BASICS OF ECONOMICS:

Economic activities are those activities, which are concerned with the efficient use of such scarce means as can satisfy the wants of man. Human wants are unlimited, in the sense, that as soon as one want is satisfied another crops up. Most of the means of  satisfying these wants are limited, because their supply is less than demand. These means have alternative uses; there emerge a problem of choice. Everybody has to make a choice r ega rd t o t he u se o f h i s s ca r ce means so t ha t he may ge t max imum sa t i s f ac t i on f rom them. In short, Economics is the study of those activities of human beings, which are concerned, with the satisfaction of unlimited wants by utilizing limited resources.

Evolution of Economics: The term ‘Economics’ is derived from two words of Greek language, namely, Oikos (Household) and Nemein (to manage), Means Household management.

Definition of Economics:Definitions of Economics have been broadly divided into four parts:

Weal th De f in i t i on  – Adam Smi th Wel fa r e De f in i t i on – A l f r ed Mar sha l l Sca rc i t y De f in i t i on – L ione l  Robb ins Growth Or i en t ed De f in i t i on –  Pau l Samue l son

Adam Smith Definition of Economics as Science of Wealth: According to classical Economists like Adam Smith, J.B. Say, Walker, J.S. Mill etc. economics is a subject that studies nature of wealth and its production, consumption, exchange and distribution etc.

Definitions:• Adam Smith, “Economics is an enquiry into the nature and causes of wealth of nations”.

• J.B. Say, “Economics is the science which treats Wealth”.

• J.S. Mill, “Economics is the practical science of production and distribution of  wealth”.

Features: Economics is the study of wealth only: It deals with consumption, production, exchange and

distribution. It gives primary place to wealth and secondary place to study of man. Nature or Meaning of Wealth: Only such material commodities constitute wealth

are scarce and useful. Material goods are those goods which can be seen or touched, for example cloth, furniture etc. Non – material goods like services and free goods like air and water are not wealth.

Causes of Wealth: Economics seeks to examine the causes that lead to increase of wealth. There are two ways of increasing wealth:

o By inc r ea s ing t he supp ly o f goods t h rough l a rge –   s ca l e p roduc t i on

made  possible by saving the commodity.o By increasing the demand for goods through extension of market.

Economic man: The supporters and followers of wealth definition of economics have imagined such a man who is fully aware of his self – interest and who makes constant efforts to achieve his selfish ends to the maximum. Such a man is called economic man.

Criticisms: More emphasis on wealth: This definition has given more importance to wealth t han t o

man . Wea l t h t ake s p r i o r i t y ove r man . I n f a c t , wea l t h i s a means t o satisfy man’s wants. Man, not wealth should have been given greater importance.

Concept of Economic Wealth: Wealth definition of economics is based on the concept of economic man. But according to Marshall and his followers such as economic man who works for his selfish motives alone is not found in real life. Economics is therefore is a study of real social human being and not of economic man.

Neglect of welfare: This de f i n i t i on a t t a ches no s i gn i f i c ance t o t he s t udy o f economic welfare of society. It lays too much emphasis on the study of wealth– getting activities alone. It pays no attention to the economic well–being of the society by proper use and equitable distribution of wealth.

Neglect of the problem of scarcity and Choice: This definition completely ignores the study of two main features of economic activities, namely: Scarcity and Choice. Wants being unlimited and economic goods having several uses  being limited, there arises the problem of choice.

Neglect of means to attain wealth: This definition chooses attainment of wealth as the sole purpose of economics, but it does not specify the means, which should be adop t ed t o a cqu i r e wea l t h . Th i s de f i n i t i on g ive s no c l ea r i nd i ca t i on a s t o whe the r wea l t h ob t a ined t h rough l ega l o r i l l ega l means . As a ma t t e r o f f a c t , economics studies exclusively those means of wealth–getting  which are lawful and just.

Marshall’s Welfare Definition:  Neo – classical economists like Alfred Marshall, J.S. Mill, Pigou, Cannan etc. have included in the scope of economics those activities of man which are undertaken to acquire material goods which promote the welfare of mankind.

Definitions: • In the words of Marshall, “Economics is a study of mankind in the ordinary  business of life; it examines the part of individual and social action which is most closely connected with the attainment and with use of material requisites of well being.”

• According to Penson, “Economics is the science of material welfare”

Features: I m p o r t a n c e t o t h e s t u d y o f M a n : These de f i n i t i ons have acco rded

more impor t ance t o t he s t udy o f man t han t o wea l t h . Wea l t h i s pu re ly a means t o satisfy wants of the man.

Study of Social Man: In economics, one studies the economic activities of those men who live in the society. Individual and collective activities of such men that are part and parcel of the society are studied in economics.

Study of real man: Economics studies real man, who possesses several qualities, believes in social welfare and is influenced by economic and non – economic motives.

Material requisites: Economics s t ud i e s t hose ac t i v i t i e s o f t he man wh ich a r e closely connected with material necessary of well – being.

Welfare: Economics studies those material means which promote human welfare. Economics is a subject of man’s material well being. It is most closely connected with attainment and the use of the material necessary of well – being.

Money is the measure of Material Welfare: According to Pigou, material or economic welfare is that part of social welfare which can be measured directly or  indirectly with the measuring rod of money.

Criticisms: Regarding Ordinary business of life: The mean ing o f t he t e rm i s no t c l e a r .

Mar sha l l ha s u se t h i s t e rm to s i gn i fy e conomic ac t i v i t i e s , i . e . , a c t i v i t i e s concerned with wealth – earning and wealth – spending.

Limited Scope: This definition had narrowed the scope of economics. Economics need not confine itself exclusively to the study of attainment of material goods.

Uncertain concept of welfare: The concept of welfare is vague, uncertain and t empora ry . S tudy o f ma t e r i a l we l f a r e makes economics a s an unce r t a i n science. The concept of welfare belongs to the sphere of psychology. It varies with time, place, conditions and persons.

Economics is a Human Science: It studies the economic activities of those men who live in society, is also wrong. It studies economic activities of all human  beings whether they are members of society or not.

Economics is only a Positive Science: Economics is the function of Ethics. Economics does not give any clue to solve economic problems. It is ‘neutral between ends’. It is wrong to call it normative science or an art.

Impractical: Its assumption that those activities of man are studied in it which is concerned with his well–being is wrong. It is not so form practical point of view. Economics studies all those activities which are related to income – spending by man, whether they promote his well being or not.

Robbins Scarcity Definition: With regard to Scarcity definition of economics, Austrian economists Menger, Petter and English economists Stigler had expressed his views but it was examined in details by P ro f . L ione l Robb ins i n h i s book “An Essay on t he Na tu re and S ign i f i c ance o f Economics Science” published in 1932.

Definitions:•According to Lord Robbins, “ E c o n o m i c s i s a s c i e n c e t h a t s t u d i e s h u m a n behavior as a relationship between ends and scarce means which have alternative uses”.

• In the words of Harvey, “Economics i s t he s t udy o f how men a l l oca t e t he i r   limited resources to provide for their wants”.

Features: Unlimited Wants or Ends: By Ends, Robbins means wants. In economics, wants of

man are concerned with goods and services. These are called economic wants. There are no limits of these wants. As one is satisfied another one crops up. This chain of wants is endless. Economics is concerned with the satisfaction of economic wants irrespective of their being virtuous or otherwise.

Limited or scarce Means: Wants are greater than means. As the Demand is more than the supply.

W > MWhere, W = WantsM = Means> = Greater Than.

Alternative Uses of Means: These Scarce means have alternative uses. E.g. Milk we know means, is a means. It can use for preparing Butter, curd, cheese etc.

Wants Differ in Urgency: Man has several wants, but at any given time one of  these wants may be more urgent and important than other wants. As such wants differs in urgency. A person wants for his sick child, medicine, milk and fruit.

Economic Problem: W h e n a l l f o u r c h a r a c t e r i s t i c s o f h u m a n l i f e ; n a m e l y , unlimited wants, scarce means, alternative uses of means and different urgency of wants become operative, there arises the problem of choice. One has to make a cho i ce a s t o wh ich wan t t o be s a t i s f i ed f i r s t and by wha t means . P rob l em o f   choice making is called economic problem.

Opportunity Cost: Definition tells us that it is due to the problem of choice that in o rde r t o fu l f i l l one wan t we have t o fo r ego ano the r . We canno t f u l f i l l a l l ou r  wants (ends) simultaneously. The opportunity cost of a thing is always expressed in terms of the next best alternative foregone.

Merits: Positive Science: As the Definition explains the nature of economic activities. It is neutral with

regard to welfare. It is silent about value – judgment. It is neither a normative science nor art. It is simply a positive science.

Analytical: Economic problems arise because ends (wants) of man are unlimited but the means to satisfy them are not only scarce but also have alternative uses. Man has to make a choice with regard to ends and scarce means. This definition is a scientific analysis of the origin of economic problems and their solution.

Wider Scope: Economics encompasses all sorts of economic activities whether  they are related to material goods or non – material services; whether they are conducive to well – being or not.

Universal: This definition is concerned with the problem of unlimited ends (wants) a n d s c a r c e m e a n s . T h i s p r o b l e m i s f o u n d a t a n y p l a c e a n d i n a n y t y p e o f economy, that is capitalism, socialism etc.

More Logical Explanation of Economic Problem: This definition has offered a more l og i ca l and p r ec i s e exp l ana t i on o f   t he na tu r e o f e conomics . Economic problem does not arise due to material well–being. It arises mainly due to the scarcity of means in relation to their demand. Problem of choice or Valuation, which is the main problem of economics, arises because of scarcity of means and tier alternative uses.

Criticisms: Ignores Social Aspect of Economic Activities: Robbins definition ignores the social aspect

of economic activities. Robbins is wrong when he holds that the a c t i v i t i e s o f t hose who l i ve ou t s i de t he soc i e ty a l so fo rm pa r t o f t he s t udy o f   economics. Need of the study of economics is felt only when economic problems assume social significance.

Economics is not neutral as regards Ends: Economics is social science. Economists have to state their judgment as to which ends are noble and wh ich ones a r e ba se and so need be unneces sa ry . I n t he words o f Thomas , “The function of an economist is not only to explore and explain, but also to advocate and criticize”.

Concealed Concept of Welfare: This definition refers to maximization of satisfaction or welfare as relates to the study of economics to allocating the scarce means into alternative uses in such manner as to get maximum satisfaction.

Very Wide scope of Economics: It has unnecessarily widened the scope of economics. If economics is to be considered as the study of choice of all sorts of scarce means, then it would become difficult to decide which action of man is to be studied and which is to be left out.

Not only a Positive Science: Definition state that economics is a positive science that concerns itself with mere choice – making valuation and that it has nothing to do with ethics or welfare of man.

Impractical: This definition has provided economic as impractical subject. It is known to all of us that want are unlimited and means are scarce. Economic cannot give any advice in this respect. If it is so, then economics has no practical utility.

Scarcity is not the cause of Economic Problem: This definition is based on wrong a s sumpt ion t ha t s ca r c i t y i s t he ma in cause o f a rousa l o f e conomic  problems. Many important problems such as the problem of unemployment and depression are economic problem but they arise not due to scarcity.

Use of Words ‘Means’ and ‘Ends’: The difference between the words ends and means i s no t c l e a r . A t h ing may be a mean a t one t ime and an end a t another time. In short, Robbins definition is a scientific and analytical definition of economics. Its main defect is it has treated economics as a simple theoretical study. It has ignored the practical or welfare aspect of economics. In fact, economics cannot be separated from its welfare content.

Growth Oriented Definitions: According to modern economists like noble prize – winner Prof. Samuelson, Benham Lipsey, Steiner, Ferguson etc. both the problems concerning nature of scarce means and their proper use are the subject of study of economics.

Definitions:• In the words of Nobel Prize winner Prof. Paul Samuelson, “Economics is the study of how people and society end up choosing with or without the use of money, to employ scarce productive resources that could have alternative uses, it produces various commodities over time and distributes them for consumption, now or in the future, among various persons and groups in society. It analyses costs and  benefits of improving patterns of resources allocation.”

• C.E. Ferguson has defined economics in these terms, “Economics is a study of the e conomic a l l oca t i on o f s ca r ce phys i ca l and human means ( r e sou rce s ) among competing ends, an allocation that achieves a stipulated optimizing or maximizing objective.”

Features: Economic Resources: These definitions underline the point that economics is a study

of economic resources. These economic resources refer to natural, human

and  phys i ca l   r e sou rce s wh ich s a t i s fy human wan t s bu t a r e s ca r ce   and  have alternative uses.

Efficient Allocation of Resources: C h o i c e – m a k i n g i s t h e m a i n p r o b l e m o f e conomics . E f f i c i en t a l l oca t i on and u se a r e t he ch i e f ob j ec t i ve s o f cho i ce – making.

Ful l  Ut i l i za t i on  o f  Resources : Acco rd ing t o g rowth o r i en t ed de f i n i t i ons , economics is not concerned with the allocation of resources only but also with their full use and employment.

Increase in Productivity: This definition also underlines the fact that the objective of economics is to increase the quantum and productivity of resources in future. This results in an increase in the growth rate of economy, more employment and higher standard of living.

Merits: Realistic Explanation of economic problem: Th i s de f i n i t i on o f f e r r e a l i s t i c

explanation of economic problems. Economic problems arise because wants are unlimited but means to satisfy those wants are limited.

Science and Art: According to Samuelson, economics is oldest among arts and newest among the group of science. In fact it is the queen of social sciences.

Not Neutral as regards Ends: As per these definitions, economics welfare forms apart of the study of economics. Economic welfare is that part of general welfare which is measured in terms of money. Economies studies both material and non – material means of economic welfare.

Practical: These definitions have rendered economics a more practical and useful subject. Economics does not analyses economic problem only rather it suggests measures to solve them.

Dynamic: These de f i n i t i ons have impa r t ed dynamism to e conomics . S tudy o f   economics is not restricted to the present day problems relating to consumption, production, distribution, etc. of economic resources, but it studies their future problems as well.

Universal: T h e s e d e f i n i t i o n s a r e u n i v e r s a l . T h e s e a r e c o n c e r n e d w i t h t h e economic problems of all types of economies, developed or underdeveloped.

Analysis of Economic Quantities: Boulding holds that according to growth – oriented definitions of economics, a major part of the economic analysis relates to the investigation of the forces determining the form of economic quantities and their mutual relations.

In short, the above definitions of economics are superior and comprehensive. Growth- o r i en t ed de f i n i t i ons o f e conomics i nc lude t he me r i t s o f t he de f i n i t i ons a s g iven by Marshall and Robbins. These definitions have given a more quantitative, dynamic and practical form of study of economics.

SCOPE OF ECONOMICS:The scope of a subject refers to the fields they actually cover. The scope of economics can be finely understood if we classify it into heads viz:

Subject matter Nature Limitations

Subject Matter:- It can be further studied as:

According to Adam Smith: The classical economist Adam Smith considered wealth as the subject matter of economics. According to him economics deals with the activities of man in earning his income me and spending it among different objects in order to obtain the maximum benefit for satisfaction of his wants.

According to Marshal: The neo classical economist Alfred Marshal regarded material welfare it be the subject matter of economics. According to him the activities of mankind as a social being and in the ordinary business of life which are related to the attainment of economic well being through the use of the material requisite are considered to be the subject matter of economics.

According to Robbins: According to Robbins those activities, which originate because of the imbalance relation between human wants and available resources constitute the subject matter of economics.

According to Keynes: Keynes is of the view that economics problems constitute the subject matter of economics.

Nature of Economics: The nature of economics includes study or discussion that weather economics is arts or science? Economics as a Science: Most of the economists regard economics as a science because it is

a body of knowledge, which deals facts and rules and studies their cause with their effect. Now economics as a science generally studied two heads:

o Economics as a Positive Science: Most of the English economists regard

economics as a positive science because it examines the relationship between causes and effect. It studies economic problems, which are existing and effect directly human life.

o Economics as a Normative Science: Some economists think that economics is a

normative science. It tells that weather a particular thing is describable or not. The aim of economics is to promote human welfare so it studies the factors relating to what out to be.

Economics is an Art: Economics not only studies how economic problems arise but it also recommends positive measures to end these problems. The purpose of economics is to promote welfare and satisfaction and thus it outlines the guidelines to achieve these objectives.

Limitations of Economics: Economics does not study all human activities. It is limited only to those activities, which are

related to wealth. Economics studies only the human activities. It does not study the activities of other creatures. Economics studies the activities of normal real and social man. The activities of insane,

drunkards etc are not studied under economics.