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Archive for the ‘Economic’ Category

Introduction: The economic is an evolutionary science. Let’s examine some of the definitions of Economics put forward from time to time by the economists.

Adam Smith’s Definition: Adam Smith (1723-1790), the founder of economics described it as a science of wealth in his book, “The wealth of nations “in 1776.
The early economist also called economics the science of wealth.
According to Cairn’s, “Economic deals with the phenomenon of wealth”
According to F.A. Walker, “Economics is that relates to wealth”

* (Wealth means that goods and services transacted with the help of money)

There are four aspects of wealth in the light of Adam Smith’s definition of Economics.

1. Production of wealth: There are four factors of production i.e. land, labor, capital and entrepreneur. The production of goods and services is the result of combination of four factors of production. The wage is given to labor as a reward of its physical and mental work where capital helps to produce goods and services by providing man made resources. The rent is that part of payment which is made only for the use of land where as the entrepreneur has to act of combining the factors of production to produce goods and services.

2. Exchange of wealth: The multiple wants of the people are satisfied by the exchange of goods and services produced for each other. The above phenomenon can take place with the help of wealth.

3. Distribution of wealth: The distribution of wealth means the share of each factor of production in national wealth produced in a year as a result of exchange of wealth. Some parts of society are backward due to unequal share in the national wealth; it is called unequal distribution of wealth.

4. Consumption of wealth: The people use their share in the national wealth for the satisfaction of their human wants and get utility from the use of goods and services. It is known as the consumption of wealth.

Economics is a social science. It has been commonly observed that people, while living in a society, show a similar economic behaviour. This economic behaviour in different aspects of economic life has been summed up as a set of generalisation which is known as economic laws. Thus an economic law is a statement, concluded and inferred, on the economic behaviour of the people in general. In other words, economic laws are supposed to govern and explain all economic activities of the people living in a society.
Reference to Robbins definition it can easily gather that the use of limited resources in a pursuit to satisfy unlimited wants, reflect the economic laws are the statements of tendencies by which human beings make use of scare resources, obviously in an alternative fashion, with a view to satisfy unlimited wants.For example the general tendency on the part of the people is that they purchase more at a lower price and vice versa, if all other things remain constant. This economic tendency has been generalised as an economic law called law of demand. Similarly, many economic laws have been made to cover tendencies in the economic life e.g. law of diminishing marginal utility, law of supply, law of substitution, law of variable proportions etc.

The study of economics, founded as a separate academic discipline in the 18th century, is an inexact science – largely because complex patterns of human behaviour have to be reduced to gross simplifications to enable economists to analyse them. Nevertheless, some general observations are known as laws.

Law of Diminishing Returns That if one factor of production – staff, say – is continually increased while the others remain constant, eventually the point is reached where each new unit of increase brings a smaller addition to production than the previous one. In a car cruising in top gear, for instance, each additional litre of petrol (gas) used produces a smaller and smaller increase in speed, so that a car cruising at 100km/hr (58 mph) uses more than twice as much petrol as a car travelling at 50km/hr (29 mph). Also known as the Law of Variable Proportions.

Gresham’s Law That ‘bad money drives out good’. Or, that debasing the metal content of coinage lowers the value of money, since owners of unadulterated coins tend to hoard them or melt them down to purchase a greater number of debased coins. Attributed, with no foundation, to Elizabeth I’s financial adviser, Sir Thomas Gresham. Probably first stated by the Polish astronomer Nicolaus Copernicus.

Iron Law of Wages That if wages rise above subsistence level, they produce a higher birthrate and expand population, which in turn forces wages down to subsistence level again. Given wide currency by British economist David Ricardo, but French origin. Not now accepted, since in the 20th century wealthy nations have in practice tended to have lower birthrates than poor nations.

Parkinson’s Law That work expands to fill the time availasble to do it. Or, that the amount of work done varies inversely to the number of people employed. Humorously (but still seriously) published by the British economist Cyril Northcote Parkinson in 1958.

Peter Principle That in any organisation every employee rises to his level of incompetence. All valuable work is therefore done by people who have not yet reached that level. Another satirical law, published by a Canadian-born author, Professor Lawrence J. Peter, in 1969.

Say’s Law. That every rise in the supply of goods produces an increase in demand for them. Stated by the French economist Jean-Baptiste Say in 1803. True only for barter economies, but generally believed until the Great Depression.

Law of Supply and Demand That competition between consumers and producers brings the supply of goods and the demand for them into balance. Cardinal ‘law’ of free-market economic theory. Overproduction lowers prices, increasing demand; over consumption raises prices, reducing demand.

The concept of elasticity of demand is very important in economic theory and policy. It is used to measure the effect of changes in price on quantity demanded. It is known that according to the law of demand, if price decreases the demand increases and if price increases the demand falls.
The quality of demand to change with changes in price is called the elasticity of demand.

By definition, then, the elasticity of demand is the rate at which the quantity demanded changes in response to a change in price.
Its formula is: Ed = percentage change in quantity demanded/percentage change in price.

This rate of change in demand varies according to commodities, market and consumers. At times a small change in prices has a big effect of demand. This phenomenon is called elastic demand. This effect is usually seen when consumers have more buying options. There are also situations when a large change in price has a small effect of demand. This is called inelastic demand. Commodities like basic food items like salt tend to show inelastic demand.

A perfect elastic demand exists when demand increase with no change in price. This is called infinite elasticity. A situation of zero elasticity result when lowering the price does not increase the demand.