ECONOMICS DEFINITION OF ECONOMICS: The study of Economics has expanded to include a vast range of topics. There are many definitions of economics. The important ones are that: 1. As a sub-discipline of social sciences, economics deals with implementing policies which can improve growth, reduce unemployment, reduce poverty, or to overcome trade deficit. 2. Economics deals with the different sectors of the economy or different economic agents (household, business, government and rest of the world) receive income and how they spend it. 3. Economics deals with allocation or reallocation of various economic resources to produce products and services which can satisfy different human wants and desires. All possible resources have alternative uses. 4. It analysis how a society’s institutions and technology affect prices and the allocation of resources among different users. 5. It examines the distribution of income suggests ways that the poor can be helped without harming the performance of the economy. 6. It studies the business cycle and examines how monetary policy can be used to moderate the swings in unemployment and inflation. 7. It is the study of how societies use scare resources to produce valuable commodities and distribute them different people. DEFINITIONS: Economic Agents: Economic Agents form part of economy which play vital role to improve or decline the performance of the economy. There are four Economic Agents: 1. 2. 3. 4. Household Business Government Rest of the World Household: A family home unit, some of which providing services to the different organisations, earning incomes, spending part of it on goods and services and saving the rest. Business: It refers to organisations, majority of them are commercial. Basically they manage or organise different factors of production, produce products or services which are provided to customers through a market system. Government: It may directly involve in some business activity through public corporations, otherwise their main task is to regulate the economy from time to time. Rest of the World: It means that selected group of countries with whom a country has either a financial or trade links. Economic Resources: Resources are the means which can be used to improve the economy of a country. There are following four types of economic resources: 1. 2. 3. 4. Natural Resources Human Resources Physical Resources Organisations Efficiency: It denotes the most effective use of a society’s resources in satisfying people’s wants and needs. Branches of Economics: There are two branches of Economics: 1. Micro Economics 2. Macro Economics Micro Economics: The branch of economics, which is concerned with the behaviour of individual entities such as markets, firms and individuals. Macro Economics: The other branch of economics, which is concerned with the overall performance of the economy. It examines a wide variety of areas such as how total investment and consumption are determined, how central banks manage money and interest rates, what causes international financial crises, and why some nations grow rapidly and while others stagnate. Positive Economics Vs. Normative Economics: Positive Economics describes the facts of an economy while Normative Economics involves value judgement. In contrast, Normative Economics involves ethical precepts and norms of fairness. Market & Command Economy: A Market Economy is one in which individuals and private firms make the major decisions about production and consumption. It is also called Laissez-Fair Economy. Command Economy is one in which the government makes all important decisions about production and distributions. Mixed Economy is a mixture of Command and Market Economy. Opportunity Cost: The cost of the forgone alternative is the opportunity cost of the decision. Choosing one thing by giving up the other. Productive Efficiency: It occurs when an economy cannot produce more of one good without producing the less of another good. Monetary Policy: It is supply of money and fixation of interest rates or other rates. Fiscal Policy: It comprises of Expenditures and Taxes. Inflation: Inflation is situation in an economy when the price index rises persistently and continuously. Micro Economics, Some Basic Terms: Purchasing Power/Real Income: It refers to the command of money income over goods and services in the given prices of those goods and services. Real Income/Purchasing Power is measured in physical units not in monetary terms. P.P = Amount / Price of Product Disposable Income: It is also known as take-home income or post-tax income as it is the difference between personal income and taxes to be paid on it. It is also a sum of consumption and savings. D.I D.I (Yd) P.I Superior Products: This class of products consists of those products which are relatively better in quality and relatively higher in price. Its demand rises as income rises. Vice Versa. Inferior Products: This class of products consists of those products which are relatively poor in quality and relatively lower in price. Its demand falls as income rises. Vice Versa. The demand of superior and inferior products are effected = = = P.I – T C (Consumption) + S (Savings) T+C+S INVESTMENT SCHEDULE & SHIFT: It refers to business spending on maintaining or expansion of the business. It can be in form of wages, interest; payments for raw materials, machine and technology. Investment plays a critical role in growth and development of the country. It is considered as engine of the growth and a higher level of investment usually means higher growth. There are three types of Investment: 1. Replacement Investment. 2. Net Investment. 3. Gross Investment. 1) Replacement Investment: It is also known as depreciation. It is the amount. Business spends on replacing on worn out machines. It case of this investment, capital stock remains same. 2) Net Investment: It refers to business expenditures, an entirely new machine which was added to the existing capital stock. Therefore It rises. 3) Gross Investment: It is the sum of both Replacement and Net Investment. Ig = Ir + In INVESTMENT SCHEDULE: I = f(i) It refers to the functional relationship which exists between Investment and Rate of Interest. This relationship is usually inverse. As interest is considered to be the cost of borrowing. Rate of Interest (i) 5.5% 6.3% 6.9% 7.2% GRAPH SHIFT IN INVESTMENT SCHEDULE: Factors affecting level of Investment: IT Revolution: When the information technology steps into business, the demand for investment in software and factories for companies will increase sharply. Information technology enhances the level of productivity, increases revenue of the companies and creates more investment opportunities. It will certainly shift the investment demand curve outward. Fear of Nationalization Investors require a freedom of business activity and any irrational interference by the government certainly discourages the investment. Only the fear of nationalization is a big Investment (I) 1,000m 910m 870m 850m reason for investors to curtail or roll back their investment. It will therefore shift the investment demand curve inward. Increase in Taxes if the government increases in taxes, the cost of capital or a product will definitely increase and in contrast, revenue of the companies will decrease dramatically. Taxes have a major effect on investment. They discourage the investors for investment. As a result, increase in taxes will shift the investment demand curve inward. Expected Increase in GDP An investment will bring the firm additional revenue if it helps the firm sell more products. This suggests that the overall level of output (GDP) will be an important determinant of investment. An increase in GDP will therefore shift the demand curve outward.