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Basic Concepts of Economics. Definition and Scope of Economics. At different times economics was defined differently by different economists.

Wealth definition (Classical definition) In 1776 Adam Smith, the Father

Of economics, defined economics as An enquiry in to the nature and causes of wealth of nations.In short this definition gives very much

Importance to the study of wealth and encouraging accumulation of wealth and exploitation of man by man to accumulate wealth.

Economists criticized this definition on the ground that it does not give importance to the welfare of man.

2) Welfare Definition.(Neoclassical Definition)

Alfred Marshall defined economics as a science of material welfare it means economics is dealing with welfare of man from material thing The biggest defect of this definition is that it divides welfare in to material and non material welfare.

3) Scarcity definition (Modern Definition)

Lionel Robbins defined economics Economics is science which studies human behavior as a relationship between ends and scarce means which have alternative uses. This definition emphasizes three important points:

a) Ends refer to human wants which are unlimited in nature.


Scarce means implies wealth to buy goods and services and satisfy human wants. Means are scarce in the real life. Another feature of means is that they can be put into alternative uses. Since wants are unlimited and means are scarce man is forced to choice. Choosing is an economic problem to satisfy wants on priority basis.


4) Growth Definition (Modern Definition)

Growth definition was mainly given by P.A.Samuelson.This definition says that economics is a study of allocation of productive resources for the production of goods and services for present and future consumption. The important points he emphasized were. a) Allocation of scarce resources for production for present and future consumption. b) It emphasizes economic growth as an important subject matter of economics. c) He considers the problem of resource allocation as a universal problem.

Scope of economics. Economics is a social science and it studies human behavior as man is a social animal. 1) Adam smith made economics a study of wealth. 2) Alfred Marshall extended economics as a study of wealth and material welfare. 3)The scope of economics was widened by Lionel Robbins by making economics a study of scarcity and choice-scarcity of resources and unlimited human wants

resulting choice leading to Optimum utilization of resources. 4) P.A .Samuelson gave economics the responsibility of achieving economic growth for future and current period. Future growth or development is sustained growth or sustained development.

Subject matter of economics.

The subject matter of economics is broadly divided in to Micro and Macro economics. The term microeconomics is derived from the Greek word micros meaning small and Macroeconomics derived from the Greek word macros meaning large.

Microeconomics Microeconomics is the study of the economic behaviour of individual economic units and individual variables. Individual economic units are individuals, individual households, firms and industries.

Here we study how consumer derives equilibrium, how individual firms allocate resources and how they reach price and output equilibrium and how industries reach the point of equilibrium. For example the price and output fixed by Reliance industries is subject of microeconomics.

The decisions like what to produce? How to produce? And for whom to produce ? are to be taken by the individual firms and therefore they are the subject matter of economics.

Another important area under microeconomics is the efficiency in the resource allocation and maximization of profit by firms and industry.

In short microeconomics deals with product pricing, factorpricing and theory of economic welfare.The following chart will show the content of microeconomics.

Macroeconomics is the study of aggregates. It explains how the economy as a whole is working. In other words macroeconomics deals with the functioning of the economy as a whole. For example macroeconomics studies the interaction among variables like employment, output and prices of an economy.Inshort macroeconomics deals with: a)national income b) level of output ,employment and their fluctuations c) Cyclical fluctuations

d) Inflation and deflation e) Aggregate consumption f) Savings and investment g) general price level economic growth h) balance of payments i) fiscal and monetary flow j) international capital flows etc.

Interdependence of Micro and Macroeconomics.

The basic goal of both the theories is the maximization of the material welfare of nations. Both are complementary to each other.

For example, some macroeconomic theories are derived from microeconomic behavior. The theories of aggregate investment function and aggregate consumption function are basically derived from individual investment and consumption behavior respectively.

The microeconomic variable like profit of individual firms depends on aggregate demand and general price level etc. When aggregate demand is high the profit of individual firms will rise and vice, the macroeconomic variables influences microeconomic variables.

Thus micro and macroeconomics are closely related we cannot make them into two watertight compartments.

Is economics a science?
Economists put economics as a science a social science. This is because it satisfies the qualities or characteristics of a science.

1) It is a systematized study of knowledge which analyses the

cause and effect relationship among price, demand, supply, production, income consumption national income etc.
2) It is concerned with observation, collection and classification

and analysis of facts. 3) Making generalization based on facts and formulating theories.
4) Subjecting the theories to the test of real world observations.

In making economic generalizations two methods are used a) Deductive and b) Inductive methods.

Is economics an art?
J.M .Keynes defined art as a system rules for the attainment of a given end When we apply this definition of art we can say that economics is an art. An art make rules to formulate policies. From the foregoing discussion we can say that economics is science in methodology and art in its application.

Positive and Normative science

Positive science analysis is analyzing the cause and effect relationship of economic phenomena.Some economists believes that economics is a positive science. It says What is or it dels with the facts about the economy and make predictions about the future course of the economic events.For example it deals with questions like What are the causes of unemployment? What are the causes of business cycle? How recession affects the investment?

Economics as a normative science is concerned with value judgements.It says what ought to be? It explains whether some economic events are desirable or undesirable.It analyses problems from ethical angles. Normative economics

deals with economic goals and policies to achieve them. Lionnel Robbins emphasized that economics as a positive science while Marshall and Pigou views that economics is both a positive and normative science.

Assignments and Quizzes Chapter 1. Module.1

Answer the following not exceeding one page.

1) Define economics. Analyze its subject matter. 2) Economics is a science which studies human behavior as a

relationship between ends and scarce means which have alternative uses. Explain. 3) What is microeconomics? How it differs from macroeconomics? 4) Differentiate between positive and normative economics. Choose the most appropriate answer from the given options in respect of the following.

1) Wealth definition of economics is given by

a) Samuelson b) Adam smith c) Alfred Marshall d)


2) Product pricing is part of.

a) Microeconomics b) Macroeconomics c) International economics d) Analysis of national income.

3) Economics is ana) Art b) Science

c) Both d) None of these.

4) Macroeconomics deals witha) National income b) Income of firms d) Equilibrium of



Positive Economics is concerned with

a) What is b) What ought to be c) both d) none of the above.

Chapter 1 .Module 2- some basic concepts.

1) Methods of economic analysis.

In economics, problems are analyzed with the help of two methodsa) Deductive and

b) Inductive methods.

The deductive methods draw conclusions from some fundamental assumptions or truth. For example: The laws of demand and supply,law of diminishing marginal utility etc are formed out of deductive reasoning.The logic of framing conclusion is from general to particular. As these conclusions are based on assumptions they may not be true.

Inductive method frame conclusions on the basis of collected data and facts. Its logic is particular to general.Many policies are formulated out of this method.
2) Central problems of economies.

For individuals, organizations and for economies resources are scarce leading to choice. The choice making is the fundamental problems of economies. The problems area) What to produce .What combinations of commodities

and quantities to produce.

b) How to produce .What technology to follow.

Wealth: It is the stock of goods owned by individuals and organizations and the nations.
3) Personal wealth is the stock of all goods ,money and

stocks and shares held by Individuals. Inotherwords wealth is defined as all the transferable goods owned by a person.
4) National Wealth of a country: National wealth contains

personal wealth of all the citizens of the country. The public properties like roads, parks, hospitals etc. are enjoyed by the public but not owned by them,but by Govt.However personal wealth like Govt. Bonds held by individuals are not part of govt. wealth.
5) Wealth and Welfare.

Social welfare depends on wealth of the society.Wefare means well-being of the society. Wealth and welfare are not synonyms, Wealth increase the social welfare also would increase, if wealth distribution is equal.
6) Money: Money is anything which used as a medium of

exchange.The important functions of money are, medium of exchange, measure of value ,store of value and standard of deferred payments. In the olden days cowry shells were used as money.
7) Constituents of money supply are :

a) Rupee notes and coins with the public b) Credit cards

c) Travelers cheques. 8) Market: Market is a place where buyers and sellers are met

to buy and sell goods and services.

9) The important functions of market are: 1.To determines

the price for the commodity through the interaction of supply and demand .2.To determines the quantity that would be bought and sold.
10)What is market mechanism? It is the interaction taking

place in a market

between supply and demand to determine the equilibrium price and quantity.
11) Investment. Net addition to the existing stock of capital. 12)Real and portfolio investments: Real investment is

increase in the real stock of capital. Portfolio investment is investments on stocks and shares issued fresh

13) Savings and investment. Investment is financed out of

savings only. Without savings investment is not possible. So without investment there is no savings.

14)Gross investment and net investment. The aggregate

investment made during a year is gross investment. It has two components- a) inventory investment and
b) Fixed investment.

But net investment is received when depreciation is deducted from gross investment, i.e. gross investment minus depreciation is net investment.( Gi-Depreciation=Net investment.)
15) Production: It is a process by which goods and services

are created for sales.

16)Factors of production are factor inputs for the production

of goods and services. The four factors of production areland, labor, capital, and entrepreneur.
17) Consumption is a process by which goods and services are

used for human satisfaction. We consume goods services because thy have utility and utility means the power to satisfy a human want.
18) The important determinants of consumption are Current

income, future income and wealth of a consumer.

19) Savings. It is the surplus of income over consumption.

20)Income. It is the net inflow of money of a person over a

period of time.

21) Wealth and Income. Accumulated savings is wealth

while .Income is the inflow of money. Wealth is a stock but income is a flow.
22) Consumers surplus. It is the price the consumer prepared

to pay minus the actual price paid for the product.