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Economics can be defined at a social science that studies a society’s usage of scarce resources to produce optimum results. There are four basic economic concepts: they are scarcity, demand and supply, cost and benefits and incentives. While providing a guideline for major decisions, economics impacts the actions and decisions undertaken by individuals, businesses and governments, at large. Some of the common subjects that economics touches upon are production and employment, investment, health, the financial system, taxation, urbanization and environmental issues.

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Microeconomics deals with an individual’s action and his or her financial health. The allocation of one’s resources is important as that will enhance one’s ability to make daily as well as long-term decisions. Microeconomics studies the values of different goods and how we could benefit from their optimal usage. It basically provides a detailed look or outcome of the finer things in life. If you want to study prices and production of single and individual markets, then microeconomics is your way out. Several macroeconomists study and observe human behaviour and test them against real-life scenarios.

Microeconomics understands the change in economic behaviour and provides solutions if the conditions change. For instance, if a manufacturer raises the prices of some goods, fewer people will buy them as compared to the past. However, on the other hand, if a natural resource is scarce, the purchase rate will increase making it more expensive than before as it is low in supply.


Price: The usage and production depend upon the supply and demand of a particular product. This is what determines the price of the product in the market. In a competitive market, the price demanded by consumers is often similar to that supplied by producers.

Product: The production process is closely studied and inputs are converted into outputs. The producers will then look at these inputs and will find ways to minimize cost only to maximize profits.

Place: Consumers will purchase a combination of products that will profit their happiness or utility depending on their willingness and ability to pay.

People: Producers observe the way in which consumers react when the need for a product is created.


Macroeconomics looks at the economy as a whole and observes any changes in Inflation, National Income, Gross Domestic Product (GDP) as well as changes in Rate of Employment. In contrast, microeconomics is more focused on individuals. Macroeconomics understands the performance, structure, and behaviour of the overall economy. Research in macroeconomics is further divided into: long-term economic growth and short-term business cycles.

John Maynard Keynes and his theories about market behaviour and government policies brought about the study of macroeconomics as early as 1930. By studying the economy as a whole, macroeconomics analyzes different sectors of the economy and their relation to the other. For instance, unemployment makes a big difference to the GDP and inflation. These macroeconomic models are used by the government to understand, project and predict the fiscal policies and their consequences.

Upcoming businesses use these models to formulate strategies in domestic as well as global markets. The scale at which governments plan their budgets and the impact of the economic policies on various businesses and consumers takes macroeconomics into the big league. If the policies are appropriate, they can offer insightful results on how economies or businesses function as well as the long-term results of the policies can be predicted.


Classical Economics: Adam Smith, a Scottish economist believed that markets would work best if they were let alone by the government. He introduced laissez-faire, a French phrase for ‘let them do’ in the 18the century. Classical economists are not a school of macroeconomic thought, however, this was a label first put forth by Karl Marx.

Keynesian Economics: Following the works of John Maynard Keynes, macroeconomics was separated from microeconomics. The followers of Keynes think that the business cycle can be managed by government interference through fiscal and monetary policy. These economists believe that if we got rid of certain rigidities in the system, it will benefit the proper clearing of supply and demand.

Monetarist Economics: This school is partly Keynesian but also follows the works of Milton Friedman. These economists believe that monetary policies are more effective and desirable to manage demand, in comparison to the fiscal policy.

New Classical Economics: This school of thought was formed to integrate microeconomic foundations into macroeconomics in a bid to resolve the contradictions between the two. These economists believe that unemployment is largely voluntary, and that inflation can be controlled by monetary policy.

New Keynesian Economics: These economists still believe that households and organisation behave on the basis of rational expectations. The government can control the macroeconomic conditions through fiscal and monetary policies.

Austrian Economics: It is an older school of thought that is beginning to gain popularity once again. Their theories are mostly applicable to microeconomics, but they still haven’t separated micro and macroeconomics. The Austrian business cycle theory offers insight into economic activity across various markets due to monetary policy and the role those financial institutions play in connecting markets to each other.


Scarcity: This concept explains the most basic economic problem that the world is facing – the scarcity of resources. There is never enough for everyone. This is one such reason why people settle for what’s second best. This hard reality forces individuals to make difficult choices on how to allocate resources effectively. The world is full of unlimited wants and scarcity is the lack of those wants.

Supply & Demand: A market is simply driven by demand and supply. If the demand for the product is high, you can charge people a higher price for the product because they need it and they don’t hesitate to buy it. This would lead to a number of manufacturers making the same product and increasing its supply. This could lead to increase in the supply of beer in the market thus making the prices drop again. Basically, demand and supply are the reason why the previous year’s most expensive product is almost half the price in the following year.

Cost & Benefits: Costs and benefits is concerned with the theory of rational choice and rational expectation. As per economists, when people behave a certain way, it is to maximize the benefit to costs in their decision. If the demand for a particular product is high, the manufacturer will hire more employees, but if the price of the product and the amount of the product sold justifies the additional costs of their salaries. For instance, a university student chooses certain subjects that might seem right or important to complete their education. Sometimes, this might also mean that a student focuses less on subjects they think are unnecessary.

Incentives: Everybody wants to work towards incentives. Parents reward their kids for doing the right thing. The reward is an incentive that is given to the child for a certain likely outcome. Economic incentives tell us how the supply and demand operations push the producers to increase the supply of what the consumers want. When a consumer demands for a particular product, the price of the product also increases. This leads to producers receiving incentives to produce more of that particular product so that results in receiving a higher price.


Law of self-interest: Adam Smith wanted people to learn to practice hard work and promoted self-interest. According to him, this practice of self-interest was natural to a few people. His famous example of this concept was that a butcher didn’t sell meat due to good intentions instead he did so because of the profits. Therefore, the decision pricing the meat as per people’s willingness to pay was a profitable transaction to both parties.

Law of Competition: If a particular product is being sold in the market and the consumers demand for it there should be more competition of producers trying to make a better product and sell it out. This is purely a study of the market and this competition between producers or markets at large, in turn benefit the consumers.

Law of Supply & Demand: This law is a theory that understands the interaction between the sellers of a particular product as well as the buyers of that product. With an increase in the price, more suppliers will be willing to make the same product and with an increase in the supply, the price falls. It determines the relationship between the price of a particular product and the consumer’s willingness to pay for it.


Pure Market Economy: This economy does not heed the interference of any government decisions. Private firms are responsible for all the productions. The consumers are the decision-makers and they decide what should be purchased. This trend is observed in the purchases they make. With regards to businesses, they decide the details of the production process and how they should stand out and be unique, as it can get very competitive.

Pure Command Economy: In this kind of economy, the government usually owns all the resources. One official or a group of people in power decide what products are needed in the market. All in all, the government makes the final call regarding businesses, the rate of employment, as well as the production process.

Traditional Economy: Here the economy is influenced by customs or religion. These two factors decide everything and help shape the goods and services that need to be produced. This economy is usually found in rural and farm-based countries. This kind of economy usually makes use of trade and barter more than the circulation of money.

Mixed Economy: Most economies around the globe are mixed economies. The classification totally depends on how much the government intervenes in its decisions. For instance, in the U.S., the government is responsible for 1/3 of the whole country’s economic activity


The different economic systems are characterized by the ownership of the resources and their allocation. Some of the economic systems are:

Capitalist Economic System: In this system, the resources as well as capital are solely and privately owned and distributed. In the current context, this system is associated with laissez-faire where the state has minimal power. Of course, the state has to supervise the market corrections and step in if there is a liquidity crisis or market failure.

Communist Economic System: The state looks after the allocation and production functions as well as the distribution of goods. In this system, there is communal ownership, it is also known as ‘Communism.’ The employees are paid equal wages in this feature. This system was used in the USSR and was considered a failure. However, economists couldn’t decipher whether it was an ideological failure or its implementation was faulty.

Socialist & Mixed Economic Systems: In this system, the government has certain control over some areas that it considers significant, for instance, national security and the welfare of the citizens. Hence, in these sectors, the state does not allow private entities to interfere in defense or essential services. However, entrepreneurs can offer their suggestions and recommendations wherever they see fit. With the rise of these economic systems, the centrally planned economies have taken a beating.


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Economics Problem Solver


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