Published on September 1, 2020

Fundamental Of Economics and Economy


What is Economics?

The term “Economics” came from the Greek word “Oikonomia” (Oikas means house or household and Nomos means management r custom law) which means Household Management.

Economics is a social science which deals with limited resources to produce the maximum amount of goods and services to satisfy unlimited human wants.

  • The Scottish economist Adam Smith is known as “Father of Economics” or “Classical Economics” or “Political Economics“. He defined “wealth“.
  • The term “Classical Economics” was coined by German political philosopher and economist Karl Marx.
  • British economist Alfred Marshall know as “Father of Neo-Classical Economics”.
  • The term “Neo-Classical Economics” was coined by American economist Thorstein Veblen.
  • Laissez-faire is a French word that means “no government control”. This word is coined by Adam Smith. This term is related to the Capitalistic economy.
  • Recession is a DECLINE in GDP.
  • If the recession continues for 9 months (3 quarters) to 12 months (4 quarters) it is called Depression.
  • 1929 – 39 or 1030’s decade is known as World Wide Great Depression.
  • British economist John Maynard Keynes is known as “father of modern Economics’. He has given the concept of “Mixed Economy” in his book “The General Theory of Employment Interest and Money” in 1936.
  • Lionel Robbins defined economics as a science of scarcity.
  • Allocation of limited resources determines what to produce and in how much quantity.
  • In Labour Intensive Technology priority is given on labour. Handloom, Indian agriculture, toys, sports goods, hospital, insurance are the exam of Labour Intensive Technology.
  • In Capital Intensive Technology priority is given to investment in fixed assets (machines, capital, plant). Powerloom, modern textile, iron and steel industry and so on are the example of Capital Intensive Technology.
  • How to produce Deals with choice of technology.
  • Undeveloped or developing countries focus on Labour Intensive Technology. For example, the development of small industry, cottage industry and so on.
  • For whom to produce deals with the distribution of produced goods and services.

Some Important Quotes Regarding the Definition of Economics:

“An Inquiry into the Nature and Causes of the Wealth of exchange, distribution and consumption of wealth.”

Adam Smith

“Economics is the science of production, distribution and consumption of wealth.”

J. B. Say

“Supply creates its own demand.”

J. B. Say

“Economics is the oldest of the arts, the newest of the science – indeed the queen of all social science.”

Lionel Robbins

“A study of mankind in the ordinary business life, it examines the behaviour of individual and social action.”

Alfred Marshall

Say’s Law of Market

“Market creates its own demand”

J. B. Say

According to Say’s Law, there is no excess supply or demand. Means there should be “No Glut”.

In economics, the choice problem arises for three reasons limited resources, unlimited human want and the existence of alternatives.

  • Supply > Demand
  • Supply – Demand > 0
  • So the excess supply is zero.

Types of Market

Market can be defined as the interaction between buyer and seller.

Market No. of Sellers/
No. of Buyer Example
1. Pure/ Perfect
Infinite Infinite
2. Monopoly Single Many Indian Railway
3. Monopsony Many Single Arms & Ammunition
4. Bilateral
(Monopoly+ Monopsony)
Single Single Trade union vs management in a factory.
5. Oligopoly (one producer follows another producer) Few Many Mineral water, Mobile service provider, OPEC.
6. Duipoly Two Many CSC,WBSECTS ( two electricity provider in West Bengal, India)
7. Oligopsony Many Few Coal mine area, Big restaurants vs suppliers.
8. Monopolistic Competition (Monopoly +Perfect
Many Many Toothpaste, soap, detergent companies.

Features of Pure/Perfect Competition

  1. Profit maximisation is objective.
  2. Buyers and sellers can freely enter into the market and exist.
  3. Individual buyers and sellers cannot influence the market price.
  4. Homogeneous product.
  5. Complete information or knowledge.
  6. Perfect or complete mobility of factors (labours).

Classification of Economy

Microeconomics vs. macroeconomics

Microeconomics Macroeconomics
1. Another name of Microeconomics is Price Theory or Theory of Firm. Another name of Macroeconomics is General Theory or Theory of Investment.
2. It deals with an individual entity. It deals with the nation’s economy as a whole.
3. It is the theory of demand and supply. It is the theory of consumption.
4. Its focuses on rent, wage, interest, profit, welfare. Its focuses on growth, unemployment, inflation.

On the basis of ownership of resources, an economy can be classified as-

  1. Capitalistic Economy: In a capitalist economic system the economy is generally owned by the individual privately and they enjoy the freedom of choice in production and consumption. The purest form of a capitalist economy is known as Laissez-faire, means no government control.

    Example: USA, UK, Australia etc.

  1. Socialist Economy: In a socialist economic system the economy is owned and controlled by the State and the put to use under proper Centralized plan.

    Example: USSR, China, Vietnam etc.

  1. Mixed Economy: In this kind of economic system both government and private sector coexist. Although the government tend to control the private sectors.

    Example: India, Pakistan, Sri-Lanka etc.

Difference between Capitalist and Socialist Economy

Sl. No. Capitalist Economy Socialist Economy
1. All the factors of production are owned by the private sector. All the factors of production is owned by the government sector.
2. Production quantity depends on market demand. Production depends on nationwide need.
3. Price of the product is determined by the private owner. Price of the product is determined by the government.
4. Absolute freedom and sovereignty are present among the producer and consumers. No freedom or sovereignty are present among the producer and consumers.
5. Huge competition can be seen among the producers. Economic planning is done.
6. Generate profit is the chief aim. The chief aim is social welfare.
7. Economic inequality is a serious problem. Bureaucracy is a major problem.

On the basis of nature, and economy can be classified as

  1. Agricultural/ traditional economy: In this case, a maximum portion of economic income comes from the agricultural sector. In Sub- Saharan Africa this kind of economy is found.

  1. Industrial/ modern Economy: In this case, most of the people are engaged in Industrial sectors and the Nations income basically depends on the industrial sector. In China, Japan, USA, UK this kind of economy can be seen.

  1. Dualistic Economy: In this type of economic system the national income depend on both the agriculture and industrial sectors. India is an example of a mixed economy.

Some other Types of Economy

  1. Simple Economy: An economy in which no application of knowledge of science and technology. Money is not the medium of exchange. This type of economy is not present now.
  1. Complex Economy: In a complex economy, infrastructure is developed and monetary structure is improved. Money is the medium of exchange. Present days economy is the complex economy.
  1. Closed Economy: In this case, a country does not maintain any international relationship.
  1. Open Economy: International trade takes place in this case.

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