Economics and the Economy Overview

Economics is the science of human behavior concerned with allocating scarce resources to maximize consumer satisfaction, producer profits, and social welfare.
The Economic Problem (Problem of Choice) arises due to:
- Scarcity of Means: Resources are limited relative to demand.
- Unlimited Human Wants: Wants are endless and recurring.
- Alternative Uses: Resources can be applied to different purposes.
Note: An economic problem only exists if both scarcity and alternative uses are present.

Microeconomics (from Greek "mikros"): Studies individual units like households or single consumers.
- Alternative Name: Theory of Price.
- Focus: Theory of Demand ( $P$ and $D$ have an inverse relation), Theory of Production ( $P$ and $S$ have a positive relation), Price Determination, and Distribution (Wages, Rent, Interest, Profit).
Macroeconomics (from Greek "makros"): Studies the economy as a whole or its major segments.
- Alternative Name: Theory of Income and Employment.
- Focus: Equilibrium Income/Output, General Price Level, Banking, Government stabilization, and International Trade involving Balance of Payments (BOP).
Methodological Assumptions: Micro assumes aggregate macro variables are constant; Macro assumes the distribution of micro variables remains constant.

Positive Economics: Deals with objective issues (past, present, or future) that are verifiable for truth (e.g., " $22\%$ of the population in India is poor"). Answers "what was/is/would be."
Normative Economics: Deals with opinions and value judgments that are not verifiable (e.g., "Old-age pensions should be stopped"). Answers "what ought to be."

Economy: A system within a specific area where people earn their living through mutual interdependence.
Simple Economy: Characterized by low income, limited interdependence, and a moderate degree of exchange.
Complex Economy: Characterized by high income, intense interdependence, and a very high degree of exchange.

Centrally Planned (Controlled) Economy: Resources controlled by the government to maximize social welfare (e.g., North Korea). Public sector dominates.
Market (Free) Economy: Driven by profit maximization and free market forces of demand and supply (e.g., USA). Private sector dominates.
Mixed Economy: Driven by both profit and social welfare (e.g., India). Prices are market-determined but the government regulates essential goods through systems like the Public Distribution System (PDS).