A brief lesson note on introductory aspect of Economics.

What is Economics?

The subject Economics has no specific definition. It has been defined in several ways by various economists as a social science which studies human and their behaviours. Some of the definitions given by some of the experts in the field include the following:

Definition of Economics by Different Economists

Adam Smith’s Definition of Economics

Adam Smith was a Scottish philosopher, widely considered as the first modern economist. Smith defined economics as “an inquiry into the nature and causes of the wealth of nations.”

Criticism of Smith’s Definition

  1. The wealth-centric definition of economics limited its scope as a subject and was seen as narrow and inaccurate. Smith’s definition forced the subject to ignore all non-wealth aspects of human existence.
  2. The Smithian definition over-emphasized the material aspects of well-being and ignored the non-material aspects. It was assumed that human beings acted as rational economic agents who mindlessly strived to maximize their own well-being.
  3. The Smithian definition prevents the subject from exploring the concept of resource scarcity. The allocation and use of scarce resources are seen as a central topic of analysis in modern economics.

Alfred Marshall’s Definition of Economics

British economist Alfred Marshall defined economics as the study of man in the ordinary business of life. Marshall argued that the subject was both the study of wealth and the study of mankind. He believed it was not a natural science such as physics or chemistry, but rather a social science.

Criticism of Marshall’s Definition

  1. The Marshallian definition, like the Smithian definition, ignored the problem of scarce resources, which possess unlimited potential uses.
  2. Marshall’s definition restricted economics as a subject to only analyze the material aspects of human welfare. Non-material aspects of welfare were ignored. Critics of the Marshallian definition asserted that it was difficult to separate material and non-material aspects of welfare.
  3. The Marshallian definition does not provide a clear link between the acquisition of wealth and welfare. Marshall’s critics claimed that it left the subject in a state of perpetual confusion. For instance, there are plenty of activities that might generate wealth but that can reduce human welfare.

Lionel Robbin’s Definition of Economics

Lionel Robbin, another British economist, defined economics as the subject that studies the allocation of scarce resources with countless possible uses. In his 1932 text, “An Essay on the Nature and Significance of Economic Science,” Robbins said the following about the subject: “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.”

Criticism of Robbin’s Definition

  1. Robbin’s definition of economics transformed the subject from a normative social science into a positive science with an undue emphasis on individual choice. His definition prevented the subject from analyzing topics such as social choice and social interaction theory, which are important topics within modern microeconomic theory.
  2. Robbin’s definition prevented it from analyzing macroeconomic concepts such as national income and aggregate supply and demand. Instead, economics was merely used to analyze the action of individuals, using stylized mathematical models.

John Stuart Mill viewed Economics as the practical science of

production and the distribution of wealth.

AC PIGOU-PARETO (1920): – He defines economics as the component of social welfare which can be measured with the provision of money. To him, Economics is all about acquiring material wealth which improves or eases the welfare of human beings.

PROF RICHARD LIPSERY (1989): – He defined economic as the allocation if study resources among alternative uses and the distribution of society among alternative uses and the distribution of society output among individual and at a point of time.
M.L. JHINGAN: – As a social science consider with a proper use and allocation of scarce resources for their achievement and maintenance of growth and stability.

However, the most generally accepted definition of Eonomics is the one put forward by PROF LIONEL ROBBINS in 1932. He defines economic as a social science which studied human behavior a relationship between ends and scarce means which have alternative uses. This definition is more embracing because it covers some major aspects of economics such as scarcity, wants, human behaviour and choice.

Prof Lionel Robbins further explained these majors aspects in his definition as follows:
science: – Economics is a science which study human behavior and makes it a social science because it deals with the activities of man. It is described as a science because it uses scientific method to describe, explain, and observe phenomenon and to predict future event.
ends: – This refer to desire or need it refer to human want which are unlimited
scarce: – This refer to the limited available resource used to certify numerous want, it can also be refer to the limited in relative demand.
means: – This refers to the resources used to certify human want.
alternative: –this means that the scarcity can be used in different purpose.

Modern Definition of Economics

The modern definition, attributed to the 20th-century economist, Paul Samuelson, builds upon the definitions of the past and defines the subject as a social science. According to Samuelson, “Economics is the study of how people and society choose, with or without the use of money, to employ scarce productive resources which could have alternative uses, to produce various commodities over time and distribute them for consumption now and in the future among various persons and groups of society.”

Nature And Scope Of Economics

1. Economics as a science: Before getting deep into the context of this topic, firstly it is significant to have an impression about science. It is mainly defined as the systematic study that signifies the cause and effect relationship. In science, it is the collection of facts and figures that should be analyzed correctly. Economics, yet, is treated as a social science due to these following features of science.

    • It depends on the systematic collection and analysis of facts and figures. Likewise, in economics, all the theories connected with micro and macroeconomics is examined carefully.
    • It is based on the formulation of theories and laws,
    • It believes in tracing the cause and effect relationship.
    • It can also make upcoming forecasts.
    • It has a scale of measurement, as in economics, ‘money’ is considered as the measuring rod.

From the above-mentioned points, it can be clearly stated that the nature of economics is correlated to science. Alike in science, various economic theories are based on logical reasoning. Let’s take an example to understand this. In science, there is Newton’s law of gravitation and in economics; law of demand signifies that there will be rise in demand if it is decreasing in price.

2. Economics as an art: Now, the question arises why nature of economics is an art? According to the Marshall, art is the application of information and knowledge. As, in economics, art acts as a solution to all economic complications. Furthermore, there are several terms in economics like distribution, consumption, and production that offer the guidelines to us, that can be used to sort out the economic problems in society.

Thus, from the above discussion, it can be clearly said that the economics is both a science and an art.

Scope of Economics

The basic concept of economics has a very vast scope and to understand this crucial aspect, it is really necessary to go through this concern very carefully.so, without wasting time, let’s go and comprehend it. Scope of economics can be classified broadly into two categories:

1. Microeconomics: Microeconomics is the study of examining every individual economic activity, industries, and their interaction. It mainly observes how a person earns and spends his income. Besides it, the nature of microeconomics has certain key areas that must be taken into consideration.

    • Elasticity: Elasticity is used to determine the ratio of change in the proportion of one variable to the change in the proportion of another variable. Commonly used elasticity in the market: price elasticity of demand, the income elasticity of demand, the price elasticity of supply etc.
    • Theory of production: In this study of production, the input is converted into output efficiently. Production can include storing, shipping, packaging, and manufacturing.
    • Cost of production: In this theory, it states that the object price is determined by the price of resources. The cost can be comprised of land, labor, capital and technology.
    • Monopoly: A monopoly can be defined as the state where a single firm is the one and only supplier of a specific commodity.
    • Economics of Information: Information economics is a kind of theory, which shows how information can affect economic decisions.
    • Oligopoly: It is termed as the situation where the small numbers of sellers dominate an industry or a market.

2. Macroeconomics: It is the branch of economics, which deals with the economic functioning and its performance, decision making, and structure as a whole. However, there are some basic concepts of nature and scope of macroeconomics that makes it more interesting than any other.

    • Output and income: Output can be defined as the total income that generates from the sold commodity. It is usually measured by the Gross Domestic Product (GDP). Moreover, there are many reasons for the rise in output: technological advancement, human capital, and better education.
    • Unemployment: It is typically measured by the overall employment rate, which means the ratio of workers without employment in the workforce. But the people who are pursuing their education and retired are excluded from this unemployment rate.
    • Inflation and deflation: In general terms, increase in price refers to inflation; while on the other hand, decrease in price refers to deflation in the economy. These fluctuations in the price can be easily measured by using price indexes.

Basic Economic Concepts

Wants – Simply the desires of citizens. Wants are different from needs as we will see below. Wants are a means of expressing a perceived need. Wants are broader than needs.

Needs: These are basic requirements for survival like food and water and shelter. In recent years we have seen a percieved shift of certain items from wants to needs. Telephone service, to many, is a need. I would argue, however, that they are wrong.

Scarcity – the fundemental economic problem facing ALL societies. Essentially it is how to satisfy unlimited wants with limited resources. This is the issue that plagues all governmet and peoples. How do we conquor the issue of scarcity? Many people have thoaught they had the answer but the issue of scarcity still exists.

Scale of Preference: Scale of preference is defined as a list of unsatisfied wants arranged in the order of their relative importance. In other words, it is a list showing the order in which we want to satisfy our wants in order of priority. In the scale of preference, the most pressing wants come first while the least pressing ones come last.

Choice: Choice is defined as a system of selecting or choosing one out of a number of alternatives. Human wants are many and we cannot satisfy all of them because of our unlimited resources. We therefore, decide which of the wants we can satisfy first. Choice arises as a result of numerous human wants and the scarcity of the resources used in satisfying these wants. Since it is difficult to produce everything one wants, choice has to be made by accepting or taking up the most pressing wants for satisfaction based on the available resources.

Opportunity Cost

Opportunity cost refers to the value of what you have to give up in order to choose something else. In a nutshell, it’s a value of the road not taken.

Questions learners usually ask in this topic and their answers.

1. Why is scarcity a fundamental problem in economics?

Answer: Economics seeks to study the relationship between ends and means. Ends are unlimited while the means are limited. Scarcity simply means resources are limited in relation to the ends. Economics is therefore concerned with allocating the limited resources among the competing and unlimited wants.

2. How do government solve the problem of scarcity?

Answer: Governments are faced with the problem of allocating scarce resources among competing unlimited wants. In doing this, government draws a scale of preference which helps them to choose or select the most important want to be satisfied. The foregone wants are the opportunity cost or real cost of the selected alternative.

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