Economics is the study of how scarce resources are allocated to satisfy unlimited wants. It examines production, distribution, and consumption of resources in society. Professor Robbins defines economics as a science 'which studies human behavior as a relationship between ends and scarce means which have alternative uses.'
cause-and-effect relationships. - Economics as an Art: Practical application of economic knowledge.
- Positive Economics: Describes 'what is.' - Normative Economics: Explains 'what ought to be.'
Important principles aiding rational decision making include: - Marginal Principle: Focus on changes in cost and revenue per unit. - Incremental Principle: Analyzing impact of policy changes on cost and revenue. - Equi-marginal Principle: Allocating resources to equalize marginal returns. - Opportunity Cost Principle: Cost of foregone alternatives. - Time Perspective Principle: Balancing short-term and long-term goals. - Discounting Principle: Future value adjusted for present value.
Definition: Effective demand is a desire backed by willingness and ability to pay. Determinants of Demand: - Price of the commodity - Income of consumers - Prices of substitutes and complementary goods - Consumer tastes and preferences - Expectations about future prices - Special influences like climate or demographics Law of Demand: Ceteris paribus, demand is inversely proportional to price.
Definition: Quantity of a product available for sale at a given price and time. Determinants of Supply: - Price of the product - Prices of other goods - Future price expectations - Technology advancements - Factor prices and government policies Law of Supply: Higher prices lead to greater quantity supplied, ceteris paribus.
- Market Equilibrium Market equilibrium occurs when demand equals supply, determining the equilibrium price and quantity. This state ensures there is no tendency for price to change further.