Economics Definition - Essay Example

Economics Adam Smith defined Economics as science of wealth. Economists define wealth as one that has “Value in use” and “Value in exchange”. Economics is the study of how wants are satisfied and decisions made when faced with limited resources. The study of economics is concerned with how people get the goods and services they need and want. Economics also focuses on money - how it is made, lost, used and misused. Adam Smith was considered to be one of the first one’s to study the historical development of industry and commerce in Europe. His ‘Inquiry into the Nature and Causes of the Wealth of Nations’ was one of the earliest attempts to study the economics part. This work helped in creating the modern academic discipline of economics and provided one of the best-known intellectual rationales for free trade, capitalism, and libertarianism. But there are critics like Murray N. Rothbard who’ve propounded that “Adam Smith perverted the development of sound economic analysis by failing to advance valid extant theories of value, money, and income distribution”. As a matter of fact Modern economics pretty much continues along Smith’s line of analysis, which says that, ‘a nation and the people do well when the economy does well, and when the economy is in crisis or doesnt do well, the nation suffers and so do the people as they dont always get the goods and services they need.’ Economics in general may be divided into; Microeconomics: Defined at the level of individual choices. This branch of economics is mainly concerned with the decisions made by individual consumers, households, and firms and how these decisions interact with each other to form the prices of goods and services and the factors of production. This is basically a bottom up approach where looking at the smaller picture individuals relationship to the economy remains the focus area. Macroeconomics: Defined at the level of aggregate results in which we study the national income, employment, interest rates, goods and services produced, total income earned, exchange rates, prices etc. In this study national economy is studied and compared with global economics. Macroeconomics can be used to analyze how best to influence policy decisions and goals like economic growth, price stability, full employment and the attainment of a sustainable balance of payments. Economics can also be divided in positive (descriptive) and normative. This is an idea we owe to the great conservative social philosopher and economic theorist and statistician, Milton Friedman. According to Friedman; Positive economics has to do with "what is," aspect. Economics is considered as a social science and such is subject to the same kind of checks which are based on the evidence like any science. By a science we mean that our work is positive rather than normative. Science is characterized by its methodology. Unlike the applied sciences the social sciences are known as a loose grouping of subjects. What they have in common are that they study the behaviour of humans. Normative economics deals with "what ought to be." In contrast to positive economics, normative economics takes into consideration moral or ethical aspects. It goes beyond the limit of science. Another great economist, Thomas Robert Malthus postulated the hypotheses that unchecked population growth always exceeds the growth of means of subsistence. Actual (i.e. checked) population growth is kept in line with food supply growth by "positive checks" (e.g. starvation, disease and the like, elevating the death rate) and "preventive checks" (i.e. postponement of marriage, etc. that keeps down the birthrate). Malthuss hypothesis implied that actual population always has a tendency to push above the food supply. Because of this tendency, any attempt to ameliorate the condition of the lower classes by increasing their incomes or improving agricultural productivity would be fruitless, as the extra means of subsistence would be completely absorbed by an induced boost in population. In his much-expanded and revised 1803 edition of the Essay, Malthus concentrated on bringing empirical evidence to bear, much of which is acquired on his extensive travels to Germany, Russia and Scandinavia. He also introduced the possibility of "moral restraint" (voluntary abstinence which leads to neither misery nor vice) bringing the unchecked population growth rate down to a point where the tendency is gone. In practical policy terms, this meant inculcating the lower classes with middle-class virtues. He believed this could be done with the introduction of universal suffrage, state-run education for the poor and, more controversially, the elimination of the Poor Laws and the establishment of an unfettered nation-wide labor market. He also argued that once the poor had a taste for luxury, then they would demand a higher standard of living for themselves before starting a family. Thus, although seemingly contradictory, Malthus is suggesting the possibility of “demographic transition", i.e. sufficiently high incomes may be enough by themselves to reduce fertility. In his ‘Principles of Economics’ (1820) Malthus expresses his differing opinion about the Classical Ricardians at several points. For example, Malthus introduced the idea of a demand schedule in the modern sense, i.e. as the conceptual relationship between prices and the quantity sought by buyers rather than the empirical relationship between prices and quantities sold. He also paid much attention to the short-run stability of prices. In view of continuous evolution in the field of economics and the kind of support it is getting with the computer, economics has started taking crucial lessons and help from IT field as well; Econometrics: The branch of economics that makes use of Mathematics and sophisticated computing applied to ECONOMICS. Statistically significant economic relations are developed by Econometricians by crunching the data. Computers also help them in this endeavor by churning the numbers until they come up with some interesting results. Statistics such as GDP per head, the rate of UNEMPLOYMENT or the rate of INFLATION. etc are used for judging the health of an economy, Inspired by Adam Smiths ‘Wealth of Nations, the brilliant British economist David Ricardo’ became one of the most important figures in the development of economic theory. Ricardo suggested the impossibility of a "general glut" – an excess supply of all goods – in an economy. For Ricardo, the appropriate theory was the "labor-embodied" theory of value or LTV, i.e. the argument that the relative "natural" prices of commodities are determined by the relative hours of labor expended in their production. Utility and Value In economics ‘utility’ is defined as utility is want-satisfying power. If something is intensely desired it is said to possess great utility. Also ‘value’ is determined by the effort we’ve to make to get something. For example, some objects like air and water, possessing utility are generously supplied by nature. The consumer doesn’t have to make much effort to get these items. Therefore the ‘value’ of such items drops. Similarly in many country districts, orchards of apples, berries or mangoes make these items available easily. For their local consumers these items do not carry much value. Therefore articles for the production of which a certain amount of labor is necessary are said to possess value or exchange power because they combine utility and scarcity. Of course, utility is the first pre-requisite of value, for nobody will give anything in exchange for what nobody wants. A fundamental contradiction in life is ‘Resources are limited or scarce while human wants are unlimited or insatiable’. Economics allows us to understand how to keep going with these limited resources. Economics is essentially a study of men as they live, move and think in their surroundings in the ordinary business of life. But it is mainly concerned with those motives which affect the mans conduct in the business part of his life. Those social laws which relate to the branches of conduct in which the strength of motives can be measured are known as Economic laws, or statements of economic tendencies i.e. tendencies of mans action under certain conditions. An economist needs the three great intellectual faculties, perception, imagination and reason to put him on the track of those causes of visible or invisible events which are remote or lie below the surface. He needs imagination especially in order to develop his ideals in analyzing his perceptions private. From an economists perspective all wealth consists of desirable things; that is, things which satisfy human wants directly or indirectly, but not all desirable things are thought of as wealth. Principle of Supply and Demand: This principle is considered the backbone of economics. This principle states that ‘value of a commodity increases as more and more people compete for the available utility’. The quantity supplied will increase if the price goes up, holding other things constant. This relationship reflects increasing marginal cost of supply (MC). On the other hand the determinants of supply are factors other than price that influence supply, for example the number of producers, cost of production, technology, methodology etc. On the other hand, demand will increase if the price goes down, holding other things constant. This relationship reflects diminishing marginal benefit from consumption (MB). Here determinants of demand include (factors other than price) income, number of consumers, and preferences. Carl Menger states that our drives give rise to needs which in turn are embedded in our nature. Failure to satisfy these needs brings up a destructive behavior while an imperfect satisfaction of these needs leads to the stunting of our nature. To satisfy our needs is to live and prosper. Therefore the attempt is made to provide for the satisfaction of our needs which is synonymous with the attempt to provide for our lives and well-being. It is the most important of all human endeavors, since it is the prerequisite and foundation of all others. There are in general three methods by which economic phenomena may be investigated; The first one is mainly a deductive analysis. As per this phenomenon the output is deduced by proceeding from a few simple premises based upon general observation to broad generalizations. The second is the historical method, which seeks an formal and factual understanding of existing institutions by tracing their evolutions from their origins in the past. The third is statistical induction, which endeavours, by the analysis of numerical data, to develop quantitative knowledge of economic phenomena. James Buchanan, one of the recent economists, a Nobel Prize winner in Economics, is best known for his work in public choice theory. His work in this area involves using economic analysis to explain political processes. In particular, Buchanan examines the incentives facing all participants in the political process. Buchanan has also made substantial contributions to the theory of public goods. Buchanans book, The ‘Calculus of Consent’, co-authored with Gordon Tullock, is considered one of the classic works that founded the discipline of public choice, a melding of economics and political science. This book argues that Government decisions are part of the economy, not exogenous factors. Therefore, methods of collective decisions must be studied as part of the study of the public sector. The book further describes the constitution as the line that is drawn between private and collective action. Public choice is then divided between pre- and post-constitutional phases. Essential Principles of Economics: There are ten major principles i. Division of Labor: Adam Smith argued that division of labor is the key cause of improving standards of living. He argued that increasing the division of labor increases productivity. ii. Opportunity Cost: This principle states that anything that is given up in order to carry out a particular decision is a cost of that decision. iii. The Equimarginal Principle: This law advises that when the same product or service is being produced in two or more units of production then resources should be allocated among the units of production in such a way that the marginal productivity of each resource is the same in each unit of production.. This will get us the maximum total output. iv. Market Equilibrium: This principle tells us about supply, demand, quantity supplied and demanded and the equilibrium point. v. Diminishing Returns: Malthus is best known for his idea that population growth would force incomes down to the subsistence level. He propounded that when a fixed input is combined in production with a variable input, using a given technology, increases in the quantity of the variable input will eventually depress the productivity of the variable input. vi. Game Equilibria: This theory allows strategy to be part of the story. One result is that we have to allow for several kinds of equilibria. vii. Measurement Principles: Economics is multidimensional, and that creates some difficulties in measuring things like production, incomes, and price levels. This law states that some of the problems can be solved more or less fully. viii. Medium of Exchange: This states that money is whatever is generally acceptable as a medium of exchange. ix. Income-Expenditure Equilibrium: This model pulls together a number of subsidiary principles that complement one another and together constitute the "Keynesian" theory of aggregate demand. x. The Surprise Principle: This law states that people respond differently to the same stimuli if the stimuli come as a surprise than they would if the stimuli do not come as a surprise. References: 1. Alfred, Marshall, Principles of Economics (online Book), available at http://www.econlib.org/library/Marshall/marP.html 2. What are the Essential Principles of Economics, available online at http://william-king.www.drexel.edu/top/prin/txt/whatare.html 3. Biographies of economists, available online at http://www.blupete.com/Literature/Biographies/Philosophy/BiosEcon.htm 4. Gallery of Economists: Pictures and Links, available online at http://distance-ed.bcc.ctc.edu/econ/econgallery/gallery.htm Read More