How to understand economics through common sense


Economics as a field of study is a superb specialization which is simply world class. This is because there is so much of a scope in economics. The entire world has so much of data to offer for research. There are hundreds of variables. Yet, economics can also be understood through common sense. This understanding of the basics is sought to be explained in this article.

Introduction

Economics is a very vast subject. It has so much of connection with politics, sociology, public administration and even psychology. Yet, any layman can also understand economics. The basics of economics are only three. They are a) Investment b) Buyers and c) Sellers. Closely related to these three are the most important aspects of what we call as demand and supply, which is common to all the three vital variables mentioned above. A huge number of examples are also explained, with specific reference to the three most important variables mentioned above.

Investment

This is the most important common sense variable in economics. This can take various forms. The investment can be by the Government, by the private parties or by a combination of the public and private parties or by the foreign companies, either in part or in total. However, there are hundreds of rules regarding investment in the most important, strategic areas concerning the economy.

These decisions can also change over time. For example, the Government of India has now allowed entire airports to be built by private parties. The GVK group of Hyderabad was given the contract to build the new International Airport at New Delhi. Investments also need license from the Government and the local bodies like the Panchayat and so on. No one can just like that set up a business, even if it is a small business, like a cell phone sales and service shop. However, the investment has to happen,

This is the most important step. The Primie Minister of India goes abroad so often to seek fresh Foreign Direct Investment(FDI). This is a crucial step, as this can bring out huge employment opportunities. For example, companies like Coca Cola and Pepsico are huge multinational companies. But their investment in India also supports a multi-billion retail trade, offering self-employment to hundreds of people. Besides this, their suppliers also get to earn money. For example, Pepsico sources the best quality potatoes directly from farmers. The entire process of preparation of the Lays brand of potato chips, which is the leading brand in India, is mechanized. No human hands are involved in the process. Imagine Lays being made available everywhere. This is done only because there is a huge demand for the brand Lays from the upper middle class and the rich people. When people go on long tours, and often travel by cars for as many as three hours at a stretch, they tend to buy the Lays brand, to just enjoy their evenings.

The Government of India and the State Governments in collaboration, have set up what are called as Special Economic Zone. Once again, the private sector participation is involved. For example, the first ever SEZ was set up by Mahindra and Mahindra on the outskirts of Chennai. This group has not only developed the area, but has provided direct and indirect employment to over three lakh people in that area alone. However, even here, there is a buyer and a seller. The Government of India and the respective State Governments are the "sellers" of huge pockets of land for setting up big companies. There will be buyers if the infrastructure facilities are good and the transport cost for exports can be controlled. This is called "competitiveness" in both economics and business management language. For example the SEZ of Sricity, which is situated just seventy five kilometers from Chennai, is a huge success as the Chennai port can handle the cargo for various types of export. So, the "buyers", that is, the companies have all come here.

Buyers

If there are no buyers to buy the product(s) of the investment, the entire economic chain will come to a grinding halt. This is true of any business, whether it is manufacturing or service. To give one simple example. Take tourism as an industry. God's own country, that is, Kerala attracts hundreds of thousands of tourists on its own, since there are so many naturally beautiful places to see. Who is the seller? The Government of Kerala, which has provided basic infrastructure, and the private parties who run the huge hotels, the restaurants, hundreds of thousands of buses, cars, vans and what have you.

The buyers are the tourists who flock there. Both Indian and foreign. Even a temporary stoppage during some natural calamity will bring the entire economic process to a standstill. People will have no jobs and no income. The recent heavy rains in Kerala, for example, has given the tourism a huge blow. One understands that it will take at least six months for the entire industry to come back to normalcy. For example, all approach roads have been badly damaged. Unless the roads are repaired, a place like Munnar will not have any tourists. The game goes on and on.

Come back to the Special Economic Zone example. In the case of Chennai, huge IT companies have moved there. India is home to one of the most intelligent, English speaking manpower in the world. Ideal for a huge range of IT services. That there are superb institutions like the IIT, the IIM at Tiruchirapalli, the VIT University, the SRM University and the University of Madras and Anna University, all capable of supplying the best quality manpower, is one sure recipe for success of this industry. Of course, the NIT also at Tiruchirapalli is a major supplier of high quality talent.

In economics, the different variables have to fall in place. The IT company comes with the investment. The buyers of its services are abroad. The seller, that is, the IT company has a huge base because of high quality manpower. This is a key point. Why, for instance, is Orissa or West Bengal not able to become a huge leader in IT services? This is because there are no "buyers" for their investment vehicles. West Bengal has a horrible reputation as a communist bastion and violent labor struggles. Ditto for Kerala as well.

Let us look at demand and supply. This follows in each variable. If the demand for new SEZs is good, there will be fresh investment. The atmosphere, the external environment, should be conducive. Once again, the supply of new SEZs can happen if there is not much of red tape and the IT controlled Government cuts corruption to a large extent. This is exactly what is happening in AP and in Telengana where there is huge amount of new investment.. It should be noted that the big industries also have the potential of bringing development in other service areas. For example, after the Sriperambadur area developed as a huge investment hub in the outskirts of Chennai, there are a huge number of manufacturing units sourcing labor from the villages. Buses ply to a distance of sixty kilometers and bring the manpower (relatively very cheap) from the villages. Imagine four from the same family of cousin brothers in the same village. In this fashion, there are thirty families. The net income has resulted in new cell phone shops, small hotels, grocery shops, and even new mini buses to some villages. Imagine the economic spin off, in terms of distribution of income. Part of such income does go into entertainment, savings, education of siblings and even marriages. One leads to another. This is simple common sense economics.

Sellers

The sellers of various goods and services in India form a formidable class of entrepreneurs. They are superb case studies. For example, in the entire stretch of five kilometers leading to the cricket ball ground hosting a Test match, one can notice mobile eateries that flourish for the five days of the Test match. These small shops will supply food at very cheap prices. They often create demand that is so huge. Take the mobile shops in a city like Mumbai. At the superb Nariman Point, where land is supposed to be costlier than even Tokyo, one can still eat a breakfast for around one hundred rupees. Compare this with the stuff available at Rs.200 in an ordinary Udipi restaurant at 2018 prices. The sure winner is the mobile shop guy. These entrepreneurs have all landed from various parts of South India, and mostly, the South Indian dishes are sold. The market is huge. There is investment, there are buyers and there are sellers.

At the prestigious Ranganathan Street at T.Nagar Chennai, everything is sold cheap. There are the big retail shops that also offer huge discounts and cater to the lower middle class. This same class is also pampered through the smaller shops that sell the comparable textile goods, for example, at far cheaper prices. The economic game goes on.

Yes, once there is huge supply, the prices will automatically come down, as some player will come up with huge discounts and force the others to follow. This is the story of Jio the new competitor in the cell phone service business.

Conclusion

Common sense observation of all economic phenomena, as discussed above, can teach us so many things. It can open up our minds to new ideas. It can offer huge food for thought for new entrepreneurs. The science of economics is complex. But the basics of investment, buyers and sellers and the allied concepts of demand and supply are so simple to understand.


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