Nature and Scope of Economics - Assignment Example

Economics Economics Task Nature and Scope of Economics Economics is a branch of science which studies the economic activitiesof the people within the country or worldwide. It basically shows the ways in which people use the scarce resources in order to fulfil their unlimited wants through productive resources like land, labour and capital etc (Mankiw, 2011). There are different schools of thoughts which give definitions of economics in various ways. Some of these schools of thoughts are discussed below: 1- Classical School of Thought Classical approach refers to the approach that is used by Adam Smith who is also known as the father of economics. He wrote a book in 1776 named Nature and Causes of Wealth of Nations. According to him economics is a science of wealth (Mankiw, 2011). In which wealth refers to goods and services leads to achieve the welfare of the nation. This concept also shows the four aspects of wealth explain as why and how wealth is produced, exchanged, distributed as well as consumed (Mankiw, 2011). 2- Neoclassical School of Thought Neoclassical school of thought refers to the well known economist Alfred Marshall who wrote a book in 1890 named as Principles of Economics. According to him economics is defined as “A study of human race in everyday business of life, it studies that part of individual and social actions that are closely related with attainment and use of material requisites (Barber, 2009).” So this definition shows three different points. Economics is a social science because it studies the people in their ordinary business of life. Economics studies those activities related to the attainment and use of material requisites or production and consumption of wealth which is related to the Adam Smith’s point of view. The objective of the study of economics is to focus on the welfare of the society. 3- Modern School of Economics Modern school of thought refers to the Lionel Robbins. He defines economics as “Economics is the science which studies human behavior as a relationship between (multiple) ends and scarce means which have alternative uses (Barber, 2009).” This definition depends on three points. Multiple ends refer to the unlimited wants of human whose are increasing day by day and having no end. So a person has a choice between more urgent and less urgent wants. A human has scarce resource or limited ways to satisfy their needs. This point is related to the ways of using the resources by a person. It basically depends upon the priority of wants by humans. Basic Economic Problems Due to scarcity of resource and unlimited wants there arise various kinds of economic problems (Mankiw, 2011). 1- What to produce for the nation? A society has to decide what amount of consumer and capital goods are to be made to satisfy the wants of the nation (Mankiw, 2011). 2- How to produce? The second economic problem is related to resource, inputs and technique of productions. A society has to decide how much amount of goods and capital is taking place for the specific good production (Mankiw, 2011). 2- For whom to produce? A society has to take action that how much each sector takes from the total production of goods and services. This refers to the distribution process. 3- How to distribute resources? A society has to decide in what areas of the nation the production of goods and services is required and whose are deserving people of the particular good depend upon the different occupation of the people (Mankiw, 2011). The above mentioned are the main points on the basis of which each country decides the best suitable economic system. Economic System Some of the economic systems are discussed below: 1- Capitalism This is the free market economy showing freedom of making goods and services. The people are allowed to start their business activities according to their choice and preferences. So in this system all the economic problems are resolved by people without any government intervention (Tucker, 2010). Example There are different countries those are liberal democracies and authoritarian system in the world using capitalism as a dominant system like the USA, Canada, Mexico and many others but there is not an example that shows the pure capitalism system. In these countries the means of producing and distributing are owned by small minorities of people and these owners worked on profit bases, but there is not an example that shows the pure capitalism system. 2- Socialism In this system mostly all the economic activities have taken place under the state guidance. All the major industries owned by governments who decide how and what to produce for the nation. There is no freedom of choice for the people they have to consume mostly those goods produced by central authorities (Tucker, 2010). Example There are some examples of the countries like Denmark, Sweden and Norway those have government democracy but these are all not pure socialist countries. These countries have a high standard of living than others that is the main feature of socialism because in this system government focus on the equality and providing benefits to the people. 3- Mixed Economy Under the mixed economic system private and public sectors works together. Public sector mostly owns industrial sector it also involves in applying policies and setting goals and targets of the nation. Central authorities take part in optimize the welfare of the nation. There are also some privatize sectors those working for the sake of profit (Tucker, 2010). Example There are many countries having the features of the mixed economy the best example is India that have private ownership as well as public sector involvement in education, banking and transportation. Factor of Production There are 4 different factors of production those help in producing goods and services in the nation which are further discussed below (Chauhan & Chauhan, 2009). Land Land means all the natural resource use for the productive perspective as well as may be used to yield income like soil, mountains and forest etc. It is basically God gifted nature and mostly suitable for the production of goods. Its supply always remains fixed either price level increases or decreases sharply. The income that generates through this factor of production is called rent (Chauhan & Chauhan, 2009). For example a person starts its business of wheat production and for this he/she requires different factors of production, one of them that he/she needs most is the area for the growth of wheat so he/she used the land for this purpose and in the end he/she has to pay rent in return to the land that he/she used. Labour Labour is a person who performs mental and physical works for the sake of reward in the form of wages and produce goods and services for the nation. The movement of labours from one place to another is called mobility of labour, so they are mobile in nature .Their movement is geographical, horizontal and in vertical manner. Their supply can be changed due to changes in population level. They are also unidentical in nature because every labour has different profession that also refers to their physical and mental powers (Chauhan & Chauhan, 2009). For example a person who works in the fields in the agricultural areas and protects the major source of food he is also a part of factor of production and gain the income in the form of wages. Capital Capital basically divided into two categories like machinery, building and different technology used for the production of goods and the other one is money which is the part of income. The income that generates on the capital is called rent. There is also another type of capital called human capital that includes human skill training and knowledge for the production of goods and services. Capital is the source to generate the revenue for the nation as well as it promotes the level of employment for the people in the nation, so it is beneficial for the nation growth and development (Chauhan & Chauhan, 2009). This the important factor of production in the industrial sector like, a high technology machine that investor use in the production of cloth in the mills this is called capital and investor pay interest on this. Entrepreneurship It is the main factor of production in initiating the work. An entrepreneur is a person who has all the control of working process done by other factor of production. First he/she plans the business then selected the suitable factor of production for particular production process. In the last provide the benefits or rewards to the factors of production in the form of rent, wages, interest and profit. He/she is only who faces the uncertainties of future like profit and loss (Chauhan & Chauhan, 2009). For example an owner of textile mill who runs the mill through different factor of production like land, labour and capital and pay income to these from the total earning, a part that is used by him as an income is called profit so the owner is also a part of factor of production. These all factors of production help in generating national income. Task 2 Production Possibility Curve (PPC) Production possibility curve or production possibility frontier is a line which shows the production of two different goods by fully utilization of scarce resources in the nation. This concept refers to the opportunity cost which means the cost of one opportunity must forgo if a person avail the benefits of another opportunity (Arnold, 2010). There are three different types of PPC but only PPC which is concave to the origin indicates the real life situation because this shows the opportunity cost increases due to transportation cost and training cost. The other two situations are convex shape and straight line shape which indicate the imaginary situations (Arnold, 2010). Illustration of Production Possibility Curve Production Possibilities Wheat (in thousand kg) Cloth (in thousand meters) A 0 20 B 1 18 C 2 15 D 3 11 E 4 6 F 5 0 So the above Production Possibility Curve and the data in the table shows that the production level of wheat and cloth on different levels, taking the different values of wheat on x-axis and the values of cloth on y-axis. The above graph indicates the real life situation because the Production Possibility Curve in the above graph is concave in shape and showing full employment of resources. Points on PPC The above Production Possibility curve represents different points from A to F and these points are representing the increasing pattern of opportunity cost. This means that at Point A there is no production of wheat only the production of cloth is taking place. Whereas, at point B the opportunity cost arises as at this point in order to produce one more unit of cloth one has to forgo one unit of wheat. So, this process continues till the point F where all the resources are utilized in the production of wheat. Movement From One Point To Another Either Within Or On The PPF Movement from one point to another on the PPF like from the point B to C showing the increment in opportunity cost and showing that the opportunity cost that arises in the form of three units of cloth forgone for the production of one more unit of wheat. But the movement from one point to another within the PPF like from point Z to C which shows that the economy is growing by taking useful measure from the government side and overcoming the unemployment problem and no opportunity cost is involved in this case as production of both goods simultaneously. Movement To Extend The PPF Outwards With the passage of time different factors affects the production of cloth and wheat for example development and new technologies taking place as well as discovery of natural resources, rise in labour supply, growth in population and new skill and techniques of production process coming out. All these kinds of factors affect the growth of production of both goods wheat and cloth in this case and due to which economy expands and PPF moves outwards. In this case no opportunity is involved because the economy is not required to produce the one good on the behalf of other. So, managers introduced different technologies for the production, provide trainings related to the new equipments to the staff and hired skilled and professional workers for the working. Through these measures a manager can expend the PPF outside which is the symbol of growth of the nation. Causes Of Inward Shifting Of PPF PPF always shifts inwards due to inefficient resource allocation or when resources are not fully utilized in the economy which means unemployment of resources. These badly affect the economic situation. Task 3 Law of Diminishing Return Classical economist including Marshall, present this law and relate this with agriculture sector but modern economist relates this with agriculture as well as other fields because in this law only one factor of production is fixed, others are variable (Hirschey, 2009). This law states that: “If the quantity of one factor of production is fixed and other variable in nature so total production will be increased at diminishing rate it results in the declining of the marginal production when there is no change in production technology (Hirschey, 2009).” Illustration of Law Fixed Factor (land) Variable Factor (labour, capital) Total Product (Kg) Marginal Product (Kg) 4 1 30 30 4 2 66 36 4 3 80 14 4 4 90 10 4 5 97 7 From the table and graph we can conclude that from the 3rd labour or capital, marginal product declines which show that the variable factors are inefficient and the total production increases at a diminishing rate. In this graph x- axis shows the values of variable factors for example labour or capital whereas the y-axis shows the values of marginal production level. Theoretical Example of Law of Diminishing Return Malthusian Theory of Population This theory implies that the world population always increases in a more rapid way than the food supply between the people so; this law based on the law of diminishing returns because the growth level is not enough for the entire population or food supply is not showing the linear way to beat the growth of population (Sandmo, 2011). Real World Example of Law of Diminishing Return This theory is basically applied in the agricultural sector because it is a more sensitive area. This law is also applicable in industrial sector or business areas. For example for the production of wheat if a person used more and more chemical fertilizer on the particular land so this can be affected badly to the wheat growing land so the marginal output level will reduce after some time. It comes to the example of capital intensive industries so well seem that the excessive use of capital can reduce the marginal output level of industrial products if maintenance of machineries is not taking place after some days. Reference Arnold, R. A. (2010). Macroeconomics. Mason, OH, Cengage Learning, South Western, p. 190-210. Barber, W. J. (2009). A history of economic thought. Middletown, Conn, Wesleyan University Press, p. 17-23. Chauhan, S., & Chauhan, S. (2009). Microeconomics Theory and applications, Part-I. New Delhi, PHI Learning Private Limited, p. 264-268. Hirschey, M. (2009). Managerial economics. Mason, OH, South-Western Cengage Learning, p. 251-256. Mankiw, N. (2011). Principles of Economics. 6th ed. Cengage Learning, p. 6-13. Sandmo, A. (2011). Economics evolving: a history of economic thought. Princeton, N.J., Princeton University Press, p. 65-73. Tucker, I. B. (2010). Microeconomics for today. United Kingdom, South Western Educational Pub, p. 519-525. Read More