Economics is the study of scarcity and its implications for the use of resources, production of goods and services, growth of production and welfare over time, and a great variety of other complex issues of vital concern to society.
Some Basic Terms
1. Micro Economics-
The study of economics centers on the concept of scarcity and its influence on resource utilization, the production of goods and services, the expansion of production and well-being over time, and a multitude of other intricate concerns that are of significant importance to society.
2. Macroeconomics
- Macroeconomics is a branch of economics that deals with the overall economic situations of an economy.
- It was established as a separate subject after John Maynard Keynes published his book, "The General Theory of Employment, Interest and Money" in 1936.
- Macroeconomics considers the interlinkages between different sectors of an economy, whereas microeconomics examines the functioning of particular sectors.
- John Maynard Keynes is recognized as the father of macroeconomics, and his work played a significant role in the emergence of the subject as a separate branch of economics in the 1930s.
3. Exports -
- Exports refer to the goods that a country produces and sells to other countries.
- This trade activity allows a domestic country to participate in the global market by selling its products to consumers in other countries.
4. Imports -
- Imports refer to the goods that are purchased by an economy from the other countries around the world.
Sectors of economy
A. On the basis of nature of activities
1. Primary sector-
- The primary sector is involved in the production of goods by utilizing natural resources.
- This sector is also known as the agriculture and related sector due to its focus on agriculture, dairy, fishing, and forestry.
- The primary sector is essential for the economic development of a country and provides the necessary raw materials for other sectors.
- It is considered the backbone of many economies, particularly those in developing countries.
- The primary sector's contribution to a nation's GDP can vary based on the level of industrialization and the availability of natural resources.
2. Secondary sector-
- The secondary sector involves the conversion of raw materials into other forms through industrial activities such as manufacturing.
- This sector is also known as the industrial sector, as it follows the primary sector, which involves the extraction and collection of raw materials.
- The secondary sector encompasses a wide range of industries, such as steel manufacturing.
- The development of the secondary sector occurred alongside the growth of various industrial activities.
3. Tertiary sector-
- The tertiary sector refers to activities that support the development of the primary and secondary sectors, without producing goods themselves.
- Examples of such activities include transportation, banking, insurance, and other service-oriented industries.
- As services are the primary output of these activities, the tertiary sector is also known as the service sector.
- The service sector includes essential services that do not directly contribute to the production of goods, such as teachers, doctors, administrative staff, lawyers, and personal service providers like washermen, barbers, and cobblers.
4. Quaternary Sector-
- The Quaternary sector, also referred to as the "knowledge sector," encompasses activities that involve education, research and development, and other related fields.
5.Quinary Sector-
- All activities where top decisions are made fall under it.
- The highest level of decision makers in governments (inclusive of their bureaucracy) and the private corporate sector fall under it.
B. Classification on the basis of ownership
1. Public Sector-
- In this sector, the government is the primary owner of most assets and is responsible for providing various services to the people.
2.Private Sector -
- The private sector refers to the segment of the economy where assets are privately owned and services are provided by individuals or companies.
- It is characterized by the ownership of resources and the operation of businesses by non-governmental entities.
C. Classification on the basis of employment
1. Organized Sector -
- People have assured work and terms of employment are regular.
2. Unorganized Sector-
- The unorganized sector comprises of small, decentralized businesses that operate independently of government regulation.
- These enterprises often offer low wages and job insecurity to their employees.
Types of economy
Economy can be broadly classified into 2 groups
1. On the Basis of Ownership and Control over Means of Production or Resources
It is further subdivided into 3 parts-
A. Market economy/Capitalist economy
- It is one of the oldest and traditional type of economic system in the world.
- Adam smith in his book an Inquiry into the Nature and Causes of the Wealth of Nations, 1776 gave detail about this type of economic system.
- It trace its origin from concept of ‘laissez fair’ meaning leave free
Feature and parts of this system is as follows-
- Enterprise is given freedom to do trade- Freedom of enterprise implies that business firms are free to acquire resources and use them in the production of any good or service.
- Right of property- In a capitalism system all the individuals have the right to own property. An individual can acquire property and use it for the benefit of his own family.
- Consumer’s Sovereignty- In capitalist system production is guided by consumer’s choices. This freedom of consumers is called consumer’s sovereignty.
- This type of economic system is Profit based/motive system.
- In a capitalist system, government intervention is absent, and firms can enter and exit the market without restrictions. The presence of a significant number of producers in the market ensures that no single firm can make more than the normal profit as there is a healthy competition. As a result, there is a wide availability of goods and services in the market.
Example- The economies of USA, UK, France, Netherland, Spain, Portugal, Australia etc. are known as capitalistic countries.
B. Socialist economy/non-market economy-
- In socialist or centrally planned economies, the government owns and controls all productive resources for the benefit of society.
- Decisions in these economies are made by a central planning authority.
- Karl Marx is an influential thinker associated with this type of economic idea.
- Socialism can be divided into two main branches: socialist and communist.
- Examples of countries with a socialist model include Russia, while communist countries include China.
- In the communist model, the state exercises control over labor as well as natural resources.
Features of this system-
- Collective Ownership of means of Production.
- Absence of market.
- Lack of competition.
- Central Planning .
Examples- Russia, China and many eastern European countries are said to be socialist countries.
C. Mixed Economy-
- A mixed economy is an economic system that combines elements of both capitalism and socialism.
- In a mixed economy, there are both free enterprise or capitalist features and government-controlled socialist features.
- Public and private sectors coexist in mixed economies.
- Mixed economies aim to achieve a balance between economic growth and social welfare.
Features of mixed Economy
- In a mixed economy, the government intervenes in the economy in a balanced way.
- Public and private sectors co-exist in a mixed economy. The private sector is composed of profit-driven production units that are privately owned, while the public sector comprises production units owned by the government that operate for the purpose of social welfare.
- Industries are regulated by the government in a mixed economy.
- The central government carries out both short-term and long-term economic planning in a mixed economy.
- Examples of countries with mixed economies include India, the United Kingdom, and others.
2. Classification on the Basis of Level of Development
This is further classified into 3 sub groups i.e. Developed, Developing and least developed countries
A. Developed-
- Developed countries have higher national and per-capita income, high rate of capital formation i.e. high savings and investment.
- They have highly educated human resources, better civic facilities, health and sanitation facilities, low birth rate, low death rate, low infant mortality, developed industrial and social infrastructures and a strong financial and capital market.
- Example- USA, UK, Germany, Canada etc.
B. Developing-
- A developing country is a sovereign state with a less developed industrial base and a lower Human Development Index (HDI) relative to other countries.
- The term low and middle-income country (LMIC) is often used interchangeably .
- Example- India ,China etc.
C. Least developed countries-
- The least developed countries (LDCs) refer to developing nations with the lowest indicators of socioeconomic development.
- According to the United Nations, these countries have the lowest Human Development Index (HDI) ratings of all countries in the world.
- Examples of LDCs include Ethiopia, Angola, Guinea, and Libya, among others.
Important one liner Question and answer.
What is microeconomics?
Microeconomics is the study of how individuals and businesses make decisions regarding the allocation of scarce resources.
What is macroeconomics?
Macroeconomics is the study of the overall performance and behavior of the economy as a whole.
What are exports?
Exports refer to the goods that a country produces and sells to other countries.
What are imports?
Imports refer to the goods that are purchased by an economy from other countries.
What is the primary sector?
The primary sector is involved in the production of goods by utilizing natural resources such as agriculture, dairy, fishing, and forestry.
What is the secondary sector?
The secondary sector involves the conversion of raw materials into other forms through industrial activities such as manufacturing.
What is the tertiary sector?
The tertiary sector refers to activities that support the development of the primary and secondary sectors, without producing goods themselves.
What is the quaternary sector?
The quaternary sector encompasses activities that involve education, research and development, and other related fields.
What is the quinary sector?
The quinary sector involves all activities where top decisions are made in governments and the private corporate sector.
What is the public sector?
In the public sector, the government is the primary owner of most assets and is responsible for providing various services to the people.
What is the organized sector?
The organized sector refers to employment where people have assured work and terms of employment are regular.
What is the unorganized sector?
The unorganized sector comprises of small, decentralized businesses that operate independently of government regulation and often offer low wages and job insecurity to their employees.
What is a market economy?
A market economy, also known as a capitalist economy, is an economic system where the production and distribution of goods and services are determined by the forces of supply and demand.
What is a socialist economy?
A socialist economy is an economic system where the production and distribution of goods and services are controlled and planned by the government or the state.