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1. ADAM SMITH
Adam Smith was a great scientist who made extraordinary contributions in economics. He was born in 1723 in Kirkcaldy, a small fishing town near Edinburgh, Scotland. At the age of 28 Adam Smith became a Professor of Logics at the University of Glasgow. It was his first academic appointment. Some time later he became a tutor to a wealthy Scottish duke. Then he received a grant 0f &300 a year. It was a very big sum, 10 times higher than the average income at that time.
With the financial security of his grant, Smith devoted 10 years to his work which founded economic science. Its full title was “An Inquiry into the Nature and Causes of the Wealth of Nations”. He published his work with great success in 1776. Adam Smith considered that the economic activity of individuals would be more effectively coordinated through the indirect and impersonal action of natural forces of self-interest and competition.
Adam Smith made economics a science. We often regard this Scottish economist as the founder of political economy.
2. THE ECONOMY
We hear or read the words “the economy” almost every day. For example, “The world economy is making little progress out of recession” or “The UK economy is beginning to recover”. So, what is meant by the economy? What is an economy? What happens in one? How does an economy work? The economy is a social mechanism which answers these three questions. The economy means a system for the management, use and control of the money, goods and other resources of a country or community.
The economy comprises millions of people and thousands of firms as well as the government and local authorities, which all take decisions about prices and wages, what to buy, sell, produce, export, import and many other matters. It is difficult to control and predict the economy, but it is certainly important to all businesses.
There are a number of ways in which a government can organize its economy. An economic system is simply the way in which a country uses its available resources (land, workers, natural resources, machinery, etc). There are three main economic systems: planned economy, market economy and mixed economy.
3. ECONOMICS
Economics is a social science studying economy. It deals mainly with data on output, income, employment, expenditure, interest rates, prices and individual activities of production, consumption, transportation and trade. Economics does not normally include such things as personal finance, ways to start a small business, etc. Economics is the study how people choose to allocate resources to satisfy their wants. The question what, how and for whom to produce is of great importance.
Like the natural sciences economics tries to find laws or principles. It builds models. The predictions of the models form the basis of economic theories.
4. MICROECONOMICS AND MACROECONOMICS
Economics as a science consists of two disciplines that is of microeconomics and macroeconomics.
Microeconomics is the branch of economics that studies individual producers, consumers or markets. Microeconomic theory is used in individual organization, labor economics, international trade, cost-benefit analysis and many other economic subfields. Microeconomics studies how government activities such as regulations and taxes affect individual markets. Besides it tries to understand what factors affect the prices, wages and earnings.
Macroeconomics is the branch of economics that studies the economy as a whole. It studies total production, total employment, the rate of change of overall prices, the rate of economic growth, overall value of inflation and so on. Macroeconomists measure overall economic activity, analyze the determinants of such activity. They are interested in maintenance of full employment and price stability.
5. RETAILERS AND WHOLESALERS
All the firms can be grouped into wholesalers and retailers. The wholesaler buys goods in bulk from producers and sells them in small quantities to retailers. So, he helps production, relieves manufacturers and retailers of the risk of a fall in demand, e.g. fashion changes. To hold stocks is in itself a valuable economic function. It evens out prices resulting from temporary changes in demand and supply.
To retail means to sell goods and services to the ultimate consumer. The retailer is the most expensive link in the chain of distribution. He charges the customer 25 to 100 percent more than the price paid for the item. The retailer performs many necessary functions. First, he may provide a convenient location. Second, he often guarantees and services the merchandise he sells. Third, the retailer helps to promote the product through advertising. Also, the retailer can finance the customer by extending credit.
6. WHOLESALE
Wholesale means to buy goods in large quantities from manufacturers and to sell or render services to whose who purchase for further resale or professional usage. There are four kinds of wholesalers: 1) merchants; 2) brokers and agents; 3) manufacturers’ wholesale departments and offices; 4) specialized wholesalers.
A wholesaler is a person or an organization who buys the goods in large quantities from manufacturers and sells them to retailers who sell directly to the public.
Merchant-wholesalers are independent commercial enterprises which get the title of all the goods they deal in. They compromise the largest group of wholesalers.
In contrast to merchant-wholesalers brokers and agents do not get the title of the goods and perform only one obligation – to promote sales. They get a 2-6% of the selling price of the goods (commission for the services rendered). The function of brokers is to bring together the buyer and the seller and help them to come to terms. Brokers do not keep stocks or take part in financing of the deals. They also do not bear any risks. Very often brokers deal in food stuffs, property, insurance or securities.
Producers form manufacturer’s wholesale departments to control stocks. There are two kinds of such departments: a) sales departments and b) purchasing departments which are structural units of the manufacturers.
Specialized wholesalers are quite common in some industries. For instance, wholesalers purchasing agricultural products buy these products from the farmers and ship in large quantities to various factories of the food industry to mechanical bakeries and bread-baking plants on behalf of state institutions.
7. THE SOURCES OF ECONOMIC WEALTH.
In 1776 new technologies were being invented and applied to the manufacture of cotton and wool, iron, transportation and agriculture. Then it was called “Industrial Revolution”.
Adam Smith was keenly interested in these events. He wanted to understand the sources of economic wealth. His answer was:
- the division of labour;
- free domestic and international markets.
Smith Identified the division of labour as the source of the greatest “improvement in the productive powers of labour”. The division of labour became even more productive when it was applied to the creation of new technologies. Scientists and engineers trained in extremely narrow fields became specialists at invention. Their powerful skills speeded the advance of technology. Machines started to perform repetitive operations faster and more accurately than people.
But, said Smith, the fruits of the division of labour are limited by the extent of the market. To make the market as large as possible, there must be no impediments to free trade both within a country and among countries. Smith argued that when each person makes the best possible economic choice based on self-interest that choice leads to the best outcome for society as a whole.
8. THE DISCOVERERS OF THE LAWS OF DEMAND AND SUPPLY
The law of demand was discovered by A.A.Cournot (1801 – 1877), a professor of mathematics at the University of Lyon, France, and it was he who drew the first demand curve in the 1830s. The first practical application of demand theory, by Jules Dupuit (1804 – 1866), a French engineer and economist, was the calculation of the benefits from building a bridge.
The laws of demand and supply and the connection between the costs of production and supply were first worked out by Dionysius Lardner (1793 – 1859), an Irish professor of philosophy at the University of London. D.Lardner showed railway companies how they could increase their profits by cutting rates on long-distance business, where competition was fiercest. And how they could raise rates on short-haul business, where they had less to fear from other suppliers.
The principles first worked out by Lardner in the 1850s are now used by economists working for the major airline companies today to work out the freight rates and passenger fares that will give the airline the largest possible profit. And the rates that result have a lot in common with those of the nineteenth century in principle.
9. ALLOCATION OF PRODUCTS AND RESOURCES
There are a number of ways in which a government can organize its economy. An economic system is quite simply the way in which a country uses its available resources to satisfy the demand of its inhabitants for goods and services.
There are three main economic systems. Planned economies are sometimes called “command economies” because they allow the government to act as a dictator. The state commands the use of resources as it owns factories, land and natural resources. Planned economies are economies with a large amount of central planning and direction when the government takes all the decisions, the government decides production and consumption.
In a pure market economy the government plays no role in the management of the economy, the government does not intervene in it. The system is based on private enterprise with private ownership of the means of production In a market economy it is consumers who decide what is to be produced.
Fortunately, a community or a country does not have to make a complete choice between the two extremes: the market economy and the command economy. Instead it can compromise and have a mixed economy.
In a mixed economy three quarters of production is carried out by the private sector through the market though subject to varying degrees of government control. For the other quarter the government is directly responsible through public sector. Thus the government influences the allocation of the goods and services produced.
Even in the USA it has been found necessary to control or regulate national income conditions. As to Britain, today it has a mixed economy. In the public sector of British economic life are the nationalized industries like coal and steel, British Tail and BOAC. The private sector are the majority of the nation’s industries, both large and small, from giants like ICI and BP to small family businesses.
BOAC – British Overseas Airway Corporation
ICI – Imperial Chemical Industry
BP – British Petroleum
10. PUBLIC AND PRIVATE SECTORS IN THE UK
At the beginning of the 1980s there were many public corporations in the United Kingdom. They included British Coal, British Steel, the Post Office, British Telecom, the British Airports Authorities, British Rail and some others.
They were nationalized mostly by Labour governments for political reasons reflecting a desire to control and plan the economy in detail and a belief in the “rightness” of public ownership as an ideal. Some corporations became public to be rescued from bankruptcy. Thus the governments saved thousands of jobs in those firms, so the taxpayer was saved from paying out large sums to unemployed people.
Very many public corporations later became private again. But some others are still publicly owned. A special Mention should be made of British Rail. Railway tracks make a natural monopoly of the state. At the same time different companies are allowed to operate competing services on the same tracks. Thus there is a natural monopoly in track ownership but not in operating trains.