The Why and Who of Economics
Economics is the social science that examines how individuals, institutions
and society make optimal choices under conditions of scarcity.
The economic perspective includes three elements: scarcity and choice,
purposeful behaviour and marginal analysis. It sees individuals and
institutions making rational decisions based on comparisons of marginal
costs and marginal benefits.
Economists employ the scientific method, in which they form and test
hypotheses of cause-and-effect relationships to generate theories, laws
and principles. Economists often combine theories into representations
called models.
Macroeconomics looks at the economy as a whole or its major aggregates.
Microeconomics examines specific economic units or institutions.
Positive economic analysis deals with facts; normative economics reflects
value judgements.
1
,Economic Systems
Laissez-faire capitalism and the command system are the two broad types
of economic systems. In the market system (or capitalism), private
individuals own most resources, and markets coordinate most economic
activity. In the command system (or socialism or communism), the
government owns most resources, and central planners coordinate most
economic activity.
The market system is characterized by the private ownership of resources,
including the capital, and the freedom of individuals to engage in
economic activities of their choice to advance their material well-being.
Self-interest is the driving force of such an economy and competition
functions as a regulatory or control mechanism.
The command systems of the Soviet Union and pre-reform China met
their demise because of coordination difficulties under central
planning and the lack of a profit incentive. The coordination problem
resulted in bottlenecks, inefficiencies and a focus on a limited number of
products. The incentive problem discouraged product improvement, new
product development and entrepreneurship.
In the market system, markets, prices and profits organize and make
effective the many millions of individual economic decisions that occur
daily.
Emerging markets are the possible global economies of the future.
Specialization, use of advanced technology and the extensive use of
capital goods are common features of market systems.
Every economy faces five fundamental questions:
(a) What goods and services will be produced?
(b) How will the goods and services be produced?
(c) Who will get the goods and services?
(d) How will the system accommodate change?
(e) How will the system promote progress?
The market system produces products whose production and sale yield
total revenue sufficient to cover total cost. It does not produce products
for which total revenue continuously falls short of the total cost.
2
,Competition forces firms to use the lowest-cost production techniques.
Economic profit (total revenue minus total cost) indicates that the industry
is prosperous and promotes its expansion. Losses signify that industry is
not prosperous and hasten its contraction.
Consumer sovereignty means that both businesses and resource suppliers
are subject to the wants of consumers. Through their rand votes,
consumers decide on the composition of output.
The prices that a household receives for the resources it supplies to the
economy determine that household's income. This income determines the
household's claim on the economy's output. Those who have the income
to spend get the products produced in the market system.
By communicating changes in consumer tastes to entrepreneurs and
resource suppliers, the market system prompts appropriate adjustments
in the allocation of the economy's resources. The market system also
encourages technological advance and capital accumulation, both of
which raise a nation's standard of living.
Competition, the primary mechanism of control in the market economy,
promotes the unity of self-interest and social interests. As directed
by an invisible hand, competition harnesses the self-interested motives of
businesses and resource suppliers to further social interest.
3
, Demand, Supply and Markert
Equilibrium
Demand is a schedule or curve representing the willingness of buyers in a
specific period to purchase a particular product at each of various prices.
The law of demand implies that consumers will buy more of a product at a
low price than at a high price. So, other things being equal, the
relationship between price and quantity demanded is negative or inverse
and is graphed as a downward-sloping curve.
Market demand curves are found by adding horizontally the demand
curves of the many individual consumers in the market.
Changes in one or more of the determinants of demand (consumer
taste, the number of buyers in the market, the money incomes of
consumers, the prices of related goods and consumer
expectations) shift the market demand curve. A shift to the right is an
increase in demand; a shift to the left is a decrease in demand. A change
in demand is different from a change in quantity demanded, the latter
being a movement from one point to another point on a fixed demand
curve because of a change in the product's price.
Supply is a schedule or curve showing the amounts of a product that
producers are willing to offer in the market at each possible price during a
specific period. The law of supply states that, other things being equal,
producers will offer more of a product at a high price than at a low price.
Thus, the relationship between price and quantity supplied is positive or
direct, and supply is graphed as an upward-sloping curve.
The market supply curve is the horizontal summation of the supply curves
of the individual producers of the product.
Changes in one or more of the determinants of supply (resource
prices, production techniques, taxes or subsidies, the prices of
other goods, producer expectations or the number of sellers in the
market) shift the supply curve of a product. A shift to the right is an
increase in supply; a shift to the left is a decrease in supply. In contrast, a
change in the price of the product being considered causes a change in
the quantity supplied, which is shown as a movement from one point to
another point on a fixed supply curve.
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Economics is the social science that examines how individuals, institutions
and society make optimal choices under conditions of scarcity.
The economic perspective includes three elements: scarcity and choice,
purposeful behaviour and marginal analysis. It sees individuals and
institutions making rational decisions based on comparisons of marginal
costs and marginal benefits.
Economists employ the scientific method, in which they form and test
hypotheses of cause-and-effect relationships to generate theories, laws
and principles. Economists often combine theories into representations
called models.
Macroeconomics looks at the economy as a whole or its major aggregates.
Microeconomics examines specific economic units or institutions.
Positive economic analysis deals with facts; normative economics reflects
value judgements.
1
,Economic Systems
Laissez-faire capitalism and the command system are the two broad types
of economic systems. In the market system (or capitalism), private
individuals own most resources, and markets coordinate most economic
activity. In the command system (or socialism or communism), the
government owns most resources, and central planners coordinate most
economic activity.
The market system is characterized by the private ownership of resources,
including the capital, and the freedom of individuals to engage in
economic activities of their choice to advance their material well-being.
Self-interest is the driving force of such an economy and competition
functions as a regulatory or control mechanism.
The command systems of the Soviet Union and pre-reform China met
their demise because of coordination difficulties under central
planning and the lack of a profit incentive. The coordination problem
resulted in bottlenecks, inefficiencies and a focus on a limited number of
products. The incentive problem discouraged product improvement, new
product development and entrepreneurship.
In the market system, markets, prices and profits organize and make
effective the many millions of individual economic decisions that occur
daily.
Emerging markets are the possible global economies of the future.
Specialization, use of advanced technology and the extensive use of
capital goods are common features of market systems.
Every economy faces five fundamental questions:
(a) What goods and services will be produced?
(b) How will the goods and services be produced?
(c) Who will get the goods and services?
(d) How will the system accommodate change?
(e) How will the system promote progress?
The market system produces products whose production and sale yield
total revenue sufficient to cover total cost. It does not produce products
for which total revenue continuously falls short of the total cost.
2
,Competition forces firms to use the lowest-cost production techniques.
Economic profit (total revenue minus total cost) indicates that the industry
is prosperous and promotes its expansion. Losses signify that industry is
not prosperous and hasten its contraction.
Consumer sovereignty means that both businesses and resource suppliers
are subject to the wants of consumers. Through their rand votes,
consumers decide on the composition of output.
The prices that a household receives for the resources it supplies to the
economy determine that household's income. This income determines the
household's claim on the economy's output. Those who have the income
to spend get the products produced in the market system.
By communicating changes in consumer tastes to entrepreneurs and
resource suppliers, the market system prompts appropriate adjustments
in the allocation of the economy's resources. The market system also
encourages technological advance and capital accumulation, both of
which raise a nation's standard of living.
Competition, the primary mechanism of control in the market economy,
promotes the unity of self-interest and social interests. As directed
by an invisible hand, competition harnesses the self-interested motives of
businesses and resource suppliers to further social interest.
3
, Demand, Supply and Markert
Equilibrium
Demand is a schedule or curve representing the willingness of buyers in a
specific period to purchase a particular product at each of various prices.
The law of demand implies that consumers will buy more of a product at a
low price than at a high price. So, other things being equal, the
relationship between price and quantity demanded is negative or inverse
and is graphed as a downward-sloping curve.
Market demand curves are found by adding horizontally the demand
curves of the many individual consumers in the market.
Changes in one or more of the determinants of demand (consumer
taste, the number of buyers in the market, the money incomes of
consumers, the prices of related goods and consumer
expectations) shift the market demand curve. A shift to the right is an
increase in demand; a shift to the left is a decrease in demand. A change
in demand is different from a change in quantity demanded, the latter
being a movement from one point to another point on a fixed demand
curve because of a change in the product's price.
Supply is a schedule or curve showing the amounts of a product that
producers are willing to offer in the market at each possible price during a
specific period. The law of supply states that, other things being equal,
producers will offer more of a product at a high price than at a low price.
Thus, the relationship between price and quantity supplied is positive or
direct, and supply is graphed as an upward-sloping curve.
The market supply curve is the horizontal summation of the supply curves
of the individual producers of the product.
Changes in one or more of the determinants of supply (resource
prices, production techniques, taxes or subsidies, the prices of
other goods, producer expectations or the number of sellers in the
market) shift the supply curve of a product. A shift to the right is an
increase in supply; a shift to the left is a decrease in supply. In contrast, a
change in the price of the product being considered causes a change in
the quantity supplied, which is shown as a movement from one point to
another point on a fixed supply curve.
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