Decoding the basics of economics

If I say that I experience diminishing marginal utility as I eat two or three blueberry cheesecakes, I am pretty sure people would label me as crazy, or a show off, but all I am trying to say is that as I eat more cheesecakes, the satisfaction that I get steadily reduces. Now, that doesn't sound so tough, does it? But Alfred Marshall wanted to sound really smart when he formulated the law, so you know who is to blame. There are so many terms, which need simplification so that you and I can get an idea of what's happening in the economic world as it impacts everyone of us.

1. Inflation:

If your parents gave Rs.100 as pocket money for a week, you could have 10 ice candies for Rs. 10 each (100/10=10). A few years later, your pocket money continues to be Rs.100 (sadly) but the ice candy now costs Rs. 20. You could have only five ice candies for the same amount. (100/20=5). This rise in prices is inflation. If inflation keeps rising, products become costlier as the value of money falls.

2. Monetary policy:

Taking the same example of pocket money worth Rs.100. A few years later when you can afford only five ice candies for Rs.100, your parents realise that inflation has set in, and they might increase your pocket money to Rs.160. Now you can have eight ice candies (160/20=8). Your parents being the financial authorities of the house increased your pocket money. Similarly, the monetary authority of the country increases or decreases the supply of money based on inflation, using the monetary policy.

3. Fiscal policy:

Every house has a budget. Income earned is spent on food, school, electricity, movies etc. If the household spends more than the budget then they will have to cut the spending for the next month, or in worst case borrow money.

Similarly, every country has a budget for every year. If the government spends more than that, then the people will have to pay more to the government, which is done by increasing taxes. Fiscal policy helps government to control spending as well as making tax policies.

4. Gross domestic product (GDP):

Let's consider an imaginary nation called Economia. Every year, the citizens of this country spend money on a number of things, which are basically consumer durables like T.V, washing machines, WiFi, eating in restaurants, watching movies in multiplexes, school and college fees, services like beauty salons, doctors, teachers, banking etc. The Economian government spends on education, health and national defense of the country; it also spends on infrastructure like roads and bridges, research projects etc. Industries and businesses expand to earn more profits. Production has to happen within Economia's geographical boundaries. Economia sells a number of things like food, technology, oil, automobiles etc. to other countries. And let's not forget an entire population of teachers, doctors, and other professionals who become the proverbial migratory birds (Exports). At the same time it also buys products like clothing, mobile phones etc. and brings services from other countries (Imports). Subtracting Economia's imports from its exports, consumer spending, industry investment and government spending is the total output of Economia, which is measured by the GDP. GDP could be measured once in 3 months or once in a year. It is one of the important indicators for the growth of the economy.

5. Types of market:

a) Monopoly: During lunchtime in most schools, food options are limited to vada pav or pav bhaji from the school canteen, as students aren't allowed outside the school premises. This makes the school canteen a monopoly producer as no one else is allowed to do so. Similarly Apple has monopoly over Mac operating system, or the Indian government has monopoly over the Indian Railways.

b) Oligopoly: If you are in the mood for black fizz, you can either have Coke, Pepsi or a Thums Up, with hardly any other options. This is an oligopoly. There exist only a few producers, or sellers in the market. Google, Apple, and Microsoft hold an oligopoly market in the world of technology and innovation.

c) Monopolistic competition: If you have planned to eat lunch or dinner at the mall, but can't choose a restaurant as so many choices are available, you can blame it on the monopolistic competition among restaurants. A market with many sellers or producers is monopolistically competitive. The sellers compete by advertising their product to be unique. Cosmetics, cars, salons etc. fall under this competition.

d) Perfect competition: It's your birthday and you are pampering yourself with an ice-cream from Gelato, and the next day, at your friend's birthday party, you eat an ice-cream from Natural's, but what shocks you is that the flavour options and the taste of both the brands are exactly the same. No matter which ice-cream seller you try, all the ice creams taste the same (homogenous). There are no advertisements for any ice-cream as all sellers have the same flavour options. The prices of the differently flavoured ice-creams are also the same. This is an example of a perfectly competitive market where there are many buyers and sellers, the products sold are homogenous and there is no need for advertisement. Each seller has information about the other sellers. This market does not exist in the real world, as it's close to impossible to make homogenous products, and have the same price in the market.

The question is why would economists make concepts so complicated when it can be explained in a simple, lucid manner. It can also cause ambiguity in understanding concepts, an error that can have implications at a global level.