Definition of Economics and Fundamental Concepts of Economics

Definition of Economics and Fundamental Concepts of Economics

definition of Economics 


According to L.Robbins

Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”

                                                    OR

Social science concerned with those aspects of social behavior and those institutions which involve allocation of scarce resources among unlimited and competing uses,to produce and distribute goods and services in the satisfaction of human wants , which are innumerable and insatiable.

Fundamental Concepts of Economics


  • Opportunity cost

  • Discounting principles

  • marginalism principle

  • Time Perspective

  • Equilibrium

Opportunity cost :

  • Opportunity cost of any good is the value of next best alternative good that is satisfied.
  • In words of Ferguson “ the alternative or opportunity cost of producing one unit of commodity “X” is the amount of commodity  “Y” , that must be sacrificed in order to use resources to produce , X rather than “Y”.

Examples

  • The opportunity cost of  the funds employed in one’s own business is the interest that could be earned on those funds had they been employed in other venture.
  • The opportunity cost of the times of entrepreneur devotes to his own business is the salary he could earn by working somewhere else.
  • OC requires ascertainment of sacrifice. If a decision involves no sacrifice, its opportunity cost is Zero.
  • The opportunity cost of given sum of money can never be zero.

Discounting principles :

  • Concept has relevance in view of Time dimension involved in the decision making.
  • Time value of money : refers to the fact that a dollar / rupee to be received in the future is not worth a $/Rs today.
  • It is important to know a technique to measure present value of dollar to be received or paid at different points in the future.

Present value of an amount

PV= s [ 1/ (1+ i)n ]

Where s = future value

           i= interest rate

Examples

  • What is the present value of $1080 in 1 yr if the interest rate is 8% per yr?
  • PV= $ 1080 [ 1/ 1.08]1
  •        = $ 1000
  • In one yr$ 1000 would increase to $ 1080 at 8% interest.

2.

  • What is the pv of $ 100000 to be received at end of 10 yrs if the rate of interest is 10%?                               
  • PV = 100000 [1/1.10]10    
  • = $ 38550
  • The process of  reducing a future amount to its present value is often referred to as Discounting Principles.

Interest rate used in the present value is referred to as Discount Rate.

Marginalism Principle :

  • In economic theory any firm makes a decision to produce by equating marginal revenues with marginal costs.(MR=MC)
  • Marginal Revenues- is the change in the Total revenue resulting from one unit change in the volume of output produce.
  • Marginal Cost- it refers to the cost of producing additional unit of output.
  • Marginal Product- it is the addition made to total produce as a result of employing an additional factor of production (labor)

Marginal concepts are always defined in terms of unit changes .

Example

Suppose 200 labourers working on a plot of one acre land can produce 250 tons of some output, Q . If one more labor is added , total production shoots up to 251.3 tons . Marginal product due to 201 th labour is 1.3 tons .

Time Perspective :

  • Economics normally make a difference between Long Run & Short Run.

short run

  • }It is the period of time in which output can be increased or decreased by changing the  amount of variable factors .
  • In short run quantities of fixed factors cannot be varied for making changes in output.

Long run

  • Period of time in which quantities of all factors may be varied.
  • In long run output can be increased not only by using more quantities of labor / Raw material but also expanding the size of existing plant or by building new plant.

Equilibrium :

Consumers Equilibrium

  • When he is able to maximize his satisfaction from  his fixed income and other resources at his disposal.

Firms Equilibrium

Selling its good at a price that maximizes the profits.

Industry Equilibrium

When there is no incentive for old firms to leave it and for new ones to enter it.

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