Fundamentals of Economics
Economics is a social science that studies how individuals, businesses, governments, and nations make choices about how to allocate scarce resources to satisfy their unlimited wants.
- Scarcity: The basic economic problem. It means that we have limited resources (like money, time, and raw materials) but unlimited wants.
- Choice: Because of scarcity, we must make choices. Economics is the study of these choices.
The Two Branches of Economics
Economics is mainly divided into two branches: Microeconomics and Macroeconomics.
What is Microeconomics? 🔬
Microeconomics is the study of the economic behavior of individual units like a single person, a single household, or a single company. It focuses on the small parts of the economy.
- Key Questions:
- How does a company decide the price of its product?
- How does a family decide to spend its budget?
- What determines the wages of a single worker?
- Simple Analogy: Microeconomics is like looking at a single tree in a large forest.
- Examples:
- Studying the demand and supply of mobile phones in the market.
- Analyzing why the price of onions has increased.
What is Macroeconomics? ✈️
Macroeconomics is the study of the economy as a whole. It looks at the big picture and deals with economy-wide phenomena.
- Key Questions:
- What causes inflation in the entire country?
- Why is the national unemployment rate so high?
- How can a country increase its Gross Domestic Product (GDP)?
- Simple Analogy: Macroeconomics is like looking at the entire forest, not just individual trees.
- Examples:
- Studying the overall inflation rate in India.
- Analyzing the country’s GDP growth rate.
- Government policies to control unemployment.
Types of Economies
Economies are classified based on how they answer three basic questions:
- What to produce?
- How to produce it?
- For whom to produce it?
Here are the main types:
1. Command Economy (Socialist Economy)
- What is it?: An economy where the government makes all the key economic decisions. The government owns most of the resources and businesses.
- Decisions Made By: Central government planning.
- Main Goal: Social welfare and equality.
- Example: Former Soviet Union, North Korea.
2. Market Economy (Capitalist Economy)
- What is it?: An economy where economic decisions are made by individuals and private firms. The government has a very limited role. It is driven by the forces of supply and demand.
- Decisions Made By: Consumers and producers.
- Main Goal: Profit maximization.
- Example: There is no pure market economy, but countries like the USA and Singapore are close examples.
3. Mixed Economy
- What is it?: This is a blend of a command and a market economy. Both the government (public sector) and private companies (private sector) play significant roles.
- Decisions Made By: Both government and private individuals.
- Main Goal: To achieve both profit and social welfare.
- Example: India is a prime example of a mixed economy. Other examples include the UK and France.
Summary Table for Revision
| Feature | Command Economy | Market Economy | Mixed Economy |
| Ownership | Government owns resources. | Private individuals own resources. | Both government and private ownership. |
| Decision Making | Central government planners. | Driven by supply and demand. | Blend of government and market forces. |
| Main Motive | Social Welfare. | Profit. | Both profit and social welfare. |
| Example | North Korea. | USA (largely). | India, UK. |