Economics
Product (business)
Economics is the social science that studies the production, distribution, and consumption of
goods and services. The term economics comes from the Greek for oikos (house) and nomos
(custom or law), hence "rules of the house(hold)."A definition that captures much of modern
economics is that of Lionel Robbins in a 1932 essay: "the science which studies human
behaviour as a relationship between ends and scarce means which have alternative
uses."Scarcity means that available resources are insufficient to satisfy all wants and needs.
Absent scarcity and alternative uses of available resources, there is no economic problem. The
subject thus defined involves the study of choices as they are affected by incentives and
resources.
One of the uses of economics is to explain how economies, as economic systems, work and
what the relations are between economic players (agents) in the larger society. Methods of
economic analysis have been increasingly applied to fields that involve people (officials
included) making choices in a social context, such as crime, education, the family, health, law,
politics, religion,social institutions, and war.Although discussions about production and
distribution have a long history, economics in its modern sense is conventionally dated from
the publication of Adam Smith's The Wealth of Nations in 1776. In this work Smith describes
the subject in these practical and exacting terms:
Political economy, considered as a branch of the science of a statesman or legislator,
proposes two distinct objects: first, to supply a plentiful revenue or product for the people, or,
more properly, to enable them to provide such a revenue or subsistence for themselves; and
secondly, to supply the state or commonwealth with a revenue sufficient for the public
services. It proposes to enrich both the people and the sovereign.Smith referred to the subject
as 'political economy', but that term was gradually replaced in general usage by 'economics'
after 1870.
Areas of economics
Microeconomics examines the economic behavior of agents (including individuals and firms)
and their interactions through individual markets, given scarcity and government regulation. A
given market might be for a product, say fresh corn, or the services of a factor of production,
say bricklaying. The theory considers aggregates of quantity demanded by buyers and
quantity supplied by sellers at each possible price per unit. It weaves these together to describe
how the market may reach equilibrium as to price and quantity or respond to market changes
over time. This is broadly termed demand-and-supply analysis. Market structures, such as
perfect competition and monopoly, are examined as to implications for behavior and economic
efficiency.
Analysis often proceeds from the simplifying assumption that behavior in other markets
remains unchanged, that is, partial-equilibrium analysis. General-equilibrium theory allows for
changes in different markets and aggregates across all markets, including their movements
and interactions toward equilibrium
Macroeconomics examines the economy as a whole "top down" to explain broad aggregates
and their interactions. Such aggregates include national income and output, the unemployment
rate, and price inflation and subaggregates like total consumption and investment spending
and their components. It also studies effects of monetary policy and fiscal policy. Since at least
the 1960s, macroeconomics has been characterized by further integration as to micro-based
modeling of sectors, including rationality of players, efficient use of market information, and
imperfect competition. This has addressed a long-standing concern about inconsistent
developments of the same subject. Analysis also considers factors affecting the long-term level
and growth of national income within a country and across countries.
v
Product line and Service
types
A product line is "a group of products that are closely related, either because they function in
a similar manner, are sold to the same customer groups, are marketed throught the same
types of outlets, or fall within given price ranges."
Many businesses offer a range of product lines which may be unique to a single organization
or may be common across the business's industry. In 2002 the US Census compiled revenue
figures for the finance and insurance industry by various product lines such as "accident,
health and medical insurance premiums" and "income from secured consumer loans". Within
the insurance industry, product lines are indicated by the type of risk coverage, such as auto
insurance, commercial insurance and life insurance.Various classification systems for
products have been developed for economic statistical purposes. The North American Industry
Classification System (NAICS) classifies companies by their primary product. The European
Union uses a "Classification of Products by Activity" among other product classifications. The
United Nations also classifies products for international economic activity reporting.
Selective products are bought less frequently. They include: furniture, clothes, AGD, RTV
products. The decision to buy is not immediate but is a result of thorough processing of
information about available brands. Our choice is determined by economic as well as
socio-cultural factors such as: prestige, influence of other people. The distribution is less
intensive than in the case of casual goods. The outlets are mainly located in places with high
circulation of customers. Promotion strategies: push & pull .
Econometrics
Econometrics applies mathematical and statistical methods to analyze data related to
economic models. For example, a theory may hypothesize that a person with more education
will on average earn more income than person with less education holding everything else
equal. Econometric estimates can estimate the magnitude and statistical significance of the
relation. Econometrics can be used to draw quantitative generalizations. These include testing
or refining a theory, describing the relation of past variables, and forecasting future variables
National accounting is a method for summarizing economic activity of a nation. The national
accounts are double-entry accounting systems that provide detailed underlying measures of
such information. These include the national income and product accounts (NIPA), which
provide estimates for the money value of output and income per year or quarter. NIPA allows
for tracking the performance of an economy and its components through business cycles or
over longer periods. Price data may permit distinguishing nominal from real amounts, that is,
correcting money totals for price changes over time. The national accounts also include
measurement of the capital stock, wealth of a nation, and international capital flows.
Economic systems is the branch of economics that studies the methods and institutions by
which societies determine the ownership, direction, and allocaton of economic resources. An
economic system of a society is the unit of analysis. Among contemporary systems at different
ends of the organizational spectrum are socialist systems and capitalist systems, in which most
production occurs in respectively state-run and private enterprises. In between are mixed
economies. A common element is the interaction of economic and political influences, broadly
described as political economy. Comparative economic systems studies the relative
performance and behavior of different economies or systems.
Development and growth economics
Growth economics studies factors that explain economic growth – the increase in output per
capita of a country over a longer period of time. The same factors are used to explain
differences in the level of output per capita between countries, Much-studied factors include
the rate of investment, population growth, and technological change. These are represented in
theoretical and empirical forms (as in the neoclassical growth model) and in growth
accounting. At a more specific level, development economics examines economic aspects of the
development process in relatively low-income countries with a focus on methods of promoting
economic growth. Approaches in development economics frequently incorporate social and
political factors to devise particular plans.
Environmental economics is concerned with issues related to degradation, enhancement, or
preservation of the environment. In particular, public bads from production or consumption,
such as air pollution, can lead to market failure. The subject considers how public policy can
be used to correct such failures. Policy options include regulations that reflect cost-benefit
analysis or market solutions that change incentives, such as emission fees or redefinition of
property rights.
Financial economics, often simply referred to as finance, is concerned with the allocation of
financial resources in an uncertain (or risky) environment. Thus, its focus is on the operation
of financial markets, the pricing of financial instruments, and the financial structure of
companies.
Game theory
Game theory is a branch of applied mathematics that studies strategic interactions between
agents. In strategic games, agents choose strategies that will maximize their payoff, given the
strategies the other agents choose. It provides a formal modeling approach to social situations
in which decision makers interact with other agents. Game theory generalizes maximization
approaches developed to analyze markets such as the supply and demand model. The field
dates from the 1944 classic Theory of Games and Economic Behavior by John von Neumann
and Oskar Morgenstern. It has found significant applications in many areas outside
economics as usually construed, including formulation of nuclear strategies, ethics, political
science, and evolutionary theory.
Industrial organization studies the strategic behavior of firms, the structure of markets and
their interactions. The common market structures studied include perfect competition,
monopolistic competition, various forms of oligopoly, and monopoly.Information economics
examines how information (or a lack of it) affects economic decision-making. An important
focus is the concept of information asymmetry, where one party has more or better
information than the other. The existence of information asymmetry gives rise to problems
such as moral hazard, and adverse selection, studied in contract theory. The economics of
information has relevance in many fields, including finance, insurance, contract law, and
decision-making under risk and uncertainty.
International trade studies the determinants of the flow of goods and services across
international boundaries. International finance is a macroeconomic field which examines the
flow of capital across international borders, and the effects of these movements on exchange
rates. Increased trade in goods, services and capital between countries is a major effect of
contemporary globalization.
Labour economics
Labour economics seeks to understand the functioning of the market and dynamics for labour.
Labour markets function through the interaction of workers and employers. Labour
economics looks at the suppliers of labour services (workers), the demanders of labour
services (employers), and attempts to understand the resulting patterns of wages and other
labour income and of employment and unemployment, Practical uses include assisting the
formulation of full employment of policies.
Law and economics, or economic analysis of law, is an approach to legal theory that applies
methods of economics to law. It includes the use of economic concepts to explain the effects of
legal rules, to assess which legal rules are economically efficient, and to predict what the legal
rules will be. A seminal article by Ronald Coase published in 1961 suggested that well-defined
property rights could overcome the problems of externalities.
Managerial economics applies microeconomic analysis to specific decisions in business firms
or other management units. It draws heavily from quantitative methods such as operations
research and programming and from statistical methods such as regression analysis in the
absence of certainty and perfect knowledge. A unifying theme is the attempt to optimize
business decisions, including unit-cost minimization and profit maximization, given the firm's
objectives and constraints imposed by technology and market conditons.
Public finance is the field of economics that deals with budgeting the revenues and
expenditures of a public sector entity, usually government. The subject addresses such matters
as tax incidence (who really pays a particular tax), cost-benefit analysis of government
programs, effects on economic efficiency and income distribution of different kinds of
spending and taxes, and fiscal politics. The latter, an aspect of public choice theory, models
public-sector behavior analogously to microeconomics, involving interactions of self-interested
voters, politicians, and bureaucrats.
Economic concepts
The theory of demand and supply is an organizing principle to explain prices and quantities of
goods sold and changes thereof in a market economy. In microeconomic theory, it refers to
price and output determination in a perfectly competitive market. This has served as a
building block for modeling other market structures and for other theoretical approaches.
For a given market of a commodity, demand shows the quantity that all prospective buyers
would be prepared to purchase at each unit price of the good. Demand is often represented
using a table or a graph relating price and quantity demanded (see boxed figure). Demand
theory describes individual consumers as "rationally" choosing the most preferred quantity of
each good, given income, prices, tastes, etc. A term for this is 'constrained utility
maximization' (with income as the "constraint" on demand). Here, 'utility' refers to the
(hypothesized) preference relation for individual consumers. Utility and income are then used
to model hypothesized properties about the effect of a price change on the quantity demanded.
The law of demand states that, in general, price and quantity demanded in a given market are
inversely related.
Supply is the relation between the price of a good and the quantity available for sale from
suppliers (such as producers) at that price. Supply is often represented using a table or graph
relating price and quantity supplied. Producers are hypothesized to be profit-maximizers,
meaning that they attempt to produce the amount of goods that will bring them the highest
profit. Supply is typically represented as a directly proportional relation between price and
quantity supplied (other things unchanged). In other words, the higher the price at which the
good can be sold, the more of it producers will supply. The higher price makes it profitable to
increase production. At a price below equilibrium, there is a shortage of quantity supplied
compared to quantity demanded. This pulls the price up. At a price above equilibrium, there is
a surplus of quantity supplied compared to quantity demanded. This pushes the price down.
The model of supply and demand predicts that for a given supply and demand curve, price and
quantity will stabilize at the price that makes quantity supplied equal to quantity demanded.
This is at the intersection of the two curves in the graph above, market equilibrium.
For a given quantity of a good, the price point on the demand curve indicates the value, or
marginal utility[40] to consumers for that unit of output. It measures what the consumer would
be prepared to pay for the corresponding unit of the good. The price point on the supply curve
measures marginal cost, the increase in total cost to the supplier for the corresponding unit of
the good. The price in equilibrium is determined by supply and demand. In a perfectly
competitive market, supply and demand equate cost and value at equilibrium.
Demand and supply can also be used to model the distribution of income to the factors of
production, including labour and capital, through factor markets. In a labour market for
example, the quantity of labour employed and the price of labour (the wage rate) are modeled
as set by the demand for labour (from business firms etc. for production) and supply of labour
(from workers).In other words, the higher the price of a product, the less of it people would be
able and willing to buy of it (other things unchanged). As the price of a commodity rises,
overall purchasing power decreases (the income effect) and consumers move toward relatively
less expensive goods (the substitution effect). Other factors can also affect demand; for
example an increase in income will shift the demand curve outward relative to the origin, as in
the figure.
Prices and quantities
In supply-and-demand analysis, price, the going rate of exchange for a good, coordinates
production and consumption quantities. Price and quantity have been described as the most
directly observable characteristics of a good produced for the market. Supply, demand, and
market equilibrium are theoretical constructs linking price and quantity. But tracing the
effects of factors predicted to change supply and demand -- and through them, price and
quantity -- is a standard exercise in applied microeconomics and macroeconomics. Economic
theory can specify under what circumstances price demonstrably serves as an efficient
communication device to regulate quantity. A real-world counterpart might attempt to
measure how much variables that increase supply or demand change price and quantity.
Elementary demand-and-supply theory predicts equilibrium but not the speed of adjustment
for changes of equilibrium due to a shift in demand or supply. In many areas, some form of
"price stickiness" is postulated to account for quantities, rather than prices, adjusting in the
short run to changes on the demand side or the supply side. This includes standard analysis of
the business cycle in macroeconomics. Analysis often revolves around causes of such price
stickiness and their implications for reaching a hypothesized long-run equilibrium. Examples
of such price stickiness in particular markets include wage rates in labour markets and posted
prices in markets deviating from perfect competition.
Another area of economics considers whether markets adequately take account of all social
costs and benefits. An externality is said to occur where there are significant social costs or
benefits from production or consumption that are not reflected in market prices. For example,
air pollution may generate a negative externality, and education may generate a positive
externality (less crime, etc.). Governments often tax and otherwise restrict the sale of goods
that have negative externalities and subsidize or otherwise promote the purchase of goods that
have positive externalities in an effort to correct the price distortions caused by these
externalities.
Marginalism
Marginalist economic theory, such as above, describes consumers as attempting to reach a
most-preferred position, subject to constraints, including income and wealth. It describes
producers as attempting to maximize profits subject to their own constraints (including
demand for goods produced, technology, and the price of inputs). Thus, for a consumer, at the
point where marginal utility of a good, net of price, reaches zero, further increases in
consumption of that good stop. Analogously, a producer compares marginal revenue against
marginal cost of a good, with the difference as marginal profit. At the point where the
marginal profit reaches zero, further increases in production of the good stop. For movement
to equilibrium and for changes in equilibrium, behavior also changes "at the margin" --
usually more-or-less of something, rather than all-or-nothing.
Related conditions and considerations apply more generally to any type of economic system,
whether market-based or not, where there is scarcity.Scarcity is defined by the amount of
producible or exchangeable goods, whether needed or desired, exceeding feasible
production.The conditions are in the form of constraints on production from finite resources
available. Such resource constraints describe a menu of production possibilities. For
consumers or other agents, production possibilities and scarcity are posited to imply that, even
if resources are fully utilized, there are trade-offs, whether of radishes for carrots, non-work
time for money income, private goods for public goods, or present consumption for future
consumption. The marginalist notion of opportunity cost is a device to measure the size of the
trade-off between competing alternatives. Such costs, reflected in prices of a market economy,
are used for analysis of economic efficiency or for predicting responses to disturbances in a
market economy. In a centrally planned economy, comparable shadow-price relations must be
satisfied for the efficient use of resources in meeting production objectives. At this level,
marginalism can be used as a tool for modeling not only individual agents or markets but
different economic systems and broad allocations of output in relation to variables that affect
them.