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The subject of economics
The word economy comes from the Greek word oikonomos, which means “one who manages a household.” At first, this origin might seem peculiar. But in fact, households and economies have much in common. A household faces many decisions. It must decide which members of the household do which tasks and what each member gets in return: Who cooks dinner? Who does the laundry? Who gets the extra dessert at dinner? Who gets to choose what TV show to watch? In short, the household must allocate its scarce resources among its various members, taking into account each member’s abilities, efforts, and desires.
Like a household, a society faces many decisions. A society must find someway to decide what jobs will be done and who will do them. It needs some people to grow food, other people to make clothing, and still others to design computer software. Once society has allocated people (as well as land, buildings, and machines) to various jobs, it must also allocate the output of goods and services
they produce. It must decide who will eat caviar and who will eat potatoes. It must decide who will drive a Ferrari and who will take the bus. The management of society’s resources is important because resources are scarce. Scarcitymeans that society has limited resources and therefore cannot produce all the goods and services people wish to have. Just as each member of a household cannot get everything he or she wants, each individual in a society cannot attain the highest standard of living to which he or she might aspire.
Economicsis the study of how society manages its scarce resources. In most societies, resources are allocated not by an all-powerful dictator but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. For instance, they examine how the multitude of buyers and sellers of a good together determine the price at which the good is sold and the quantity that is sold. Finally, economists analyze forces and trends that affect the economy as a whole, including the growth in average income, the fraction of the population that cannot find work, and the rate at which prices are rising.
There are many definitions of economics. One of them was formulated by Paul Samuelson, a prominent American economist and the author of textbooks on economics which have been used by economics students all over the world for decades: Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people.
Economics is a science. However it is of practical value in business. An understanding of the overall operation of the economic system puts the business executive in a better position to formulate policies. The executive who understands the causes and consequences of inflation is better equipped during inflationary periods to make more intelligent decisions than otherwise. Indeed, more and more economists are employed by corporations. Their job? To gather and interpret economic information upon which rational business decisions can be made.
In spite of its practical benefits, however, the students must be warned that economics is an academic subject. Unlike accounting, advertising, corporation finance, and marketing, economics is not primarily a how-to-make-money area of study. A knowledge of economists may be helpful in running a business or in managing one’s personal finances, but this is not its primary objective. In economics, problems are usually examined from the social, not from the individual point of view. Production and consumption of goods and services are discussed from the viewpoint of society as a whole, not from the standpoint of one’s own personal financial benefits.
Economics is concerned with the following:
1. The production of goods and services: how much the economy produces; what particular combination of goods and services; how much each firm produces; what techniques of production it uses; how many people it employs.
2. The consumption of goods and services: how much the population as a whole spends (and how much it saves); what pattern of consumption is in the economy; how much people buy of particular items; how people’s consumption is affected by prices, advertising, fashion and other factors.
As individuals want more than they can have, this makes them behave in certain ways. Economics studies that behaviour of people as consumers of various goods and services. The society as a whole faces the similar problem, so economics also studies the behaviour of producers (firms), and of governments which can influence the level of production and consumption as a whole.