The Subject Matter of Economics

No one comes to economics as a traveller to an unknown land. Much of our everyday experience is related to economics. Studying economics is directly connected with very important things that involve everyone, such as unemployment, inflation, wages, poverty, taxes, banks, foreign currencies. Economics is the science that deals with the production, distribution and consumption of wealth and with the various related problems of labour, finance, taxation etc. Economics is concerned with the economy or economic system. The economic system determines how the nation's resources of land, labour, machinery and raw materials are allocated and used. The problem of allocating resources is a central theme of economics, because most resources are scarce. The allocation of scarce resources and the distribution of the product of those resources are a major part of the subject matter of economics.

The distribution is determined by the amounts of money paid as wages, rent and other forms of income.

Economists use assumptions to build models, both for explanation and for prediction of economic events. They summarize conclusions on economic questions into economic principles. Western economists believe that all economic questions can be analyzed by examining the decisions of individuals and the outcome of those decisions made by people as consumers or as managers of firms. The Marxist analysis of Western economies is based on the interrelations between social classes – workers and capitalists.



Economic Systems

Different economic systems answer the "what", "how" and "for whom"

questions differently. The main economic systems today are capitalism, socialism, communism, mixed economies and traditional economies.

Capitalism - is an economic system characterized by private ownership of most resources, goods and services. Capitalism relies on the market system to allocate resources, goods and services to their most highly used value. In capitalist economy what to produce is determined by consumers, how to produce is determined by profit seeking entrepreneurs, who maximize profit by producing in the most sufficient manner, and for whom to produce is determined by income and prices. In a capitalist system workers are generally paid according to how productive they are, and the distribution of income is unequal because people differ in their abilities.

Socialism - is an economic system characterized by government ownership of

resources other than labour and centralized economic decision making. Under the

socialist system the government authorities answer the "what", "how" and "for whom" questions. In socialist system government planners set wages and though wages are not equal for all workers, incomes tend to be more evenly distributed than in capitalist countries. In centrally planned economies government planners decide what goods will be produced and set the prices at which they are sold.

Communism - is an economic system in which all resources (including labour) are commonly owned and economic decisions making is centrally planned. According to communist theory, people contribute what they are able to the economy but receive what they need. In theory, this means that goods are produced for use rather than to earn profits and that everyone's needs are met.


Utility and Prices

Our basic needs are simple, but our additional individual wants are often very complex. Commodities of different kinds satisfy our wants in different ways. A banana, a bottle of medicine and a Textbook satisfy very different wants. The banana cannot satisfy the same wants as the Textbook. This characteristic of satisfying a want is known in economics as its utility. Utility, however, should not be confused with usefulness. For example, a submarine may or may not be useful in time of peace, but it satisfies a want. Many nations want submarines. Economists say that utility determines "the relationship between a consumer and a commodity. Utility varies between different people and between different nations. A vegetarian does not want meat, but may rate the utility of bananas very highly, while a meat-eater may prefer steak. A mountain-republic like Switzerland has little interest in submarines, while marine nations rate them highly. Utility varies not only in relation to individual tastes and to geography, but also in relation to time. In wartime, the utility of bombs is high, and the utility of pianos is low. Utility is therefore related to our decisions about priorities in production. The production of pianos falls sharply in wartime.

The utility of a commodity is also related to the quantity which is available to the consumer. If paper is freely available, people will not be so interested in buying too much of it. If there is an excess of paper, the relative demand for paper will go down. We can say that the utility of a commodity therefore decreases as the consumer's stock of that commodity increases. A special relationship exists between goods and services on the one hand, and a consumer and his money, on the other. The consumer's desire for a commodity tends to diminish as he buys more units of that commodity. Economists call this tendency the Law of Diminishing Marginal Utility.


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