Economics

What is economics?
Human beings have got unlimited wants. Satisfaction of wants requires goods and
services. Goods and services are not freely available. They need to be produced.
Production of goods and services requires resources. But resources are limited in
supply and have got multiple uses. Since all goods and services needed to satisfy
unlimited human wants cannot be produced because of resource constraint, we need
to make choice as to which goods and services are to be produced and in what
quantity (choice in consumption). Again, since more goods are preferable to fewer
amounts of the same, and since resources may be combined in alternative bundles to
produce a given amount of output, we need to choose that bundle of resources which
will yield the largest output of a given commodity (choice in production). The choice
of consumption bundle that will land the consumers on the highest level of
satisfaction and the choice of the resources bundle that will allow us to achieve the
highest level of production using the minimum bundle of resources will lead us to the
achievement of highest level of efficiency with respect to both consumption and
production. Economics is all about attaining this highest level of efficiency in both
consumption and production.
What is microeconomics and macroeconomics?
Microeconomics discusses the behavior of individual firm and consumer in their
effort to reach the most efficient level of production and consumption.
Macroeconomics, on the other hand, discusses the employment and utilization of all
available resources in the economy at the given point of time. Macroeconomics deals
with aggregate output (national income), aggregate employment, price level and so
on.
Basic problems of human society:
Basic problems of human society are:
1 What to produce?

2 How to produce?

3 For whom to produce?

Since human wants are unlimited, the wants of any human society also are unlimited.
But to satisfy those unlimited wants, a limited amount of goods and services will
need to be produced. This in turn, will require an unlimited supply of resources which
will unfortunately not the situation we observe in nature. So the number and quantity
of goods and services to be produced should, necessarily, have to be limited. Hence,
these raises the question of making choice- which goods and services should be
produced and whose production should be forgone at least for the time being.
Again since the supply of resources is limited in nature and resources can be
combined in alternative bundles to produce a given output, a decision needs to be
made as to which resources are to be employed in what amount to produce a given
output.
Further, production of goods and services is carried out to satisfy human wants. Since
the human society consists of many individuals, who will consume what amount of
the goods and services produced also need to be decided.
Capitalist economy:
Capitalist society whose private ownership of the means of production in society
recognized, all the above mentioned problems are solved by price-mechanism.
Market forces of demand and supply act freely and price fluctuates independently in
response to changes in demand and supply. In such an economy, producers make
their production decisions based on the free movement of price. If price of a
commodity rises, that will induce the producers to produce more of the commodity.
After deciding on the kinds and quantity of goods to be produced, producers employ
different types of resources depending on their respective market prices. And finally,
who will consume which commodity and in which amount will also be decided by
the consumers according to their respective income and price of the commodities
prevailing in the market.
Socialist economy:
In the socialist economy, means of production are owned by the state. State
determines, through central planning, which goods and services are to be produced
and in what amount, what resources will be employed to produce the goods and
services and also who will consume what commodity in what quantity (through
rationing).
Mixed economy:
In the mixed economy, means of production are partially owned by state and partially
by private citizens. The decision about what to produce, how to produce and for
whom to produce are taken partly by state through planning and partly by the private
citizens through market mechanism.
Islamic economy:
In an Islamic economy, the solution of the basic economic problems is likely to come
about more or less in the same way as in the mixed economy or in a capitalist
economy with the exception that nothing can be produced or consumed if it is
prohibited by the scripture.
Demand:
What backed by purchasing power is called demand.
Law of demand:
Other things remaining the same, if the price of a commodity goes up its demand
(quantity) declines and vice versa. This gives us a generally negatively sloped
demand curve.
Responses of demand to price changes:
If the quantity demanded changes more than proportionately following a given price
changes, the demand is said to be elastic. For example, demand for luxury goods.
If the quantity demanded changes less than proportionately following a given price,
the demand is inelastic.
If the quantity demanded changes proportionately with the price changes, the demand
is unit elastic.
The rate of response of quantity demanded to price changes is called the elasticity of
demand. Elasticity of demand is measured by

Ed = = =

For elastic demand ed 1

For inelastic demand ed 1
For unit elastic demand ed = 1
Since price and quantity demanded are inversely related, so own price elasticity is
negative.
Cross elasticity of demand:
The change in the quantity demanded of a commodity following changes in the price
of another commodity is called the cross elasticity of demand.
Two goods are said to be substitute if their cross elasticity is positive. For example;
tea and coffee.
Two goods are said to be complimentary if their cross elasticity is negative. For
instance; tea and sugar.
Why does a demand curve slope downward to the right?
Because of the law of diminishing marginal utility, the more and more a person buys
of a commodity, its marginal utility declines to him. So he can be induced to buy
additional unit of the same commodity only if its price decreases. This leads to a
downward sloping demand curve giving an inverse (negative) relationship between
price and quantity.