CHAPTER 1: MEANING, NATURE AND SCOPE OF ECONOMICS

1.1 Stages of developing economics as a subject and its significance and scope : Economics as a subject has
developed in the following stages

1.2 ELEMENTS OF ECONOMICS SYSTEM

Elements of an Economic System Economic systems mainly deal with the relationships between production (supply) and consumption (demand). What is being produced has to be consumed and what is being consumed has to be produced. Four elements define production:

Manufacturing. Transformation of materials into intermediate and finished goods. Regulation. The way the production system is controlled and regulated. Mostly the role of governments but increasingly of international multilateral agreements. Circulation. !ctivities that lin" the elements of the production system. #ncludes transport and communications. Distribution. !ctivities ma"ing goods and services available to the consumer such as retailing.

With the emergence of logistics the elements of circulation and distribution are increasingly embedded. Further all these elements especially manufacturing are using inputs for their processes also "nown as factors of production. They include land (including natural resources) capital and labor. The enterprise itself is often considered as the fourth factor as its main purpose is the organi$ation of the other factors of production. 1.3 METHODS OF ECONOMIC ANALYSIS: An economic theory derives laws or generalizations through two methods: (1) Deductive Method and (2) Inductive Method. hese two ways o! deriving economic generalizations are now e"#lained in $rie!: (1) Deduc !"e Me #$d $% Ec$&$'!c A&()*+!+: he deductive method is also named as analytical% abstract or prior method. he deductive method consists in deriving conclusions !rom general truths% ta&es !ew general #rinci#les and a##lies them draw conclusions. 'or instance% i! we acce#t the general #ro#osition that man is entirely motivated $y sel!(interest. In a##lying the deductive method o! economic analysis% we #roceed !rom general to #articular. S e,+ $% Deduc !"e Me #$d: he main ste#s involved in deductive logic are as under: (!) Pe-ce, !$& $% #e ,-$.)e' $ .e !&/u!-ed !& $: In the #rocess o! deriving economic generalizations% the analyst must have a clear and #recise idea o! the #ro$lem to $e in)uired into. (!!) De%!&!&0 $% e-'+: he ne"t ste# in this direction is to de!ine clearly the technical terms used analysis. 'urther% assum#tions made !or a theory should also $e #recise. (!!!) Reduc!&0 #*,$ #e+!+ %-$' #e (++u', !$&+: he third ste# in deriving generalizations is reducing hy#othesis !rom the assum#tions ta&en.

(!") Te+ !&0 $% #*,$ #e+!+: +e!ore esta$lishing laws or generalizations% hy#othesis should $e veri!ied through direct o$servations o! events in the rear world and through statistical methods. ( heir inverse relationshi# $etween #rice and )uantity demanded o! a good is a well esta$lished generalization). (2) I&duc !"e Me #$d $% Ec$&$'!c A&()*+!+: Inductive method which also called empirical method was ado#ted $y the ,-istorical .chool o! /conomists0. It involves the #rocess o! reasoning !rom #articular !acts to general #rinci#le. his method derives economic generalizations on the $asis o! (i) /"#erimentations (ii) 1$servations and (iii) .tatistical methods. In this method% data is collected a$out a certain economic #henomenon. hese are systematically arranged and the general conclusions are drawn !rom them. 'or e"am#le% we o$serve 222 #ersons in the mar&et. 3e !ind that nearly 145 #ersons $uy !rom the chea#est sho#s% 1ut o! the 5 which remains% * #ersons $uy local #roducts even at higher rate 6ust to #atronize their own #roducts% while the !i!th is a !ool. 'rom this o$servation% we can easily draw conclusions that #eo#le li&e to $uy !rom a chea#er sho# unless they are guided $y #atriotism or they are devoid o! commonsense. S e,+ $% I&duc !"e Me #$d: he main ste#s involved in the a##lication o! inductive method are: (1) o$servation (2) !ormation o! hy#othesis (3) generalization and (*) veri!ication. C$&c)u+!$&: he a$ove analysis reveals that $oth the methods have wea&nesses. 3e cannot rely e"clusively on any one o! them. Modern economists are o! the view that $oth these methods are com#limentary. hey #artners and not rivals. Al!red Marshall has rightly remar&ed: ,Inductive and Deductive methods are $oth needed !or scienti!ic thought% as the right and le!t !oot are $oth needed !or wal&ing7. 3e can a##ly any o! them or $oth as the situation demands.

What is mean by static, and dynamic study? he word static originates !rom the !ield o! #hysic. It is used to denote some &ind o! movement in which s#eed is constantly maintained. Ali&e% in economic static mean the studies !ocus only on #articular #eriod o! time. It is similar to ta&ing a #hoto when you #ress the $utton !or a shot then the #hoto is 6ust at a #articular #oint o! time. In economic most #a#er is a static analysis% !or instance% we say the mar&et is in e)uili$rium when demand and su##ly e)uate one another% which is gra#hically re#resent $y the intersection #oint o! demand and su##ly curve. his is a static analysis since we 6ust only see the #icture at a #oint o! time.

-ow a$out dynamic analysis8 Dynamic we !ocus on the change o! time and how the e)uili$rium change with time. It is the same as watching the movie you can see how the image animate and movement. Dynamic analysis allows us to see the #ath o! varia$le how the varia$le changes with time. It hel#s us to see whether the e)uili$rium will reach or not. In dynamic economic the study o! time #ath o! varia$le is to see whether the varia$le will converge to a #oint which we called sta$le or steady state or will it diverge (the saddle #oint).

1.4 MICRO ECONOMICS Vs MACRO ECONOMICS Microeconomics is generally the study o! individuals and $usiness decisions9 macroeconomics loo&s at higher u# country and government decisions. Macroeconomics and microeconomics% and their wide array o! underlying conce#ts% have $een the su$6ect o! a great deal o! writings. he !ield o! study is vast9 here is a $rie! summary o! what each covers: Microeconomics is the study o! decisions that #eo#le and $usinesses ma&e regarding the allocation o! resources and #rices o! goods and services. his means also ta&ing into account ta"es and regulations created $y governments. Microeconomics !ocuses on su##ly and demand and other !orces that determine the #rice levels

seen in the economy. 'or e"am#le% microeconomics would loo& at how a s#eci!ic com#any could ma"imize it:s #roduction and ca#acity so it could lower #rices and $etter com#ete in its industry. Macroeconomics% on the other hand% is the !ield o! economics that studies the $ehaviour o! the economy as a whole and not 6ust on s#eci!ic com#anies% $ut entire industries and economies. his loo&s at economy(wide #henomena% such as ;ross <ational =roduct (;D=) and how it is a!!ected $y changes in unem#loyment% national income% rate o! growth% and #rice levels. 'or e"am#le% macroeconomics would loo& at how an increase>decrease in net e"#orts would a!!ect a nation:s ca#ital account or how ;D= would $e a!!ected $y unem#loyment rate. 3hile these two studies o! economics a##ear to $e di!!erent% they are actually interde#endent and com#lement one another since there are many overla##ing issues $etween the two !ields. 'or e"am#le% increased in!lation (macro e!!ect) would cause the #rice o! raw materials to increase !or com#anies and in turn a!!ect the end #roduct:s #rice charged to the #u$lic. . he $ottom line is that microeconomics ta&es a $ottoms(u# a##roach to analyzing the economy while macroeconomics ta&es a to#(down a##roach. ?egardless% $oth micro( and macroeconomics #rovide !undamental tools !or any !inance #ro!essional and should $e studied together in order to !ully understand how com#anies o#erate and earn revenues and thus% how an entire economy is managed and sustained. 1#( D$e+ Gross Domestic Product - GDP Me(&2 he monetary value o! all the !inished goods and services #roduced within a country:s $orders in a s#eci!ic time #eriod% though ;D= is usually calculated on an annual $asis. It includes all o! #rivate and #u$lic consum#tion% government outlays% investments and e"#orts less im#orts that occur within a de!ined territory. GDP 3 C 4 G 4 I 4 N5 where: 0C0 is e)ual to all #rivate consum#tion% or consumer s#ending% in a nation:s economy 0G0 is the sum o! government s#ending 0I0 is the sum o! all the country:s $usinesses s#ending on ca#ital 0N50 is the nation:s total net e"#orts% calculated as total e"#orts minus total im#orts. (<@ A /"#orts ( Im#orts) 1.6 THE ECONOMIC PRO7LEM: SCARCITY AND CHOICE, RIS8 AND UNCERTAINTY

he .(+!c ec$&$'!c ,-$.)e' is a$out +c(-c! * and c#$!ce since there are only a limited amount o! resources availa$le to #roduce the unlimited amount o! goods and services we desire. All societies !ace the #ro$lem o! having to decide:

1#( 0$$d+ (&d +e-"!ce+ $ ,-$duce H$9 .e+ $ ,-$duce 0$$d+ (&d +e-"!ce+ 1#$ !+ $ -ece!"e 0$$d+ (&d +e-"!ce+

Sc(-c! * I% +$'e #!&0 !+ +c(-ce : ! 9!)) #("e ( '(-;e "()ue. I! the su##ly o! a good or service is low% the mar&et #rice will rise% #roviding there is su!!icient demand !rom consumers. ;oods and services that are in #lenti!ul su##ly will have a lower mar&et value $ecause su##ly can easily meet the demand !rom consumers. 3henever there is e"cess su##ly in a mar&et% we e"#ect to see #rices !alling. 'or e"am#le% the #rices o! new cars in the BC have $een !alling !or several years and there have $een huge !alls in the #rices o! clothing as su##ly !rom countries such as Dhina and Eietnam has surged. I&+( !(.)e #u'(& 9(& + (&d &eed+ -uman $eings want $etter !ood9 housing9 trans#ort% education and health services. hey demand the latest digital technology% more meals out at restaurants% more !re)uent overseas travel% more leisure time% $etter cars% chea#er !ood and a wider range o! cosmetic health care treatments. /conomic resources are limited% $ut #u'(& &eed+ (&d 9(& + (-e !&%!&! e. Indeed the develo#ment o! society can $e descri$ed as the u&c$"e-!&0 $% &e9 9(& + (&d &eed+ ( which #roducers attem#t to su##ly $y using the availa$le !actors o! #roduction.

M(;!&0 c#$!ce+ T-(de:$%%+ 9#e& '(;!&0 c#$!ce+ Ma&ing a choice made normally involves a -(de:$%% ( in sim#le terms% choosing more o! one thing means giving u# something else in e"change. +ecause wants are unlimited $ut resources are !inite% choice is an unavoida$le issue in economics. 'or e"am#le: 1. H$u+!&0: Dhoices a$out whether to rent or $uy a home G a huge decision to ma&e and one !ull o! uncertainty given the recent volatility in the +ritish housing mar&etH here are costs and $ene!its to renting a #ro#erty or choosing to $uy a home with a mortgage. +oth decisions involve a degree o! ris&. 1$-;!&0: Dhoosing $etween !ull(time or #art(time wor&% or to ta&e a course in higher education lasting three years G how have these choices and commitments $een a!!ected $y the introduction o! university tuition !ees8 T-(&+,$- (&d -("e): he choice $etween using /uro( unnel% a s#eedy low(cost !erry or an airline when travelling to 3estern /uro#e. Iour choices a$out which modes o! trans#ort to use to get to and !rom wor& or school each day.

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R!+; (&d U&ce- (!& *: he uncertainties o! economic activities are systematized in !our categories: (.trategic uncertainty: which re!ers to the de#endence o! economic success on the actions o! other actors who !ollow their own interest. his #ro$lem o! dou$le contingency is #ervasive in all contractual agreements that are incom#lete% that is% which leave discretion to the e"change #artners. (Bncertainty originating !rom contingent assessments o! the value o! goods in the mar&et% de#ending on emerging #rocesses in which )ualities are esta$lished in collective inter#retative activities. An e"am#le o! this is the art mar&et% where )uality and #rice is the outcome o! inter#retation in the mar&et. (Bncertainty with regard to #roduct )ualities emerging !rom incom#lete or asymmetrically distri$uted in!ormation. (Bncertainty stemming !rom events occurring in the !uture that are un&nown to #resent actors. he )uestion o! how economic actors deal with these sources o! ris& and uncertainty #rovides a crucial entry #oint !or the investigation o! any economy. It can $e assumed that these issues are relevant in all economic systems and throughout economic history. Da#italistic economies% however% are characterized $y a s#eci!ic tension $etween institutions reducing uncertainty and institutions creating uncertainty% es#ecially mar&ets. Bncertainty is a crucial source o! o##ortunities !or #ro!its $ut also creates #ro$lems !or the coordination o! economic activities% and causes insecurity !or actors.