University in Novi SadFaculty of Economics Subotica

Economics Basics /2nd semester(Individual term paper)

Student: XXXXXX

Economics Basics: Introduction

Economics is the study of what constitutes rational human behavior in the endeavor to fulfill needs and wants. The most important fact about Economics that we must always remember is that it is a social science. All societies have more wants than resources. Economics, often referred to as the "dismal science", is a study of certain aspects of society. Economics is the social science that studies economic activities. There are different definitions of economics. Adam Smith, who is considered to be the founding father of modern Economics, defined Economics as the study of the nature and causes of nations wealth or simply as the study of wealth. The definition set out at the turn of the twentieth century by Alfred Marshall, author of "The Principles of Economics", reflects the complexity underlying economics: "Thus it is on one side the study of wealth; and on the other, and more important side, a part of the study of man."

Economics may appear to be the study of complicated tables and charts, statistics and numbers, but, more specifically, it is the study of what constitutes rational human behavior in the endeavor to fulfill needs and wants.As an individual, for example, you face the problem of having only limited resources with which to fulfill your wants and needs, as a result, you must make certain choices with your money. You'll probably spend part of your money on rent, electricity and food. Then you might use the rest to go to the movies and/or buy a new pair of jeans. Economists are interested in the choices you make, and inquire into why, for instance, you might choose to spend your money on a new DVD player instead of replacing your old TV. They would want to know whether you would still buy a carton of cigarettes if prices increased by $2 per pack. The underlying essence of economics is trying to understand how both individuals and nations behave in response to certain material constraints. We can say, therefore, that economics, often referred to as the "dismal science", is a study of certain aspects of society. Adam Smith (1723 - 1790), the "father of modern economics" and author of the famous book "An Inquiry into the Nature and Causes of the Wealth of Nations", spawned the discipline of economics by trying to understand why some nations prospered while others lagged behind in poverty. Others after him also explored how a nation's allocation of resources affects its wealth. To study these things, economics makes the assumption that human beings will aim to fulfill their self-interests. It also assumes that individuals are rational in their efforts to fulfill their unlimited wants and needs. Economics, therefore, is a social science, which examines people behaving according to their self-interests. The definition set out at the turn of the twentieth century by Alfred Marshall, author of "The Principles of Economics", reflects the complexity underlying economics: "Thus it is on one side the study of wealth; and on the other, and more important side, a part of the study of man."We have now formed an idea about the meaning of Economics. This at once leads to a general definition of Economics. Economics is the social science that studies economic activities. This definition is, however, too broad. It does not specify the exact manner in which the economic activities are to be studied. Economic activities essentially mean production, exchange and consumption of goods and services. However, with the progress of civilization, the complexity of the production, exchange and consumption processes in society have increased manifold. Economists at different times have emphasized different aspects of economic activities, and have offered different definitions of Economics.

Key words and phrases: individual-person, manifold-mnogobrojni, formed, fulfill,

Branches of economics: Microeconomics and Macroeconomics

Economic theory has several branches. Among these, two are most important. These are microeconomics and macroeconomics. Microeconomics is the branch of economics which is concerned with the decision-making of a single unit of an economic system. Since the study of microeconomics starts with the individual consumers and producers, policies for the correction of any wrong decisions at the micro-level are also facilitated by microeconomics. Usefulness of Microeconomics can be seen as a relation between determination of demand pattern and determination of the pattern of supply. Prices are determined by the interaction of the forces of demand and supply of the goods and services. By determining demand and supply, microeconomics helps us understand the process of price determination. By explaining prices and the pattern of resource allocation, microeconomics helps us to formulate appropriate development policies for an underdeveloped economy. Microeconomics has its limitations as well as monetary and fiscal policies, income determination, business cycles and unemployment. As we have said, economic theory has several branches. The second most important after microeconomics is macroeconomics. Macroeconomics is the branch of economics which is concerned with the economic magnitudes relating to the economic system as a whole, rather than to the microeconomic units like individuals or firms. Macroeconomics work with national income, with the price level, with the national output. Macroeconomics deals with some of the questions untouched by microeconomics. The determination of national income and of total employment in the country are vital concerns of macroeconomics. The determination of the general price level is discussed in macroeconomic theories. Discussion of business cycles in general and anti-depression policies in particular, fall within the scope of macroeconomics. The difference between the total inflow and the total outflow of foreign exchange is known as the balance of payments of a country, which is also a part of macroeconomics. The effects of various government policies on the economic variables like national income or the general price level are also studied in macroeconomics. The most important contribution of macroeconomic theories is to show that different markets of an economic system (for example, the commodity market, the money market, etc.) are interrelated. Any disturbance in one of these markets affects all the others.

Economic theory, as it stands today, has several branches. Among these, two are most important. These are microeconomics and macroeconomics. We shall now briefly mention the major features of these two branches to have an idea regarding the nature of economics.Macro and microeconomics are the two vantage points from which the economy is observed. Macroeconomics looks at the total output of a nation and the way the nation allocates its limited resources of land, labor and capital in an attempt to maximize production levels and promote trade and growth for future generations. After observing the society as a whole, Adam Smith noted that there was an "invisible hand" turning the wheels of the economy: a market force that keeps the economy functioning. Microeconomics looks into similar issues, but on the level of the individual people and firms within the economy. It tends to be more scientific in its approach, and studies the parts that make up the whole economy. Analyzing certain aspects of human behavior, microeconomics shows us how individuals and firms respond to changes in price and why they demand what they do at particular price levels. Micro and macroeconomics are intertwined; as economists gain understanding of certain phenomena, they can help nations and individuals make more informed decisions when allocating resources. The systems by which nations allocate their resources can be placed on a spectrum where the command economy is on the one end and the market economy is on the other. The market economy advocates forces within a competitive market, which constitute the "invisible hand", to determine how resources should be allocated. The command economic system relies on the government to decide how the country's resources would best be allocated. In both systems, however, scarcity and unlimited wants force governments and individuals to decide how best to manage resources and allocate them in the most efficient way possible. Nevertheless, there are always limits to what the economy and government can do.

The main economic problemThe main economic problems are unlimited human needs, limited availability of resources and fulfillment of unlimited needs with limited resources. If some needs are satisfied, other needs appear. In the first place, the most important needs are the need for existence, for living, some social needs, and then come the others, and in the last place are luxury needs. The main problem before any society, as we have defined it, is to satisfy the unlimited needs with limited resources. Here arises the problem of choice or selection. It implies that every society has to arrange its requirements in order of priority. Modern economists talk about three main economic problems: what, how and for who to produce. The economy must decide which goods and services to produce and in what quantity, which goods and services not to produce, and all that carefully. A particular quantity of a particular good or service can be produced in many different ways, by different combinations of inputs, which is called a technique of production. After commodities have been produced, there remains the task of deciding how to distribute them, which is the third important question.

The main economic problems faced by every society are:1. Unlimited human wants,2. Limited availability of resources to satisfy those wants, and3. Fulfillment of unlimited wants with limited resources.In any society, human wants are unlimited. If one want is satisfied, the other appears soon. For instance, if the basic needs of a human being (e.g. food, clothing and shelter) are satisfied then some secondary needs appear very soon. These secondary needs may be social needs, i.e. the need for attaining a social function, the need for fulfilling some social obligations, etc. However, in comparison with this unlimited human wants, the resources required to satisfy such wants remain limited.Thus, the main problem before any society is to satisfy the unlimited wants with limited resources. Here arises the problem of choice or selection. It implies that every society has to arrange its requirements in order of priority. Then, with its limited resources, the society has to satisfy the human wants in order of priority. In Economics, we try to analyse the causes behind these basic economic problems and find out possible ways to solve the problems mentioned.

The main causes behind the economic problems of any society are: Unlimited human wants: Every human being requires varieties of goods and services for maintaining and improving his or her standard of living. Whenever the basic needs for food, clothing and shelter are fulfilled, people feel that they want and need education, a book, a pen and pencil, an eraser, a chair, a table, a TV set, a tape-recorder, a CD-player, a computer, travel, sports, finer clothes, a washing machine, and thousands of such items. In a modern society, these wants are increased further in response to the pressures of fashion and advertising. These wants appear one after another like untiring waves of the sea. Limited resources for satisfying these wants: Production of various goods and services require resources like land resources, mineral resources, forest resources, physical capital (e.g. machines, factory sheds, etc.) and money capital, human resources (e.g., skilled man-power), etc. However, compared to the unlimited wants for various goods and services, these resources seem to be insufficient. It implies that even if all these available resources are fully employed for producing various goods and services, only a small part of human wants can be satisfied. So, scarcity of resources is an important reason behind the economic problem in any society.In recent times, economists have analysed economic systems from a broad perspective. These modern economists talk about three main economic problems: (1) What to produce; (2) How to produce and (3) For whom to produce. In short, these are called the What, How and for Whom questions.The very first question that any economic system must answer is: What goods and services are to be produced in a society and in what quantities? This question arises from the fact that human wants are unlimited,while resources are limited.The satisfaction of human wants requires the consumption of goods and services.Human beings, therefore, wish to consume goods and services. But, since resources are limited, the economic system cannot produce all types of goods and services. No goods or service can be be produced in infinitely large quantities. Only finite amounts of a limited number of goods and services can be produced. Therefore, there arises this decision-problem. The economy must decide which goods and services to produce and which goods and services to exclude from production. The economy must choose its production plan carefully. Not everything can be produced and even those things which are produced cannot be produced in unlimited quantities.The second basic problem that every economy must solve is that of deciding how to produce the goods and services (that the economy has decided to produce). A particular quantity of particular goods or service can be produced in many different ways. The economy must choose a particular way of producing the specified amount of the goods. Moreover, this must be done for each of the different goods and services that the economy wants to produce.Supposing that the first two basic problems have been solved i.e. the economy has decided on the amounts of production of various goods and services and has also chosen the appropriate techniques for producing them. There still remains the problem of deciding on the manner in which the produced goods and services will be used. That will, obviously, be used to satisfy human wants. But among the members of society, who will receive the produced commodities and in what amount? In other words, after the commodities have been produced, there remains the task of deciding how they will be distributed. Who will get the produced commodities? This is known as the question: For whom to produce? It is also known as the problem of distribution.

Key words and phrases: for instance-primera radi, need for attaining-potreba za posedovanjem, has to arrange-mora da ugovori, requirements-zahtevi, maintaining and improving-odravanje i unapreenje, untiring waves-neumorni talasi, insufficient-nedovoljno, satisfaction of human wants-zadovoljavanje ljudskih potreba, appropriate techniques-prikladne tehnike, deciding on the manner- odluivanje o nainu, task-zadatak, specified amount- odreeni iznos, production plan-plan proizvodnje, social obligations-drutvene obazveze, possible ways to solve- mogui naini reavanja.

3