Economics, you said?

- Shreeya Jain , Economics Association

2017-02-19

Technical

In life, there are things we need, and then there are things we want. For instance, to live we need: food, shelter, clothing... And … pizza?

Okay, so maybe that last one is more of a want, but you get the idea, don’t you? Speaking of “wants”, we have a bunch of those as well; we want things like cars, cellphones, televisions, and other such things that make our life easier and more enjoyable.

In order to get the things we need and want, we use what are called Scarce Resources. Scarcity (also called paucity) is a condition on which resources are available in a limited amount but desired in a seemingly infinite amount. So a Scarce Resource is something that has more demand and uses than it can meet; the two biggest examples of this are time & money. Using these resources, whatever they may be, we have to figure out the best way to use what we have, to get what we need/want; the study of how we make these decisions is Economics.

Flavors of Economics

Micro and macroeconomics are the two vantage points from which the economy is observed. Macroeconomics looks at the total output of a nation and the way the nation allocates its limited resources of land, labor and capital in an attempt to maximize production levels and promote trade and growth for future generations. After observing the society as a whole, Adam Smith noted that there was an invisible hand turning the wheels of the economy: a market force that keeps the economy functioning.

Microeconomics looks into similar issues, but on the level of the individual people and firms within the economy.

To put it simply, Microeconomics is the “specifics” with many assumptions, and Macroeconomics is the “big picture”explained.

If I wanted to study how a customer’s buying habits helped determined which products my local Subway decides to stock, then I would be studying Microeconomics. If, on the other hand, I wanted to study how interest rates were affecting the economy in India, then I’d be studying Macroeconomics.

Consumer and Capital goods

All goods produced in the economy are of two kinds: consumer goods and capital goods.

Goods which are consumed for their own sake to satisfy current wants of consumers directly are called consumer goods. Consumer goods sustain the basic objective of an economy, i.e., to sustain the consumption of entire population of the economy. It is consumption of basic necessities of life—food, shelter, clothing that make us function.

Capital goods,on the other hand, are assets of producers which are repeatedly used in production of other goods and services.

The same physical good could be a consumer good or a capital good. An apple bought at a grocery store and immediately eaten is a consumer good. An identical apple bought by a company to make apple juice is a capital good. The difference lies in its utilization.

Production Possibility Frontier

Under the field of macroeconomics, the Production Possibility Frontier (PPF) is a curve that shows all possible combinations of the capital and consumer goods that can be producedwhen the economy is producing its goods and services most efficiently and, therefore, allocating its resources in the best way possible.If the economy is not producing the quantities indicated by the PPF, resources are being managed inefficiently and the production of society will dwindle. The production possibility frontier shows there are limits to production, so an economy, to achieve efficiency, must decide what combination of goods and services can be produced.

An economy can be producing on the PPF only in theory. In reality, economies constantly struggle to reach an optimal production capacity. And because scarcity forces an economy to forgo one choice for another, the slope of the PPF will always be negative.

Price Mechanism

Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy. Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. The Law of Demand states that if all other factors remain constant, if a good’s price is higher, fewer people will demand it.

Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship.

The movement in price (up or down) causes movement along the demand and supply curves and the new quantity demanded will change accordingly.

The Law of Supply states that as the price rises for a given product/service, suppliers are willing to supply more. Price, therefore, is a reflection of supply and demand. The movement in price (up or down) causes movement along the supply curve and the quantity demanded will change accordingly. All points above the equilibrium price represent a product surplus, that is, more is being produced than is demanded at that price and below, more is demanded than supplied at that price.

So that’s it, economics in a nutshell. Warning! It is necessarily a limited explanation and misses out much; it is no more than a simplified, basic introduction to a complex and fascinating discipline.