Economics and Economy

Every group of people must solve three basic problems of daily living: what goods and services to produce, how to produce these goodsand services, and for whom to produce these goods and services.

Economics is the study of how society decides what, how, and for whom to produce.

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)."

By goods we mean physical commodities such as steel, cars, and strawberries. By services we mean activities such as massages or live theatre performances which can be consumed or enjoyed only at the instant they are produced. In exceptional circumstances, society may find that some of the questions about what, how, and for whom to produce have already been answered; until the arrival of Man Friday, Robinson Crusoe need not worry about the 'for whom' question. In general, however, society must answer all three questions.

By emphasizing the role of society, the definition places economics within the social sciences, the sciences that study and explain human behaviour. The subject matter of economics is that part of human behaviour which relates to the production, exchange, and use of goods and services. The central economic problem for society is how to reconcile the conflict between people's virtually limitless desires for goods and services, and the scarcity of resources (labour, machinery, and raw materials) with which these goods and services can be produced. In answering the questions what, how, and for whom to produce, economics explains how scarce resources are allocated between competing claims on their use.Economics is about human behaviour. Economists analyse problems, not the subject matter of economics. Economists aim to develop theories of human behaviour and to test them against the facts.

The modern market economy is populated by three types of economic agents, whose interaction constitutes economic activity: consumers, producers, and the government. The main social purpose of the economy is to produce goods and services for the satisfaction of the needs and wants of consumers.

Consumers, typically, represent households that.provide labour, and other resources to produce against an income which they use to purchase consumer goods or to save.

Producers, typically, represent enterprises or firms that acquire factors of production, or inputs – labour, land, and capital – from households and combine them to produce outputs, or commodities which can be classified into goods-tangible commodities – and services. The activities of firms move around the sale of their output at a profit.

The third basic element, the government, is involved with the economy, on the one hand, as a producer and consumer and, on the other hand, as a regulator, supervisor and promoter of economic activities.

The economic agents are engaged in a complex web of transactions involving factors of production and outputs. However, the volume of the commodities that can be produced and purchased is limited by the scarcity of resources. This fact has two important consequences as regards economic decision-making:

a) the utilization of resources has to be efficient. In terms of the welfare of economic agents, the utilization of resources is efficient when every opportunity has been exhausted to make some individuals better off without hurting the interests of others;

b) individual economic agents and society as a whole cannot simply use more, they have to make compromises between alternative uses.

Given these constraints, consumers, producers, and the government have to make rational decisions over available resources. Rational decisions reflect choices that draw maximum profit from given resources or obtain desired results with the minimum efforts or cost.