Introduction to Economy

 

Lecture 1- Introduction

An economy is a system of interrelated production, trade, exchange and consumption activities that determines allocation of resources. 

Economy Word(Origin)

oikonomos(Greek) → oeconomia(Latin) → yconomie(French) → economy(English) 

Oikonomos/Oikonomia(oikos → house, nomia → manage) 

Adam Smith(18th century Scottish economist)- Father of economy

Major work:

1. The Theory of Moral Sentiments(1759)- free market economy(laissez-faire economic) 

2. The Wealth of Nations(1776)- wealth is not the will of god, but was factored by natural, social, political, economical and technological parameters. 

It was Smith who gave the concept of gross domestic product(GDP). 

Lionel Robbins(1935) → Economy: science of scarcity

Central Problem of Economy

Scarcity of Resources → Choice Problem

Basic Economic Activities

There are numerous economic activities(trading, exchange, etc.), but 3 major economic activities that form the base of economy- Production, Consumption and Capital Formation

Factors of Production-

Factors of production are those inputs used in the production process to produce the outputs(finished goods and services).

Unused Land, Labour and Capital doesn't count as a factor of Production.

There are mainly four factors of production- 1. Land 2. Labour 3. Physical Capital 4. Human Capital(Entrepreneur).

Types of Economy

Based on the type of economic activity, Economy is divided into two types

1. Traditional Economy(non-industrial mainly agriculture based economy)

2. Industrial Economy

Based on the Government regulations, Economy is divided into three types

1. Market based Economy(Capitalism) → USA

• Self regulated demand and supply(Consumer and Producer are free to exercise their choice) 
• Dominated by Private sector
• High competition
• High Income inequality

2. Command based Economy(Socialism/Communism) → China, Cuba, Laos, Vietnam

• Demand and supply are governed by political entity
• Dominated by Public sector
• Less competition
• Low Income inequality

3. Mixed Economy → India

• Market forces are free to operate under certain conditions(Government Regulations)
• Coexistence of Public and Private sector
• High competition
• Medium Income inequality

Microeconomics vs Macroeconomics

Based on the scope of study, economy can be microeconomics or macroeconomics

Macroeconomics- Microeconomics studies individuals and business decisions(Economy of an organization) 

Macroeconomics- Behavior of the whole economic system in totality(Economy of a nation)

Other terms associated with Economy

Green Economy- low carbon and resource efficient economy

Gig economy- temporary and part time job(Freelancing)

Formal vs Informal economy-

Formal- monitored by Government

Informal- not monitored by Government

Table of Content Lecture 2