Importance Of Economics Everyone is a part of economy and everyone uses the rules of economy too. From the time we are born, we become consumers of various products and services (say, medical services, baby foods, and so on). We grow and diversify to attain various different roles as producers, traders, mediators and agents. Today’s world is that of “economic imperialism”, where economical factors, most importantly, money dictates all the elements of the society, not to forget close family relations. With recession wreaking havoc, economics is something which even ignorant households are learning.
Economics is a science which deals with production, distribution and consumption of goods and services. Therefore, we can conclude that whatever involves “transfer of money” includes “economics”. There are two schools of economics, namely, microeconomics and macroeconomics. The combined results of these two determine the actual effect of economics on people. To list all the important functions of economics would be literary impossible as newer issues keep creeping up. In the following lines, we have described some broad and basic functions of economics. Significance Of Economics Optimizes Resource Usage
In today’s world, the amount of resources available to us is reducing each day. This condition will only worsen, if we keep using our resources with low efficiency and effectiveness. Economics provides a mechanism for looking at possible ways to optimize resource utilization and reduce wastages. Utilizes the “Opportunity Cost” This is another principle used for resources in which the scarce resources are utilized efficiently, after calculating and checking the opportunity cost. A simple theory of exclusion is put into play. If you choose something over another thing, then what loss you sustain is the opportunity cost.
If we minimize the opportunity cost, we get maximum profits. For example, a person who invests $10,000 in a stock denies himself the interest that could have been accrued, by leaving the $10,000 in the bank account instead. The opportunity cost of the decision to invest in stock, is the value of the interest. When this principle is used in budget allocations by government, it results in better growth rates. Gains Social Efficiency If a society keeps on putting money into its economy with no profits or loss, then the economy becomes inefficient and so does the society, as it gets dependent on the economy.
If the input into an economy is larger than the output, then the society starts disintegrating and falls prey to destructive social evils, like unemployment and poverty. The same is the case if the economy is stagnant. Understanding of economics leads to better planned economy. Also, profitable economic steps introduced largely aid in the society’s overall prosperity. Stabilizes The Overall Economy The stability of an economy is inevitable to any country or society. Only through economically sound practices can we ensure that the economy is stable and growing at the same time.
In recent times, when the world’s economy fell, only a few countries were able to sustain their growth rate and prevent severe monetary impacts on their citizens. Understands Individual Economics This is important for the growth of individuals economically. A person needs to understand the economic situations and stipulations present in his own life. He may not need the hardcore subjective understanding of economics, but he definitely needs to understand the economic practices that he must follow to eradicate chances of going broke or bankrupt.
Also, understanding of economics helps in using the resources in the best possible way and gaining maximum profit. What is Economics? A Definition of Economics Ever wonder why food costs rise when gas prices spike? Ever question why U. S. politicians worry when other countries talk of going bankrupt? Ever wonder why you can’t get a good interest rate on your savings account? All of these phenomena can be explained through economics. Economics is the study of the production and consumption of goods and the transfer of wealth to produce and obtain those goods.
Economics explains how people interact within markets to get what they want or accomplish certain goals. Since economics is a driving force of human interaction, studying it often reveals why people and governments behave in particular ways. There are two main types of economics: macroeconomics andmicroeconomics. Microeconomicsfocuses on the actions of individuals and industries, like the dynamics between buyers and sellers, borrowers and lenders. Macroeconomics, on the other hand, takes a much broader view by analyzing the economic activity of an entire country or the international marketplace.
A study of economics can describe all aspects of a country’s economy, such as how a country uses its resources, how much time laborers devote to work and leisure, the outcome of investing in industries or financial products, the effect of taxes on a population, and why businesses succeed or fail. People who study economics are called economists. Economists seek to answer important questions about how people, industries, and countries can maximize their productivity, create wealth, and maintain financial stability.
Because the study of economics encompasses many factors that interact in complex ways, economists have different theories as to how people and governments should behave within markets. Adam Smith, known as the Father of Economics, established the first modern economic theory, called the Classical School, in 1776. Smith believed that people who acted in their own self-interest produced goods and wealth that benefited all of society. He believed that governments should not restrict or interfere in markets because they could regulate themselves and, thereby, produce wealth at maximum efficiency.
Classical theory forms the basis of capitalism and is still prominent today. A second theory known as Marxism states that capitalism will eventually fail because factory owners and CEOs exploit labor to generate wealth for themselves. Karl Marx, the theory’s namesake, believed that such exploitation leads to social unrest and class conflict. To ensure social and economic stability, he theorized, laborers should own and control the means of production. While Marxism has been widely rejected in capitalistic societies, its description of capitalism’s flaws remains relevant.
A more recent economic theory, the Keynesian School, describes how governments can act within capitalistic economies to promote economic stability. It calls for reduced taxes and increased government spending when the economy becomes stagnant, and increased taxes and reduced spending when the economy becomes overly active. This theory strongly influences U. S. economic policy today. As one can see, economics shapes the world. Through economics, people and countries become wealthy. Because buying and selling are activities vital to survival and success, studying economics can help one understand human thought and behavior.
Branches of Economics Economics has two branches: microeconomics and macroeconomics. Microeconomics is the branch of economics that deals with the personal decisions of consumers and entrepreneurs. Its primary concern is to help consumers and investors make their lives better by increasing their earnings and satisfying their needs despite limited resources. Also included in its study are the consumers’ decisions on what products to buy and how the cost of commodities is determined. Macroeconomics deals with the larger aspects of a nation’s economy, such as the sectors of agriculture, industry, and service.
It aims to (a) speed up the economy’s growth rate and increase total production; (b) increase the rate of employment; (c) keep the prices of commodities stable so that they remain affordable; and (d) have sufficient reserves for foreign exchange for importing goods and paying off loans. Economists help in solving problems like unfair wages, rapid population growth, people migration to city centers, high crime incidence, and loss of human resources due to overseas migration. Economic Methodology What is the difference between positive and normative economics?
Positive economics is objective and fact based, while normative economics is subjective and value based. Positive economic statements do not have to be correct, but they must be able to be tested and proved or disproved. Normative economic statements are opinion based, so they cannot be proved or disproved. While this distinction seems simple, it is not always easy to differentiate between the positive and the normative. Many widely-accepted statements that people hold as fact are actually value based.
For example, the statement, “government should provide basic healthcare to all citizens” is a normative economic statement. There is no way to prove whether government “should” provide healthcare; this statement is based on opinions about the role of government in individuals’ lives, the importance of healthcare and who should pay for it. The statement, “government-provided healthcare increases public expenditures” is a positive economic statement, because it can be proved or disproved by examining healthcare spending data in countries like Canada and Britain where the government provides healthcare.
Disagreements over public policies typically revolve around normative economic statements, and the disagreements persist because neither side can prove that it is correct or that its opponent is incorrect. A clear understanding of the difference between positive and normative economics should lead to better policy making, if policies are made based on facts (positive economics), not opinions (normative economics). Nonetheless, numerous policies on issues ranging from international trade to welfare are at least partially based on normative economics.
Deduction in Economics Deductive economics starts with a set of axioms about economies and how they work, and relies on these principles to explain individual cases or events. Supply and demand analysis, a staple in any introductory economics course, is an example of deductive reasoning because it involves a set of generally accepted principles about demand and supply. To summarize, deduction in economics starts with a generally accepted principle and proceeds to the specific. Induction in Economics
Inductive reasoning in economics does the reverse of deductive reasoning; namely, it begins with an individual problem or question and proceeds to form a general principle based on the evidence observed in the real world of economic activity. For example, an economist who asks if a government program of public works spending will stimulate a region’s economy will proceed to research the issue, collect and analyze data, and based on conclusions, form a general theory about the economic impact of fiscal policies. Classification of economic resources? here are two types of economic resources: a. Property resources b. human resources Human resources is the set of individuals who make up the workforce of an organization, business sector or an economy. “Human capital” is sometimes used synonymously with human resources, although human capital typically refers to a more narrow view; i. e. , the knowledge the individuals embody and can contribute to an organization. Likewise, other terms sometimes used include “manpower”, “talent”, “labour”/”labor” or simply “people”. The Four Factors of Production in Economics
Land Land refers to the natural resources that are available and used in the production of goods. For example, a heavy mining industry could not exist without the natural deposits of valuable minerals in the ground, while a thriving farming community would have a hard time surviving with poor soil and no rainfall. Labor Labor refers to the human inputs of work to produce the goods and services. For example, the training required for employees to successfully operate machines to produce cars would be considered as part of labor.
In addition, the mental capacity to perform tasks and invent new products is also part of labor. The only human element not included in labor is entrepreneurship. Capital Capital refers to the tools and machines that are required for the production of the product. For example, when making cars, the capital would include the factory and all the machinery in the factory used in making the car. On a farm, the capital would include the tractors, harvesters and other equipment used to grow crops or raise livestock. Entrepreneurship
Entrepreneurship refers to the economic motivation for an individual to attempt to make a profit from an idea. For example, people may know how to build cars, machines may be available and the land for the factories for sale, but it takes an entrepreneur to put those factors together in an attempt to make a profit. Entrepreneurs put their own resources at stake by personally investing in the company. For example, a business owner is not paid an hourly wage like the people who work for her. Instead, her income depends on the success or failure of the business venture. production possibility curve
A graphical representation of the alternative combinations of the amounts of two goods or services that an economy can produce by transferring resources from one good or service to the other. This curve helps in determining what quantity of a nonessential good or a service an economy can afford to produce without jeopardizing the required production of an essential good or service. Also calledtransformation curve. What are the three basic economic problems? the basic economic problem is the unlimited wants and needs of human which results to scarcity of resources. what are the needs? the needs are the things we must posses in order to survive like food,water, clothing,shelter. while the wants are those things that human would like to have in order to improve there status in life. we limited resources that’a why encounter this problem. the economic resources like land, labor,and capital which are the factors if production are insufficient to satisfy our needs and wants. All 3 problems are more clearly explained using a ppf/ppc: 1) What to produce: This problem is what should the economy produce in order to satisfy consumer wants (as seen by demand curves) as best as possible using the limited resources available.
If a country produces goods in a way that maximises consumer satisfaction then the economy is allocatively efficient. 2) How to produce: This problem is how to combine production inputs to produce the goods decided in problem 1 as most efficiently as possible. An economy achieves productive efficiency if it produces goods using the least resources possible. A productively effiecient economy is represented by an economy that is able to produce a combination of goods on the actual curve of the PPF. 3) For whom to produce: Should the economy produce goods targetted towards those who have high incomes or those who have low incomes.
What sort of demographic group should the goods in the economy that are produced be targetted towards? If the economy is addresses this problem then it has reached preto efficiency or pareto optimality. If all three problems are addressed at any one time then the economy has achieved static efficiency. If the economy achieves static efficiency over a period of time then it is dynamically efficient. All these problems are focused around the problem of unlimited wants and limited resources. Where resources are the fators of production (such as labor, capital, technology, land.. ) which are used to produce the products that satisy the wants. conomic system An organized way in which a state or nation allocates its resources and apportions goods and services in the national community. Types of Economic Systems “You can’t always get what you want. ” That’s what the Rolling Stones sang, anyway (check it out: great song even if it’s a bit before your time). And while Mick Jagger probably didn’t have Econ 101 in mind, he managed to sum up perfectly the core concept underlying all economics. Scarcity is the fundamental challenge confronting all individuals and nations. We all face limitations… so we all have to make choices.
We can’t always get what we want. How we deal with these limitations—that is, how we prioritize and allocate our limited income, time, and resources—is the basic economic challenge that has confronted individuals and nations throughout history. But not every nation has addressed this challenge in the same way. Societies have developed different broad economic approaches to manage their resources. Economists generally recognize four basic types of economic systems—traditional, command, market, and mixed—but they don’t completely agree on the question of which system best addresses the challenge of scarcity.
A traditional economic system is—here’s a shocker—shaped by tradition. The work that people do, the goods and services they provide, how they use and exchange resources… all tend to follow long-established patterns. These economic systems are not very dynamic—things don’t change very much. Standards of living are static; individuals don’t enjoy much financial or occupational mobility. But economic behaviors and relationships are predictable. You know what you are supposed to do, who you trade with, and what to expect from others. In many traditional economies, community interests take precedence over the individual.
Individuals may be expected to combine their efforts and share equally in the proceeds of their labor. In other traditional economies, some sort of private property is respected, but it is restrained by a strong set of obligations that individuals owe to their community. Today you can find traditional economic systems at work among Australian aborigines and some isolated tribes in the Amazon. In the past, they could be found everywhere—in the feudal agrarian villages of medieval Europe, for example. In a command economic system or planned economy, the government controls the economy.
The state decides how to use and distribute resources. The government regulates prices and wages; it may even determine what sorts of work individuals do. Socialism is a type of command economic system. Historically, the government has assumed varying degrees of control over the economy in socialist countries. In some, only major industries have been subjected to government management; in others, the government has exercised far more extensive control over the economy. The classic (failed) example of a command economy was the communist Soviet Union. The collapse of the communist bloc in the late 1980s led to the emise of many command economies around the world; Cuba continues to hold on to its planned economy even today. In market economies, economic decisions are made by individuals. The unfettered interaction of individuals and companies in the marketplace determines how resources are allocated and goods are distributed. Individuals choose how to invest their personal resources—what training to pursue, what jobs to take, what goods or services to produce. And individuals decide what to consume. Within a pure market economy the government is entirely absent from economic affairs.
The United States in the late nineteenth century, at the height of the lassez-faire era, was about as close as we’ve seen to a pure market economy in modern practice. A mixed economic system combines elements of the market and command economy. Many economic decisions are made in the market by individuals. But the government also plays a role in the allocation and distribution of resources. The United States today, like most advanced nations, is a mixed economy. The eternal question for mixed economies is just what the right mix between the public and private sectors of the economy should be. Why It Matters Today
Half of the twentieth century went down as a global battle between defenders of free markets (democratic capitalist nations, led by the United States) and believers in command economies (the communist bloc, led by the Soviet Union). The US and USSR never went to war against each other directly, but dozens of smaller (yet still tragic and significant) wars unfolded around the world as bitter fights over economic systems turned bloody. Korea, Vietnam, Nicaragua, Afghanistan, Angola… millions of people died in the various “hot” theaters of a Cold War fought to decide whether markets or states should control economic affairs.
The great irony was that the Cold War finally ended not on a battlefield, but because the Soviet economy finally self-destructed by the late 1980s. For most of the world, the Soviet collapse proved that command economies were simply inferior to the market-dominated mixed economies of the capitalist world. Of course, China – still ruled politically by an authoritarian Communist Party, even though its economy is now more mixed if not exactly free – is now the biggest creditor nation to the United States. What are six major economic goals of a market economy? Freedom, efficiency, equality, stability, security, growth.
The 6 Economic Goals Objectives: – Summarize the basic economic goals societies share 6 Economic Goals – Economic Efficiency – Making the most of resources – Societies must be efficient – Economic Freedom – Freedom from govt intervention in the production & distribution of G & S – Economic Security and Predictability – We want to know that G & S will be available (Paychecks too) – Safety Net- – govt programs that protect ppl experiencing unfavorable economic conditions 6 Economic Goals Cont. – Economic Equity – Fair distribution of wealth – Economic Growth and Innovation Innovation leads to growth, and economic growth leads to a higher standard living – Standard of Living- – level of economic prosperity – Other Goals – Environmental Protection, Consumer Safety Millennium Development Goals “MDG” redirects here. For other uses, see MDG (disambiguation). The Millennium Development Goals are aUN initiative. The Millennium Development Goals (MDGs) are eight international development goals that were officially established following theMillennium Summit of the United Nations in 2000, following the adoption of the United Nations Millennium Declaration.
All 193 United Nations member states and at least 23 international organizations have agreed to achieve these goals by the year 2015. The goals are: Eradicating extreme poverty and hunger, Achieving universal primary education, Promoting gender equality and empowering women, Reducing child mortality rates, Improving maternal health, Combating HIV/AIDS, malaria, and other diseases, Ensuring environmental sustainability, and Developing a global partnership for development. 
Each of the goals has specific stated targets and dates for achieving those targets. To accelerate progress, the G8 Finance Ministers agreed in June 2005 to provide enough funds to the World Bank, the International Monetary Fund (IMF), and the African Development Bank (AfDB) to cancel an additional $40 to $55 billion in debt owed by members of theHeavily Indebted Poor Countries (HIPC) to allow impoverished countries to rechannel the resources saved from the forgiven debt to social programs for improving health and education and for alleviating poverty.
Debate has surrounded adoption of the MDGs, focusing on lack of analysis and justification behind the chosen objectives, the difficulty or lack of measurements for some of the goals, and uneven progress towards reaching the goals, among other criticisms. Although developed countries’ aid for achieving the MDGs has been rising over recent years, more than half the aid is towards debt relief owed by poor countries, with much of the remaining aid money going towards natural disaster relief and military aid which do not further development.
Progress towards reaching the goals has been uneven. Some countries have achieved many of the goals, while others are not on track to realize any. A UN conference in September 2010 reviewed progress to date and concluded with the adoption of a global action plan to achieve the eight anti-poverty goals by their 2015 target date.
There were also new commitments on women’s and children’s health, and new initiatives in the worldwide battle against poverty, hunger, and disease. Government organizations assist in achieving those goals, among them are the United Nations Millennium Campaign, the Millennium Promise Alliance, Inc. , the Global Poverty Project, the Micah Challenge, The Youth in Action EU Programme, “Cartoons in Action” video project, and the 8 Visions of Hope global art project.