Economics is a branch of science concerned with social relations that develop in the system of economic activity of a society. These are production, distribution, exchange, consumption and accumulation of goods and services, as well as the management of these processes. Economics aims at the satisfaction of a growing number of needs taking into account that resources are limited.
Branches of Economics
Generally economics is divided into two types that are macroeconomics and microeconomics.
Macroeconomics studies the behavior of the general economy of a country and the world, economic expansion and stagnation, economic growth and cycle, inflation, as well as market systems and unemployment.
Macroeconomics observes global economic problems that cannot be untangled at the microeconomics level. Some of them are:
- determination of economic growth and factors influencing it;
- trade balance;
- currency circulation;
- organization of the government's balance sheet.
Macroeconomics distinguishes four economic agents. Households are the main consumers of goods and services, they earn salaries and wages, pay taxes to the government and instead receive transfer payments such as retired pay, grants, etc. Companies are the second agent that produces goods and services in order to get profit, they also pay taxes and salaries to their employees. The third agent which deals with production and distribution of public goods, pays transfers to households and subsidies to firms and makes purchases on the goods market is the state. Last but not least is foreign sectors which includes international trade and capital circulation.
Microeconomics studies how economic decisions are made by individuals; the way of consumers’ purchase decision making; firms production planning; working time evaluation; how decisions result in an overall market equilibrium that determines the price level, etc. The crucial question of microeconomics is to define goods capacity level and price of the end products, resources allocation and the impossibility of absolute abundance.
Within the microeconomic models it is assumed that agents make a choice of the best option in terms of some criteria for the limited resources usage. Microeconomics states: the behavior of economic agents is rational or boundedly rational. Irrational choice is studied as part of behavioral economics.
Systems of economy
The economic system is a set of principles and rules, which determine the form of the main economic relations emerging in the process of production, exchange, distribution and consumption of goods and services.
The purpose of the economic system is to efficiently organize relations between consumer and producer.
Economic system can be characterized by:
- forms of ownership;
- limited resources distribution pattern;
- the ways of regulating the economy.
Traditional economy is described as an economic system, in which customs define the way resources will be utilized. It usually uses extensive development that includes land fields and workforce enlargement. There is no private ownership as all property belongs to the commune.
Market-oriented economy upraises with the appearance of private property. It differs from the previous one not only in the form of the ownership but also in the existence of competition. It is based on the principles of free enterprise, competition, as well as on contractual relations between business entities. Government interference in economic activity is limited.
Centrally-controlled economy is a contradiction of the market-oriented economy. Here almost all of the economic resources are state-owned and the economy is managed through a state plan. State owns all possessions and controls manufacturers.
Mixed economic system. This structure combines elements from centrally-controlled and market-oriented economic systems. The state and the private sector play an important role in the production, distribution, exchange, and consumption of all resources and material goods.
Indexes of Economics
They are characteristics that demonstrate the economic performance of a country in a particular sphere and specified period of time (week, month, quarter, year). These indicators help to identify the approach of negative changes in the financial sector of the country. Among the many economic elements it is worth considering the most common ones.
National income. It is a macroeconomic parameter that shows the income of the citizens of the country for a certain period of time.
GNP (gross national product) - the value of the volume of products and services related to the national economy (both within the country and abroad).
GDP (gross domestic product) shows the total value of all services and goods produced in the national economy over a certain period of time.
Economic growth. The monthly published calculation of this value is based on GDP. It shows the upswing or contraction of the economy.
Unemployment rate shows the number of people who are part of the economically active population and are able and willing to work, but cannot find any job.
National wealth. This value for a certain period of time reflects all the benefits of society and the country as well. When calculating the index, human and natural resources, social and productive capital are taken into account.
Schools of Economics
There are eight schools in economics. They started to develop in the 16th-17th centuries and can be compared as stages of evolution of economics.
Mercantilism. This school was formed in the 16-17 centuries. It was the first serious formation of economic theory as a science. Proponents said that it was necessary to accumulate wealth in order to maintain the economy of the country, they encouraged export and supported producers. By wealth mercantilists meant metals such as gold and silver. They could also be obtained through foreign trade. T. Man, A. Monctrétien and others actively supported this school of economics.
Physiocracy. The School of the Physiocrats was formed in the 18th century. The essence of the theory consisted in the fact that the economy of the country could be developed only by means of farming, while the production had no influence whatsoever. The physiocratic school of economics consisted mainly of major farmers of the time.
School of political economy (classical). Proponents of this movement of economics believed that there was a natural order to the economy so there was no need for market regulation by the government. The basis of the theory is that the state has minimal interference in the market, only free pricing can give a developed economy.
Marxism. The founder of the school is rightly considered Karl Marx, the period of the late 19th century - early 20th century. According to this theory of economics, material production is the basis of society's development. The essence of the theory is the construction of the state, where there is no private property, labor is distributed equally, full employment and decision-making is made by the state.
Marginism. Marginists came to the conclusion that consumer choice depends on the degree of importance of the purchased good or service for a given consumer, the level of saturation and quantity of these goods, and the possibility of their reproduction. The acuteness of the need for this or that good is unequal, there is a kind of hierarchy of needs. Proponents of the theory were Menger, Wieser, Walras.
Neoclassical school of economics. Proponents thoroughly analyzed how supply and demand develop and interact, introduced the concept of elasticity of demand, and proposed their own "compromise" theory of price. Representatives of the school: Alfred Marshall, Arthur Pigun, late 19th century, early 21st century.
Keynesianism. The founder of the theory John Keynes, 20th century - early 21st century. He believed that the market system is inherently disequilibrium, so it needs strict government regulation. The state increases the money supply, reduces interest rates; lack of demand is compensated by public works and budget financing.
Institutionalism. Founder, John Galbraith, late 20-early 21 century. In this theory, the main role in economics is attributed to institutions, which also act in the market for international trade. It is impossible to analyze the behavior of an economic entity without the environment considering.
Neoconservatism. Founder Milton Friedman, late 20th - early 21st century. Economics studies large-scale economic phenomena as well as those economic choices made by small economic units, such as households, firms, and economic markets.The theory boils down to the fact that the competitive market is the best form for the economy of the country, the state is only supposed to provide normal conditions in a competitive environment, the market is self-regulating.