Nature of Economics PDF

What is Scope of economics? Economics Assumptions Nature of in Economics Economics What is Economics? Economics is the science that deals with production, exchange and consumption of various commodities in economic systems. It shows how scarce resources can be used to increase wea...

What is Scope of economics? Economics Assumptions Nature of in Economics Economics What is Economics? Economics is the science that deals with production, exchange and consumption of various commodities in economic systems. It shows how scarce resources can be used to increase wealth and human welfare. The central focus of economics is on the scarcity of resources and choices among their alternative uses. Meaning of Economics The term “Economics” owes its origin to the Greek word “Oikonomia”, which can be divided into two parts: oikos means home and nomos means management. Thus, in earlier times, economics was referred to as home management where the head of a family managed the needs of family members from his limited income.  Till the 19th century, Economics was known as “Political Economy.” The book named “An Inquiry into the Nature and Causes of the Wealth of Nations” (1776) usually abbreviated as ‘The Wealth of Nations’, by Adam Smith is considered as the first modern work of Economics. Economics Definition Defining economics has always been a controversial issue since time immemorial. Definition of economics by different Wealth Definition of Economics economists have different viewpoints. Some economists had Welfare Definition of Economics a viewpoint that economics deals with problems, such Scarcity Definition of Economics as inflation and unemployment while others believed that economics is a study of money. Therefore, a simple Growth Definition of Economics definition of economics is defined by taking four definition. Wealth Definition of Economics This is a classical definition of economics by Adam Smith, who is also considered as the father of modern economics. Economics is the study of the nature and causes of nations’ wealth or simply as the study of wealth. Adam Smith Key Features of Wealth Economics Definition The main objective of Economics is to gain maximum wealth as possible; The core of economic activity are production, distribution and consumption; It deals with the causes of the creation of wealth in an economy; The term wealth used in this definition referred to material wealth. Welfare Definition of Economics It is a neo-classical definition of economics by Alfred Marshall. It is the study of mankind in the ordinary business of life. It enquires how he gets his income and how he uses it. In one view, it is a study of wealth and on other hand it is part of study of man. Alfred Marshall Key features of Welfare Economics Definition It defines Economics as the study of activities related to a human being and their material welfare. Marshall clarified that Economics is related to incomes of individuals and its uses for creating material welfare. Collectively, incomes of a group of individuals form the wealth of a nation and ultimate goal is to increase welfare of individual by their routine activities. Scarcity Definition of Economics It is a pre-Keynesian definition of economics by Robbins (1932) in his book “Essays on the Nature and Significance of the Economic Science”. Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses. Lionel Charles Robbins Key features of Scarcity Economics Definition It recognized that Economics is a science deal with the economic behaviors of a human being. It also focuses on optimum utilization of scarce resources. It provides three basic features of human existence, which are unlimited wants, limited resources, and alternative uses of limited resources There is a need for efficient use of scarce resources, and the primary objective of Economics is to ensure efficiency in the use of resources with a purpose to satisfy human wants. Growth Definition of Economics This is the modern perspective definition of economics by Samuelson. He provided the growth-oriented definition of economics. Paul Samuelson Economics is the study of how man and society choose with or without the use of money to employ the scarce productive resources, which have alternative uses, to produce various commodities over time and distributing them for consumption, how or in the future among various person or groups in society. Key features of Growth Economics Definition It deals with the allocation of scarce resource to be used in productive purposes. The selection of the most efficient use of the resources from alternative ways. The growth of economies will depend upon the consumption and production in the economy. This definition also points towards Economics as a study of an economic system. Economics is the study of choice under conditions of scarcity. Economics have different definition by different economists and social thinkers with different objectives and contexts. All these definitions are correct, and none can be taken as universally acceptable. Economics is broadly classified into two types: Microeconomics is a branch of economics that studies the behavior of individual consumers and organizations in the market. It focuses on the demand and supply, pricing, and output of individual organizations. Macroeconomics examines the economy as a whole and deals with issues related to national income, employment pattern, inflation, recession, and economic growth. Difference Between Micro and Macro Economics Microeconomics deals with the economic problems of a single industry or organization, while macroeconomics deals with the problems of an economy as a whole.  What is Microeconomic? Microeconomics is a branch of economics that deals with the study of the economic behavior of individual organizations or consumers in an economy. Moreover, microeconomics focuses on the supply and demand patterns and price and output determination of individual markets. Microeconomics lays emphasis on decisions related to the selection of resources, the amount of output to be produced, and the price of products of an organization. Thus, it can be said that the focus of microeconomics is always at the individual level. Microeconomic Definition Following are the important definitions of microeconomics: According to Henderson and Quant, “Microeconomics is the study of economic actions of individuals and well-defined groups of individuals.” According to Ghrdener Ackley, “Microeconomics deals with the division of the total output among industries, products and firms and the allocation of the resources among competitive use. It considers problems of the income distribution. Its interest is in relating prices of particular goods and services.” According to Prof. Boulding, “Microeconomics is the study of a particular firm, a particular household, individual price, wages, income, industry and particular commodity.”  Microeconomic Definition According According According to Watson, “Microeconomics is the According to Prof. Leftwitch, “Microeconomics theory of the behavior of small units, like the is concerned with the economic activities of consumers, producers and markets.” economic units as consumers, resource owners and business firms.” Importance of Microeconomics Price Determination: Micro-economics plays an important role in price determination and volume of production, allocation of resources etc. Helps in Aggregate Study of Economic Problems: The total economy is constituted of several small units. Hence, after study of small units, the study of the problem of the total economy becomes easier. Economists study economics problems where as in micro-economics, small units are studied, which facilitates in understanding the economy and aggregate study of bigger problem. Importance of Microeconomics It Explains Various Aspects of International Trade: Microeconomics theories explain many aspects of international trade such as the emergence, nature and gains of international trade, determination of exchange rate, impact of tariffs on prices etc. Helps in Individual Decisions: Microeconomics studies the individual units. Hence, economic decisions in respect to individual units may be taken easily, with its help. A consumer may take decision in what quantity a commodity is to be purchased, at various prices. Similarly, a firm or an industry can take decisions decision regarding volume of production at various levels, taking production costs into consideration. Importance of Microeconomics It Teaches the Art of Economizing: microeconomic principles deal with the economizing of scarce resources and show how to use them efficiently. Microeconomic law, like the law of substitution, shows how a consumer can maximize his satisfaction by equating the ratios of marginal utilities to the prices of different goods which he buys. Likewise, there is optimum utilization of the factors of production when their marginal products become unequal. It Helps in Regional Policy Formulation: With the help of micro-economics the study of particular area or particular use is possible. With its help, suggestion may be given in the context of problems of any related industry, by the study of government policies. For example, problem of textile industry may be studied, with reference to Government polices and necessary suggestion may be given. Importance of Microeconomics It Provides a Base to Business Decision-making: For example, the knowledge of price theory has its own significance in practical business decision-making and it is useful to a business in determining the price policy. It guides in attainment of maximum productivity through optimum allocation of his given resources. Helpful in Economic Policy Formulation: Microeconomics is useful in determination of economic policies. The justification of various economic policies of the government is decided, in the contest of their effects on individual units. In these policies, effects on prices, effects on price of any particular commodity, wages and personal, consumption may be tested. Limitations of Microeconomics Microeconomics is very important and useful for economics analysis. Below are the following limitations of microeconomics: Unrealistic and Impractical Assumptions: Microeconomics is based on several unrealistic and impractical assumptions and hence the conclusions drawn are not correct and their desired use does not become possible. The entire microeconomics is based on the assumption of full employment even in a short-term analysis, which is unrealistic. Microeconomic theories assume laissez faire policy and pure capitalism in their behavioristic models. Today there is no pure capitalism, so most of the microeconomic theories have no significant relevance to practice. Situation perceived by assumptions like perfect competition, full employment, full dynamism, etc. are not visible in real life.  Limitations of Microeconomics Ignorance of Macro Economy: Microeconomics studies specific economic units separately from the rest of the whole economy. It explains only a part and not the whole of working of an economic system. Hence, complete knowledge of specific areas becomes possible but drawing of conclusions regarding the whole economy is not possible by it.  Limitations of Microeconomics Unusable for Studies of Certain Economic Problems: Microeconomics is not useful for study of certain economic problems. For solution and study of modern problems, Government recognizes national level as the base, which is related to macroeconomics. Intervention of Government is consistently increasing in various economic activities. Employment policy, tariff policy, distribution of income and wealth, export- import policy, industrialization, economic planning and population are subjects of national importance. Their study is possible only in macroeconomics and not in microeconomics. Limitations of Microeconomics By assuming independence of wants and production in the system, microeconomics has failed to consider their “dependence effect” on economic welfare. Limitations of Microeconomics Microeconomics misleads when one tries to generalize from the individual behavior. It is improper to portray the character and behavior of aggregate simply by generalizing from character and behavior of the individual components What is Macroeconomics? Macroeconomics is a branch of economics that mainly deals with the economic behavior of various units combined together. Macroeconomics focuses on the growth of an economy as a whole by undertaking the study of various economic aggregates, such as aggregate supply and demand, changes in employment, gross domestic product (GDP), overall price levels, and inflation. Macroeconomics Definition Following are the important definitions of macroeconomics: According to Prof. Chamberlin, “The macro model deals with aggregative relatives.” According to Gardna Ackley, “Macroeconomics concerns with such variables as the aggregate volume of the output of an economy with the extent to which its resources are employed, with the size of national income and with the general price level.” Macroeconomics Definition According to Prof. K. E. Boulding, “Macroeconomics deals not with individual quantities as such but with aggregates of their quantities, not with individual incomes, but with national income, not with individual prices, but with price level, not with individual output but with national output.” According to M.H. Spencer, “Macroeconomics is concerned with the economy as a whole or large segment of it. In macroeconomics, attention is focused on such problems as the level of unemployment, the rate of inflation, the nation’s total output and other matters of economy-wide significance.” Importance of Macroeconomics The following points explain the importance of macroeconomics: Macroeconomics helps in understanding the functioning of an economic system and provides a better view of the world’s economy. It enables nations to formulate various economic policies. It helps economists in finding solutions to economic problems by providing various economic theories. It helps in bringing stability in prices by supporting detailed analysis of fluctuations in business activities. It helps in identifying the causes of the shortage in the balance of payment and determining remedial measures. Scope of Economics The scope of economics has been broadened to many and some area are mentioned below: Microeconomics Macroeconomics International arena Public finance Welfare Health Environmental studies Urban and rural development Assumptions in There are certain assumptions in economics about an economic situation to happen in the future. Economists use assumptions to Economics break down complex economic processes and advocate different theories to understand economic variables. Three important assumptions in economics, are as follows: Consumers have rational preferences Existence of perfect competition Existence of equilibrium  Consumers Have Rational Preferences This assumption states that consumers act in a rational manner and focus on satisfying their needs. It is also assumed that the tastes of consumers remain constant for a long period. For instance, a consumer who is vegetarian may not change his/her preferences in the near future. Existence of Perfect Competition According to this assumption, there is perfect competition in an economy, wherein there are numerous buyers and sellers. It is assumed that homogenous products exist in the market and both buyers and sellers cannot affect prices. Existence of equilibrium As per this assumption, equilibrium exists wherein both consumers and entrepreneurs achieve maximum satisfaction. In a market, there can be two types of equilibrium: industry equilibrium and firm’s equilibrium. An industry is at equilibrium if profits achieved are normal. On the other hand, a firm is at the state of equilibrium if its profits are maximum. Nature of Economics: as a Science, Art, Social Science Nature of economics is broadly categories into 3 types: Economics as a science, Economics as an art and Economics as a social science. Economics as a Science A subject is considered science if: It is a study of the relationship between cause and effect. It is capable of measurable and based on facts. It has its own methodological apparatus. It should have the ability to forecast. After being analyzed, economics has all the features of science. Like science, it has a cause and effect relationship between economic phenomena. For instance, Law of demand explains the cause and effect relationship between price and quantity demanded a commodity. Similarly, the outcomes are measurable in terms of money. It has its own methodology of study (induction and deduction). It forecasts the future market condition with the help of various statistical and non-statistical tools. Thus, majority of economic laws are of this type and therefore, economics as a science. Critics Economics as a science but not a perfect science like physical science. The fact is that we cannot rely upon the accuracy of the economic laws. The predictions made on the basis of economic laws can easily go wrong. In other words, the subject matter of economics is the economic behavior of man which is highly unpredictable. Two nature of Positive Normative economics as Economics Economics a science: Positive Economics A Positive Economics or science that is based on cause and effect relationship between variables but it does not pass value judgment. In other words, it states “what is”. Positive statements are about facts. They state what the reality is. Economics should be neutral between ends. It is not for economists to pass value judgments and make pronouncements on the goodness or otherwise of human decisions.  As normative economics or science, economics involves value judgments. It is prescriptive in nature and describes “what ought to be” or “what should be the things”. Normative Normative economics is concerned with normative statements. In this case, economics is not concerned with facts rather it is concerned Economics with how things should be. For example, the questions like what should be the level of national income, what should be the wage rate, how much of national product be distributed among people – all fall within the scope of normative economics. Thus, normative economics is concerned with welfare propositions. Why Economists Disagree?  Art is a branch of study that deals with expressing or applying the creative skills and Economics as imagination of humans to perform a certain activity. an Art Similarly, economics also requires human imagination for the practical application of scientific laws, principles, and theories to perform a particular activity. Art is a system of rules for the achievement of a given end. We know that in practice, economics is used for achieving a variety of goals. Every individual economic unit has an economic goal to achieve. It decides its course of action by keeping in mind the end to be achieved and the situation faced by it. Therefore, economic laws are widely used and relied upon at all levels of our economic activities. And that makes economics an art. Economics is an art: Art tells us how to do the thing i.e. to achieve an objective. Economics is also used for achieving a variety of goals. For e.g. All policies etc made in economics has the ultimate objective of solving economic problems. Art is the practical application of theoretical knowledge Like Art, Economics also practices its theoretical laws. For e.g. The various policies are made only after having theoretical knowledge of the society and country as a whole. Hence, economics is also an art.  Economics as a Social Science Economics is also considered as social science as it deals with studying the behavior of human beings and their relationships in society. This is because of the exchange of goods takes place within the society and among different societies to satisfy the needs and wants of people. Economics is a social science: Economists develop models, or theories, which are simplified representations of the real world. Models help economists to understand, explain, and predict real-world economic phenomena. Like other social scientists, economists usually do not perform laboratory experiments. They typically examine what has already occurred in order to test their theories. Economic theories, like all scientific theories, are simplifications—and hence are “unrealistic.” Economists, as do all scientists, employ assumptions. One important economic assumption is “all other things being equal.” Models are evaluated on their ability to predict and not on the realism of assumptions. Economic models relate to behavior, not thought processes. Thank You So Much MGA ANAK!