FUNDAMENTALS OF ECONOMICS PDF
Fundamentals of Economics for Business is an innovative text designed specifically for students in business education programs. It provides a comprehensive. ASSESSMENT STRATEGY. There will be written examination paper of three hours. OBJECTIVES. To gain basic knowledge in Economics and understand the . FUNDAMENTALS OF ECONOMICS: Understanding and Applying It for Everyday Use. DR. CLYDE ASHLEY. OVERVIEW. This virtual summer enrichment camp.
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Economics is the study of optimal use of scarce resources to promote social welfare. Of particular interest has been the role of prices in achieving a socially. Department of Economics, School of Business and Management Sciences. Indiana - Purdue University .. The Basics of Supply and Demand. Dilts, Chapter 4. Economics Concepts Explained | FINANCE & DEVELOPMENT iii. Back to Basics: Economic concepts explained v Foreword. Maurice Obstfeld. I. THE BIG.
They believed that the automatic forces of competition would take the actual level of output back to the full employment. Therefore, these economists were concerned with the problem of unemployment.
The fact that there was relatively few situations of prolonged unemployment and depression before gave support to this belief of classical economists. However, the situation changed dramatically during the s. During this decade, there was widespread unemployment in the advanced capitalist countries of the world. It was this which led to the development of macro economic theory by the famous economist J. Keynes provided a theory of the determination of employment and output.
He explained that the economy can operate at any level of employment, with full employment only as one possible level. In fact, according to him, economy normally operates at less than full employment level. Ever since then, economists have shown their concern with macro economics and micro economics has assumed as unprecedented importance. The contemporary economists are concerned with both micro economics and macro economics. Economics as a Science While explaining the subject matter of economics we have often stated that economics is a social science.
A social science studies various human activities. Economics as a social science studies economic activities of the people. By classifying economics as a social science, economists have placed their subject in the category of science rather than art.
Let us understand why economists regard economics as a science or why we use the title science for economics. The term science implies the following : i ii A systematic body of knowledge which traces the relationship between cause and effect.
Observation of certain facts, systematic collection and classification and analysis of facts. Subjects such as Physics, Chemistry, Botany, etc. In this sense, economics is also considered to be science since it satisfies all these characteristics of science.
Firstly, economics is a systematic body of knowledge as it explains cause and effect relationship between various variables such as price, demand, supply, money supply, production, national income, employment, etc. As in other sciences, one way of making generalisations in economics is through logical deduction.
This is the traditional Deduction Method where economic theories are deduced by logical reasoning. In this method certain assumptions are made and by using logical reasoning we arrive at certain logical deductions. From these deductions certain economic laws or themes are formulated. Thus, under the deductive method, logic proceeds from the general to the particular.
This method is called abstract or a prior because it is based on abstract reasoning and not on actual facts.
Economic laws, like other scientific laws, state what takes place when certain conditions assumptions are fulfilled. For example, Newtons Law of Gravitation in Physics states that every body in the universe attracts every other body with a force.
But the gravitational force depends upon the size of the mass and the distance between the two bodies. Therefore, the Gravitation Law states that given the mass of the two objects, the force of gravitation is inversely proportional to the distance between them. In the same way, the law of demand in economics states that a fall in the price of commodity leads to a large quantity being demanded given other things, such as income of the consumer, prices of other commodities, etc. An alternative method to derive economic generalizations is Inductive Method.
Under this method, a mass of data is collected from actual experience with regard to economic phenomenon and on the basis of these collected observations certain generalizations are made and conclusions are drawn there from.
The logic in this approach is from particular to general. The generalizations are based on observation of individual instances. They are used side by side in any scientific enquiry. Thus, like other branches of science, economics possesses the above mentioned characteristics 2 and 3 as well. In economics we collect data, classify and analyse these facts and formulate theories or economic laws. Lastly, we call economics a science because the truth and applicability of economic theories can be supported or challenged by confronting them to the observations of the real world.
If the predictions of the theory are refuted by the real-world observations, the theory stands rejected. But if the predictions of the theory are supported by the real-world events, then the theory is formulated. For example, the law of demand, stating the there is an inverse relation between price and quantity demanded, is a scientific economic hypothesis, because it has been corroborated by the real world observations. The method of economics is, therefore scientific and hence it is appropriate to label economics as a science.
However, compared with physical and natural sciences, economics is at a disadvantage. Economics cannot claim the precision of the physical sciences because the human and social behaviour is complex and unpredictable. In economics, unlike Physics, Chemistry and Biology, we cannot perform the controlled experiments. We have to depend upon observation of economic events; these observations are not so well behaved and orderly.
That is why economy laws are not as accurate, precise and of universal validity as laws of physical and natural scienties are. The laws of economics or economic theories are conditional subject to the condition that other things are equal; Economic theories are seldom precise and are never final; they are not as exact and definite as laws of physical and natural sciences. From the above discussion, we make the following two observations: 1.
The laws of physical and natural sciences have universal applicability, but economic laws are not of universally applicable.
Fundamentals Of Economics AND Management: Study Notes
The laws of physical and natural sciences are exact, but economic laws are not that exact and definite. Economics as an Art Art is completely different from science. What is an art? Keynes defines art as a system of rules for the attainment of a given end. The object of art is to formulate rules to be used for formulation of policies.
Thus, as compared to science, which is theoretical, art is practical. A science teaches us to know, an art teaches us to do. Applying this definition of art, we can say that economics is an art.
Various branches of economics, like consumption, production, distribution, money and banking, public finance, etc. Thus, the theory of demand guides the consumer to obtain maximum satisfaction with given income. Similarly, theory of production guides the producer to equate marginal cost with marginal revenue while using resources for production. Thus, economics is an art in the sense that the knowledge of economic laws helps us in solving practical economic problems in everyday life.
To conclude, we can say that economics is both a science and an art. As a science, economics is a systematic body of knowledge which makes generalizations and theories by adopting scientific approach.
As an art, it puts this knowledge into practice. It uses economic theories and laws in formulating various economic policies. Thus, economics is science in methodology and art in its application. Corsa observed that science required arts, and arts requires science-each being complementary to the other.
The five fundamental principles of economics, basic terms we need to know in order to move on.
It is advisable, therefore, to treat economics both as a science and an art. Samuelson has rightly stated that economics can be described as the oldest of the arts and the newest of the sciences indeed the queen of social sciences. Another question related to nature of economics is whether it is a positive science or a normative science or both.
Economics as a Positive Science A positive science is that science in which analysis is confined to cause and effect relationship. In other works, it states What is and not what ought to be. There is a school of thought which believes that economics is only a positive science. It should confine itself to stating the cause and effect relationship. It should not pass any value judgement regarding what is right and what is wrong.
Positive economics is concerned with the facts about the economy. It relates to what the facts are, were or will be about various economic phenomena in the economic. It studies the economic phenomena as they exist, finds out the common characteristics of economic events, specifies cause and effect relationship between them, generalize their relationship by formulating economic theories and make predictions about future course of these economic events.
For example, positive economics deals with questions like what are the causes of unemployment?
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How do we account for inflation? Why price of a particular good has increased? Economics as a Normative Science Economics as a normative science is concerned with what ought to be. Its objective is to examine real economic events from moral and ethical angles and to judge whether certain economic events are desirable or undesirable. It tries to find out and prescribes certain course of action which is desirable and necessary to achieve certain goals.
Thus, normative economics involves value judgment. Normative economics deals primarily with economic goals of a society and policies to achieve these goals. It also prescribes the methods to correct undesirable economic happenings. To understand the difference between the positive and normative nature of economics, let us consider some economic events and their positive and normative aspects, in economic studies.
For example, how are the prices of foodgrains determined is a question of positive economics, but what should be the prices of foodgrains is a question of normative science. Consider another example. The statement a decrease in taxes will encourage production is a question for positive economics, but should taxes be reduced or not is a question of normative economics. In the past, there was controversy among economists over the nature of economics. Robbins emphasized that economics is purely a positive science.
According to him economics should be neutral between ends. It is not for economists to pass value judgement and make pronouncements on the goodness or otherwise of human decisions.
Marshall and Pigou, on the other hand, considered economics both a positive and a normative science. However, there is hardly any controversy on this issue now. It is generally agreed not that economics is both a positive and a normative science.
Economists believe now that complete neutrality between ends is neither feasible nor desirable. It is not possible because in many matters the economist has to suggest measures for achieving certain economic objectives. He advocates various policies for increasing employment, reducing inflation, etc.
While making these suggestions, he is making value judgement. A mere study or positive facts would not take us very far. Complete elimination of value judgements from the study of economics robs the subject much of its practical utility. In many cases, an economist as a policy formulator and social reformer has to pronounce undesirable effects of certain economic events and has to make suggestions for their removal. When he does this, he is not entirely neutral between ends.
Thus, neutrality between ends is not desirable in many cases. Deductive and Inductive Methods of Economic Analysis In Economics the issues are analysed either by inductive method or by deductive method.
The deductive method tries to draw conclusions from certain fundamental assumptions or truths. The logic proceeds 1. For example, we can deduce from the basic truth that a man will buy more at lower prices.
The Law of Demand and the Law of diminishing Marginal Utility have been derived from deductive reasoning. The inductive method, on the other hand, deduce conclusions on the basis of collection and analysis of facts and figures. The Logic proceeds from particular to general. It leads to exact and precise conclusions for policy making.
The Deductive method was used by earlier economists. It is a simple method, obviates the need of experimentation and collection of statistical data. But deductive conclusions are based upon assumptions that may turn out to be untrue or partially true.
Hence it is unsuitable for policy making as it is dangerous to claim universal validity for economic generalizations. Economics is a Science and an Art Being a systematized body of knowledge and establishing the cause and effect relationship of a phenomenon, Economics is a scientific study. Like other branches of science, we in economics deduce conclusions or generalizations after observing or collecting facts and figures. However the laws of economics are conditionalthey assume other things being equal.
Economics cannot predict with so much certainty and accuracy as physical can. The reason is obvious. The subject deals with the behaviour of human beings as such controlled experiment is not possible.
However some economists prefer to treat economics as an art. An art is a system of rules for attainment of a given endso remarked J. It implies that the function of an art is to provide rules, norms and maximises to solve human problems. An art teaches us to do. The fact is that every science has an art or a practical side and every art has a scientific side which is theoretical.
Economics deals with both theoretical aspects as well as practical side of many economic problems we face in our daily life. The theoretical side teaches us to know and the applied side teaches us to do.
Thus, Economics is both science as well as an art. Robbins said that human wants are unlimited but the means available to satisfy them are limited. It is also true in case of any economy, whatever the economy required cannot be satisfied fully.
This is because economic resources or means of production are limited and they can be put to alternative uses. So every economy faces some common problems. One of them is what to produce? In view of limited resources a country cannot produce all goods. So it has to make a choice between different goods and services.
If it gets X it must have to sacrifice Y. Hence, every economy has to decide what goods and services should be produced. The second issue is how to produce? As an economy decides to produce certain goods, it faces the problem to decide how these goods will be produced.
The problem arises because of unavailability of some resources. How to produce also involves the choice of technique of production. A country may produce by labour intensive methods or by capital intensive methods of production, depending upon its stock or man power. Thirdly, another central problem is for whom to produce? Goods and services are produced for people specially for those who have the means to pay for them.
A country may produce mass consumption goods at a large scale or goods for upper classes. All it depends upon the policies of the government as well as private producing units.
Strictly speaking, such things as health, goodwill, etc. In Economics, however, it is only transferable goods i. For instance, a house is a transferable good because it can be sold off or given away as a gift. Thus, a persons wealth is defined as the stock of all transferable goods owned by any person.
In calculating national wealth, however, we must be careful on two-points : i There are some goods whose benefits are enjoyed by the citizens of the country. But no citizen personally owns these goods. These are public properties. Natural resources for instance, mineral resources, forest resources, etc , roads, bridges, parks, hospitals, public educational institutions and public sector projects of various types for instance, public sector industries, public irrigation projects, etc.
These are to be included in the nations wealth. For instance, if a citizen of the country holds a Government bond, it is personal wealth. But from the point of view of the Government, it is a liability and, hence, it should not be considered as a part of the nations wealth. Thus, the national wealth of a country is the sum of all public properties in the country.
This also takes into account that part of the total personal wealth in the country which is not a liability for the Government.
Social welfare depends on the wealth of the nation. Wealth, in general, gives rise to welfare, although wealth and welfare are not the same thing. In certain cases, however, wealth and welfare may not go hand in hand.
If a nation goes on creating wealth without paying any consideration to the health and the mental peace of the citizens of the country, it is doubtful whether social welfare increases. Again, if an wealth of society increases, but the distribution of the wealth among the citizens of the country is very unequal, this inequality may create social jealousy and tension.
In this case too, societys welfare may not increase. Economists, however, assume that when wealth increases, welfare increases too. Even if there is any negative side effect for instance, social tension due to inequality of wealth distribution , this negative effect is unable to outweigh the positive beneficial effect. The net effect is that, welfare increases. Similarly, when wealth decreases, welfare is assumed to decrease. Before the emergence of money, goods were exchanges for goods.
This was known as Barter System. In that system goods were used as medium of exchange. For example, one horse can be exchanged for two cows. Later on, some valuable metals like gold and silver were used as the medium of exchange. However, the supply of these precious metals could not be increased with the expansion of business activities and growing demand for money.
Thus, paper notes were considered to be the medium of exchange. When general acceptability of any medium of exchange is enforced by law, that medium of exchange in called the legal tender. For example, the rupee notes and coins are legal tenders. However, when some commodity is used as a medium of exchange by custom, it is called customary money. For example, the use of cowrie-shell in ancient India as a medium of exchange.
Rather, it refers to a system by which the buyers and sellers of a commodity can come into touch with each other directly or indirectly. Thus, when economists talk of the fish market, they may mean a place where buyers and sellers of fish meet.
But when they talk about, say, the housing market, they do not mean a place where buyers and sellers of houses meet. They mean the system of buying and selling houses through contacts between the buyers on the one hand and the sellers on the other.
Thus, in Economics, a market for a commodity is a system by which the buyers and the sellers establish contact with each other directly or indirectly with a view to purchasing and selling the commodity.
Functions of a market The major functions of a market for a commodity are : i to determine the price for the commodity, and ii to determine the quantity of the commodity that will be bought and sold. Both the price and the quantity are determined by the interactions between the buyers and the sellers of the commodity. The market mechanism When economists talk of the market mechanism, they mean the totality of all markets i.
The market mechanism determines the prices and the quantities bought and sold of all the goods and services. For a country, as a whole, investment is the increase in the total capital stock of the country.
For an individual, investment is the increase in the capital stock owned by him. Real investment and portfolio investment Economists talk of two types of investment : real investment and portfolio investment. However, it is only the purchase of new shares issued by accompany that can properly be termed as investment because the company will use the money for expanding its productive capacity, i.
Purchase of an existing share from another shareholder is not an investment because in this case the companys real capital stock does not increase.
It is savings that are invested How is investment financed? Consider, for instance, a producer who wished to make a real investment, i. He would buy the machine by spending his own savings or take a loan or if the producer has set up a joint stock company sell shares to the public.
In all cases, it is savings which are transformed into investment. If a loan is taken from a bank, the bank would lend the money kept in the bank by the depositors. This money will be nothing but the savings of the depositors. If shares are sold to the public, the purchasers will use their savings to purchase the shares. Thus, for the country as a whole, investment comes from savings.
It is the countrys savings which are invested excepting, of course, in such cases where the country receives foreign investment or foreign aid. The gross investment includes a inventory investment and b fixed investment. Investment in raw materials, semi-finished goods and finished goods is referred to as inventory investment. On the other hand, investment made in fixed assets like machineries, factory sheds etc. By deducting depreciation cost, of capital from the gross investment, we net new investment.
It also refers to creation of goods or performance of services for the purpose of selling them in the market. Notice that this definition includes the production of goods as well as that of services. There was a time when production meant the fabrication of material goods only. A tailors activity was considered to be production.
He produced shirts, pants, etc. But the activity of the trader who sold clothes to the purchasers was not considered to come under the heading of production, because he did not tailor the clothes himself. But this is not the position taken by economists today.
Two groups, later called "mercantilists" and "physiocrats", more directly influenced the subsequent development of the subject. Both groups were associated with the rise of economic nationalism and modern capitalism in Europe. Mercantilism was an economic doctrine that flourished from the 16th to 18th century in a prolific pamphlet literature, whether of merchants or statesmen.
It held that a nation's wealth depended on its accumulation of gold and silver. Nations without access to mines could obtain gold and silver from trade only by selling goods abroad and restricting imports other than of gold and silver. The doctrine called for importing cheap raw materials to be used in manufacturing goods, which could be exported, and for state regulation to impose protective tariffs on foreign manufactured goods and prohibit manufacturing in the colonies.
Physiocrats believed that only agricultural production generated a clear surplus over cost, so that agriculture was the basis of all wealth. Thus, they opposed the mercantilist policy of promoting manufacturing and trade at the expense of agriculture, including import tariffs.
Physiocrats advocated replacing administratively costly tax collections with a single tax on income of land owners. In reaction against copious mercantilist trade regulations, the physiocrats advocated a policy of laissez-faire , which called for minimal government intervention in the economy.
The publication of Adam Smith's The Wealth of Nations in , has been described as "the effective birth of economics as a separate discipline. Smith discusses potential benefits of specialization by division of labour , including increased labour productivity and gains from trade , whether between town and country or across countries. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.
Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. Thomas Robert Malthus used the concept of diminishing returns to explain low living standards.
Human population , he argued, tended to increase geometrically, outstripping the production of food, which increased arithmetically. The force of a rapidly growing population against a limited amount of land meant diminishing returns to labour. The result, he claimed, was chronically low wages, which prevented the standard of living for most of the population from rising above the subsistence level.
Ricardo saw an inherent conflict between landowners on the one hand and labour and capital on the other. He posited that the growth of population and capital, pressing against a fixed supply of land, pushes up rents and holds down wages and profits.
Ricardo was the first to state and prove the principle of comparative advantage , according to which each country should specialize in producing and exporting goods in that it has a lower relative cost of production, rather relying only on its own production. Mill pointed to a distinct difference between the market's two roles: allocation of resources and distribution of income. The market might be efficient in allocating resources but not in distributing income, he wrote, making it necessary for society to intervene.
Smith wrote that the "real price of every thing Smith maintained that, with rent and profit, other costs besides wages also enter the price of a commodity. Classical economics focused on the tendency of any market economy to settle in a final stationary state made up of a constant stock of physical wealth capital and a constant population size.
Marxist later, Marxian economics descends from classical economics. It derives from the work of Karl Marx. The first volume of Marx's major work, Das Kapital , was published in German in In it, Marx focused on the labour theory of value and the theory of surplus value which, he believed, explained the exploitation of labour by capital.
These three items are considered by the science only in relation to the increase or diminution of wealth, and not in reference to their processes of execution.
One hundred and thirty years later, Lionel Robbins noticed that this definition no longer sufficed, [d] because many economists were making theoretical and philosophical inroads in other areas of human activity.
In his Essay on the Nature and Significance of Economic Science , he proposed a definition of economics as a study of a particular aspect of human behaviour, the one that falls under the influence of scarcity, [e] which forces people to choose, allocate scarce resources to competing ends, and economize seeking the greatest welfare while avoiding the wasting of scarce resources.
For Robbins, the insufficiency was solved, and his definition allows us to proclaim, with an easy conscience, education economics, safety and security economics, health economics, war economics, and of course, production, distribution and consumption economics as valid subjects of the economic science.
A body of theory later termed "neoclassical economics" or " marginalism " formed from about to The term "economics" was popularized by such neoclassical economists as Alfred Marshall as a concise synonym for "economic science" and a substitute for the earlier " political economy ". It dispensed with the labour theory of value inherited from classical economics in favour of a marginal utility theory of value on the demand side and a more general theory of costs on the supply side.
An immediate example of this is the consumer theory of individual demand, which isolates how prices as costs and income affect quantity demanded. Modern mainstream economics builds on neoclassical economics but with many refinements that either supplement or generalize earlier analysis, such as econometrics , game theory , analysis of market failure and imperfect competition , and the neoclassical model of economic growth for analysing long-run variables affecting national income.
Neoclassical economics studies the behaviour of individuals , households , and organizations called economic actors, players, or agents , when they manage or use scarce resources, which have alternative uses, to achieve desired ends. Agents are assumed to act rationally, have multiple desirable ends in sight, limited resources to obtain these ends, a set of stable preferences, a definite overall guiding objective, and the capability of making a choice.The natural resources of countries are not consistently correlated with either income levels or income growth.
The market might be efficient in allocating resources but not in distributing income, he wrote, making it necessary for society to intervene. For instance, a fall in expected money income, or a reduction in the uncertainty of acquiring employment, and a fall' in returns from educational investment and increases in the cost of educational investments would lead to reduction in educational demand. Economics cannot predict with so much certainty and accuracy as physical can.
Let us assume that the two households earn dollars per month.
Returns on investment: Education relates to economic growth through educated person, which means that the improvement in productivity will not exist if we fail to train educated people in a better way. The Occupation - Education Link: First, education inculcates skills such as typing, accounting, teaching, medicine, law, engineering and computer engineering, which are useful in the productive processes.
However, social factors, which diminish the willingness of workers to move constrain mobility of labour.
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