"There's nothing to eat in this house," as you open your refrigerator door and take a look at the food within. Afterwards, you enter a wardrobe filled with clothing and realize, "I have nothing to wear." You are dealing with a shortage. You can never get enough of everything you desire or need. It's a reality that there's an abundance of food and clothing. You choose to disregard the alternatives that were presented to you at the time, but you know that ultimately you will give in and eat the apple that is next to the dry grapes at the bottom of the bin before putting on the jeans and blouse that you hate. You are an economic being. In light of shortage, you consider your options.
What is Economics?
The study of economics examines how people, organizations, and society decide to respond to scarcity. Observing how people respond to scarcity is interesting. To ensure that everyone receives an equitable share of the limited resources, some people develop complex plans and procedures. Some people invent things as they go along. Everybody uses economics in their daily lives. People continuously battle to survive, make ends meet, and even prosper given the relative shortage they encounter, whether they live in a single person or the greatest community on Earth.
Though it was not always recognized by that name, economics has been around for a very long time. Philosophers have long studied choice and scarcity before the discipline was called such. Adam Smith, the founder of modern economics, was regarded as a moral philosopher rather than an economist.Economists are the ones who research these decisions. People have an incredibly wide range of options, which makes the area of economics very wide. While some economists focus on how individuals and organizations make decisions, others research how countries manage scarcity.
To explain the behavior of whatever it is they are investigating, economists create theories. A portion of these ideas are eventually verified using data from the real world (empirical data), while in other cases, these theories are implemented without any kind of testing. Economists are employed by big businesses, financial institutions, and colleges, and economics as a matter of subject is used by us in day-to-day life for making efficient choices.
How do we define economics?
There is no universally accepted definition of economics (its definition is controversial). This is because different economists defined economics from different perspectives:
a. Wealth definition
b. Welfare definition,
c. Scarcity definition,
d. Growth definition
Hence, its definition varies as the nature and scope of the subject grow over time. But, the formal and commonly accepted definition is as follow:
Economics is a social science which studies efficient allocation of scarce resources so as to attain the maximum fulfillment of unlimited human needs. As economics is a science of choice, it studies how people choose to use scarce or limited productive resources (land, labour, equipment, technical knowledge and the like) to produce various commodities.
The following statements are derived from the above definition.
Economics studies about scarce resources;
It studies about allocation of resources;
Allocation should be efficient;
Human needs are unlimited
The aim (objective) of economics is to study how to satisfy unlimited human needs up to the maximum possible degree by allocating resources efficiently.
The rationales of Economics:
There are two fundamental facts that provide the foundation for the field of economics.
1) Human (society‘s) material wants are unlimited.
2) Economic resources are limited (scarce).
Since there are only a limited number of resources available to generate the infinite number of products and services we seek, the fundamental economic dilemma is one of choice and scarcity. Economics, therefore, is the study of how people choose how to spend limited resources in an effort to satisfy their seemingly limitless desires. Consequently, the foundation of all decision-making is choice. We must make difficult decisions as a family, a country, and as individuals about how to best use the resources at our disposal to satisfy our needs and desires. Economists examine how these decisions are made in many contexts, assess the results in light of norms like stability, equality, and efficiency, and look for different models of economic organization that can result in better living standards or a more ideal distribution of wealth.
The following are examples of scarce resources:
All types of human resources: manual, intellectual, skilled and specialized labor;
Most natural resources like land (especially, fertile land), minerals, clean water, forests and wild - animals;
All types of capital resources ( like machines, intermediate goods, infrastructure ); and
All types of entrepreneurial resources
Scope of Economics
The study of economics is becoming more and more broad, covering a wide range of subjects and problems. Numerous new subfields within the field of economics have emerged recently, such as industrial economics, welfare economics, development economics, transport economics, environmental economics, and so on. Nonetheless, macroeconomics and microeconomics—the two main divisions of modern economics—form its central component. It indicates that both macroscopic and microeconomic analysis is possible in economics.
Macroeconomics:
Macroeconomics is a branch of economics that deals with the effects and consequences of the aggregate behavior of all decision-making units in a certain economy. In other words, it is an aggregative economics that examines the interrelations among various aggregates, their determination, and the causes of fluctuations in them. It looks at the economy as a whole and discusses the economy-wide phenomena.
The news is always about things like unemployment, inflation, financial markets, booms and busts, interest rates, and exchange rates. Each of these occurrences has an impact on our health. For this reason, macroeconomics is fascinating. But macroeconomics is more than simply news; it's an exciting intellectual journey. Its coverage of a wide range of topics is sufficient proof of its intrinsic complexity. However, a few straightforward concepts can help navigate through challenging circumstances.
Additionally, macroeconomics is helpful. Price changes and the emergence or disappearance of jobs have an impact on people, affluent or poor. People are curious about what their governments are doing. The social fabric of a society can be torn apart by dramatic events like depressions, which occur when overall economic activity is far below average and unemployment soars, or hyperinflations, which occur when prices are rising at monthly rates of 50% or more. However, these events can be avoided when policymakers apply sound economic principles.
Microeconomics:
Microeconomics is concerned with the economic behavior of individual decision-making units such as households, firms, markets and industries. In other words, it deals with how households and firms make decisions and how they interact in specific markets.
The prefix micro- in microeconomics comes from the Greek word mikros, meaning small. Microeconomics studies the behavior of "small" units, such as consumers, workers, savers, business managers, firms, specific industries and markets, and so forth, macroeconomics focuses primarily on aggregates, such as the total amount of goods and services produced by society and the absolute level of prices.
However, microeconomics is not just concerned with "small" problems. Rather, it highlights how many "big" problems are best understood by recognizing that they are made up of a lot of smaller ones. The study of molecules, atoms, and subatomic particles is the foundation of much of our knowledge in physics and chemistry, while the study of individual behavior forms the basis of much of our knowledge in economics.
In any society, people are the primary decision-makers. The collective decisions they make shape the economic landscape of a society. Workers choose what professions to
accept, consumers choose how many different things to buy, and company owners choose how many employees to recruit and how much output to generate. Microeconomics is the study of the factors that affect these decisions and how these countless little ones add together to determine the workings of the entire economy.
Because prices have important effects on these individual decisions, microeconomics is frequently called price theory.
Economic Resources
Economic resources are classified into four categories:
Land:
Land is more than simply a piece of land; it encompasses all natural resources. Included are groundwater, fish in the ocean, trees, mineral deposits, and plain old land. Natural resources on land can be classified as either renewable or non-renewable. Chickens and pine trees are examples of renewable resources that are readily replenished. It is difficult to replace non-renewable resources like oil and Atlantic cod. Rent is the term for the money paid for land.
Labor:
People with their talents and abilities are referred to as laborers. Professional, skilled, and unskilled laborers make up the labor force. People without formal training who are given pay to undertake repetitive jobs like assembly line production or hamburger making are referred to as unskilled labor. Those who are compensated for their knowledge and abilities are considered to be engaged in skilled work. Skilled laborers include mechanics, carpenters, electricians, plumbers, and welders. Workers in the professional sector are compensated for their expertise. This group includes physicians, attorneys, engineers, scientists, and even educators.
Capital:
In economics, "capital" refers to all of the factories, tools, and equipment needed in the manufacturing process rather than actual money. The result of investment is capital. Give up. Isn't that unclear? You have most likely had a pleasant life up to this point, believing that investing in the stock market is what you do and that capital is equivalent to money. I apologize. Investment is the money used to purchase the physical assets that are needed to create additional assets, while capital is the item itself. You need capital in order to produce capital. Interest is constantly paid since capital is always acquired with borrowed funds.
Entrepreneurship:
Unlike labor, when one ends up working for someone else, entrepreneurship actually creates businesses by combining land, labor, and capital in new ways to provide a good or service. Entrepreneurs are unique individuals who are willing to take great risks. These people are willing to risk their wealth in order to earn profits. Entrepreneurs include such well-known people as Bill Gates, Azim Premji, Dhirubhai Ambani etc.
Opportunity Cost
If resources are scarce, then output will be limited. We can't get all we want if output is restricted. So, a decision needs to be taken. People, businesses, and the government are compelled to make decisions about what outputs to generate, in what quantities, and what outputs not to produce as a result of the scarcity problem. Simply said, the choice is implied by scarcity. Cost is thus implied by choice. This implies that every decision taken results in the sacrifice of another option. We refer to this expense as the opportunity cost.
Opportunity Cost:
Opportunity cost is the amount or value of the next best alternative that must be sacrificed (forgone) in order to obtain one more unit of a product.
There is always going to be a cost associated with using a manufacturing element. Why? Production factors are finite, not infinite. Consequently, you forfeit your capacity to use land, labor, capital, or entrepreneurial endeavors for other purposes if you decide to use them for one. Consider your effort as a resource. Let's say you have one hour to devote to writing a book, instructing students, or weaving a hammock. You must make decisions that are known as trade-offs. Assume you choose to weave a hammock. You can neither teach a class nor write a book in that hour of time. If writing a book is your next best alternative, then economists would say that the opportunity cost of spending an hour weaving a hammock is the hour you could have spent writing a book. Opportunity cost is the next best alternative use of a resource.
When we say opportunity cost, we mean that:
It is measured in goods & services but not in money costs
It should be in line with the principle of substitution.
In conclusion, when the opportunity cost of an activity increases people substitute other activities in its place.
Opportunity cost is sometimes referred to as implicit cost. For any productive activity there are explicit costs like labor, raw materials, and overhead, which are easily calculated, and there are the implicit costs, which are more difficult to assess.
Note for UPSC Aspirants: For UPSC aspirants interested in exploring further, here are some keywords to guide your research:Scarcity, allocation, resources, needs, choice, efficiency, unlimited, scarcity definition, microeconomics, macroeconomics, opportunity cost, trade-offs, entrepreneurship, labor, capital
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