Economics studies how people, businesses and governments use limited resources to meet unlimited wants. Lok Sewa papers ask about famous definitions, the law of demand and supply, factors of production, types of market and economic systems. This note explains each concept in simple words with the names and dates you need to remember.
1. Definitions of economics
| Economist | Definition (type) | Book and year |
|---|---|---|
| Adam Smith | Science of wealth (wealth definition); called the father of economics | An Inquiry into the Nature and Causes of the Wealth of Nations, 1776 |
| Alfred Marshall | Study of mankind in the ordinary business of life (welfare definition) | Principles of Economics, 1890 |
| Lionel Robbins | Science of human behaviour as a relationship between ends and scarce means with alternative uses (scarcity definition) | An Essay on the Nature and Significance of Economic Science, 1932 |
| Paul Samuelson | Study of how society uses scarce resources over time (growth definition) | Economics, 1948 |
The main economic problem is scarcity: wants are unlimited but resources are limited, so we must choose. The value of the next best option given up is called opportunity cost.
2. Microeconomics and macroeconomics
| Microeconomics | Macroeconomics |
|---|---|
| Studies individual units: a consumer, a firm, one market | Studies the whole economy: national income, inflation, unemployment |
| Price theory | Income and employment theory |
| Example: price of rice in a market | Example: GDP growth of Nepal |
The terms were first used by Ragnar Frisch (1933). J. M. Keynes, author of The General Theory of Employment, Interest and Money (1936), is called the father of modern macroeconomics.
3. Demand and supply
- Demand is the desire for a good backed by the ability and willingness to pay at a given price and time.
- Law of demand: other things remaining the same, when price rises, quantity demanded falls, and when price falls, quantity demanded rises. The demand curve slopes downward.
- Factors affecting demand: price of the good, consumer income, prices of related goods (substitutes and complements), tastes, population and expectations.
- Supply is the quantity sellers are willing to sell at a given price and time.
- Law of supply: when price rises, quantity supplied rises. The supply curve slopes upward.
- Equilibrium price is where demand equals supply.
- Elasticity of demand measures how much demand changes when price or income changes.
- Law of diminishing marginal utility: each extra unit consumed gives less satisfaction than the one before.
4. Factors of production
| Factor | Reward (income) |
|---|---|
| Land (all natural resources) | Rent |
| Labour (human effort) | Wage |
| Capital (man-made means of production) | Interest |
| Organisation / entrepreneur (takes risk) | Profit |
5. Types of market
| Market | Features |
|---|---|
| Perfect competition | Many buyers and sellers, identical goods, free entry and exit; firms are price takers |
| Monopoly | One seller, no close substitutes; seller sets the price |
| Duopoly | Two sellers |
| Oligopoly | A few large sellers (e.g. telecom, fuel companies) |
| Monopolistic competition | Many sellers with slightly different (branded) products, e.g. soap or tea |
6. Economic systems
| System | Ownership and control | Example |
|---|---|---|
| Capitalist (market) economy | Private ownership; prices decided by the market; profit motive | USA |
| Socialist (command) economy | State ownership; government planning | Former Soviet Union, Cuba |
| Mixed economy | Both public and private sectors | Nepal, India |
The Constitution of Nepal aims at a socialism-oriented economy based on public, private and cooperative sectors (three-pillar economy).
7. Key terms at a glance
| Term | Meaning |
|---|---|
| Microeconomics | Study of individuals, firms and markets |
| Macroeconomics | Study of the whole economy: GDP, inflation, unemployment |
| Law of demand | Price rises, demand falls (other things equal) |
| Law of supply | Price rises, supply rises |
| Inflation | General rise in prices |
| Opportunity cost | Value of the next best option given up |
8. Thinkers
- Adam Smith: father of economics, The Wealth of Nations (1776).
- J. M. Keynes: father of macroeconomics.
- Alfred Marshall: welfare definition of economics.
- Lionel Robbins: scarcity definition of economics.
9. How this topic is asked in the exam
Objective questions ask definitions of economics, laws of demand and supply and the father of economics. Subjective questions ask the difference between micro and macroeconomics.
📌 Key points to remember
- Adam Smith (Wealth of Nations, 1776) is the father of economics; wealth definition.
- Marshall: welfare definition (1890); Robbins: scarcity definition (1932); Samuelson: growth definition.
- Opportunity cost is the value of the next best alternative given up.
- Ragnar Frisch coined micro and macro; Keynes (1936) is the father of macroeconomics.
- Law of demand: price up, demand down (downward curve); law of supply: price up, supply up.
- Rewards: land–rent, labour–wage, capital–interest, organisation–profit.
- Monopoly has one seller; oligopoly a few; perfect competition many with identical goods.
- Nepal has a mixed economy with public, private and cooperative sectors.
Test yourself: Basic Concepts of Economics
20 questions on Definitions of economics, Factors of production and Economic systems.