ECONOMICS – DEFINITION AND NATURE SCOPE.pptx

Economics– Definition and Nature & Scope  Derivation The word ‘Economics’ was derived from two Greek words, oikos (a house) and nemein (to manage) which would mean ‘managing an household’ using the limited funds available, in the most satisfactory manner possible.  Meanin...

Economics– Definition and Nature & Scope  Derivation The word ‘Economics’ was derived from two Greek words, oikos (a house) and nemein (to manage) which would mean ‘managing an household’ using the limited funds available, in the most satisfactory manner possible.  Meaning  Economics is everywhere  Starts from morning till evening  Begins from cradle and ends at grave and even after grave Economics is the science that deals with  production  exchange  consumption  It shows how scarce resources can be used to increase wealth and human welfare.  The central focus of economics is on scarcity of resources and choices among their alternative uses.  The resources or inputs available to produce goods are limited or scarce.  Scarcity induces people to make choices among alternatives, and the knowledge of economics is used  Factors responsible for the emergence of economic problems Existence of unlimited human wants and Scarcity of available resources.  The numerous human wants are to be satisfied through the scarce resources available in nature.  Economics deals with how the numerous human wants are to be satisfied with limited resources.  Science of economics revolves around want - effort - satisfaction. Wealth Definition Adam smith Wealth Definition Adam smith (1723 - 1790), in his book “An Inquiry into Nature and Causes of Wealth of Nations” (1776) defined economics as the science of wealth. He explained how a nation’s wealth is created. He considered that the individual in the society wants to promote only his own gain and in this, he is led by an “invisible hand” to promote the interests of the society though he has no real intention to promote the society’s interests  Welfare Definition Alfred Marshall Alfred Marshall (1842 - 1924) “Principles of Economics” (1890) “Political Economy” or Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well being”. The important features of Marshall’s definition are as follows: a) According to Marshall, economics is a study of mankind in the ordinary business of life, i.e., economic aspect of human life. b) Economics studies both individual and social actions aimed at promoting economic welfare of people. c) Marshall makes a distinction between two types of things, viz. material things and immaterial things. Material things are those that can be seen, felt and touched, (E.g.) book, Scope of Economics Economics - A Science and an Art Economics is a science:  Cause and effect relation.  Amenable to measurement.  Based on logic Economics - A  StudySocial social Science behaviour i.e., behaviour of men in-groups. Economics as an art  An art is a system of rules for the attainment of a given end.  An art economics teaches us to do.  Applying this definition, we find that economics offers us practical guidance in the solution of economic problems. Science and art are complementary to each other and economics is both a science and an art.  Positive and Normative Economics a) Positive science: It only describes what it is and normative science prescribes what it ought to be. Positive science does not indicate what is good or what is bad to the society. It will simply provide results of economic analysis of a problem. b) Normative science: It makes distinction between good and bad. It prescribes what should be done to promote human welfare. A positive statement is based on facts. A normative statement involves ethical values. For example, “12 per cent of the labour force in India was unemployed last year” is a positive statement, which could is verified by scientific measurement. “ Methodology of Economics Deductive method and inductive method Deductive method and inductive method economic analysis  The two methods work best when used together.  They are corelative and help in establishing concrete theories and producing better solutions to economic and social problems.  Deductive method  It is also known as the analytical abstract priori method or the hypothetical method.  A person assumes the information and then follow the phase of logical reasoning to arrive at a concrete result or conclusion.  By including some assumptions and experiments, a theory is built in this method. This method involves three stages; 1.Observation 2.Logical reasoning 3.Experimentation, instance and testing through observation. Merits of the deductive method  Simple and convenient: This method is observation based and is easy to practice. For example, in the Law of Diminishing Marginal Utility, after the increase in consumption, the consumer reaches the point of satiety, and the utility of the good begins to diminish.  Removes the need for experimentation: Experiments are vital in subjects like chemistry and physics but not mandatory in the case of economics.  Accurate results: Deductive method includes logical reasoning on the part of the economist or the analyst. Hence, logical thinking increases the chances of precision and sets high standards.  Demerits of deductive reasoning  Assumption based: Assumptions have a higher chance of going wrong and result in invalid solutions. This can lead to a serious economic crisis if done inappropriately.  Imaginative: There is a greater chance of the deductive method being far from reality since it works based on imagination. Real-life problems cannot be solved by imaginative solutions.  Inductive method  Analysts or theorists progress from a practical outlook to a scientific problem to shorten the gap between theoretical knowledge and practical applications.  The induction method is carried out with the help of statistics and experimentation.  Various statistical functions are used so it involves a lot of numbers, quantities and formal terms. Merits of inductive method  It is a very practical and applicable method, and it is simply descriptive.  It is totally verifiable since it deals with quantities.  Laws and theories under the inductive method may not be universal but are condition specific. Demerits of inductive method  If in case the analysts or theorists do not possess a balanced and stable judgement, then this method is unhelpful as they will be extracting insufficient data.  Inductive method works based on experiments, and experiments require materials and resources. It is often difficult to gather and access the facts required for experiments.  The Inductive method is an incomplete method alone. It can be used if combined with deductive methods or deductive reasoning.  Subject Matter of Economics a) Traditional Approach: Economics is studied under five major divisions namely consumption, production, exchange, distribution and public finance. Consumption: The satisfaction of human wants using goods and services is called consumption. Production: Goods that satisfy human wants are viewed as “bundles of utility”. Hence production would mean creation of utility or producing things for satisfying human wants. Exchange: Goods are produced not only for self-consumption, but also for sales. They are sold to buyers in markets. The process of buying and selling constitutes exchange. Distribution: The production of any agricultural commodity requires four factors, viz., land, labour, capital and organization. These four factors of production are to be rewarded for their services rendered in the process of production. The landowner gets rent, the labourer earns wage, the capitalist is given with interest and the entrepreneur is rewarded with  Modern Approach i) Microeconomics and ii) Macroeconomics. Microeconomics analyses the economic behaviour of any particular decision-making unit such as a household or a firm. Microeconomics studies the flow of economic resources or factors of production from the households or resource owners to business firms and flow of goods and services from business firms to households. It studies the behaviour of individual decision-making unit with regard to fixation of price and output and its reactions to the changes in demand and supply conditions. Hence, microeconomics is also called price theory. Macroeconomics studies the behaviour of the economic system as a whole or all the decision-making units put together. Macroeconomics deals with the behaviour of aggregates like total employment, gross national product (GNP), national income, general price level, etc. So, macroeconomics is also known as income theory. Microeconomics cannot give an idea of the functioning of the economy. Similarly, macroeconomics ignores the individual’s preference and welfare. What