Introduction to Economics

Economics: Meaning

• The word "Economics" originates from the Ancient Greek "oikonomikos" (oikos means "households" and Nemein means "management", "custom", or "law").
• Economics means "management of households".
• The term was once known as "Political Economy" and was later renamed as "Economics" by Alfred Marshall in the late 19th century.

Economics: Its Nature

• The nature of Economics refers to its contents and why it is included within the subject.
• Various definitions of Economics have been provided by notable economists.
• Economics is a social science, meaning it studies the behaviors of people in society.

Adam Smith's Wealth Definition

• Adam Smith defined economics as "the science of wealth" in his book "An Inquiry into Nature and Causes of Wealth of Nations" (1776).
• Smith's approach emphasizes how wealth is generated and increased.
• He posits that individuals in society inherently seek to improve their own well-being and are guided by an "invisible hand".

Marshall's Welfare Definition

• Alfred Marshall's definition of economics prioritizes welfare over wealth.
• Economics concerns the experiences of ordinary people who are motivated by love and not solely by the desire for economic gain.

Criticisms

• For Adam Smith, economics is about getting activities and "wealth-spending".
• Marshall's definition focuses on the welfare of ordinary people.

Introduction to Micro Economics

• Economics is everywhere, and understanding economics can help one make better decisions and lead a happier life.
• A subject should have a name or title that facilitates a clear and correct understanding of its contents.

Learning Objectives

• To acquire a fundamental knowledge of Economics and its nature and scope.
• To understand the meaning of basic concepts of Economics and their application in various definitions.

Kinds of Goods

• Free Goods: Available in nature and in abundance, with no expenditure required to own or use them (e.g., air, sunshine).
• Economic Goods: Have value in exchange and are consumed by paying a price (e.g., food, clothes).
• Perishable Goods: Short-lived goods that spoil quickly (e.g., fish, fruits).
• Durable Goods: Goods that can be used for a long period (e.g., table, chair).

Public vs Private Goods

• Public Goods: Available to everyone, with benefits that spill over to others who did not pay for the good (e.g., national defense, law enforcement).
• Private Goods: Consumed by a single person or household, with benefits accruing only to the individual who pays for the good (e.g., food, drinks).

Services

• Produced and consumed, with characteristics such as:
  • Intangible
  • Heterogeneous
  • Inseparable from their makers
  • Perishable

Milton Friedman

• Popularized the saying "There is no such thing as a free lunch", meaning that someone has to pay for the benefits received.

Utility

• Meaning: The want-satisfying power of a commodity or service.
• Characteristics:
  • Psychological
  • Not equivalent to usefulness
  • Not the same as pleasure
  • Personal and relative
  • Function of the intensity of human want
  • Subjective concept
  • No ethical or moral significance
• Types of Utility:
  • Form Utility
  • Time Utility
  • Place Utility
  • Service Utility
  • Possession Utility
  • Knowledge Utility

Measurability of Utility

• Wants of a person are satisfied by the act of consumption.
• The consumer derives utility, measured in terms of "Utils".
• An "Util" is a unit of measurement of utility.
• Marshall states that utility can be measured indirectly using the medium of money.

Price

• The value of the good expressed in terms of money.
• Fixed by the forces of demand and supply of the good.
• Determines what goods are to be produced and in what quantities.
• Decides how the goods are to be produced.

Market

• A place where buyers and sellers enter into an exchange of goods and services over a price.

Cost

• The expenses incurred to produce or acquire a given quantum of a good.
• Together with revenue, it determines the profit gained or the loss incurred by a firm.

Revenue

• Income obtained from the sale of goods and services.
• Total Revenue (TR) represents the money obtained from the sale of all the units of a good.
• TR = P x Q, where P is the price per unit of the good and Q is the total quantity of the goods sold.

Equilibrium

• Stable Equilibrium:
• Particular Equilibrium and General Equilibrium:
  • An equilibrium, when it pertains to a single variable, may be called particular equilibrium.
  • An equilibrium, when it relates to numerous variables or even the economy as a whole, may be called general equilibrium.### Goods and Services
• Goods and services satisfy human wants
• In Economics, "goods" implies "services" unless specified otherwise

Types of Goods

• Goods are tangible, have physical dimensions, and can be preserved over time
• Goods exist independently of their owner and are transferable
• Goods have value-in-exchange

Kinds of Goods (and Services)

• Free goods: available in nature, abundant, and do not require expenditure (e.g., air, sunshine)
• Economic goods: have value-in-exchange and require expenditure (e.g., water)
• Capital goods: do not directly satisfy consumer wants, but help produce consumer goods (e.g., machines)
• Perishable goods: have a limited lifespan and can be easily destroyed
• Durable goods: have a longer lifespan and can withstand wear and tear

Public vs. Private Goods

• Public goods: available to everyone, regardless of who pays and who doesn't
• Private goods: refer to opportunity cost, where someone has to pay the cost of producing benefits

Wealth Definition: Different Perspectives

Adam Smith (The Classical Era)

• Definition: Economics is the science of wealth
• Key point: Wealth is created and increased when individuals pursue their self-interest, guided by an "invisible hand" that promotes the collective good
• Criticisms: Overemphasis on material wealth, neglecting human welfare, and ignoring religious and spiritual values

Alfred Marshall (The Neo-Classical Era)

• Definition: Economics is a study of humankind in the ordinary business of life
• Key point: Focus on welfare and how it is influenced by both material and immaterial factors
• Criticisms: Definition of welfare is not clear, and overemphasizes material things over immaterial services

Lionel Robbins

• Definition: Economics is a science of choice
• Key point: Focus on scarcity and how individuals make choices under these constraints
• Criticisms: Fails to distinguish between goods that contribute to human welfare and those that do not

Scope of Economics

• Economics is concerned with human beings and their activities related to wealth
• Economics is an art and a science, providing guidance for solving economic problems
• Economics is a positive science, analyzing problems based on facts, and a normative science, examining what ought to be

Economics Definitions

Alfred Marshall (The Neo-Classical Era)

• Definition: Economics is a study of mankind in the ordinary business of life
• Focus on welfare, which means happiness or comfortable living conditions

Lionel Robbins (The New Age)

• Definition: Economics is a science that studies human behavior as a relationship between ends and scarce means with alternative uses
• Key points: Unlimited human wants, scarce resources, and alternative uses

Paul Samuelson (The Modern Age)

• Definition: Economics is the study of how men and society choose to employ scarce productive resources to produce various commodities over time and distribute them for consumption
• Key points: Scarcity, alternative uses, and dynamic nature of economics

Learn about the meaning and nature of economics, including its origins and evolution as a field of study.