What is Economics?

Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people Goods are scarce but wants are unlimited Given unlimited wants, an economy should make the best use of its limited resources

Efficient Economy
An economy is producing efficiently when it cannot make anyone economically better off without making someone else worse off. The essence of economics is to acknowledge the reality of scarcity and then figure out how to organize society in a way which produce the most efficient use of resources.
2

Importance of studying economics

Explores the behavior of the financial markets interest rates and stock prices Examines the reasons why some people or countries have high incomes while others are poor Studies business cyclesups and downs of unemployment and inflation Studies global trade and finance and the importance of globalization Looks at growth in developing countries and purposes ways to encourage the efficient use of resources Asks how govt. policies can be used to pursue important goals
3

Microeconomics
Adam Smith, a great economist, is the founder of microeconomics This branch is concerned with the behavior of individual entities such as markets, firms, households and even the government. Studies the determinations of prices of land, labor and capital (these three are called factors of production) Inquires about into the strengths and weaknesses of the market mechanism
4

Macroeconomics
This is concerned with the overall performance of the economy. Macroeconomics examines variety of areashow total investment and consumption are determined, how central banks manage money and interest rates, what causes financial crisis, why some nations grow rapidly etc.
5

Tasks of Economists
Economists use the scientific approach to understand economic lifeobserving economic affairs. Economics relies upon analyses and theories Economists developed a specialized techniquesECONOMETRICS which applies the tools of statistics to economic problems to understand causality of many economic problems
6

Ultimate goal of Economics

The ultimate goal of economics is to improve the living conditions of people in their everyday lives.

Three problems of Economic organization

What commodities are produced
How these goods are made For whom they are produced

Market, Command and the Mixed Economies

A market economy is one in which individuals and private firms make the major decisions about production and consumption. In the USA and increasingly around the world, most economic questions are settled by the market mechanism. The extreme case of a market economy, in which the government keeps its hands off economic decisions, is called a Laissezfaire economy.
9

Command Economies
A Command economy is one in which government makes all important decisions about production and distribution. In short in a command economy government answers the major economic questions through its ownership of resources and its power to enforce decisions.
10

Mixed Economies
Mixed Economies with the elements of market and command. That is in this economic system most decisions are made in the market place. But government plays an important role in overseeing the functioning of the market. Most societies today operate mixed economies.
11

Positive vs Normative Economics

Positive economics describes the facts of an economy, while normative economics involves value judgments. Example of Positive economics: Why do doctors earn more than engineers? Does free trade raise or lowers the wages? Example of Normative economics: Should something be happen type questions. It deals with ethical percepts and norms of fairness.
12