About Economics

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The word "ECONOMICS" came from a Greek Word "OIKONOMIA" meaning, "management of a household, administration" or "one person or system who manages a household." Economics is the study of how people choose to use resources.

Economics is a science as well as an art of analyzing Production, Distribution & Consumption of Goods & Services. It starts from individual to national demand & takes a stop to their consumption. But throughout the way it covers lot of things.

Resources include the time and talent people have available, the land, buildings, equipment, and other tools on hand, and the knowledge of how to combine them to create useful products and services.

Important choices involve how much time to devote to work, to school, and to leisure, how many dollars to spend and how many to save, how to combine resources to produce goods and services, and how to vote and shape the level of taxes and the role of government.

Often, people appear to use their resources to improve their well-being. Well-being includes the satisfaction people gain from the products and services they choose to consume, from their time spent in leisure and with family and community as well as in jobs, and the security and services provided by effective governments. Sometimes, however, people appear to use their resources in ways that don't improve their well-being.

In short, economics includes the study of labor, land, and investments, of money, income, and production, and of taxes and government expenditures. Economists seek to measure well-being, to learn how well-being may increase over time, and to evaluate the well-being of the rich and the poor. The most famous book in economics is the Inquiry into the Nature and Causes of The Wealth of Nations written by Adam Smith, and published in 1776 in Scotland.

Although the behavior of individuals is important, economics also addresses the collective behavior of businesses and industries, governments and countries, and the globe as a whole. Microeconomics starts by thinking about how individuals make decisions. Macroeconomics considers aggregate outcomes. The two points of view are essential in understanding most economic phenomena.

The necessity of economics starts from individual's daily life. Taking from the ground level it ends up at the nationally even worldwide. The study of economics starts from people's Needs & Wants which ultimately seeks the definition for Demand.

The Needs & Wants refers Individual's requirements for something that he/she doesn't have. Here 'need' refers to something that is must while 'want' refers to desire to acquire. Now the question arises *"WHY we NEED?"

A household and an economy face many decisions like, who will work? What goods and how many of them should be produced? What resources should be used in production? At what price should the goods be sold? The management of society's resources is important because resources are scarce. Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have. Now we have the answer to the star marked question which is 'Scarcity'.

People set their priority to fulfill their needs & wants based on some factor like- what they want most, what the cost for the specific objective & what they can afford. After determining the most important need the budget constraint determines the choice for the settlement & taking alternatives. The choice therefore varies depending on the buying power of consumers.

As we see that it is not possible to create everything as per people's requirements that means the scarcity will ultimately drive us towards Needs & Wants. And there is also a factor called Opportunity Cost which says people need to sacrifice to obtain one thing while he/she is having another. For Example- A student can either choose to study at Medical School or can choose to study at Engineering School. So the person who is up to this decision can't choose both. If he takes one have to forgo another. Here the time of choice comes.

People Make Choices Based on 10 Principles

People Face Tradeoffs. To get one thing, you have to give up something else. Making decisions requires trading off one goal against another. 

The Cost of Something is what You Give Up to Get It. Decision-makers has to consider both the obvious and implicit costs of their actions’ 

Rational People Think at the Margin. A rational decision-maker takes action if and only if the marginal benefit of the action exceeds the marginal cost.   

People Respond to Incentives. Behavior changes when costs or benefits change.

In general Economics is categorized in 2 specific areas as-

Micro Economics - Where it deals with individual's need for Production, Distribution & Consumption of Goods & Services.

Macro Economics- Where it deals with the National and/or Global need for Production, Distribution & Consumption of Goods & Services.

Task 2:

Law of demand:

If all other things remain constant (ceteris paribus) the higher the price, the lower will be the quantity demanded and vice versa.

The demand schedule

The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded. A Demand Schedule for Ice Cream is given here.

Now we will be deriving a demand curve. The demand curve is a graph of relationship between the price of a good and the quantity demanded. In the graph we can see that the increase & decrease in Quantity of Ice-Cream Cones are causing fluctuations in the price of the cones.

To derive the market demand curve we need to consider all consumers in the market, add up quantity demanded by all individuals at each price to get market demand and add them horizontally.

Price

For many firms, the division of total costs between fixed and variable costs depend on the time horizon being considered. In the short run, some costs are fixed. In long run, fixed costs become variable costs. Because many costs are fixed in short run but variable in the long run, a firm's long-run cost curves differ from its short-run cost curves. Fixed cost is any cost that does not depend on the firm's level of output. These costs are incurred even if the firm is producing nothing. Variable cost is a cost that depends on the level of production chosen.

Task 3:

Equilibrium:

The economic Equilibrium is such a situation where the quantity demanded & the quantity supplied is equal. To achieve the equilibrium, we need proper price & it should match the demand. That means to achieve the equilibrium there should be equal demand & supply.

Market Equilibrium:

At any price above P supply exceeds demand, while at a price below P the quantity demanded exceeds that supplied. In other words, prices where demand and supply are out of balance are termed points of disequilibrium, creating shortages and oversupply. Changes in the conditions of demand or supply will shift the demand or supply curves. This will cause changes in the equilibrium price of Ice-cream cone and quantity in the market.

Surplus (excess supply)

When the price is greater than the price of the equilibrium, then the quantity supplied is greater than the quantity which is demanded .Then there is excess supply or we can say a surplus. The suppliers will thereby make the prices low in order to increase their sales, thereby moving towards the equilibrium.

Excess Supply

Excess supply takes place when the price of the current market is above the equilibrium. The producers are unable to sell their products as they would like at that price when there is access supply. The competition among the producers in order to increase the sales results to downward pressure on the prices.

We can show excess supply on a graph as the horizontal distance between the demand and the supply curves at a price which will be above the equilibrium price.

Shortage (higher demand)

When price is less than equilibrium price, then quantity which is demanded is less than the quantity which is supplied. Then we can say that there is excess demand or we can also call it a shortage. Suppliers will raise the price due to too many buyers chasing for few goods, henceforth it is moving toward equilibrium.

Excess demand takes place when the current market price is lower than the equilibrium price (P*). The customers will want to buy more goods than the producer will want to sell, when there is access demand. The product sells out quickly, when price is below the equilibrium and then the competition among consumers, along with recognition by producers that they could make the price high and still sell all units, leads to upward pressure on prices.