Economic Theories

Economic theories are based on the principles that everything in the world is made up of matter. Therefore, economics can also be regarded as a science of the physical universe. This type of science is called “Economics” a short term of Economics/ Economics-theory. Other than this branch, there are many more theories and disciplines related to economics. The field of Economic Theory has opened new horizons for economic research and discoveries. There are many economic concepts like, theory of demand, theory of the business cycle, theory of macroeconomics, economic globalization, national income analysis, balance of payments and international trade.

Economic theory is usually of two types: the market economy and state or central economy theory. The market economy theory is an economic theory that describes how the prices and production functions in the market economy. On the other hand, state or central economy theory is an economic theory that attempts to describe the internal mechanisms of the state or central economy. It basically deals with the political systems of the different countries, and the policies and decisions that are made by the government.

The basic economic concept is that price is determined by demand and supply. Since, supply always increases and decreases, the price of any commodity stays level. In simple terms, the economy simply refers to the ability of producers to satisfy consumer demand.

Since, production always needs to take place whether people need it or not, demand and supply concept are very important in economics. In the theory, if there is sufficient demand and supply of goods and services, then the prices of the commodities will also stay at the level that is decided. However, if the demand and supply are unequal, then the prices of commodities are bound to change.

Many economic theories have been developed in order to fully understand the nature and functioning of the economy. These economic theories include; the theory of perfect competition, the theory of technological change, theory of industrial and business cycles, theory of home production, and economic fluctuation. Each of these theories has their own contribution in understanding the economic system. Economic theories are not absolute, but they are helpful in decision-making and in providing predictions about the future trend of the economy.

The theory of perfect competition states that there is a constant price for every product regardless of the production process used to produce it. Another theory of perfect competition states that the price of a product increases proportionately to the increase in its demand. Another theory of industrial and business cycles states that in a market economy, demand always tends to exceed supply. In economic fluctuations, demand always tends to exceed supply and so on.