Chapters :

Introduction of Economy – 01

ECONOMICS- MEANING:

Economics is essentially a study of the usage of resources under specific constraints, all bound with an audacious hope that the subject under scrutiny is a rational entity which seeks to improve its overall well-being. Put simply the economies involve all production and consumption-related activities as well as the trade of goods and services in a country. An economy is often synonym of the economic system. Therefore, it includes the distribution of resources to the factors of production as well the labor and capital required for the production factors to produce an output.

The term ‘economics’ dervied from the Greek word oikonomia, which is composed of oikos (house) and nomos(custom or law), meaning rules of the houshold.

Two branches within the subject have evolved thus: microeconomics (individual choices) which deals with entities and the interaction between those entities, while macroeconomics (aggregate outcomes) deals with the entire economy as a whole.

BRANCHES OF MODERN ECONOMICS:

Macroeconomics

Macro means large. When the study relates to the whole economy or to aggregates relating to the whole economy then the subject of study is macro economics. Macroeconomics is the branch of economics that deals with the economic aggregates of a country as a whole. The word macro is derived from the Greek word macros meaning large. It has emerged after the British economist John Maynard Keynes published his famous book The General Theory of Employment, Interest and Money in 1936. The Great Depression of 1929 made economists think about the subject in a newer way which was holistic and macroeconomic study developed. It is also called the Theory of Income and Employment.

The content of macroeconomic analysis involves a combination of units to get a complete picture of the economic system so as to deal with economic affairs at a large scale. The focus areas are aggregate economic variables of an economy. The components of output, price level and employment operate in an economy simultaneously which indicates that they bear a close relationship with each other.

This forms the basis of macroeconomic study which attempts to analyse these attributes together. It sees the economy as a combination of four components households, firms, government and external sector.

The study area involves the analysis of effects in the market of taxation, budgetary policies, and policies on money supply, role of state, rate of interest, wages, employment, and output. It is, therefore, also called income theory as it is concerned with the economy as a whole and seeks to study the causes and solutions for economic issues such as unemployment, inflation, balance of payment deficits and so on.

Microeconomics

Micro means small. So, when the study or the problem relates to an individual unit or part of the economy then the subject of study is micro economics. Microeconomics is the study of economic activity of an economic unit or a part of the economy or a small group of more than one unit. Derived from the Greek word micros meaning small, it relates to the individual economic agent’s behaviour and the result of such interactions in determining the price of goods and services. It is, thus, also called Price Theory.

It is the microscopic study of the economy which deals with decision making by any individual, firm, household with respect to matters of production, consumption, determination of prices in the market, determination of wage rate, and so on. The aim is to provide a framework within which the behaviour patterns and interrelationships between individual economic units can be studied and their behaviour with regards to production, exchange and distribution of goods and services can be predicted. Thus, attainment of a state of equilibrium from the point of view of individual economic units is the main aim in microeconomic analysis.

Further, micro economics also puts emphasis on behaviour patterns and role of firms and individuals in income distribution and study of conditions of efficiency in production and attainment of overall efficiency. Efficiency implies optimum allocation of resources among the consumers and producers so that there is neither excess demand nor excess supply of goods and services. The analysis of the three central problems of an economy- what goods and services to be produced, how to produce them and how they can be distributed in the economy is all subject matter of micro economics.

TYPES OF ECONOMIES:

  1. Traditional Economy:

Traditional economy is an economic system in which traditions, customs, and beliefs help shape the goods and services the economy produces, as well as the rules and manner of their distribution. Countries that use this type of economic system are often rural and farm-based. Also known as a subsistence economy, a traditional economy is defined by bartering and trading. A little surplus is produced and if any excess goods are made, they are typically given to a ruling authority or landowner.

Government involvement is very little in this type of economy.

  1. Command Economy:

Also known as a planned economy, command economies have as their central tenet that government central planners own or control the means of production within a society. Private ownership or land, labor, and capital is either nonexistent or sharply limited to use in support of the central economic plan.

  1. Free market Economy:

This type of economy also has very little governmental interference or control. Economic decisions here are made based on market priniples. There is a lot of competition between firms, which provides many choices to consumers.

Resources for roduction are under private ownership and they make their decisions with the desire to maximise profits.

  1. Mixed Economy:

Mixed economy is that economy in which both government and private individuals exercise economic control. Under this system there is freedom of economic activities and government interferences for the social welfare. Hence it is a blend of both the economies. The concept of mixed economy is of recent origin.

  1. Open Economy:

An open economy is an economy in which there are economic activities between the domestic community and outside. People and businesses can trade in goods and services with other people and businesses in the international community, and funds can flow as investments across the border.

  1. Closed Economy:

A closed economy is one that has no trade activity with outside economies. The closed economy is self-sufficient, which means no imports come into the country and no exports leave the country.

The purpose of a closed economy is to provide domestic consumers with everything they need from within the country’s borders.

Capitalism and Socialism:

The main difference between capitalism and socialism is the extent of government intervention in the economy.

A capitalist economic system is characterised by private ownership of assets and business. A capitalist economy relies on free-markets to determine, price, incomes, wealth and distribution of goods. Private businesses will be owned by private individuals/companies.

A socialist economic system on the other hand is characterised by greater government intervention to re-allocate resources in a more egalitarian way. The state will own and control the main means of production. In some models of socialism, ownership would not be by the government but worker co-operatives.

Capitalism is unconcerned about equity. It is argued that inequality is essential to encourage innovation and economic development. Socialism is concerned with redistributing resources from the rich to the poor. This is to ensure everyone has both equal opportunities and in some forms of socialism – equal outcomes.

In Capitalism it is argued that the profit incentive encourages firms to be more efficient, cut costs and innovate new products that people want. If firms fail to keep up, they will go out of business. But, this business failure allows resources to flow to new more efficient areas of the economy. Something known as ‘creative destruction’

In Socialist economy ownership often leads to inefficiency because workers and managers lack any real incentive to cut costs.

SECTORS OF ECONOMY:

Primary Sector

In Primary sector of economy, activities are undertaken by directly using natural resources. Agriculture, Mining, Fishing, Forestry, Dairy etc. are some examples of this sector. It is called so because it forms the base for all other products. Since most of the natural products we get are from agriculture, dairy, forestry, fishing, it is also called Agriculture and allied sector.

People engaged in primary activities are called red-collar workers due to the outdoor nature of their work.

Secondary Sector

It includes the industries where finished products are made from natural materials produced in the primary sector. Industrial production, cotton fabric, sugar cane production etc. activities comes under this sector.

Hence its the part of a country’s economy that manufactures goods, rather than producing raw materials Since this sector is associated with different kinds of industries, it is also called industrial sector.

People engaged in secondary activities are called blue collar workers.

Examples of manufacturing sector: Small workshops producing pots, artisan production. Mills producing textiles, Factories producing steel, chemicals, plastic, car. Food production such as brewing plants, and food processing. Oil refinery.

Tertiary Sector:

The tertiary sector of the economy is also called as the service sector. This sector’s activities help in the development of the primary and secondary sectors. By itself, economic activities in tertiary sector do not produce a goods but they are an aid or a support for the production. Goods transported by trucks or trains, banking, insurance, finance etc. come under the sector. It provides the value addition to a product same as secondary sector.

This sector jobs are called white collar jobs.

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