What is economics?
Basically, economics is subject that is used to study the production, exchange and consumption of the goods and services. On the other words, this is a study of the usage of resources.
Adam Smith defines Economics as,
“An inquiry into the nature and causes of the wealth of nations”
This is the basic economic problem. This concept tells that humans have unlimited needs and wants, but the resources that we use to produce goods and services are limited. (land, labor, capital, enterprise) Scarcity is known as the basic economic problem because it causes all the other economic problems.
Following problems occur due to scarcity.
- What to produce?
- How to produce?
- Whom to produce?
This is one of the fundamental concepts in economics. Basically, opportunity cost is the next best alternative foregone. It means that, we have to give up something in order to obtain something.
Eg: – Assume that you have $20. You could spend it to buy a book or a meal. If you buy a book you have to give up the meal. Therefore, opportunity cost is the meal. If you buy a meal you have to give up the book. Then the opportunity cost is the book.
Opportunity cost is divided into three main parts according to its behavior. They are,
- Increasing opportunity cost
- Decreasing opportunity cost
- Constant opportunity cost
Increasing opportunity cost:
In this condition, the opportunity cost to produce one good will increase if you increase the production of one good.
Decreasing opportunity cost:
According to the law of decreasing opportunity cost, the opportunity cost of producing an additional unit will decrease if you increase the production of one good.
Constant opportunity cost:
According to the law of constant opportunity cost, the opportunity cost of producing an additional unit will remain constant if you increase the production of one unit.
Demand is the quantity of a product or service that the buyers are willing to buy at various prices. And the demand curve is graphed as a straight line.
Factors which affect the demand
- Price of the relevant product
- Income of the consumer
- Taste and fashion
Supply is the quantity of a good or service that the sellers are willing to deliver at a particular price. And the supply curve is graphed as an upward sloping curve.
Factors which affect the supply
- Price of the commodity
- The cost of production
- Availability of resources
- Government regulations
- Taxes and subsidies
The law of demand
The law of demand means the negative relationship between the price and the quantity of demand.
Reasons for the law of demand
Substitution effect: The substitution effect could be seen when the quantity demand of a commodity changes due to a change in a price of other closely related commodity.
Eg: – Suppose that the price of coffee increases while the price of tea remains unchanged. Then tea becomes cheaper. As a result, the demand for tea will increase.
Income effect: Income effect means the change in demand because of a change in the real income of consumers as a result of a change in the price of a given commodity. The real income means the purchasing power consumers.
Eg: If the price of the given commodity decreases, the purchasing power of consumers increases because consumers could buy more units of the given commodity. Therefore, the demand of this particular good will increase.
The law of supply
The law of supply means the positive relationship between the price and the quantity of supply.
Reasons for the law of supply
Willingness to produce: This means the willingness of suppliers to produce goods. If the price of a particular good increases, most probably the profit margins of consumers increase. Then the willingness of producers to produce goods increases.
Ability to produce: Increase in production by additional units will increase the marginal cost when the production capacity and price of inputs remain unchanged. Therefore, producers will try to increase the production if an increase in price of the commodity helps to cover the marginal cost.