Economics is simply the study of the allocation of resources and the study of choices. It is one of the social sciences disciplines which is concerned with the production, distribution, and consumptions of goods and services. Economics studies how market participants make choices to satisfy their wants and needs when resources are scarce. Market participants are all the individuals, businesses, governments, and all other notions.
Scarcity is the condition where the want factor is greater than the resources we have and hence we have to make choices on how we will use the limited available resources.
Economics study has some of the prominent assumptions:
- Scarcity
Scarcity in economics is the situation where there are limited resources to fulfil unlimited needs and wants. Scarcity is a very fundamental economic problem. For instance, water resources we have are limited, land resources are limited and eventually there will be scarce conditions for these and all the resources available.
For instance, in a production line, human efficiency and capacity will lead to production and quantity of the goods produced is dependent on the material available. Human ability to work is limited i.e. we cannot work all the time, hence the production is limited. Also, materials used for production are also limited hence production is limited. Hence, every resource we have is limited i.e. they are scarce.
- Trade-Off
Trade-off is simply making choices to optimally maximize the satisfaction and fulfil the needs. We have unlimited wants and needs but due to scarcity constraints we cannot satisfy all our wants and needs. This simply defines the concepts of trade-offs. Trade-offs are all the alternatives that we forgo as we select one over others. The forgone best option is the opportunity cost for the selected choice.
For instance, there is always a trade-off between work-leisure, spending now or saving for future, Profit maximization or wealth maximization.
- Rationality
Economics assumes that every individual is rational i.e. one will always take decisions that best suit the interest and satisfy the need. In scarce situations, one always acts in its own self-interest. Rationality also means that people are already aware of the situation and know their preferences. Individuals have the ability to overcome any economic obstacles in the best possible way.
Rationality allows economists to understand the behaviour of individuals as rationality will let them behave in predictable ways.
For instance, it is due to the rational behaviour that in law of demand and supply that, higher will be the cost of something, rational people probably wish to buy less of it and the seller wishes to sell more of it.
- Cost and Benefits
In economics, all our decisions are based on cost-benefit analysis. We have scarce resources hence all our choices are rationalized by the cost-benefit analysis. Before considering any choices, we analyse the marginal costs and marginal benefits related with the choices. Cost-Benefit analysis takes into account both quantitative and qualitative factors for analysis of the value for money for a particular project or investment opportunity.
For instance, there are 5 workers working in an organization with Rs. 10,000 as monthly salary. Total cost of employees for a year will be Rs.1, 20,000. There is a new robot who can replace 5 workers and can work as efficiently as 5 workers. The cost of the robot is Rs. 80,000 and maintenance free. The company will save Rs. 40,000 if the company selects to go for robotics mode of operation. This is the cost-benefit analysis.
There are two types of disciplines in economics:
- Microeconomics
- Macroeconomics