Banky’s Understanding: Three key definitions: (1) Adam Smith (1776) — ‘Study of wealth’ — how wealth is produced and consumed. Known as ‘wealth definition.’ Smith is the Father of Modern Economics. (2) Alfred Marshall (1890) — ‘Study of man in ordinary business of life’ — focused on welfare, not just wealth. Known as ‘welfare definition.’ (3) Lionel Robbins — ‘Science which studies human behaviour as relationship between ends and scarce means which have alternative uses.’ Known as ‘scarcity definition’ — the most accepted modern definition.

Banky’s Understanding: Microeconomics studies the behaviour of individual entities: markets, firms, households. How a single company decides pricing. How consumers choose between products. How wages are determined in one industry. Founded by Adam Smith in ‘The Wealth of Nations’ (1776). Key insight: economic benefit comes from self-interested actions of individuals — the ‘invisible hand.’ Micro examines how decisions affect supply & demand, which determines prices.

Banky’s Understanding: Macroeconomics studies the overall performance of the economy as a whole — GDP, unemployment rates, price indices, national income, total consumption, total investment. Founded by J.M. Keynes in ‘General Theory of Employment, Interest and Money’ (1936) during the Great Depression when 25% of Americans were unemployed. Macro studies: business cycles (boom/recession), what causes inflation, how central banks manage money, why some nations grow and others stagnate.

Banky’s Understanding: The fundamental economic problem: wants are unlimited but resources are scarce. Robbins defined economics around this concept. Key aspects: (a) Wants are unlimited — satisfy one, another arises. (b) Means/resources are limited relative to demand. (c) Resources have alternative uses — ₹50 can buy a pen OR a movie ticket, not both. (d) We must make choices — which is why economics is called the ‘science of choice.’ Without scarcity, there would be no economic problem!

Banky’s Understanding: Every society must answer: (1) WHAT commodities are produced and in what quantities? Pizzas or shirts? Few luxury or many cheap? Consumption goods now or investment goods for tomorrow? (2) HOW are goods produced? Who does the production? With what resources and techniques? Factories run by people or robots? (3) FOR WHOM are goods produced? How is income distributed? Are many poor and few rich? Do teachers earn more or athletes?

Banky’s Understanding: Also called Capitalistic Economy. Individuals and private firms make the major decisions about production and consumption. A system of prices, markets, profits & losses, incentives & rewards determines what, how, and for whom. Firms produce what yields highest profits (what), using least costly techniques (how), consumers decide spending based on their income (for whom). The extreme version with ZERO government interference is called ‘Laissez-faire’ (French: ‘allow to do’). Example: England (closest historical example).

Banky’s Understanding: Also called Socialistic Economy. Government makes ALL important decisions about production and distribution. Government owns most means of production (land, capital), directs enterprises, employs most workers, tells them how to work, and decides output distribution. Example: Soviet Union during most of the 20th century. Government addresses all 3 fundamental questions by virtue of ownership and enforcement power.

Banky’s Understanding: No real economy is purely market or purely command. All are mixed economies with elements of both. In mixed economies, markets make most decisions but government regulates, produces some goods, controls pollution, provides welfare. India is a Mixed Economy from the beginning of economic planning — public sector + private sector + joint sector coexist and complement each other. Even the USA has government regulation!