(a) –Economics is the
study of how human beings make their living in order to satisfy their wants.
-Economics is
a social science which deals with behavior of people e.g. in consumption of
goods and services.
(b) The reason economics has many definitions is because of
the evolving views of the subject itself or different views among economists.
(c) Economics is split
between analysis of how the overall economy works and how single markets
function. Economic theory developed considerably between the
appearance of Smith’s The Wealth of Nations and the Great Depression,
but there was no separation into microeconomics and macroeconomics. Economists
implicitly assumed that either markets were in equilibrium—such that prices
would adjust to equalize supply and demand—or that in the event of a transient
shock, such as a financial crisis or a famine, markets would quickly return to
equilibrium. In other words, economists believed that the study of individual
markets would adequately explain the behavior of what we now call aggregate
variables, such as unemployment and output.
Microeconomics is based on models of consumers or firms
(which economists call agents) that make decisions about what to buy, sell, or
produce—with the assumption that those decisions result in perfect market
clearing (demand equals supply) and other ideal conditions. Macroeconomics, on
the other hand, began from observed divergences from what would have been
anticipated results under the classical tradition. Today the two fields coexist
and complement each other.
(d) Why professor Samuelson emphasizes on the words choose
and scarce- All human wants can’t be satisfied due to scarcity of resources. If
there are many wants and resources are scarce, choices will be made. Scarcity
is the fundamental economic problem of having seemingly unlimited
human wants and needs in a world of limited resources.
It states that society
has insufficient productive resources to fulfill all human wants and needs.
Economies of scale apply to a variety of organizational and business situations and at various levels, such as a business or manufacturing unit, plant or an entire enterprise. For example, a large manufacturing facility would be expected to have a lower cost per unit of output than a smaller facility, all other factors being equal, while a company with many facilities should have a cost advantage over a competitor with fewer.
Economies of scale often have limits, such as passing the optimum design point where costs per additional unit begin to increase. Common limits include exceeding the nearby raw material supply, such as wood in the lumber, pulp and paper industry. A common limit for low cost per unit weight commodities is saturating the regional market, thus having to ship product uneconomical distances. Other limits include using energy less efficiently or having a higher defect rate.
Physical and
engineering basis
Some of the economies of scale
recognized in engineering have a physical basis, such as the square-cube law,
by which the surface of a vessel increases by the square of the dimensions
while the volume increases by the cube. This law has a direct effect on the
capital cost of such things as buildings, factories, pipelines, ships and airplanes.
Friction loss of trains, ships and
airplanes is proportional to cross sectional area, so making these longer
results in less friction per unit of cargo volume, speed and other drag factors
being equal.
Heat losses from industrial processes
vary per unit of volume for pipes, tanks and other vessels in a relationship
somewhat similar to the square-cube law.[
Capital and operating
cost
Overall costs of capital projects are
known to be subject to economies of scale. A crude estimate is that if the
capital cost for a given sized piece of equipment is known, changing the size
will change the capital cost by the 0.6 power of the capacity ratio (the point
six power rule).
In estimating capital cost, it
typically requires an insignificant amount of labor, and possibly not much more
in materials, to install a larger capacity electrical wire or pipe having
significantly greater capacity.
The cost of a unit of capacity of many
types of equipment, such as electric motors, centrifugal pumps, diesel and
gasoline engines, decreases as size increases. Also, the efficiency increases
with size.
Operating crew size
Operating crew size for ships,
airplanes, trains, etc., does not increase in proportion to capacity.
Many manufacturing facilities,
especially those making bulk materials like chemicals, refined petroleum
products, cement and paper, have labor requirements that are not greatly
influenced by changes in plant capacity. This is because labor requirements of
automated processes tend to be based on the complexity of the operation rather
than production, and many manufacturing facilities have nearly the same basic
number of processing steps and pieces of equipment, regardless of production.
Economies of scale
and returns to scale
Economies of scale is related to and
can easily be confused with the theoretical economic notion of returns to
scale. Where economies of scale refer to a firm's costs, returns to scale
describe the relationship between inputs and outputs in a long-run (all inputs
variable) production function. A production function has constant
returns to scale if increasing all inputs by some proportion results in output
increasing by that same proportion. Returns are decreasing if, say,
doubling inputs results in less than double the output, and increasing
if more than double the output. If a mathematical function is used to represent
the production function, and if that production function is homogeneous, returns to scale
are represented by the degree of homogeneity of the function. Homogeneous
production functions with constant returns to scale are first degree
homogeneous, increasing returns to scale are represented by degrees of
homogeneity greater than one, and decreasing returns to scale by degrees of
homogeneity less than one.
It is argued that mathematics allows
economists to form meaningful, testable propositions about wide-ranging and
complex subjects which could less easily be expressed informally. Further, the
language of mathematics allows economists to make specific, positive
claims about controversial or contentious subjects that would be impossible
without mathematics. Much of economic theory is currently presented in terms of
mathematical economic models, a set of stylized
and simplified mathematical relationships asserted to clarify assumptions and
implications.
Broad applications include:
- optimization problems as to goal equilibrium, whether of a household, business firm, or policy maker
- static (or equilibrium) analysis in which the economic unit (such as a household) or economic system (such as a market or the economy) is modeled as not changing
- comparative statics as to a change from one equilibrium to another induced by a change in one or more factors
- Dynamic analysis, tracing changes in an economic system over time, for example from economic growth.
A giffen good is a consumer good for which demand rises when the price increases, and demand falls when the price decreases. This phenomenon is notable and it arises because it violates the law of demand, whereby demand should increase as price falls and decrease as price rises.
Chebyshev's inequality guarantees that in any probability distribution, "nearly all" values are close to the mean — the precise statement being that no more than 1/k2 of the distribution's values can be more than k standard deviations away from the mean (or equivalently, at least 1 - 1/k2 of the distribution's values are within k standard deviations of the mean). The inequality has great utility because it can be applied to completely arbitrary distributions (unknown except for mean and variance), for example it can be used to prove the weak law of large numbers.
In practical usage, in contrast to the empirical rule, which applies to normal distributions, under Chebyshev's Inequality just 75% of values lie within two standard deviations of the mean and 89% of values within three standard deviations.[1][2]
The term Chebyshev's inequality may also refer to the Markov's inequality, especially in the context of analysis.
The formulae: Pr(|X-A|=>KY)<=1/K2
