Economics is studying about turning scarce resources to commodities and distributing those resources.How choices are made and how resources are utilized keeping these choices in mind.
Resources are limited; choices (Needs & wants) needs to be prioritized.
Economics is all about studying economic activities of mankind.
One theory may work at some county but not in other because conditions or economic factors are different.
Factors can be
- Natural resources
- Human Quality and quantity
- Historical background
- PESTLE Conditions (political economic social technology legal and environment;;;;PESTLE )
- Mindset culture etc
Economies of world are diverse in nature.
The goal of economics is betterment, to improve condition of life, development, raising standard of living.
Challenge is to satisfy needs of its population. But needs keep on growing.
There are 2 aspects of these challenges
Availability of goods and services to population needs to be done keeping these 2 things in mind
- Supply network
- Distribution network
There are 3 types of economies
- State and Market mix
Capitalist(Market) Economy: given by Adam Smith 1723-1790 in wealth of nation 1776, Govt regulation did not allow economies to grow completely hence Division of labour, Laissez faire(non interference of govt) is needed. According to him invisible mechanism and market forces (price) will bring wellbeing and equilibrium in economy. Thus he favoured competition. In short Private Enterprise system, Free Enterprise system and Market economy is capitalism. Eg USA
State Economy (Centralised , Centrally Planned or Non market economy): Given by Karl Marx. Philosophy came in USSR after Bolshevik Revolution 1917 matured in China
Examples can be taken from Past governance of USSR and China
USSR : Socialist Economy collective ownership of factors of production relatively high power of state in running economy
China : Communist Economy sole ownership of state and absolute power in running economy.
Mixed Economy: Adam smith’s theories were questioned during great depression 1929. Keynes questioned equilibrium is brought by stagnating poor. Even when economy will be in full potential there will be unemployment. Fall in demand ——-recession—depression. Govt intervention is needed to regulate economy.
To overcome depression raise demands by increase govt expenditure, Fiscal policy, low fiscal deficit low interest rate, easy and cheap supply of money
In market economy, price decides everything citizen have to pay for everything it reduces their purchasing power ultimately depression.
Considering Keynes many economies adopted Mixed system in which basic goods and services were given by govt called Public Goods, expenditure would be born by public exchequer.Thus people had more money to buy preferred goods as they were getting minimum from govt.
Keynes suggested to tweak capitalist model, which came to known as mixed economy.
Under leadership of Mao tse tung in china opposition came for total state economy.In 1985 china announced open door policy.
Post World War 2 many economies adopted mixed system like India Malaysia, Indonesia etc.
Both the economic conditions are complimentary to each other not dichotomy.
Economic reforms in India started in 1991.Mixed economy since independence.Only composition of state market mix is changed according to economic and social conditions.
World Bank suggests mix economy system only, but countries should identify extent and areas in which market or state intervention are needed.
Role of State in an Economy:
- As a regulator
- As a producer or supplier of pvt goods and services
- As the producer of public or social goods or services,, loss occurred to state by this mechanism is paid by public exchequer
The economy which selected both 2 &3 under control of state with monopoly are state economy while where both the functions are decided and governed by market forces private sector are capitalist economy, mixed economy had atleast one role of providing public services fixed for them.
Striking right balance between role of state and market in economy is economic reforms.
3 sectors of economy:
Primary sector: where there is direct use of natural resources eg agriculture
Secondary/Industrial/Manufacturing sectors: which uses produce of primary sector as raw material eg automobile
Tertiary sectors: all those activities where services are provided banking
Based on contribution of a sector in total production of economy and ratio of population dependent on it for livelihood economies are named.
Type of economies
Agrarian Economy: If share of primary sector is 50% or more in GDP of an economy.
Monetary terms India is not an agrarian economy but dependency ratio makes it one. Services sector is the largest sector of India.
Sector wise Indian GDP composition in 2014 are as follows : Agriculture (17.9%), Industry (24.2%) and Services (57.9%).if 50% or more is contributed by secondary sector then Industrial or manufacturing economy and if service/tertiary sector accounts for more than 50% then service economy.