Fundamental of

Economic and its types

Definitions

ADAM SMITH: Study of how wealth is produced and consumed. This

definition is also called wealth Definition. This definition is too
materialistic as it gives more importance to wealth than to man for
whose use wealth is produced.

Prof. Alfred Marshall: Economics is the study of mankind in ordinary

business of life. Its study of wealth as well as man. Wealth means any
commodity which gives man satisfaction or utility or welfare. Wealth is
the means to welfare. His definition is also called welfare definition.

Definitions

Lionel Robbin: Economics is the science that studies human

behaviour as a relationship between ends and scare means which have
alternative uses. The means or resources are less in relation to their
demand. How men use the scare resources to fulfil their desires is the
subject matter of economics. This is also called Scarcity Definition.

Analysis of Robbins Definition

Man has unlimited wants

The means to satisfy are limited

Resources also have alternative uses.

Man has to make a choice.

Microeconomics

Adam Smith: Founder of microeconomics

It studies how households and firms make decisions to allocate limited

resources, typically in market where goods and services are being
bought and sold.

These decisions affect demand and supply which in turn determines

prices which again determines demand and price.

Macroeconomics

It is concerned with overall performance of the economy.

Deals with performance, structure and behaviour of a national or a

regional economy as a whole.

It is the study of the behaviour and decision of the entire economics.

It studies aggregated indicators like GDP, unemployment and price

indices to understand how the whole economy functions.

Macroeconomists develop models that explain the relationships among

such factors as national income, output, consumption, unemployment,
inflation, savings, investment, international trade and international
finance.

Types of Economies
1.

Market/ Capitalistic Economy

2.

Command/ Socialistic Economy

3.

Mixed Economy

Market Economy

Here individuals and private firms make major decisions about

production and consumption.

Firms produce commodities that yield highest profit by the techniques

that are least costly.

Consumption is determined by the individuals decisions about how to

spend their incomes.

Laissez-faire: Extereme case of market economy in which government

doesnt interfere in economic decisions.

Developed nations have Market/ Capitalistic Economy.

Command Economy

Here government makes all the decisions about production and

distribution.

Soviet Union during most of the twentieth century has this type of
economy.

The government addresses major economic questions by virtue of its

ownership of resources and its power to enforce decisions.

Mixed Economy

It has elements of both market and command economies.

Today most of the nations have mixed economies.