Chapter 1 – The Fundamental of Economics

Economics is a social science. It is one of the most important branches of knowledge at present. In this branch of knowledge we try to understand how the economy of a particular region, a country or the global economy works.

Economists have given different definitions of Economics from time to time as per their understanding of different situations needing attention for economic solutions. Few of the definitions given by renowned economist are discussed below

Adam Smith

• Father of modern Economics
• Known as Wealth Definition

Marshall

• Economics is a study of mankind in the ordinary business of life
• Known as Welfare Definition

Robbins

• Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses
• Known as Scarcity Definition

Micro and Macro Economics

Microeconomics

• Micro economics is a branch of economics that studies how households and firms make decisions to allocate limited resources, typically in markets where goods or services are being bought and sold.
• Microeconomics examines how these decisions and behaviours affect and supply and demand for goods and services, which determines prices; and how prices, in turn, determine the supply and demand for goods and services.
• Microeconomics analyses the market behavior of individual consumers and firms in an attempt to understand the decision-making process of firms and households.

Macroeconomics:

• Macro economics is concerned with the overall performance of the economy.
• Macroeconomics did not exist in its modern form until 1936, when John Maynard Kaynes published his revolutionary book titled General Theory of Employment, Interest and Money.
• In his new theory, Keynes developed an analysis of what causes business cycles, with alternating spells of high unemployment and high inflation.
• Macroeconomics examines a wide variety of areas, such as how total investment and consumption are determined, how central banks manage money and interest rates, what cause international financial crises, and why some nations grow rapidly while others stagnate.
• Macroeconomics is a branch of Economics that deals with the performance, structure and behavior of a national or regional economy as a whole.
• It is the study of the behavior and decision-making of entire economies.
• Macroeconomists study aggregated indicators such as GDP, unemployment rates and price indices to understand how the whole economy functions.
• Macroeconomists develop models that explain the relationship among such factors as national income, output, consumption, unemployment, inflation, saving, investment, international trade and international finance.
• Microeconomics is primarily focused on the actions of individual agents, such as firms and consumers, and how their behavior determines prices and quantities in specific markets.

TYPES OF ECONOMIES

Market Economy / Capitalistic Economy

• Individuals and private firms make the major decision about production and consumption
• Ex-United States
• The Extreme case of a market economy, in which the government does not interface in economic decisions is called a LAISSER-FAIRE economy

Socialistic Economy / Command Economy

• Government makes all important decisions about production and distribution

Mixed Economy

• No contemporary society or economy falls completely into either of these extreme categories. Rather, all societies are mixed economies, with elements of both market and command economies
• Ex-India