An introdution to Economics
What is Economics?
The english word economics is derived from the greek word "oikos" meaning "house" and "nomos" meaning "the low and order of the stars".The traditionl meaning of economics or the Greek word "oikonomike" is household manegement.The Latin word"oeconomid" has also similar meaning.This Latin word not only involves household manegement but also manegment in general.It may argued that the subject economics was 1st studied in ancient Greece.What was the study of house hold manegmentbut also manegment in general.It may be argued that the subject economics was first studied in greece.
Economics Basics – Cost, efficiency and scarcity
Going by the geeky definition, opportunity cost is the value of the next-highest-valued substitute use of that resource. For instance you may forego going to the physics class for a session of LAN gaming, but the risk of not understanding subsequent lectures and flunking the semester is the opportunity cost you should be aware of. Every entity has a different point-of-view regarding this opportunity cost as the needs and resources of entities keep shifting with time.
Economic efficiency is the measure of output obtained with a given set of inputs, i.e. least amount of wastage. Technological ability usually decides the upper limit for the maximum efficiency which can be achieved.
The basic definition of scarcity is slightly philosophical— humans have unlimited desires but the means of production being finite and limited (labor, land and capital), various trade-offs are to be made to allocate the resources in the most efficient way possible.
The production-possibility frontier (PPF) is a bridge which ties the three concepts. If we assume that the economy produces just a couple of goods (guns and butter are the default choices for economists, scary lot!), then the economy can produce a greater quantity of guns only if it reduces the quantity of butter produced. Each point on the PPF curve shows the maximum possible output of an economy (i.e. the potential that the economy holds).
Elasticity is defined as the change in quantity of the goods associated with a change in the prices. It usually depends on the nature of product (luxury v/s necessity), the number of substitutes available in the market, share of wallet etc.
If quantity of the good changes drastically with a change in its prices, it is said to be elastic (PS3 selling at a 40% discount will see a sharp rise in the total number of units sold).
If quantity of the good does not change much with a change in its prices, it is said to be inelastic (onions need to be purchased even after the prices double as it is a basic necessity and there are no actual substitutes).
Utility is the satisfaction that one achieves from consuming a good/service, and is an abstract concept based on the individual in question. Marginal utility is the extra satisfaction one gets from each additional unit of consumption.
Taking a holistic example in lieu of an easier and obvious one — research proves that the money one earns contributes hugely towards average life happiness in the initial stages of getting those riches, but its role tapers off sharply as the income grows.
The economists refer to this is as the law of diminishing marginal utility. The third chocolate doesn’t seem as tasty as the first one, eh?