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Terminologies of Economics, brief explanations.

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Please explain in your own words.

1. What is economics?
2. a) What is opportunity cost?
b) Give an example of opportunity cost.
3. What is the law of demand?
4. What is a normal good?
5. What is an inferior good?
6. What is the law of supply?
7. What is a surplus?
8. What is a shortage?
9. What is a price ceiling?
10. What is a price floor?
11. a) What is a fixed cost?
b) Give an example of a fixed cost.
12. a) What is a variable cost?
b) Give an example of a variable cost.
13. What is the distinction between economic profit and accounting profit?

Various eminent economists have defined this subject in accordance with their different understanding or realization of economic problems. We have to accept this subject as a social science concerned with the attempt of the people to accommodate scarcity to their wants and how these attempts interact through exchange. But we have to memories only that which may be acceptable to all the Economists and may be explained term by term to give definition of the subject. We confine ourselves, as students, with the definitions given by Robbins, Alec Cairncross and Paul Samuelson quoted in the solution below.

Committing to memory the terminologies is important from the point of an intelligent comprehension of the subject, why any particular economic event occurs in a particular manner, when or how a solution for it could be found before it affects all of us so badly. Why the major economies are doing so poorly world over these days, adding to unemployment, accumulation of debts, and closure of factories and so on, how long it will take to recover from this cycle, what is the remedy etc.

Economics to overlaps with other subjects like Ethics, Politics, and Psychology as we have to understand how wants are met and satisfied. Ethics says it is harmful to smoke and we must give the habit. Then the manufacturing of cigarettes will stop with consequent result of unemployment in this industry. Closure of an industry is economically wrong as it has created an adverse chain reaction in agriculture, transport, advertising, packing, factories which manufacture machineries for manufacturing cigarettes.
Unemployment would have political repercussions and politicians of every hue and cry would exploit the situation in their best political interest. They will present completely different picture to the public which will resonate in the senate. Politics studies our wants from the angle of order, justice and equality. These wants should be satisfied by guiding the people in particular way.

Many people believe smoking reduces mental tension. How far it is true only psychologists can explain!

Here we must bear in mind that economic assumptions are based on motives and hence if we loose touch with reality we avoid psychology. Whether it is moral or immoral for a business man to amass wealth when millions are starving are two different questions. Businessman strives to maximize profit and his motive is to acquire power and gain social distinction. The motives become too complex. The situation has reached where the economist must seek the knowledge of Psychology.

To sum up we see that no subject can be studied in complete isolation, concentrating on one and ignoring other

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Solution Summary

.Why do we take interest in Economics more than other social sciences like Ethics, Politics or Psychology? A common man would answer that since it concerns money. But a person who has some knowledge of the subject would readily answer that really because of the implied use of money in exchange, scarcity and choice that we study it. Economics is the subject that plays important part in human affairs, the things it does to our life like baying or selling of goods, how we earn or spend it and for what, how we produce an item, arrange or organize the production of that item. At any particular moment of time I can either write this solution or play tennis but can not do both. In other words I can contribute my time effectively at only one place and that makes my labor scarce. I can use the land either for tilling or making a tennis court but in no way both. Now the land has also become scarce having alternative uses. I have accumulated vast amount of money and desire to multiply it by several times. In such a case either I can invest it in the only way I earned it or indulge in splurging in enjoying life. Well if I invest it becomes capital for some industrial unit or if splurge it becomes income for the people who render their labor/ services to me.

Here we have observed that what is true of individual is also true for the society at large, as a whole. The society faces the economic problem of making income go as far as possible

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1What is economics?

There are many definitions of the economics - shortest being by Jacob Viner that Economics is what economics does. By this definition he simply meant that it was an aggregate of all economic studies done by economists. But only that definition is worth committing to memory which may be acceptable to all the economists and secondly which may be explained term by term to give a definition of the subject.

This definition is by Robbins who defined as "Economics is the science which studies human behavior as relationship between ends and scarce means which have alternative uses".

Professor Alec Cairncross gives a compromise definition that it is a social science studying how people attempt to accommodate scarcity to their wants and how these attempts interact through exchange.

Prof Paul Anderson Samuelson has stated that Economists generally agree with the following definition:
"Economics is the study of how men and society choose with or without use of money, to employ scarce productive resources to produce various commodities over time and distribute them for consumption, now and in the future, among various people and groups in society."

2. a) What is opportunity cost?
b) Give an example of opportunity cost.

To an economist some of the most important costs to doing one thing rather than leaving other originate from forgone opportunities that have to be sacrificed in doing this one thing. It has to be at the cost of other thing.
Now sacrificing this one thing at the cost of other is known as "Opportunity Cost". It is nothing but substitution of alternatives in the ...

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