Economics : Art Or Science

A controversial topic .

An economist David Rosenberg, former chief economist at Merrill Lynch once said , “Why did God invent economists?”

“To make weathermen feel good about themselves.”

There are some reasons for this statement.

Economics cant be considered as science as Science is a systematized body of knowledge ascertainable by observation 

and experiment. It is a body of generalizations, principles, theories or laws which traces out a casual relationship 

between causes and results.

Economics can define the causes and result but cannot do so with presicion.Just cause price of sugar increase by 1 dollar does not mean price of tea will increase by 1 dollar.

Again markets are frequently ahead of, and often out of sync with, the economy.economics follows

 the market but the market does not always follow economics .

Models are of limited utility.

correlation does not always mean causation.

There are two kinds of science:

Positive Science

Normative Science or Prescriptive Science

Some claim,

Economics is a positive science because:

Firstly, economists collect the facts.

Secondly, they analyze them and derive result.

Thirdly, they determine the relationship between facts and results.

Finally, they give a title to the relationship.

Economics is normative science because:

Firstly, economists points out different economic problems.

Secondly, they analyse them in the light of statistics or facts and figures.

Finally, they advise policies, laws, theories to solve the problems.

Economics is an art because:

Economists suggest policies along with their implementation procedures to solve the economic problem.

Thus, economics is a science as well as an art.

Types of goods

Normal goods - the quantity demanded of such commodities increases as the consumer’s income increases and decreases as the consumer’s income decreases. Such goods are called normal goods.

Giffen goods - a Giffen good is an inferior good which people consume more of as price rises, violating the law of demand.. In the Giffen good situation, cheaper close substitutes are not available. Because of the lack of substitutes, the income effect dominates, leading people to buy more of the good, even as its price rises.

Substitutes goods- substitute good for another kind insofar as the two kinds of goods can be consumed or used in place of one another in at least some of their possible usesn increase in price for one kind of good (ceteris paribus) will result in an increase in demand for its substitute goods, and a decrease in price (ceteris paribus, again) will result in a decrease in demand for its substitutes.

Complementary goods - A complementary good or complement good in economics is a good which is consumed with another good;if goods A and B were complements, more of good A being bought would result in more of good B also being bought and vice versa eg car and Petrol. If the demand for car increases then the demand for petrol also increases.

Consumer surplus and price elasticity of demand

Consumer surplus and price elasticity of demand 

Inelastic Demand means fixed demand ( demand does not changes with a change in price).
When demand is inelastic, there is a greater potential of consumer surplus because there are some consumers who are willing to pay a higher price to consume that product. Whatever the price, the quantity demanded remains the same.
 

Inelastic Demand means consumers are willing to pay a higher price for buying the commodity.
Here,Consumers are willing to pay P1 for Q1 quantity of commodity.
But they actually pay P.
Here,triangle PP1AE is the consumer surplus.

Elastic Demand means flexible demand (demand changes with a change in price, law of demand follows).

When the demand for a good or service is perfectly elastic, consumer surplus is zero because with the increase in price of the commodity, the demand would decrease and vice versa. And would reduce the consumer surplus.

 

Here P is the the market price and
P1 is the price the consumer is willing to pay.
Now, suppose the price increases From P to Pn.
With the increase in price from P to Pn, Consumer surplus falls from PnPBA to PnPB1A1.

Elastic Demand means consumers are not willing to pay a higher price for buying the commodity.
With the increase in small Price, Demand will fall much more than proportion.
Here, Triangle PP1AB is the consumer surplus.

Change in Consumer Surplus: Price Increase

Consumer surplus = Amount a consumer is willing to pay – amount he actually pays

Consumer Surplus

Consumer surplus is a measure of the welfare that people gain from the consumption of goods and services with regard to the prices they pay for it.

Consumer surplus is the difference between the total amount that consumers are willing to pay and what they actually pay for a good or service (indicated by the demand curve) . Consumer surplus is a measure of welfare. 

The amount of consumer surplus can be derived from the demand curve. The price of a commodity is determined by the interaction of demand and supply curve. 

Consumers always like to feel like they are getting a good deal on the goods and services they buy and consumer surplus is simply an economic measure of this satisfaction. For example, assume a consumer goes out shopping for a CD player and he or she is willing to spend $250. When this individual finds that the player is on sale for $150, economists would say that this person has a consumer surplus of $100.

What is a Market?

A market is a place where buyers and sellers meet and interact. In today’s internet era, buyers and sellers don’t meet necessarily, but they interact and and perform their desired roles.

Market structure is best defined as the organisational and other characteristics of a market. There are some characteristics which affect the nature of competition and pricing.

The most important features of market structure are:

• The number of firms.
• The market share of the largest firms
• The nature of costs
• The degree to which the industry is integrated
• The extent of product differentiation
• The structure of buyers in the industry

Summary of market structures

Changes in Market Equilibrium

Market equilibrium refers to a situation in which quantity demanded is equal to the quantity supplied, the point at which demand and supply curve meets. 

Increase in Supply results in a right ward shift in supply curve, leading to a new equilibrium point( the intersection point of demand and new supply curve.) 

 

· With the increase in supply, supply curve shifts rightward.

· The new equilibrium point is E1

· It would result in fall in prices and increase in quanity demanded.

Increase in demand results in a right ward shift in demand curve, leading to a new equilibrium point( the intersection point of demand and new supply curve.)

· With the increase in demand, demand curve shifts rightward.

· The new equilibrium point is E1

· It would result in rise in prices and increase in quanity demanded.

Simultanous Increase in demand and supply results in a right ward shift in demand curve and supply curve, leading to a new equilibrium point( the intersection point of demand and new supply curve). The changes in both demand and supply is a real market situation, The supply and demand curve changes as a result of change in market conditions.

· With the simultaneous increase in demand and supply, demand and supply curves shift rightward.

· The new equilibrium point is E1

· Here, It would result in rise in price P1 and increase in quanity demanded Q1.

Equilibrium Price

Equilibrium Price 

Equilibrium Price refers to the the market price at which the supply of an item equals thedemand of it. equilibrium is an important concept in economics. Equilibrium price is also referred as the equilibrium output.
Market equilibrium. 
Market equilibrium occurs where the amount consumers wish to purchase at a particular price is the same as the amount producers are willing to offer for sale at that price. It is the point at which there is no incentive for producers or consumers to change their behaviour.
Equilibrium price and output are found at the point of intersection of demand and the supply curve. 

Equilibrium Point is the Point where Quantity Demanded = Quantity supplied.
( Both quantity Demanded and quantity supplied are displayed on x-axis.)

Here, P₁ is the equilibrium price. At P1,
Quantity demanded = Quantity supplied.
Q _D+S is the equilibrium level of quantity demanded and supplied

Example to Find out equilibrium Price

Given Demand and Supply functions are

Qd = 3P + 2 (1)
Qs = 10 - P (2)

In equilibrium, Qs = Qd.

And so, we can equate (1) and (2)

Qd = Qs
or 3P + 2 = 10 - P
or 3p + p = 10 - 2
or 4p =8 or p = 2

So, for the given equations, Equilibrium Price = 2

And to calculate the quantity Demanded, we will put the value of p in equation (1)
Qd = 3P + 2
= 3(2) + 2 = 8

And Qs = 8

And the equilibrium level of output is Qd = Qs = 8