Economics

Economics

Economics, Business, Finance information for online study; you can learn about economics and related subjects, self-study and e-Learning courses about economics.

Economics, Finance, Business

Robbins’ most famous book was An Essay on the Nature and Significance of Economic Science, one of the best-written prose pieces in economics. That book contains three main thoughts. First is Robbins’ famous all-encompassing definition of economics that is still used to define the subject today: “Economics is the science which studies human behavior as a relationship between given ends and scarce means which have alternative uses.”

Finance is defined by various groups of people in many ways. Although, it is difficult to give a complete definition of finance after the selected statements, but this will help you to reduce its broad meaning.

"It is an easy task to provide necessary funds (money) by the business of finance, companies, firms, individuals and other institutions, which is best suited for achieving their financial objectives." Managing finance funds and other valuables, which can easily be converted into cash."

A simple business is to say that business occurs when a person or organization profits by providing goods or services in exchange for money.

According to well-known professors William Pride, Robert Hughes, and Jack Kapoor, business is 'the organized effort of individuals to produce and sell, for a profit, the goods and services that satisfy society's needs.' A business, then, is an organization which seeks to make a profit through individuals working toward common goals. The goals of the business will vary based on the type of business and the business strategy being used. Regardless of the preferred strategy, businesses must provide a service, product, or good that meets a need of society in some way.

Stephenson defines business as, "The regular production or purchase and sale of goods undertaken with an objective of earning profit and acquiring wealth through the satisfaction of human wants."

According to Dicksee, "Business refers to a form of activity conducted with an objective of earning profits for the benefit of those on whose behalf the activity is conducted."

at the individual level, while macroeconomics looks at the decisions that affect entire countries and society as a whole. Microeconomics focuses on supply and demand and other forces that determine the price levels seen in the economy.

Markets

Monopolistic Competition

Monopolistic competition also refers to a market structure, where a large number of small firms compete against each other. However, unlike in perfect competition, the firms in monopolistic competition sell similar, but slightly differentiated products. This gives them a certain degree of market power which allows them to charge higher prices within a certain range.
Monopolistic competition builds on the following assumptions: (1) all firms maximize profits (2) there is free entry and exit to the market; (3) firms sell differentiated products (4) consumers may prefer one product over the other. Now, those assumptions are a bit closer to reality than the ones we looked at in perfect competition. However, this market structure will no longer result in a socially optimal level of output, because the firms have more power and can influence market prices to a certain degree.
An example of monopolistic competition is the market for cereals. There are a huge number of different brands (e.g. Cap’s Crunch, Lucky Charms, Foot Loops, Apple Jacks). Most of them probably taste slightly different, but at the end of the day, they are all breakfast cereals.

Monopsony

Market systems are not only differentiated according to the number of suppliers in the market. They may also be differentiated according to the number of buyers. Whereas a perfectly competitive market theoretically has an infinite number of buyers and sellers, a monopsony has only one buyer for a particular good or service, giving that buyer significant power in determining the price of the products produced.

Oligopoly

An oligopoly is similar in many ways to a monopoly. The primary difference is that rather than having only one producer of a good or service, there are a handful of producers, or at least a handful of producers that make up a dominant majority of the production in the market system. While oligopolists do not have the same pricing power as monopolists, it is possible, without diligent government regulation that oligopolists will collude with one another to set prices in the same way a monopolist would.

In a Nutshell

There are four basic types of market structures: perfect competition, imperfect competition, oligopoly, and monopoly. Perfect competition describes a market structure, where a large number of small firms compete against each other with homogenous products. Meanwhile, monopolistic competition refers to a market structure, where a large number of small firms compete against each other with differentiated products. An Oligopoly describes a market structure where a small number of firms compete against each other. And last but not least a monopoly refers to a market structure where a single firm controls the entire market.

Monopoly

A monopoly is the exact opposite form of market system as perfect competition. In a pure monopoly, there is only one producer of a particular good or service, and generally no reasonable substitute. In such a market system, the monopolist is able to charge whatever price they wish due to the absence of competition, but their overall revenue will be limited by the ability or willingness of customers to pay their price.

Production, Cost and Efficiency

Production costs are often classified as direct or indirect product costs. For example, direct materials and direct labor are direct product costs because they can be easily and economically traced to the products being manufactured. On the other hand, manufacturing overhead costs are indirect product costs because they are not easily or economically traceable directly to the products. Instead, the manufacturing overhead costs must be allocated or assigned to the products often through a predetermined overhead rate.

Production refers to the transformation of inputs into outputs (or products). An input is a resource that a firm uses in its production process for the purpose of creating a good or service. A production function indicates the highest output (Q) that a firm can produce for every specified combinations of inputs (physical relationship between inputs and output), while holding technology constant at some predetermined state. Mathematically, we represent a firm’s production function as: Q = f (L, K) 
Assuming that the firm produces only one type of output with two inputs, labor (L) and capital (K)

The Production Function. The quantity of output is a function of, or depends on, the quantity of labor and capital used in production. Output refers to the number of units of the commodity produced. Labor refers to the number of workers employed. Capital refers to the amount of the equipment used in production. We assume that all units of L and K are homogeneous or identical. Technology is assumed to remain constant during the period of the analysis Q = f (L, K)

Supply and Demand

Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand.

The relationship between demand and supply underlie the forces behind the allocation of resources. In market economy theories, demand and supply theory will allocate resources in the most efficient way possible. How? Let us take a closer look at the law of demand and the law of supply.

a) The Law of Demand

The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more. The chart below shows that the curve is a downward slope.

b) The Law of Supply

Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at higher price increases revenue.

Firms

Company law distinguishes a few types of firms according to how profits or losses earned by the firm are distributed, including:

Partnership: There are several owners of the firm that are permitted to share in any profits generated by its business and are equally liable for all its losses.

Limited liability Company (LLC): An entity that the law defines as owning the profits which may then be redistributed to those who own the company, called shareholders. In a limited liability company, shareholders are only liable for losses up to the stake they hold in the company.

Co-operative: Owned and operated by its members. Typically, it redistributes profits to those members.

Q1 = Profit maximization (MR=MC)
Q2 = Revenue Maximization (MR=0)
Q3 = Marginal cost pricing (P=MC) – locative efficiency
Q4 = Sales maximization – maximum sales while still making normal profit (AR=ATC)

Market Failure

When there is only one buyer or seller in the market, that firm can set the price of the product or the quantity supplied. Many countries have a limit on how much market share one firm can have or how big they can become. Negative Externalities occur when the production or consumption of a good or service causes the social cost to exceed the private cost. Positive Externalities occur when the production or consumption of a good or service causes the social benefit to exceed the private benefit. These are goods that can’t exclude people, i.e., if it’s produced then anyone can consume it, and one person consuming the good doesn’t decrease the availability of the good for someone else. Ex: Street lights or lighthouse. Public goods cause market failure because people don’t reveal their true preferences. People know that they will get it for free and someone else can pay. So the government usually ends up producing the good. One party has material information that the other does not, or both parties lack material information that would affect whether or not the trade occurs, or for what price it occurs.

Positive externalities are benefits that are infeasible to charge to provide; negative externalities are costs that are infeasible to charge to not provide. Ordinarily, as Adam Smith explained, selfishness leads markets to produce whatever people want; to get rich; you have to sell what the public is eager to buy. Externalities undermine the social benefits of individual selfishness. If selfish consumers do not have to pay producers for benefits, they will not pay; and if selfish producers are not paid, they will not produce. A valuable product fails to appear. The problem, as David Friedman aptly explains, “Is not that one person pays for what someone else gets but that nobody pays and nobody gets, even though the good is worth more than it would cost to produce.”

Macroeconomics

Macroeconomics studies about the overall working of a national economy. It is more focused on the big picture and analyzing things such as growth, inflation, interest rates, unemployment, and taxes. When you hear the Federal Reserve is raising interest rates or that the national unemployment rate is 7.5%, you are hearing about macroeconomic topics.

It is also to say study of the behavior of a national or regional economy as a whole. It is concerned with understanding economy-wide events such as the total amount of goods and services produced the level of unemployment, and the general behavior of prices.

Areas of Finance

Finance is one of the most important functional areas of business and within a firm. It joins other functional areas like marketing, operations technology, and management as key areas of business. Business owners and business managers have to have at least a basic understanding of finance even if they outsource certain areas of their financial operations. The goal of this article is to help you understand the three areas of finance and their relationship to your company.

Personal Finance

Personal finance is defined as the management of money and financial decisions for a person or family including budgeting, investments, retirement planning and investments. A financial plan is absolutely essential in helping you reach your financial goals. The plan should have multiple steps or milestones. A sample plan might include getting control of your budget, creating a spending plan, then getting out of debt.

Corporate Finance

Corporate finance jobs involve working for a company in the capacity of finding and managing the capital necessary to run the enterprise. This is done while maximizing corporate value and reducing financial risk.

The functions you may implement while in such a position include:

  • Setting up a company's overall financial strategy
  • Forecasting profits and losses
  • Negotiating lines of credit
  • Preparing financial statements
  • Coordinating with outside auditors

More sophisticated corporate finance jobs might involve merges activity, such as calculating the value of an acquisition target or determining the value of a division for a spinoff.

Investment Banking

Some of the most glamorous – and intense – financial careers are jobs in investment banking. Investment banking firm deal with facilitating the issuance of corporate securities and making these securities available for investors to purchase, all while trading securities and providing financial advice to both corporations and wealthy individual investors.

Typically, investment banking firms have a number of divisions and groups with many different objectives and responsibilities. Working in a traditional investment banking firm would allow you to interact with issuers of securities, mergers and acquisitions professionals, or the trading desk, which trades stocks, bonds and other securities in the secondary market.

Capital

Capital is how companies invest in their businesses. They can't use the money to give themselves raises, increase dividends, or lower prices. They must use it to produce greater gains in the future. A business uses capital to transform itself into something more profitable. Capital (aka owner's equity) on the other hand, refers to money invested by the proprietor or owner(s) of the business. It is actually an internal liability with reference to the 'business entity' concept of accounting.

Capital is a large sum of money which you use to start a business, or which you invest in order to make more money. You can use capital to refer to buildings or machinery which are necessary to produce goods or to make companies more efficient, but which do not make money directly.

Classification of Business

Industry: Industry implies the economic activities that are associated with the conversion of resources into goods that are ready for use. This involves production, processing, mining of goods. The industry is further divided into three broad categories; primary industry, secondary industry and tertiary industry.

Commerce: In simple terms, commerce refers to the buying and selling of goods for value, and includes all those activities which facilitate the transaction. Further, commerce encompasses two types of activities, trade and auxiliaries to trade.

From the past few years, the entire concept of business has undergone a drastic change, i.e. it has been turned from producer oriented activity to consumer-oriented activity. Previously, the approach is ‘to sell what is produced’, but now the approach is ‘to produce what is demanded’.

Activities of Business

Major activities of business are following…

Human Resources

Even in well-ordered businesses, a number of human resource tasks need attention. If you lack a dedicated HR person in your business, that leaves employee acquisition in your hands or those of of your managers. You must conduct interviews, hire applicants and determine what benefit packages, if any, your company will offer. You will also need to address any interpersonal conflicts that crop up in the normal course of business.

Accounting

In essence, accounting boils down to tracking the money you take in and the money you spend. For businesses that deal in a small number of transactions per week or month, periodic data entry may be sufficient. Retail businesses with a high number of transactions typically call for daily accounting. Keeping up to date on expenditures and income allows you to see where you make the most and where your business loses money.

Budgets

As a part of managing your finances, implementing a budget can help you keep costs down. For smaller businesses, budgets may consist of little more than a monthly allotment to cover overhead, insurance and payroll. In larger businesses, where multiple departments may engage in long-term projects, you may need to set out fairly complicated allotment on an annual basis. Your budget should include expected revenue and costs that you update monthly or more often, based on any new information.

Networking

I have a confession. I don't like the word "networking." The idea of "networking" as popularly conceived, seems smarmy and artificial. But we're stuck with the word. And we still need to network. To paraphrase John Donne, "no entrepreneur is an island." You can probably look at each business that you've started (or want to start), and identify someone--a key connection--that helped to make it successful.

You'll make connections like these in the most unlikely places, so it pays to be social. "Networking events" aren't the only times that you should be networking.

Sales

Sales are the heart of all businesses. Depending on the industry you work in, sales may hinge on a dedicated sales team that develops prospects into clients, performs demonstrations and maintains contact with your existing client base. In some cases, you may fill the role of primary salesperson for your business by dealing with new client acquisition. As with the other aspects of business, this is best handled by scheduling an allotted amount of time each day or week to specifically handle sales-oriented tasks.

Business Management

When planning out your business, you’ve probably created plenty of short-term and long-term goals, but have you planned out any medium-term goals? A plan should contain:

A long-term vision and mission - the future state you want your career to be and how you achieve it, based on your professional values.

A series of medium-term objectives in support of that vision. These are the three to five year milestones and goals that serve as the stepping-stones to that vision.

Short-term "plateaus" you can seek -- skills, experiences, or accomplishments you can seek in the one year to 18 month timeframe to help you achieve the medium-term objectives.

No matter what stage your startup is currently in, you can never stop listening to your customers. As Johnson states, “Customers have the most relevant ideas, the most immediate feedback, they are increasingly happy to help (through social media) and they pay the bills. So put in place a formal approach to listening to customers all the time and acting on their input.”

A mentor with experience as an entrepreneur or business executive can take a lot of weight off your shoulders. You have the benefit of their experiences and the advice of someone who has been there before.

I can’t emphasize this enough; having team members who are smarter than you is essential for a fast growing company. It will be your team, not just simply your product and business strategy, that will steer your company to success.

Organization and Regulation of Business

Among the ever-changing regulations in business are employment laws. These laws pertain to minimum wages, benefits, safety and health compliance, work for non-U.S. citizens, working conditions, equal opportunity employment, and privacy regulations--and cover the largest area of subjects of all the business regulations. Several employment regulations stand out as the heavy hitters among the others.

The 1938 Fair Labor Standards Act, applied by the Wage and Hour Division, is still in effect today and was last updated in 2017. It covers setting the national minimum wage, overtime, record keeping and child labor laws that cover employees in the private sector as well as federal, state and local governments. The carbon footprint and the effect of businesses on the environment is regulated by the Environmental Protection Agency alongside state agencies. The EPA enforces environmental laws passed by the federal government through educational resources, frequent inspections and local agency accountability. Sensitive information is usually collected from employees and customers during hiring and business transactions, and privacy laws prevent businesses from disclosing this information freely. Information collected can include social security number, address, name, health conditions, credit card and bank numbers and personal history. Not only do various laws exist to keep businesses from spreading this information, but people can sue companies for disclosing sensitive information.

The Safety and Health Act of 1970 ensures that employers provide safe and sanitary work environments through frequent inspections and a grading scale. A company must meet specific standards in order to stay in business. This regulation has changed frequently throughout the years alongside the changing sanitary and workplace standards.

In accordance with the 1970 act, employers must provide hazard-free workplaces, avoiding employee physical harm and death, through a number of procedures.

Three organizations oversee workplace health and safety:

  • Occupational Safety and Health Administration (OSHA)
  • Mine Safety and Health Administration (MSHA)
  • Wage and Hour Division (rules for employee children under age 18)

Financial Theory

Numerous economists have explained the role of finance in the market with the help of different finance theories. The concept of finance theory involves studying the various ways by which businesses and individuals raise money, as well as how money is allocated to projects while considering the risk factors associated with them.

The concept of finance also includes the study of money and other assets, managing and profiling project risks, control and management of assets, and the science of managing money. In simple terms, financing also means provision and allocation of funds for a particular business module or project.

There are a number of finance theories that offer separate approaches to the finance hypotheses. The Arbitrage Pricing Theory, for example, addresses the general theory of asset pricing.

Proper asset pricing is necessary for the proper pricing of shares.

The Arbitrage Pricing Theory states that the return that is expected from a financial asset can be presented as a linear function of various theoretical market indices and macro-economic factors. Here it is assumed that the factors considered are sensitive to changes, and that is represented by a factor-specific beta coefficient.

The Prospect Theory, on the other hand, takes into consideration the alternatives that come with uncertain outcomes. The model is descriptive by nature and attempts to represent real-life choices but not optimal decisions.

International Economics

International economics deals with the economic activities of various countries and their consequences. In other words, international economics is a field concerned with economic interactions of countries and effect of international issues on the world economic activity. It studies economic and political issues related to international trade and finance. International trade involves the exchange of goods or services and other factors of production, such as labor and capital, across international borders. On the other hand, international finance studies the flow of financial assets or investment across borders.

International trade and finance became possible across nations only due to the emergence of globalization. Globalization can be defined as an integration of economics all over the world. It involves an exchange of technological, economic, and political factors across nations due to advancement in communication, transportation, and infrastructure systems. With the advent of globalization, there is a rapid increase in the free flow of goods and services, capital, labor and finance between nations. The consequences of globalization can be negative or positive.

Concept of Economics

International economics refers to a study of international forces that influence the domestic conditions of an economy and shape the economic relationship between countries. In other words, it studies the economic interdependence between countries and its effects on economy.

The scope of international economics is wide as it includes various concepts, such as globalization, gains from trade, pattern of trade, balance of payments, and FDI. Apart from this, international economics describes production, trade, and investment between countries.

International economics has emerged as one of the most essential concepts for countries. Over the years, the field of international economics has developed drastically with various theoretical, empirical, and descriptive contributions.

Generally, the economic activities between nations differ from activities within nations. For example, the factors of production are less mobile between countries due to various restrictions imposed by governments.

The impact of various government restrictions on production, trade, consumption, and distribution of income are covered in the study of internal economics. Thus, it is important to study the international economics as a special field of economics.

Development Economics

Economic development is about the transition of whole economies from low-productivity, poor places into high-productivity industrial economies. This transition encompasses several aspects: a move out of agriculture and into manufacturing or services, urbanization, declining fertility rates, integration with global markets. The quality of development projects depends in part on how well grounded project preparation is in knowledge about what works and what does not. Development practitioners need to be well informed if their projects are to have impact. They enact laws, shape and review development policies, and hold governments accountable for World Bank-financed programs. This applies for the landlocked Himalayan kingdom of Bhutan. The role of its parliament has been increasing since the country’s successful transition from monarchy to constitutional monarchy in 2008. Through its engagement with these elected representatives, the World Bank effectively integrates citizen voice in its programs to achieve lasting and inclusive development results.

Economic Systems

Economic systems are the means by which countries and governments distribute resources and trade goods and services. They are used to control the five factors of production, including: labor, capital, entrepreneurs, physical resources and information resources. In everyday terms, these production factors involve the employees and money a company has at its disposal, as well as access to entrepreneurs, the people who want to run companies or start their own businesses. The physical materials and resources needed to run a business, along with the data and knowledge companies use to be successful, are also factors in production. Different economic systems view the use of these factors in different ways.

Traditional Economic System

A traditional economic system is the best place to start because it is, quite literally, the most traditional and ancient type of economy in the world. There are certain elements of a traditional economy that those in more advanced economies, such as Mixed, would like to see return to prominence.

Market Economic System

A market economy is very similar to a free market. The government does not control vital resources, valuable goods or any other major segment of the economy. In this way, organizations run by the people determine how the economy runs, how supply is generated, what demands are necessary, etc.

Command Economic System

In a command economic system, a large part of the economic system is controlled by a centralized power. For example, in the USSR most decisions were made by the central government. This type of economy was the core of the communist philosophy.

Since the government is such a central feature of the economy, it is often involved in everything from planning to redistributing resources. A command economy is capable of creating a healthy supply of its resources, and it rewards its people with affordable prices. This capability also means that the government usually owns all the significant industries like utilities, aviation, and railroad.

Mixed Economic System

A mixed economic system (also known as a Dual Economy) is just like it sounds (a combination of economic systems), but it primarily refers to a mixture of a market and command economy (for obvious reasons, a traditional economy does not typically mix well). A mixed economy is a combination of different types of economic systems. This economic system is a cross between a market economy and command economy. In the most common types of mixed economies, the market is more or less free of government ownership except for a few key areas like transportation or sensitive industries like defense and railroad.

However, the government is also usually involved in the regulation of private businesses. The idea behind a mixed economy was to use the best of both worlds – incorporate policies that are socialist and capitalist.

To a certain extent, most countries are mixed economic system. For example, India and France are mixed economies.

Related Subjects

Basic related subjects of economics, finance and business are following:

  1. Psychology
  2. Sociology
  3. Political
  4. Science
  5. Decision Sciences
  6. Economics
  7. Statistics
  8. Mathematics

Note: These subjects have awesome combinations each other for your career.