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Economics
Economics is a social science that analyzes the production, distribution and consumption of goods and services. It studies the economics behavior of the people and economic phenomenon. Economic Behavior is a conscious effort to derive maximum gain from scarce resources and opportunities available to them. Economic Phenomenon deals with the production and consumption of goods & services and distribution & rendering of these for human welfare. Economics is the study of how people allocate their limited resources to their alternative uses to produce and consume goods and services to satisfy their endless wants or to maximize their gains. Land: Everything physical, which is not the result of human effort is within the economic definition of land. This concept thus includes not merely the dry surface of the earth, but all natural materials, forces and opportunities. such as: water, air, minerals, sunshine, plant and tree growth, as well as the land itself which is applied to the production process. Labor: Any mental or physical work done for the sake of reward. The efforts, skills, and knowledge of people which are applied to the production process. (Human capital) Capital: Real Capital (Physical Capital ) Tools, buildings, machinery -- things which have been produced and used in further production Financial Capital: Assets and money which are used in the production process
Economics
While maximizing their gains people as producers and consumers have to make choices regarding the use of resources and spending their earnings due to following basic facts of economic life. Human wants are unlimited Resources available are scarce People want to maximize their gains Scarcity: means that society has limited resources and therefore cannot produce all the goods and services people wish to have. Resources scarcity is a relative term it implies that resources are scarce in relation to demand for resources. Scarcity is a mother of all economic problems
Economics Micro and Macro Economics
Micro economics deals with some segment of the economy at a time– a particular industry, or a kind of work, or geographic area. It examines how consumers choose between goods, how workers choose between jobs, how a business decides what to produce using what production methods.
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Macro economics looks at totals for the economy as a whole: total output and income, the level of employment and unemployment, the amount of money in circulation, the level of prices. Why Pakistan’s output was 3% higher in 2010 than in 2009? Why is unemployment rising faster despite economic recovery? Micro and macro economics must be related because the whole is the sum of the parts. Summing up: Microeconomics analyzes details of the economy, the behavior of the individuals and businesses in a particular market or set of related markets. Macroeconomics analyzes relations between aggregates, such as total output, employment, money supply and price level. Spending Goods and Services bought Revenue Goods & services sold Labor, land, and capital Income = Flow of inputs = Flow of money^ and outputs Factors of production Wages, rent and profit
- Produce and sell^ FIRMS -^ goods and servicesHire and use factors of production - goods and servicesBuy and consume - of productionOwn and sell factors HOUSEHOLDS
- • Households sellFirms buy MARKETS FOR FACTORS OF PRODUCTION
- • Firms sellHouseholds buy FOR GOODS^ MARKETS
Flow in an Economy Flow in an Economy
The flow of goods, services, resources and money payments are shown in circular flow diagram. In a simple economy, Household and Firms are two major entities. Firms use various economic resources like land, labor and capital, which are provided y households. Firms make payment of money to the households for receiving various resources. The HH in turn make payments of money to business organizations for receiving consumer goods and services. These two entities show interdependence between themselves in a simple economy.
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If the resources required for clean up --- bulldozers, trucks, labor engineers, supervisors---were not used for clean up they would be used to produce something else. What they do not produce is the real cost of the cleaning up activities, or the opportunity cost.
Production Possibility Curve.
Economic choices at the level of the economy are represented by the production possibilities curve. At pt.A all resources are devoted to food production and at pt. B all resources are devoted to production of cloth. (unrealistic). Between A & B the economy can produce various combinations of the two. Pts. E &F represent two feasible combinations. Pt C lies outside the production frontier, and is not a feasible combination. D, which lies inside the frontier is feasible but not desirable, since more could be produced with available resources. At pt. D the economy’s resources are not fully utilized. All the points on the PPC represent various choices available. These curves are not stationary because the capacity of an economy is normally increasing for two reasons:
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The growth in the supply of productive resources– the labor force increases through population growth, the stock of buildings, machinery, and other capital goods increases through investment. New land can also be added into production. The second reason is improvement in technology, which leads to more production/output from the same quantities of resources. Fig. 2 If the increase in capacity affects the output of both capacity we have the curve A1 B1. If the production of food increases mainly due to technology – hybrid/maxi-Pak wheat or hybrid corn, the new PPC is A2B. What is important here? Increased productivity in the food sector due to technology releases resources from the food sector to use in increasing output in the clothing sector. The PPC alone cannot tell us what combinations of goods will be produced in an economy. This will depend on the preferences, custom, climate and other factors. In Africa where all seasons are warm and clothing needs are minimal. A point closer to A may be preferred, while in Iceland a point farther from A or somewhat closer to B will be preferred.
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