Introduction to Economics

With regards to government exam like UPSC Civil Services, both macroeconomics and microeconomics become relevant. However, focus should be more on understanding macroeconomic concepts. Some ideologies of Economics revolves around different philosophies and school like socialism and capitalism. India is a mixed economy.

Economics by definition is a “social science”, concerning the production, distribution, and consumption of goods and services. It is a study of how to utilize the limited resources that we have, in the most efficient and stable manner.

The Various Branches of Economics

The major branches of Economics include:

• Microeconomics
• Macroeconomics

Microeconomics

This branch deals with the behavior of actors and individuals like business, firms, investors, consumers etc. In Microeconomics, the focus is on determining unit economics, determining price levels.

It is a bottoms-up approach.

Macroeconomics

Macroeconomics focusses on studying the behavior of the country and its policies, with their impact on the economic on a whole level.

Rather than analyzing single corporates or entities, it analyzes entire industries and economies. It answers the what’s – What stimulates growth? What should be the interest rate?

It is a top-down approach.

Types of sectors in an Economy

There are three types of sectors in an Economy

• Primary Sector:

The Primary sector includes those industries, which extract the raw materials, in turn helping the other sectors of the economy. It forms the foundation of everything that is made. It is also called the agriculture and allied sector. This is because most of the consumer products comes from daily, agriculture, forestry, etc.

The Primary sector engages in extraction and collection of natural products. These raw materials are then processed and packaged.

Primary sector business activities include the following:

• Mining and quarrying
• Fishing
• Agriculture
• Forestry
• Hunting
• Secondary Sector:

The secondary sector includes the processing, manufacturing, and construction companies. It produces goods from raw materials provided by the primary sector. The following business activities are a part of the Secondary sector:

• Automobile production
• Chemical engineering
• Aerospace space
• Shipbuilding
• Textile
• Energy utilities
• Tertiary Sector:

The tertiary sector includes activities related to commerce, transport, financial services, administration, business, real state, health, and other such service sectors.

The sector in further divided into the market services sector, which includes IT, Finance, Business, Operations, Trade & Transport, and other such services, and the non-market sector, which includes education, social work, public administration etc.

Different types of Economic Systems

Any system involving the production, distribution and exchange of goods and services can be called an Economic System. Classification of the various type of Economic System depends on the means of ownership.

The following are the types of economies:

• Traditional Economic System
• Command Economic System
• Market Economic System
• Mixed System

1. Traditional economic system

A traditional economy is a system that established trends, historical data, and customs. Tradition guides economic decisions like production and distribution. Economic decisions like production and distribution guides traditional economic system. Societies with traditional economies depend on fishing, agriculture, hunting, gathering.

2. Command economic system

A command system has a centralized authority which plays a dominant role to make decisions. It is usually the government, which controls a major portion of the economic structure.

• It is also known as a planned system
• It is a common system in communist regimes.
• A resource dominated region or country has a major chance of becoming a command economy, as most of the resources would be controlled by an authority like the government.

3. Market economic system

Market economy works on the concept of free market. A free market means a system which is regulated by demand & supply, with little or no interference from the government. The government, however, does exercise its control over some resources like oil, gas, etc.

A pure market economic system, however, is just theoretical and doesn’t exist. This is because most of the economies have a little interference in some form by a central authority like the government.

• An authority interferes mostly to regulate fair trade and curb monopolistic behavior.
• Growth is highest under a market economic system.
• However, one downside of this system is the domination of private entities, which become so powerful sometimes, that they may influence authority decisions to curb any further growth of competition, thus defeating the whole purpose of a market economy.

4. Mixed system

A mixed system is mostly a combination of the market and command economic systems. It is like a market economy, only that it is regulated from time to time by a strict authority.

Most of the economies work on a mixed economic system. Some industries may be private, the rest would be relying on public authorities for its functioning, which is mostly under the control of the government.

• Supposedly, a mixed economic system is a combination of market and command economies.
• While it sounds like an ideal economic system, the government in most cases tends to exert more control that necessary.

What is the difference between Economic Growth and Economic Development?

The economic growth, at its crux, is the measure of the rise nation’s output, due to an increase in efficiency of utilization of resources. It is a conservation concept, where growth is calculated on empirical data. Economic development, on the other hand, is like a normative concept, where we talk about improving the standard of living in terms of physical, mental, and socio-economic conditions.

Economic Growth

• Economic Growth is a quantitative measure which considers an increasing output in an economy in terms of its monetary value for a particular time period.
• Gross Domestic Product (GDP) and Gross National Product (GNP) are the measures of the actual size of the economy.
• Other parameters may include – Human Resource, Natural Resource, Technological advancement, capital formation, etc.

Economic Development

Economic Development is a projection of a broader view of an economy. It considers the production and output level of the economy, and also considers the living standard of its citizens. Thus, the focus here is also on improving socio-economic conditions of the residents.

• Human Development Index (HDI) is an important indices to measure the real growth and development in the economy.
• Improvement in measures like GDP per capita, increasing self-esteem, happiness index, government facilities, health and education parameters, can be called an economic development.

Demand & Supply – The Concept

The supply-demand theory is an interaction between the sellers and buyers of the resource. It is relationship between the price of a product, to the willingness of a person to buy or sell the product.

• As prices rise, people are willing to supply more and demand less.
• Similarly, when the prices falls, people are willing to supply less and demand more.

This is based on two separate laws – the law of demand and the law of supply. These two laws interact to determine actual market price and volume of goods in the market.

• Law of Demand – Buyers would demand less of a good at higher prices.
• Law of Supply – Sellers would supply more of an economic good at higher prices.

There are a number of factors which can influence both supply and demand, causing their increase or decrease in various ways.

Supply

The Law of Supply the amount of goods sold of a particular category, at a specific price. The Supply relationship shows an upward slope, meaning that an increase in the prices leads to an increase in the quantity of supply of the good.

• Each additional unit’s opportunity cost would be increasing from the seller’s perspective.
• As a result, the manufacturers of the good would supply at an increased price, as a higher selling price would justify the higher opportunity cost of each additional unit sold.

Demand

Unlike the Law of Supply, the law of demands states that a rise in price of a good would result in fewer purchases or demand, if all other factors remain equal.

This means that an increase in the price of the goods would reduce the demand of that good.

• This is because as the cost of the good rises, the opportunity cost of buying the good increases, and the demand thus decreases.
• In such case, people would look for consumption of something with more value rather than going for a good with higher price. The curve in this case, would thus, be a downward slope.

It is important for both supply and demand to understand that time is always a dimension on these charts. The quantity demanded or supplied, found along the horizontal axis, is always measured in units of the good over a given time interval. Longer or shorter time intervals can influence the shapes of both the supply and demand curves.

Factors of Production

Factors of production are the resources used in an economic system to produce goods and services. They are building blocks of the economy. There are four categories in the factors of production:

• Land
  • Examples of this category includes water, copper, oil, natural gas, forests.
  • These are raw materials in production processes.
  • Renewable resources – Forest
  • Non-Renewable resources – Oil, Natural Gas.
• Labor
  • This is the contribution of human resource in the production of goods and services.
  • Examples include – Work done by a waiter in a restaurant, work done by a pilot in flying a plane.
  • Anyone paid for any job that they did, and contributed to the production of goods and services is labor.
• Capital
  • Examples include tools, machinery, buildings which are used by human resources to produce goods and services.
  • Specific Examples: Forklift, hammers, conveyor belts, delivery vans, computer systems.
  • When a teacher uses a book to teach, teach is the labor and book is the capital.
• Entrepreneurship
  • An entrepreneur is a person who combines the other factors of production – land, labor, and capital – to earn a profit. The most successful entrepreneurs are innovators who find new ways to produce goods and services or who develop new goods and services to bring to market. Without the entrepreneur combining land, labor, and capital in new ways, many of the innovations we see around us would not exist. Entrepreneurs are a vital engine of economic growth helping to build some of the largest firms in the world as well as some of the small businesses in your neighborhood. Entrepreneurs thrive in economies where they have the freedom to start businesses and buy resources freely.