The science of economics

The science of economics is based upon the facts of our everyday lives. Economists study our everyday lives and the general life of our communities in order to understand the whole economic system of which we are part. They try to describe the facts of the economy in which we live, and to explain how it all works. The economist's methods should of course be strictly objective and scientific.

We need food, clothes and shelter. We probably would not go to work if we could satisfy these basic needs without working. But even when we have satisfied such basic needs, we may still want other things. Our lives might be more enjoyable if we had such things as radios, books and toys for the children. Human beings certainly have a wide and very complex range of wants. The science of economics is concerned with all our material needs: it is concerned with the desire to have a radio as well as the basic necessity of having enough food to eat.

Most people work to earn a living, and produce goods and services. Goods are either agricultural (like maize and milk) or manufactured (like cars and paper). Services are such things as education, medicine and commerce. Some people provide goods; some provide services, other people provide both goods and services. For example, in the same garage a man may buy a car or some service which helps him to maintain his car.

The work people do is called economic activity. All economic activities together make up the economic system of a town, a city, a country or the world. Such an economic system is the sum-total of what people do and what they want. The work people undertake either provides what they need or provides the money with which they can buy essential commodities. Of course, most people hope to earn enough money to buy commodities and services which are non-essential but which provide some particular personal satisfaction, like toys for children, visits to the cinema and books.

TYPES OF ECONOMIC SYSTEMS

The way a society answers three fundamental economic questions is known as its economic system. The economic system is the set of mechanisms and institutions that resolve the What, How, and Who questions. In other words, it is the way in which the economic activity in a country is organized. Economic systems generally fall into one of the following categories: traditional, command, market and mixed economies.

Traditional System. Traditional economic systems typically are found in remote countries. Such systems may characterize isolated tribes or groups, or even entire countries. People of traditional economic systems live in rural areas and engage in agriculture or other basic activities such as fishing or hunting.

The goods and services produced in traditional economies are usually those which have been produced for many years or even generations.

Command System. A command economy is an economic system characterized by centralized planning and public ownership of resources. A command economy differs from a market economy in two important ways:

1. In a command economy the state owns productive resources, including natural resources, land, factories, financial institutions, retail stores, etc. Private property and private enterprise are reduced to a minimum.

2. In a command economy resources are directed and production coordinated through some form of central planning rather than by market..

Thus, in a command economy, productive resources are usually owned by the government, which regulates all economic activities through a central plan.

Market System. A market economy is generally associated with private ownership of economic resources, free enterprise, and exchange of goods and services in markets.

Private property means that individuals and business firms have the rights to own the means of production. Although markets exist in traditional and command economies, the major means of production (such as firms, factories, farms and mines) typically are publicly owned. In a market economy anyone is free to use economic resources to start a business and sell a product in the market. Government's role is quite limited. The right of business owners to use private economic resources for whatever purpose they want is called freedom of enterprise.

In a market economy, firms themselves choose the most efficient production technique, guided by the price system. Market economies do not guarantee an equitable distribution of income. In this area planning has some advantages.

Mixed System. A mixed economy is an economic system which combines elements of public control of the means of production with private ownership. In a mixed economy the government and private sector cooperate in solving economic problems. The government controls production through taxation and orders for goods and services for the army, the police force, administration and other needs. In a mixed economy the government may also be a producer of goods.

Market

Economic activity occurs in markets. A market is a means by which buyers and sellers carry out exchange. It is a way in which they can do business together.

Economists define markets as mechanisms or systems for exchanging money for goods and services. Markets are often physical places such as a supermarket. department store, or shopping mall.

Many market transactions are conducted without buyers and sellers actually meeting. For example, buyers can look through catalogues and then order goods by mail or telephone, without face-to-face contact with sellers. Others use their computers to shop on the Internet, where they can trade with people and businesses all over the world. They are still in a market because they are making exchanges.

Goods and services are bought and sold in product markets; resources are sold in resource markets. The most important resource market is the labour market or job market.

In a free market, competition takes place among sellers of the same commodity, and among those who wish to buy that commodity. Such competition influences the prices in the market. The price system basically operates on the principle that everything that exchanges - every good, every service and every resource - has its price. In a free market with many buyers and sellers, the prices of these things reflect the quantities that sellers want to sell and the quantities that buyers want to purchase. Prices fluctuate, and such fluctuations are affected by current supply and demand. Prices provide consumers and producers with the information they need to make economic decisions.