Economics -- The study of how society chooses to employ resources to produce goods and services and

distribute them for consumption among various competing groups and individuals. Here Businesses can
contribute to an economic system by inventing products that greatly increase the available resources.
For example: By discovering new energy sources, new ways of growing foods, new ways producing goods
and services.

There are 2 major branches of economics. Such as -

Macroeconomics -- Concentrates on the operation of a nation’s economy as a whole. For example: Why
Interest rate changes? Why unemployment goes up?

Microeconomics -- Concentrates on the behavior of people and organizations in markets for particular
products or services. For Example: Why people choose to use Gas (CNG conversion) rather than oil, why
people buy more of a product at reduced price?

DIFFERENCE BETWEEN MICRO AND MACRO ECONOMICS:

MICRO ECONOMICS:- MACRO ECONOMICS:-

1.Evolution of micro economics took place earlier
than macroeconomics.
2.It is branch of economics, which studies
individual economic variables like demand,
supply, price etc.
3.It has a very narrow scope i.e. an individual, a
market etc.
4.Demand,supply,market forms etc. related to
micro economics.
5.It is helpful in analysis of an individual
economics unit like firm.
6.Theory of demand, theory of production, price
determination theory etc develop from micro
economics.
1.It evolved only after the publication of Keynes‘
book, General theory of employment interest and
money.
2.It is a branch of economics which studies
aggregate economic variables, like aggregate
demand, aggregate supply, price level etc.
3.It has a very wide scope i.e. a country.
4.Aggregate demand aggregate supply, national
income etc. related to macro economics.
5.It is helpful for analyzing the level of
employment, income, economic growth etc.
6.Theory of national income, theory of
employment theory of money, theory of general
price level etc. develop from macro economics.

THOMAS MALTHUS and the DISMAL SCIENCE:

Malthus believed that if the rich had most of the wealth and the poor had most of the population,
resources would run out. This belief led the writer Thomas Carlyle to call economics “The Dismal
Science. Neo-Malthusians still believe there are too many people in the world and that the solution to
poverty is radical birth control, including forced abortions and sterilization. The latest world statistics,
however, show population growing more slowly than expected. In some industrial countries—like Japan,
Germany, Italy, Russia, and the United, States—population growth may be so slow that eventually there
will be too many old people and too few young people to care for them. In the developing world, on the
other hand, population will climb relatively quickly and may lead to greater poverty and more unrest.
ADAM SMITH the FATHER of ECONOMICS:

Smith believed freedom was vital to the survival of any economy, especially the freedom to-own land or
property and to keep the profits from working the land or running a business. He believed people will
work long and hard if they have Incentives for doing so that is, if they know they'll be rewarded As a
result of those efforts, the economy will prosper, with plenty of food and all kinds of products available
to everyone. He is considered as the father of modern economics.

Capitalism – An economic system in which All or most of the land, factories and stores are owned by
individuals, not the government, and operated for profit. Countries with capitalist foundations: United
States, England, Australia, Canada.

Foundation/ people’s rights of capitalism:

The right to own private property: This is the most fundamental of all rights under capitalism. Private
ownership means that individuals can buy, sell, and use land, buildings, machinery, inventions, and other
forms of property. They can also pass property on to their children.

Profit/Ownership: Here profits equal revenues minus expenses (salaries, materials, taxes). Profit acts as
incentive for taking risk and initiative.

The right to freedom of competition: Within certain guidelines established by the government,
individuals are free to compete with other individuals or businesses in selling's and promoting goods and
services.

The tight to freedom of choice: People are tree to choose where they want to work and what career they
want to follow.' Other choices people are free to make include where to live and what to buy or sell.

Supply Curve:

Supply refers to the quantities of products manufacturers or owners are willing to sell at different prices
at a specific time. Here, in a graph shows a simple supply curve for T-shirts. The price of the shirts in
dollars is shown vertically on the left of the graph. The quantity of shirts sellers are willing to supply is
shown horizontally at the bottom of the graph. The various points on the curve indicate how many T-
shirts sellers would provide at different prices. For example, at a price of $5 a shirt, a T-shirt vendor
would provide only 5 shirts, but at $50 a shirt the vendor would supply SO shirts. The supply curve
indicates the relationship between the price and the quantity supplied. All things being equal, the higher
the price, the more the vendor will be willing to supply. In this curve, the supply curve rises from left to
right. Think it through. The higher the price of T-shirts goes (the vertical axis), the more sellers will be
willing to supply.
Demand curve refers to the quantity of products that people are willing to buy at different prices at a
specific time. Here, in a graph shows a simple demand curve for T-shirts. The various points on the graph
indicate the quantity demanded at various prices. For example, at $45, buyers demand just 5 shirts. But
at $5, the quantity demanded would increase to 35 shirts all things being equal, the lower the price, the
more buyers are willing to buy. Here the curve showing the quantity of T-shirts demanded at different
prices. The demand curve falls from left to right: It is easy to understand why. The lower the price of T-
shirts, the higher the quantity demanded.

The place where quantity demanded and quantity supplied meet is called the equilibrium point. When
we put both the supply and demand curves on the same graph, we find that they Intersect at a price
where the quantity supplied and the quantity demanded are equal. In the long run, the market price will
tend toward the equilibrium point. Figure shows. At a price of $15, the quantity of T-shirts demanded
and the quantity supplied are equal (25 shirts). That crossing point is known as the equilibrium point or
equilibrium price. In the long run, that price will become the market price. Market price, then, is
determined by supply and demand. It is the price toward which the market will trend.

Degrees Of competition/ competition within free markets:

Economists generally agree there are four different degrees of competition: (I) perfect competition, (2)
monopolistic competition, (3) oligopoly, and (4) monopoly.

Pure/Perfect competition: Perfect competition exists when there are many sellers in a market and none
is large enough to dictate the price of a product. Sellers' products appear to be identical, such as
agricultural products like apples, corn, and potatoes. There are no true examples of perfect competition.

Monopolistic Competition: Under monopolistic competition a large number of sellers produce very
similar products that buyers nevertheless perceive as different, Such as hot dogs, sodas, personal
computers, and T-shirts. Product differentiation—the attempt to make buyers think similar products are
different in some way—is a key to success.

Oligopoly: An oligopoly is a degree of competition in which just a few sellers dominate a market, as we
see in tobacco, gasoline, automobiles, aluminum, and aircraft. One reason some industries remain in the
hands of a few sellers is that the initial investment required to enter the business often is tremendous.

Monopoly: Monopoly is a degree of competition in which only one seller controls the total supply of a
product or service, and sets the price.
Limitation of free market:

A competitive environment creates an atmosphere of survival of the fittest. This causes many businesses
to disregard the safety of the general public to increase the bottom line.

Wealth is not distributed equally - a small percentage of society has the wealth while the majority lives
in poverty.

There is no economic stability because greed and overproduction cause the economy to have wild
swings ranging from times of robust growth to cataclysmic recessions.

Socialism -- An economic system based on the premise that some basic businesses, like utilities, should
be owned by the government in order to more evenly distribute profits among the people.
Entrepreneurs run smaller businesses. Citizens are highly taxed almost 60% usually. Government is more
involved in protecting the environment and the poor.

The benefits of socialism also include the following:

 In theory, based on public benefits, socialism has the greatest goal of common wealth;

 Since the government controls almost all of society's functions, it can make better use of
resources, labors and lands;

 Socialism reduces disparity in wealth, not only in different areas, but also in all societal ranks and
classes.

 Excess or insufficient production can be avoided;

 Prices can be controlled in a proper extent;

 Socialism can tackle unemployment to a great extent.

Some of the primary criticisms of socialism are claims that it creates distorted or absent price signals,
results in reduced incentives, causes reduced prosperity, has low feasibility, and that it has negative
social and political effects.

 The national economy develops relatively slowly;

 There is an inability to obtain the upmost profit from the use of resources, labors and land;

 Places that have a geographical advantage lose chances to develop better and people who have
intelligence and wealth lose chances to make their businesses become bigger and more
powerful this called Brain drain.

 People lose initiative to work and enthusiasm to study as doing more isn't rewarded.
Communism -- Is an economic and political system in which the government makes almost all economic
decisions and owns almost all the major factors of production. Prices don’t reflect demand which may
lead to shortages of items, including food and clothing. Most communist countries today suffer severe
economic depression and citizens fear the government. Some countries even don’t allow its citizens to
practice different religions, change jobs, or move to a different town they prefer. For Example: North
Korea, Cuba, Venezuela practice Socialism. China also practices Communism but it is rapidly being open.

Advantage of communism:

 In a communist regime, people are treated equally in the eyes of the government regardless of
education, financial standing, et cetera.

 In a communist system, people are entitled to jobs. Because the government owns all means of
production, the government can provide jobs for at least a majority of the people.

 In communism, the government dictates economic structure; therefore, economic instability is

out of the question.

 In communism, there are certain laws and goals which determine resource and responsibility
allocation

 In communist societies, everyone can work harmoniously without stepping on each other's toes.

 In a communist society, the sense of cooperation allows for efficiency in resource distribution.

Disadvantage of communism:

The government owns all the businesses and properties (the means of production).

There is no freedom of speech.

Large or geographically-broad populations tend to be diverse, making it difficult to maintain a common

goal or set of rules for shared effort and resources.

Central planning is difficult to achieve.

Consumers' needs are not taken into consideration.

Productivity and efficiency are difficult to achieve without profit motive for the workers.

It is difficult to achieve internal balances between supply and demand without a price mechanism.

Mixed Economies -- Some allocation of resources is made by the market and some by the government.
Most countries don't have a name for such a system. If free-market mechanisms allocate most resources,
the leaders call their system capitalism. If the government allocates most resources, the leaders tall it
socialism. Bangladesh is a vibrant example of Mixed Economy. There are 2 major economic system those
are –

1. Free-market economies exist when the market largely determines what goods and services get
produced, who gets them, and how the economy grows. Capitalism is the popular term for this
economic system.

2. Command economies exist when the government largely decides what goods and services will be
produced, who gets them, and how the economy will grow. Socialism and communism are variations on
this economic system.

Understanding Economic System/ Key Economic Indicators:

There are 3 major economic indicators, those are-

1. Gross Domestic Product (GDP): Total value of final goods and services produced in a country in a
given year. As long as a company is within a country’s border, their numbers go into the country’s GDP
(even if they are foreign-owned). Expression under product method is, GDP=(P*Q) . Expression under
expenditure approach is, GDP=C+I+G+(X-M)

• Gross national product (GNP) is the total income earned by a country’s factors of production in a
year or a given time period, regardless of where assets are located (nations' output). Formula:
GNP=GDP+NFIA (Net Factor Income from Abroad) or, GNP=C+I+G+(X-M)+NFIA

• Net national product (NNP) is the total market value of all final goods and services produced by
residents in a country during a given time period. Formula: NNP=GNP-Depreciation or,
NNP=C+I+G+(X-M)+NFIA-Depreciation

2. The unemployment rate:

Unemployment rate is the number of civilians at least 16 years old who are unemployed and tried to find
a job within the prior four weeks. Unemployment rate is one of the most closely watched statistics
because a rising rate is seen as a sign of weakening economy that may call for cut in interest rate. A
falling rate, similarly, indicates a growing economy which is usually accompanied by higher inflation rate
and may call for increase in interest rates.

3. Inflation and price indexes:

Price indexes help gauge the health of the economy by measuring the levels of inflation, disinflation;
deflation, and Stagflation.

Business cycles:
Business cycles are the periodic rises and falls that occur in economies over time. Economist Joseph
Schumpeter identified the four phases of long-term business cycles as boom-recession-depression-
recovery:

I. An economic boom is just what it sounds like—business is booming.

2. Recession is two or more consecutive quarters of decline in the GDP. In a recession prices fall, people
purchase fewer products, and businesses fail. The recession that started in 2008 is an example.

3. A depression is a severe recession, usually accompanied by deflation. Business cycles rarely go

through a depression phase. In fact, while there were many business cycles during the 20th century,
there was only one severe depression (1930s).

4 A recovery occurs when the economy stabilizes and starts to grow. This eventually leads to an
economic boom, starting the cycle all over again.

Government economic tools:

Monetary policy:

Monetary policy is the management of the money supply and interest rates by the Federal Restive Bank.
The Fed's most visible role is the raising and lowering of interest rates. When the economy is booming,
the Fed tends to raise interest rates. This makes money more expensive to borrow. Businesses thus
borrow less, and the economy slows as businesspeople spend less money on everything they need to
grow, including labor and machinery. The opposite is true when the Fed lowers interest rates. Businesses
tend to borrow more, and the economy is expected to grow. Raising and lowering interest rates should
therefore help to control the rapid ups and downs of the economy.

Fiscal policy:

Fiscal policy refers to the federal government's efforts to keep the economy stable by increasing or
decreasing taxes or government spending. There are 2 types of fiscal policy tools, those are

1. Taxation: The first fiscal policy tool is taxation. Theoretically, high tax rates tend to slow the economy
because they draw money away from the private sector and put it into the government. High tax rates
may discourage small-business ownership because they decrease the profits businesses can earn and
make the effort less rewarding.

2. Government Spending: The second fiscal policy tool is government spending on highways, social
programs, education, infrastructure (e.g., roads and utilities), defense, and so on. The national deficit is
the amount of money the federal government spends beyond what it gathers in taxes for a given fiscal
year.

National Debts: national debt is the sum of government deficits over time. National debt is divided
generally into three categories: (1) Floating debt, (2) Funded debt, (3) Unfunded debt.

 External debt: Money borrowed by a country from foreign (usually European, North American,
or Japanese) lenders. Interest on this debt must be paid in the currency in which the loan was
made.
 Internal debt: Internal debt is the part of the total debt in a country that is owed to lenders
within the country. Internal debt's complement is external debt. Commercial banks, other
financial institutions etc.