practice with politics[98] is a focus of contention that may shade or distort the most unpretentious original tenets of economics, and is often confused with specific social agendas and value systems.[99]
Issues like central bank independence, central bank policies and rhetoric in central bank governors discourse or the premises of macroeconomic policies[100] (monetary and fiscal policy) of the States, are focus of contention and criticism.[101][102][103][104]
Ideologies and economics
For example, it is possible associate the U. S. promotion of democracy by force in the 21st century, the 19th century work of Karl Marx or the cold war era debate of capitalism vs. communism, as issues of economics. Although economics makes no such value claims, this may be one of the reasons why economics could be perceived as not being based on empirical observation and testing of hypothesis. As a social science, economics tries to focus on the observable consequences and efficiencies of different economic systems without necessarily making any value judgments about such systems, for example, examine the economics of authoritarian systems, egalitarian systems, or even a caste system without making judgments about the morality of any of them.
Ethics and economics
The relationship between economics and ethics is complex. Many economists consider normative choices and value judgments, like what needs or wants, or what is good for society, to be political or personal questions outside the scope of economics. Once a person or government has established a set of goals, however, economics can provide insight as to how they might best be achieved.
Others see the influence of economic ideas, such as those underlying modern capitalism, to promote a certain system of values with which they may or may not agree. (See, for example, consumerism and Buy Nothing Day.) According to some thinkers, a theory of economics is also, or implies also, a theory of moral reasoning.[105]
The premise of ethical consumerism is that one should take into account ethical and environmental concerns, in addition to financial and traditional economic considerations, when making buying decisions.
On the other hand, the rational allocation of limited resources toward public welfare and safety is also an area of economics. Some have pointed out that not studying the best ways to allocate resources toward goals like health and safety, the environment, justice, or disaster assistance is a sort of willful ignorance that results in less public welfare or even increased suffering.[106] In this sense, it would be unethical not to assess the economics of such issues. In fact, federal agencies in the United States routinely conduct economic analysis studies toward that end.
Effect on society
Some would say that market forms and other means of distribution of scarce goods, suggested by economics, affect not just their "desires and wants" but also "needs" and "habits". Much of so-called economic "choice" is considered involuntary, certainly given by social conditioning because people have come to expect a certain quality of life. This leads to one of the most hotly debated areas in economic policy, namely, the effect and efficacy of welfare policies. Libertarians view this as a failure to respect economic reasoning. They argue that redistribution of wealth is morally and economically wrong. Socialists view it as a failure of economics to respect society. They argue that disparities of wealth should not have been allowed in the first place. This led to both 19th century labour economics and 20th century welfare economics before being subsumed into human development theory.
The older term for economics, political economy, is still often used instead of "economics", especially by certain economists such as Marxists. The use of this term often signals a basic disagreement with the terminology or paradigm of market economics. Political economy explicitly brings social political considerations into economic analysis and is therefore openly normative, although this can be said of many economic recommendations as well, despite claims to being positive. Some mainstream universities (many in the United Kingdom) have a "political economy" department rather than an "economics" department.
Marxist economics generally denies the trade-off of time for money. In the Marxist view, concentrated control over the means of production is the basis for the allocation of resources among classes. Scarcity of any particular physical resource is subsidiary to the central question of power relationships embedded in the means of production.
Economics in practice
Main article: Economist
The professionalization of economics, reflected in the growth of graduate programs on the subject, has been described as "the main change in economics since around 1900."[107] Most major universities and many colleges have a major, school, or department in which academic degrees are awarded in the subject, whether in the liberal arts, business, or for professional study. The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel (colloquially, the Nobel Prize in Economics) is a prize awarded to economists each year for outstanding intellectual contributions in the field. In the private sector, professional economists are employed in industries such as banking and finance. Economists also work for various government departments and agencies, for example, the Treasury.

 

SCOPE OF ECONOMICS There is no single universally accepted definitions of Economics. As such, many economics have defined Economics in defferent ways:

SCOPE OF ECONOMICS

SCOPE OF ECONOMICS

There is no single universally accepted definitions of Economics. As such, many economics have defined Economics in defferent ways:

For instance, Adam Smith (1776) defined “Economics as an enquiry into the nature and the cause of the wealth of nations”. He is mostly considered as the father of Economic. By this definition, Adam Smith sees economics as how mankind use the available resource to produce goods and service for distribution and consumption of goods and services.

Alfred Marshall, also defined economics as “a study of mankind in the ordinary business of life”. Marshall, like Adam Smith, seem to examine individual and society that move towards the attainment of economic well-being of mankind, through productivity, distributions and consumption of goods and services.

However, the generally accepted definition is the one given by Professor Lionel Robbins. He defined “Economics as a science, which studies human behaviour as a relationship between ends and scares means which have alternative uses”. This definitions is more acceptable because it identifies the fundamental problems facing humanity such as wants scarcity and choice.

Generally, Economics deals with how best society resources is relation to production, distribution, exchange and consumption of goods and services.

BASIC CONCEPT OF ECONOMICS

(a)   Economics as a Science:

Economics is regarded as a science. However, it is not a natural science like physics, Chemistry, Biology, and Astronomy. But it is a social science which uses scientific approach or methods to study human behaviour. The methods includes:

i.                   Observation of facts:- Economics like other science subject deals with observation or empirical facts. It depends on accumulation of knowledge through observation or research.

ii.                 Formulation of hypothesis:- Economics involves formation of hypothesis or identification of the issues or problem to be studied like other science subjects. Example of hypothesis formation is why demand curve slope downward from left to right.

iii.              Testing of hypothesis:- The hypothesis formation should be tested or researched into find the truth or other wise.

iv.               Sampling:- Data Collection begins with sampling of the population size to collect or seek their view with regard to the problem statement

v.                  Data Collection:- Economists collect data about phenomena for a research purposes. For instance economists conduct market survey as a means collection information about consumer behaviour in relation to price changes

vi.               Classification of Data:- Economists after collection of data have to be grouped them differently for examination.

vii.             Generalization:- After economist have classified and analysed the data collected. The information is used for generalization or formulating of laws, such as the lower the price the higher the quantity demanded.

viii.          Prediction:- Economists like natural scientist make predictions on the basis of theory. The prediction could be on the purchases and sales of security as a result of price fluctuations.

ix.               Conclusion:- After the researcher completed the research have to draw conclusion on the problem statement either accepting it or reject it.

Similarities between social science and natural science

The natural science or the hard science and the social science share the following similarities

1.      The natural science and the social science are both scientific subjects or discipline

2.      They both adopt scientific methods or approaches in under taking research. The methods are observation o facts, formulation of hypothesis, sampling, data collection, classification of data, formulation of laws or theories, interpretations of data, making predictions and drawing conclusion.

Differences between social and natural science

The differences between natural science and the social science include any of the following.

1.      The natural science or the hard science studies natural environment, whilst social science or soft science studies human behaviour.

2.      Predictions in natural science are more precise. While prediction in social science are not precise or exact as human behaviour cannot be predicted.

3.      In natural science hypothesis can be tested in laboratory. However, hypothesis cannot be tested in laboratory, but the facts can be observed over a period of time.

4.      In natural science laws are accurate than the social. This is because, laws relates to human behaviours continue to varies or change. But not so in natural science as into is studies the phenomena or behaviour.

(b)   Human Behaviour

Economists study how individuals behave in the management of the scares resources to satisfy his or her unlimited wants. It is a fact that, human wants are many but resources to satisfy them are limited in supply. As a result, man behaviour continue changing depends on his condition at a given time.

(c)    Ends:-

Ends refers to goals, wants, aims and objective of an individual, firm or government. Every individuals have unlimited goals to attain an a results needs more resources.

Characteristics of Ends

1.      Ends are unlimited or numerous at any given time

2.      Ends different from one person to another. This is because human needs are different from one another.

3.      Ends are competitive to the relative scares resources of man.

4.      Every ends has exchange value or monitory value in it

5.      The satisfaction of one ends could or may lead to another. That is, one achievement for a certification, could lead to a desire for a job.

(d)   Means:-

Means are those resources needed to satisfy our wants. These resources refer to us an factors of production, that is land, labour, capital and entrepreneur. The ends of an individual firm or government are satisfied by the combination of these factors product. Means are limited in supply. Means or resources could be naturally or artificially. It could also be renewable or non-renewable, natural or artificial resources.

Characteristics of  Means

1.      Means are limited or shortage in supply in relation to demand for them

2.      Means also have alternative uses

3.      They have price for their uses that is not free

4.      Means can be combined in different proportions to produce goods and service

5.      Means could be a natural or artificial resources

6.      Means could be a renewable or non-renewable resources

(e)    Alternative uses:-

It refers to how resources could be put into different uses.

(f)     Scarcity:-

Scarcity refers to limited supply of resources in relation to demand for them. Scarcity does not means non-availability of resource, but they are limited in supply to meet all needs of man.

Scarce means, refers to limited supply of resources used to satisfy our needs or want, it could also refers to limited supply of factors of production.

Scarce means is often the fundamental problem facing individual, firm and government.

For instance, an individual student may have 20Gp and wish to buy a pen and an exercise book. However, the money may be tow small to buy the two items

On the other hand a firm too, may have just five thousand Ghana cedis and wish to buy raw materials and new production plant to enhance productivity. But the money may be too small to buy the two items.

Government too, may have about three million Ghana cedis and wish to provide infrastructure in hospitals, schools and road. But the money will be too small to help provide all the project.

Scarcity of resources made it, impossible to meet the desire of an individual firm and government at the same time.

(g)   Choice:-

Choice is the act of selecting one thing among others alternatives. Choice is the only solution to scarcity of resources and the endless ends or desire.

It is a fact that, man at nay point in time is confronted with the endless desire or ends to have many things but constrain with relative scarce means or resources. So, these is the need to make rational choice.

(h)   Scale of Preference:-

Scale of preference is the list of wants in ranking order of importance. in other words, it is the listing or tabulation of wants in order of priority or importance

Scale of preference helps in individual, firm and government in making rational choice over a period of time by placing the most important need first, before the least important need last. In other words, the most pressing needs in first on the list and the least important one last.

Example of an individual student scale of preferences is as follows:

1.      Exercise books

2.      Text books

3.      Graph book

4.      Calculator

5.      Mathematical set

6.      Bags

7.      Mobile phone

The exercise book is first because it is the most important and the mobile phone is last, because it is least important.

Importance of scale of preference

1.      It helps an individual firm, and government in identification of most pressing need.

2.      It guides the economics agents in the optimum allocation of resources

3.      It helps in ranking one needs in order of priority

4.      It helps in making of rational choice over period of time

5.      Maximum satisfaction can be attained through the scale of preference.

(i)     Opportunity Cost:-

Opportunity cost is alternative forgone after making a choice. The opportunity cost of a product, is the alternative which must be given-up in order to produce something else. In other, opportunity cost is the sacrifice made on something in order to enjoy something else. It is refers to as the real cost or the true cost.

For example, Mubarik had five (5) Ghana cedis to buy a mathematical set or calculator, but no both if he decided to buy the mathematical set the leaving out the calculator becomes the opportunity cost. It is important to note that opportunity cost is always based on two things.

Money cost on the hand, it the total amount of money spent to acquire a set of goods and services. It is refereed to us an accountant cost. Opportunity cost is also known as the forgone alternative or the economists cost.

The concept of opportunity cost is relevant to the economies of the world the firm and individual. This is because, it deals with problems of choice which is core or most important to the study of economics. It also deals with the efficient allocation of resources.

Importance of Opportunity Cost

Opportunity cost does have some importance to the individual, firm and government.

1.      It helps an individual, firm and government in making rational choice

2.      The concept helps a producer in selecting the best method of production, which will reduce cost and increase profit.

3.      It helps an individual, firm and government to use their time resources well

4.      The helps the individual, firm government in making retinal choice on what to spend the scarce resource on

5.      It also helps an individual, firm and government to know what to produce

6.      It also helps the government to know what to import into the country.

Production possibility frontiers (PPF)

Production possibility Frontiers is a curve which shows the maximum combination of output that can be produce within the economy over a period of time using its available resources and given technology. It is also known as a transformation curve. With a given resource and technology, a country can produce either goods A or B or combination of them at various level.

The table below shows the various combinations of sharenut and cocoa Ghana can produce in 2011.

Production Possibility Frontier (PPF) Table of Ghana in 2011

Possibilities	Bags of Cocoa (in millions)	Bags of Share nut (in million)
A	0	100
B	40	80
C	80	60
D	120	40
E	160	20
F	200	0

(a)   If the country is at possibility (B) and wish to stop the production of cocoa to share nut, how many extra share nuts bag can it produce.

Solution:

- point of production of sharenut is 80 bags

- maximum attainable production of share nut is 100

Extra = implies = maxim – point of production

Extra = 100 – 80

Extra = 20 bags of share nut

(b)   What percentage of the cocoa in the country producing at possibility (C)

Solution:

Point of Production (C) = 120

Maximum production = 200

(c)    What percentage is producing share nut at possibility (C)

Solution:

Point of production = 40

Maximum production = 100

Illustration the information on the PPF

It is important to note that PPF or PPC curve be any of the follow.

(a)  



This is known as concave or increasing opportunity

(b)  



This is known as convex or decreasing opportunity cost

(c)   



This is known as constant opportunity cost

Sample Questions

i.                   Explain why Economics is considered as science

ii.                 What do you under stand by the term Economics

iii.              Compare and contrast the social science to that of natural science

iv.               Explain carefully the concept of opportunity. Why is the concept so important

v.                  The basic problem of economics is scarcity. Explain this statement

vi.               Explain the term scale of preference. how does it help an individual, firm and government to efficiently allocate resource?

Importance of Economics

The reasons why we study economics include any of the following:

1.      Economics aims at preparing students or learners for gainful employment after course. As a practical subject, it prepares learners to fit well in modern economy as entrepreneurs or employees.

2.      It also enable learners to understand environment and designs ways to positively influence them.

3.      It also enables us to appreciate and understand the effort government is making in the management of national resources towards efficiency and avoid wastage.

4.      It also equips students with practical skills and tools for economic analysis and management.

5.      The subject also promotes national thinking and behaviour and finds possible solution to life and materials problem.

Branches of Economics

We have four branches of Economics. These are Micro Economics, Macro Economics, Positive Economics and Normative Economics.

(a)   Micro Economics is the branch of Economics that studies the economics as a unit. Micro economics is concerned with the basic decision making of an individual and firm. It is also concerned with cost of production, output, pricing and marketing decision of an individual and firm or business enterprise.

Importance of Micro-Economics

1.      It enables the state or government to design and make policies that will improve the welfare and living standard of the people. E.g. Poverty Reduction Strategy and Micro Finance.

2.      It also helps to come out with policies that develop and promote better understanding of the functioning of the various units within the economy. E.g. output, cost of production, pricing and marketing.

3.      It also helps in the development of sound economic tools for analysing, interpretation of the economy.

Limitation of Micro Economy

1.      Most data obtained from micro economic environment are not reliable. As most people in that sector are illiterates and hence do not keep records. Some are also found in inaccessible areas due to bad road network.

(b)   Macro-Economics
Macro Economics is a branch of economics that studies the economy as a whole. In other words, macro economics deals with larger units within the economy. It relates to aggregate demand, unemployment, national income, balance of payment, population, money and banking and so on.

Importance of Macro-Economics

1.      It helps in the fair distribution of income to all sectors of the economy but not in the hands of only few. E.g. investment in all sectors of the economy by the state.

2.      The study of macro economics also helps to satablize prices of goods and services in order to build confidence in the economy. E.g. the use of monetary policies to control inflation.

3.      It also promotes to increase the gross domestic product (GDP) of the economy to promote living standards of the people.

4.      It also works to eliminate infant and maternal mortality within the economy.

Limitations of Macro-Economics

1.      Data Collection is Often difficult.

2.      Some data are grouped without considering the nature of the components.

(c)    Positive Economics

Positive Economics is a branch of economics that uses scientific methods or approach in the economic analysis. It uses the same methods for evaluation and formulation of laws or theories of economics. The methods includes observation of facts, hypothesis formulation, data collection and prediction and forumaltion of laws or theories. It is based on objective analysis.

(d)   Normative Economics

Normative Economics is the study of economics based on personal opinion and not generally accepted theories. It is based on value judgement or subjective judgement, in analysing economic issues.

BASIC ECONOMIC PROBLEMS FACING SOCIETY

1.      What to Produce?

What to produce is one of the major basic problems facing or confronting society. Every society is faced with the problem of what to use the scare resources to produce, for the benefit of the society. Should they use the resources to produce agricultural prodcust, industrial products, consumer products, and so on.

2.      How to Produce?

Another basic problem is how to produce. This refers to the method or technique to adopt in the production of goods and services. The method could be labour intensive or capital intensive. The method to adopt must reduce cost of production and increase output and profit.

3.      For whom to Produce?

This refers to which segment of the society to produce for or who are the target customers? Is it rich or poor people, male or female, infant or adult?

4.      Where to Produce?

Another basic problemis where to locate the industry to minimize cost and maximize profit. It could be near source of raw-materials, water, electricity, market or labour.

5.      When to Produce?

When to produce goods and services to meet customer deadline.

6.      Efficient use of resource

Resources are efficiently used or allocate, when it is impossible to use it to produce more or one commodity without producing less of others. It is also referred to the production of quality goods and services to ensure that, they reach the final consumer.

ECONOMIC SYSTEM

Economic system is an arrangement and specification of how production and consumption of resources are owned and controlled in the society. In other words, it is an arrangement for managing the relative scarce resources in a particular place and time.

We have three types of Economic Systems. These are Capitalism, Socialism and Mixed Economy.

(a)   Capitalism

This is an economic system in which most of the productive resources are owned and controlled by private individuals or group of individuals and the economic activities of the government are minimum.

The role of the government is to provide security and the private individuals engages in the economics activities. The capitalism is also known as free market economy, as prices of goods and services are influenced by market forces or demand and supply. That is, there is not price control.

Characteristics of Capitalism

1.      Private individuals are allowed to own and acquire properties such as building or factors of production.

2.      Producers compete in the production of similar or same goods and services.

3.      Individuals are allowed to inherit properties.

4.      The basic right of an individual is protected by the state.

5.      Consumers is regarded as a king, due to competition.

6.      Prices of goods and services are determined by the market forces of demand and supply.

7.      Producers aim at maximising profit.

Advantages of Capitalism

1.      People enjoy higher standard of living, as a result of job availability

2.      Countries under capitalist economy enjoy rapid economic development as a result of efficiency of private individuals as against government control.

3.      It allows an individual to freely make their choice, and not by the sate.

4.      Capitalism also brings about efficiency of management due to the private ownership of businesses and competition.

5.      It also brings about the specialization and division of labour because of the intension to produce more.

6.      It also brings about the innovation, as a result of freedom enjoyed by the people.

Disadvantages of Capitalism

1.      It widens income gap between rich and poor, as the rich get richer and the poor, poorer.

2.      Little attention is paid to human welfare as a result of profit.

3.      It leads to instability and waywardness as a result of widening income gap between rich and poor. Example, armed robbery and prostitution.

4.      Easy decision making is likely to be unfavourable.

5.      Social vices such as drug addiction becomes the order of the day, as a result of unemployment.

(b)   Socialism / Centrally Planned Economy

Socialism is an economic system in which the means of production are owned and controlled by the state. The economic activities of the individual is minimum. Resources are bein allocated or distributed by the state. Cuba is an example of socialist state.

Features of Socialism

1.      Resources are owned and controlled by the state. Example factors of production.

2.      Economic decisions are made or taken by the government in the interest of all.

3.      Factors of production are optimally utilized. Example no unemployment.

4.      Freedom of choice in terms of consumption and occupation.

5.      Absence of unhealthy competition by producers which sometimes result to proce war, is non-existent.

Advantages of Socialism

1.      There is optimum production, that is, no under or over production.

2.      There is equitable distribution of resources for general welfare of the people rather than profit motives or reasons.

3.      No room for exploitation of the people by the private individual.

4.      Full employment can be achieved in socialism. That is, no redundancy of labours.

5.      There is often commensuration of incentives for all workers as a promotion, rewards and allowances.

6.      There is absence of bribery and corruption as in the case of mixed economy.

Disadvantages of Socialism

1.      Prices of goods and services are artificial. That is, pricing is being influenced by the state, which can collapse the businesses.

2.      State controlled suppresses or kills individual initiatives in setting-up industries.

3.      Economic decisions are worrying and cumbersome.

4.      Absence of competition reduces the economic management of resources or businesses.

5.      Workers are often lazy, which may negatively affect production.

(c)    Mixed Economy

Mixed economy is an economic system in which the productive resources are owned and controlled by both the state and private individuals. Mixed economy is the combination of the capitalist and socialist ideas for efficient economic management.

In the mixed economy some enterprises are owned by the state, some are owned by the private sector. Also, in the mixed economy privatize and nationalize business enterprises.

Nationalization is the process by which the state takes ownership of the private enterprise. It is the case, when government sees the facility as being strategic to provide essential services for the general well-being of the people. Accra Brewery Limited is an example.

Privatization on the other hand, is the process by which the state owned enterprises are shifted either partly or whole to the private sector. It is when the state had a major problem for the efficient management of the facility. Examples are Ghana Telecom and Ghana Commercial Bank Limited.

Features of Mixed Economy

1.      It promotes private initiatives with government regulatory role.

2.      There is freedom of choice by both the producers and the consumers.

3.      Both the state and private sectors engage in economic activities.

4.      State invest in the strategic sector such as health, education and transportation.

5.      Fair competition among producers and consumers.

6.      Government can privatize the state owned enterprises to the private sector.

7.      Government can also nationalize the private owned enterprises.

Advantages of Mixed Economy

1.      Equitable distribution of wealth and income by government through minimum wage policy.

2.      Exploitation on the part of the private sector is greatly reduced as a result of competition and government regulatory power.

3.      Limited controlled by the government encourages private initiatives and innovation.

4.      There is freedom of choice by both producers and consumers.

5.      Workers enjoy job security because of government regulatory power and trade unions.

Disadvantages of Mixed Economy

1.      Pricing of goods and services of the state owned enterprises are often artificial and can collapse the industry.

2.      It creates room for bribery and corruption in the state owned businesses.

3.      Inefficiceny and mismanagement often characterized by state owned enterprises.

FUNCTIONS OF ECONOMIC SYSTEM

Every economic system whether capitalist, socialist or mixed performe the following functions.

(a)   What to Produce?

Every economic system determines what to use the available resources to produce in order to satisfy the need of the society. The available resources could be used to produce consumer or industrial goods.

(b)   How to Produce?

They also think of a method or a technique to adopt in the production of the commodity. The method could be capital intensive or labour intensive methods of production, to minimize cost and maximize profit.

(c)    For Whom to Produce?

They also determine for whom the goods should be produced in order to avoid wastages or shortages.

(d)   How Much to produce?

(e)    Where to Produce?

This is where the economic system decides where to locate the industry. In the capitalist economy, it is the private sector that determines where to produce. But in the centrally planned economy, it is government. Both government and the private sectors determine where to produce.

(f)     How to Distribute?

It is also the function of the economic system to decide the efficient method for the distribution of goods and services in the country. This will ensur