Economics: Definition, Nature & Scope

Study Notes

Economics is derived from Greek words "oikos" (house) and "nemein" (to manage), implying the management of household resources.
It encompasses all aspects of life, from dawn to dusk, and extends through all life stages.
Defined as the science that examines production, exchange, and consumption of goods and services.
Focuses on maximizing wealth and human welfare through the effective use of scarce resources.
Central concept revolves around scarcity, necessitating choices among alternative uses of limited resources.
Economic challenges arise from the clash between unlimited human wants and limited resources.

Adam Smith: Defined economics as the science of wealth in "An Inquiry into Nature and Causes of Wealth of Nations" (1776), emphasizing individual gain leading to societal benefit through an "invisible hand."
Alfred Marshall: In "Principles of Economics" (1890), described economics as the study of mankind's ordinary business life, particularly in relation to material well-being.
- Highlights the dual focus on individual and social actions aimed at economic welfare.
- Distinguishes between material (tangible) and immaterial (intangible) goods.

Economics is recognized as both a science and an art.
As a Science:
- Relies on cause-and-effect relationships.
- Curates measurable results.
- Bases conclusions on logical reasoning.
As an Art:
- Offers systematic approaches to achieving specific economic outcomes.
- Provides practical solutions to economic problems, showing its applicability in real contexts.
Science and art are interlinked in economics, contributing to a comprehensive understanding of economic phenomena.

Positive Economics: Describes and explains economic facts without prescribing what should happen.
- Example: "12 percent of the labor force in India was unemployed last year" is a verifiable positive statement.
Normative Economics: Involves value judgments to prescribe desirable outcomes for economic policies and actions, defining what is good or bad for society.

Incorporates both deductive and inductive methods for a well-rounded analysis.
Deductive Method:
- Also known as the analytical or hypothetical method.
- Begins with assumptions leading to a logical conclusion through observation and experimentation.
- Involves three stages: observation, logical reasoning, and experimentation/testing.
Both methods are complementary and enhance the development of economic theories and solutions.

Refers to the cost advantages that producers experience when production becomes more efficient.
Expansion in production leads to various benefits, including reduced costs and increased sales.

Internal Economies of Scale: Cost benefits that arise from factors within the company, such as improved technology or bulk purchasing.
External Economies of Scale: Benefits that accrue from external factors, like industry growth or development of a skilled labor pool.

Indicates losses experienced by a firm as it grows beyond its optimal size, leading to inefficiencies.
Causes include organizational challenges, management issues, and difficulties in sourcing raw materials.

Internal Diseconomies of Scale: Arise from problems within the organization, such as mismanagement or inefficiency in production processes.
External Diseconomies of Scale: Caused by factors outside the organization, such as increased competition or resource scarcity.

Diseconomies lead to an increase in long-run average costs when production surpasses the optimal scale.
Average cost per unit rises as production expands beyond a certain point, indicating a reduction in efficiency.
Average cost is calculated using the formula: (Total Fixed Costs + Total Variable Costs) / Total Output.