Relevance of Economics in Law:

Economics and Law are Social Sciences. Economics is the study of the Economy or the Money
Flow in the country. Law is the study of Legislative and Executive aspects of the Economy. The
two sciences are closely interlinked and influence each other in very many ways. For the study of
law it is important to appreciate economics and it provides context for law making and
enforcement.
Some of the reasons why the study of economics is important as a part of the study of law are:
1. Economics is the study of human behaviour and its interaction with money flow and
social factors and hence provides a unique lens into law making. Understanding human
behaviour is therefore imperative to the study of law.
2. Every aspect of the economy like Cash Flow, Demand, Supply, Foreign Exchange, Types
of Markets etc. is covered in the study of Economics. Economic law making is
impossible without a deep understanding of these concepts. The creation, development
and regulation of Indian financial markets has been enabled by legislations. Regulatory
bodies are guided by a set of laws that specify their powers and conduct. RBI, LIC, SEBI,
PFRDA are examples of creation of financial market players through legislation.
3. Economics helps us in understanding the Negative Externalities in Law of Torts. Today
environment protection is a key agenda of governments across the world. Environment
laws are developed in the context of the economy. For e.g. laws may be stringent on
violations in certain countries while they may not be so in other given the state of the
economic development. Understanding economic structure is therefore critical to
development and application of laws.
4. In Law of Contracts, the study of Economics helps us to evaluate the concepts of
Compensation and damages.
5. The study of economics facilitates a better understanding of the economy. This
understanding helps in the development and application of legal roots through legislation
or common law. As a result, economic efficiency and equitable resource distribution can
be achieved through these policies. For example, the Union Budget is announced at the
start of every financial year. To prepare the Budget and the fiscal policies, the study of
Economics would be very beneficial to achieve Economic Efficiency.
6. Economic offenses like insider trading, Havala channels, betting cheating, frauds, and
money laundering can be known and understood through the study of economics. As a
result, better policies can be enacted to prevent these offenses.
7. Economics enables logical reasoning which is pivotal to the study of law.
8. The Study of economics is helpful in the study of Intellectual Property Rights like
Copyrights and Patents.
9. To frame trade and foreign exchange policies, the study of Economics is imperative. For
Example, before the New Economic Policy of 1991, the FERA Act was in force to
govern Foreign Exchange and trade in Indian Economy. However, post 1991, as the
economy went through great changes, the FERA Act was repealed and gave way to the
FEMA Act. Thus, no trade policy can be framed without the study of the Economy or
Economics.
10. It also helps in framing and implementation of Labour Laws. For example, today, the
labour law is restrictive in terms of hiring and firing of employees. As a result the
enterprises are facing surges and slumps in terms of their development. So this study is
important to make necessary changes in the law. Hence the study of economics is
imperative to the framing of labour laws.
11. For framing of industrial policies, the study of economics is critical. For example, the
study of market behaviour, the development of ratio of the sectors like the primary
secondary and tertiary sectors in the economy, the study of the requirements of the
industries helps in framing a favourable industrial policy which facilitates equal growth
of all sectors.




Positive and Normative Science:
Microeconomics is concerned with positive and normative analysis. Here is how we distinguish
both the approaches:
a) Positive analysis deals with explanation and prediction. In other words, positive analysis
describes the cause and effect relationships. The positive analysis is central to
microeconomics. Theories are developed to explain phenomena, tested against
observations, and used to construct models from which predictions are made. For
example, Indian Government imposes a quota on the import of some goods. What will be
the impact of this policy on the forces of market? How will that affect the Indian
consumers? These questions belong to the realm of positive analysis as they describe the
causal relationships between factors.
b) Normative analysis deals with what ought to be. Normative analysis is not only
concerned with alternative policy options, it also involves the design of particular policy
choices. For example, consider the situation of a new tax on petrol. The auto mobile
companies would evaluate as to how many large and small cars are to be produced to
maximize profit. How much money is to be invested to make the cars fuel efficient? On
the other hand, the policy makers would evaluate whether the policy is in public interest
or not. If it is found desirable, then what could be the optimal size of the tax? If it is
undesirable, then what could be the alternative to the tax? These questions belong to the
realm of normative analysis.