Principle of Economics

Principle of Economics

Economic laws tell us how man behaves under certain conditions. They also provide us an idea about the results likely to follow those conditions. For example, a fall in price is accompanied by an extension in demand. According to Alfred Marshall, ‘laws or statements of economic tendencies are those social laws which relate to branches of conduct in which the strength of motives chiefly concerned, can be measured by a money price.’ As the economic phenomena are complex and varied, a number of factors influence the formulation of the basic principles, which are nothing but generalizations and are also called laws.

In other words, the fundamental assumption of economic analysis is that every individual acts in a sensible manner, and there is a balance of marginal costs and marginal gains. Sensible conduct leads to a maximum gain of money.

Thus, there are four fundamental and important assumptions on which all economic laws are formulated. They are as follows:

  1. Maximum satisfaction: This broadly relates to the human activities or attempts which are concerned with deciding the preferences of innumerable wants on the basis of degree of their urgency, and allocate available resources which are scarce.
  2. Man is a rational being: It indicates that the person behaves rationally while deciding his preferences. He does not behave on the basis of impulses while making a choice between his wants, and allocating resources to satisfy those wants.
  3. Average man: This is the term which explains the economic motives and activities of a group of people. If we wish to find out the total market demand for any particular commodity, it is necessary to consider the demand of an average consumer for that commodity and then multiply it by the total number of consumers in the market.
  4. Other things being constant: The term ‘other things’ refers to income, taste, price, fashion, prices of substitute goods in the market, etc. These factors are assumed to be constant so that the correct analysis of the economic activity can be made.

Types of Economics

Basically, there are two types of economics:

  • Internal Economics
  • External Economics

Internal economics:

  • Technical Economies: It is concerned with the size of the firm, superior technique, or increased specialization.
  • Managerial Economics: It arises by creating special departments or functional specializations. It is useful when production is taken on a large-scale.
  • Commercial Economies: Purchase of material and goods, greater bargaining power in case of large purchases, and concessions in transport.
  • Financial Economies: Big firms enjoy the position of better creditworthiness and can borrow money at a favorable rate of interest.
  • Risk-Bearing Economies: A big firm can spread the risks over a larger area by diversifying output.

External economics:

  • Economics of concentration (advantages of localization)
  • Economics of information: Publications, technical journals, and central research institutes are some of the examples.

It can be further classified on the basis of the scope of the study.

Macroeconomics and Microeconomics

Macroeconomics deals with the study of the whole economic system, while microeconomics is the study concerned with the innumerable decision-making units which constitute the whole economic system. In other words, it can be said that microeconomics deals with a particular individual, household, or industry, or with the problems of individual firms of economic distribution. It tries to explain the motives, behavior of individual consumers, the growth, and/or decline of individual firms.

Macroeconomics is concerned with the overall dimensions of economic life in a country, i.e. with the aggregate volume of income, output, consumption, demand, supply, saving, investment, and employment. In short, it is concerned with the overall performance of an economy. The basic concepts include gross domestic product (GDP), national income, national consumption, expenditure and investment, demand and supply, price and employment, etc.