In a market economy, commerce and customers make a decision of their own decision what they will consume and manufacture, and in which conclusions on the allotment of those sources are without government interference. Hypothetically this denotes that the manufacturer is required to decide what to produce, how much to produce, what prices to set up for consumers for those productions, what to pay workers, and so on. These conclusions in a market financial system are impacted by the forces of competition, supply, and demand. This is frequently distinguished with a premeditated economy, where central government concludes what will be manufactured and in what amounts. A market economy is also compared with the mixed economy where there are market processes through the system of markets that is not completely free but under some state control that is not widespread enough to comprise a deliberate financial system. In reality, there is Continue reading
Economics Concepts
The Diamond-Water Paradox in Economics
The concept of the value of goods was one of the most actively discussed topics by economists in the 18-19th century. In “A Study of the Nature and Causes of the Wealth of Nations,” published in 1776, Adam Smith voiced the question that would later become known as the diamond-water paradox. It sounded like this: “There is nothing more useful than water: but you can hardly buy anything with it… Diamond, on the contrary, has almost no use-value; but a very large number of other goods can often be obtained in exchange for it”. The classical economists Adam Smith and Karl Marx considered a product’s value concerning how it satisfies a human need. The price was associated with the effort and labor expended to meet a specific demand. Besides, classical economists used the concepts of use-value and exchange-value, which determine the nature and exchange value of products. Later, in the Continue reading
Econometric Forecasting Models
Econometric model building holds considerable promise as a method of forecasting demand. The best starting point towards an understanding of the basis of econometric forecasting is regression analysis. But the difficulty with regression analysis is that it is used to forecast a single dependent variable based on the value and the relations between one or more independent variables and each of these independent variables is assumed to be exogenous or outside the influence of the dependent variable. This may be true in many situations. But unfortunately, in most broad economic situations an assumption that each of the variable, is independent is unrealistic. For example, let us assume that demand is a function of Gross National Product (GNP), price and advertising. In regression terms we would assume that all three independent variables are exogenous to the system and hence are not influenced by the level of demand itself or by one Continue reading
Keynesian View of Inflation
John Maynard Keynes, one of the most influential economists of the 20th century, relates inflation to a price level that comes into existence after the stage of full employment. While, the quantity approach emphasizes the volume of money to be responsible for rise in the price level. Keynes distinguishes between two types of rise in prices (1) rise in prices accompanied by increase in production, and (2) rise in prices not accompanied by increase in production. If an economy is working at a low level, with a large number of unemployed men and un-utilized resources then expansion of money or some other factors leading to an increase in demand will result not only in a rise in the price level but also rise in the volume of goods and services in an economy. This will continue until all unemployed men find employment and capital and other resources are more Continue reading
Meaning of Profit in Economics
Profit means different things to different people. The word ‘profit’ has different meanings to business, accountants, tax collectors workers and economists. In a general sense, profit is regarded as income of the equity shareholders. Similarly wages getting accumulated of a labor, rent accruing to the owners of any land or building and interest getting due to the investors capital of a business, are a kind of profit for labors, land owners and investors. To an accountant, profit means the excess of revenue over all paid out costs including both manufacturing and overhead expenses. It is much similar to net profit. In economics, profit is called pure profit, which may be defined as a residual left after all contractual costs have been met, including the transfer costs of management insurable risks, depreciation and payment to shareholders, sufficient to maintain investment at its current level. Profit is usually perceived as earnings and Continue reading
Government – Meaning and Roles
Government is one of humanity’s oldest and most important institutions. Since the early times, some kind of government has been an important source in the society. Every society needs some people to make and enforce decisions upon the society and the government refers to the process of exercising power in a group. Government generally means the public government as of a nation, state, province, country, city or village. Government affects the activity of every human in important ways. Form of government refers to the set of political institutions by which a government of a state or a country is organized. Each successive government is composed of a body of individuals who control and exercises control over political decision-making. Their function is to make and enforce laws and arbitrate conflicts. In some countries and states this group is often of hereditary class and in some of democracy, where political roles remain Continue reading