Microeconomics and Macroeconomics
Positive economics ("what is") and normative economics ("what ought to be")
Economics, which is a widely definable term, is a social science, seeking to explain the economic basis of human societies. Economics shows how a particular society solves its economic problems. An economic problem does exist whenever scarce means are used to satisfy alternative ends. If the means are not scarce, then there is no economic problem.
Economics is about economising, which is something we all do everyday.
We are forced to economise because of scarcity. The central focus of economics is on scarcity and choice. Scarcity is the fundamental economic condition of human life. The resources available to produce goods are limited so that the goods themselves are scarce. Economic scarcity requires society (societies) to make economic choices, and economics is about comparing alternatives and choosing among them.
The basic economic problem is that of allocating scarce resources among the competing and virtually limitless wants of consumers in society. The basis of all economic activities arises from the fact that there has never been in this world unlimited food, medical care, clothing, housing and other material necessities of life which human beings require. Shortages of these items have always persisted in human society.
Some of these items have always been attributed to the malfunctioning of the economy during periods of unemployment or underemployment, while some have been due to the scarcity of economic resources, such as labour, capital and natural resources.
Our time and means are limited. Society is continually considering how to allocate or "economise" resources and time so as to get the most satisfaction from them. Each of us is confronted with the need for making choice. The choice between alternatives is the very foundation of the economic system. Hence, any society, whether it is an advanced capitalist society, a dictatorial or socialist state must face the following basic economic problems.
What variety of goods should be produced and in what quantities?
This involves the allocation of scarce resources in relation to the
composition of total output in the economy. Since the means and resources are scarce, the society has to decide about the goods to be produced.
This involves the allocation of scarce resources in relation to the
composition of total output in the economy. Since the means and resources are scarce, the society has to decide about the goods to be produced.
How the goods and services should be produced? The society has to decide who should produce the goods, the resources to be used and the methods of production to be adopted.
For whom should the goods produced be distributed? Some decision must be made on the manner in which the wealth is to be distributed among the citizens or the allocation of goods among the members of the society.
The allocation of consumer goods among the households is made on the basis of exchange. Similarly, the distribution of income is determined by the quantity of resources contributed by a family in the form of services of labour, land, capital and enterprises towards production. The government may also influence the distribution of income through its policies of taxation, subsidisation and transfer payments.
All nations have to decide in some way what goods and services to produce, how to produce them and for whom to produce them. These three questions of what, how and for whom to produce are central to the economic problem.