INTRODUCTION TO ECONOMICS 1.1ORIGIN OF ECONOMICSEconomics was originally introduced as a science of statecraft. It was concerned with the collection of revenuefor the state i.e., government. Advisors to the government were also required to point out the best possible wayof spendingthe revenue. The growthof trade, industryandcommerce after industrial revolutionintheeighteenth century required that the functions of the state should be specified. Political economy emerged as theresult of the efforts to define functions of the state. Wealth was identified as the source and means to satisfy ourvarious wants, so wealth was emphasied. Adam !mith, generally "nown as the father of Economics definedEconomics as #science of wealth$.What economics is all about?The concept of Economics has been changing during different stages of developing Economics as sub%ect. &etus discuss these stages.Stages of Developing Economics as a SubectEconomics as a sub%ect has developed in the following stages'(. Wealth concept). Welfare concept*. !carcity concept+. ,evelopment concept!" Wealth Concept,uring the eighteenth and the early part of nineteenth century, classical economists, such as Adam !mith, -...!ay and Wal"ar defined Economics as the science of wealth. Adam !mith systematied the concept in the formtheboo"whichwasentitledas ##Anenquiryintothenatureandcauseof thewealthof nations.$$ Theseeconomists stated that Economics is related to and concerned with wealth.E/cessiveemphasis onwealthenabledthebusinessmenandindustrialiststoamass wealthbyanymeans,whether fair or foul. !ocial reformers li"e Thomas, 0arlyle, -ohn 1us"in, 0harles ,ic"ens and William 2orrisreacted sharply to the wealth concept of Economics. They branded Economics as a dismal science, gospel of2ammon and science of bread and butter etc. #" Welfa$e ConceptAccording to this concept, Economics is not the science of wealth but it is concerned with human welfare. Itstudiesandemphasieswealthasameans of satisfyinghumanwants, not asanendof humanactivities.2arshall was the pioneer of welfare thought. According to him, ##Political Economy or Economics is the studyof man"ind in the ordinary business of life..... Thus it is on the one side a study of wealth and on the other, andmore important side a part of the study of man.$$ The important features of this welfare concept are as below '3i4 Economics is the science of human welfare.3ii4 Economics is the study of man"ind in the ordinary business of life.3iii4 Economics is a social science.3iv4 Economics is the study of only economic activities.%" Sca$cit& ConceptTheproponent ofthisconcept was#&ionel 1obbins$.Accordingtohim, ##Economicsisthescience, whichstudies human behaviors as a relationship between ends and scarce means which have alternative uses.$$ Theimportant features of this concept are'3i4 Economics is a positive science.3ii4 Economics is the study of human behavior.3iii4 5ur wants are unlimited.3iv4 5ur resources are limited6scarce.3v4 1esources can be put to alternative uses.Accordingtothisapproachcertainuniversal truthareregardedasthebasisof economicproblems. Everyindividual andeconomyhasunlimitedwants andscarcemeans tosatisfythesewants. Inabilitytosatisfyunlimited wants with limited resources creates the problems of choice ma"ing i.e., fi/ing priority of wants to be(INTRODUCTION TO ECONOMICS 1.1satisfied. As resources can be put to alternative uses, we will have to ta"e decision as to which specific wantshouldbesatisfiedwithparticularmeans. Inthisway, choicema"ingor decisionma"ingisthemeansoftac"ling all these economic problems. '" Development Concept!carcity concept e/plains the presence of economic problems. It is concerned with the positive aspect of thesub%ect. 2odern economists feel that economist should also suggest how the scarce means should be furtherincreased to satisfy more wants and attain good living. The originator of this concept is Professor !amuelson,who presented the growth7oriented definition of Economics. According to him, ##Economics is the study of howman and society choose, with or without the use of money to employ scarce productive resources, which couldhave alternative uses, to produce various commodities over time and distribute them for consumption now andinthefutureamongvariouspeopleandgroupsof society. Theimportant featuresof thisconcept maybesummaried as follows'3i4 Problem of choice ma"ing arises due to unlimited wants and scarce means. We have to decide whichwants are to be satisfied and which of them are to be deferred.3ii4 Wants have tendencytoincrease inthe moderndynamic economic system, sothe availableresources shouldbe %udiciouslyused. .est possible efforts shouldalsobe made toincrease theresources, so that increasing wants can be satisfied.3iii4 Economics is not concerned with the identification of economic problems but it should also suggestways and means to solve the problems of unemployment, production, inflation etc.3iv4 Economists should also suggest how the resources of the economy should be distributed amongvarious individuals and groups.3v4 Economists should also point out the plus and minus points of different economic systems.ECONOMICS (S SCIENCE!cience is the systematied body of "nowledge which creates relationship between causes and their effects. Inother words, every discipline which has got certain theories, concept and laws showing the relationship betweencauses and their effects is science. Economics has got its own theories, concepts and laws, so it is definitely ascience though not an e/act science, li"e Physics and 0hemistry. !cience is classified as follows')ositive Sciences* It deals with the actual happenings. It presents the real picture of facts without any commentsand suggestions. Economics also deals with the positive issues, so it is a positive science.Positive issues6E/amples of Positive !tatements in Economics3i4 .angladesh is an over7populated country.3ii4 Prices in .angladesh economy are constantly rising.3iii4 We have adopted mi/ed economy.3iv4 .angladesh is a least developed economy.3v4 There is inequality of income in our economy.No$mative Science* It deals with norms of facts and suggests, what ought to be or what ought to have been. Itpromotessocial andeconomicvalues. Economicsisalsonormativescience, becauseit suggestsways andmeasures to be adopted for economic betterment of the people.8ormative issues6E/amples of 8ormative !tatements in Economics3i4 The fundamental principle of economic development should be the developments of our ruralareas.3ii4 Agricultural income should also be ta/ed.3iii4 There should not be multi7national companies in consumer goods industries in our country.3iv4 Private sector should be encouraged for accelerating the pace of our industrialiation.ECONOMIC +(WS o$ )RINCI)+ESIneconomics, theterm#law$ meansstatementsofgeneraltendencies. Economiclawsgeneraliethehumanbehaviour regardingeconomic activities.According toProfessor2arshall,##Economic laws orstatements of)INTRODUCTION TO ECONOMICS 1.1economictendenciesarethosesociallawswhichrelatetobranchesofconductinwhichthestrengthofthemotives chiefly concerned can be measured by a money price.$$Cha$acte$istics of Economic +a,s!" Economic la,s a$e statements of economic ten-enc&* Economic laws, li"e other laws establish relationshipbetween causes and their effect. As these laws are not cent per cent e/act, so they are e/pressed in terms ofeconomictendencies. Inother words, theselaws e/plaintheli"elihoodof humanbehavior under specificconditions. 9or e/ample, according to law of demand, the demand of a particular commodity will fall, if there isan increase in its price. In real life, there are certain cases, when demand of the commodity may not fall evenafter the increase in its price. Economic laws are not as e/act as the laws of Physics and 0hemistry.#" Economic la,s a$e h&pothetical*Economic laws simply indicate the general tendency of human behavior.These laws are not applicable in every situation. This is why, every economic law is associated with the phrase,#otherthingsbeingequal$ or#otherthingsremainingthesame$. 9ore/ample, thelawofdiminishingutilitye/plains that utility derived from the use of the successive units of a commodity goes on falling, but this lawwill apply, when units are uniform, sufficient and there is always continuity in their use.%" Economic la,s a$e $elative* Economic laws are closely related to time, place and situations. 2ost of the economic laws are not universal. 0hange of time, place and situations ma"e then ineffective.'" Economic la,s a$e human la,s*Economic laws may be termed as human laws, because, they are basedupon human behaviour. &aboratory testing of human behaviours cannot be made, as that of matters in physicsand salts in chemistry. This is why, economic laws are less e/act. It is an accepted truth that every individual isdifferent from the other individual or there are individual differences, so laws regarding human behaviours cannever have universal application.." Ce$tain unive$sal la,s* 0ertain economic laws have universal application, such as problems of scarce meansand endless wants. It is equally true for every individual and economy.2arshall has compared the economic laws with the law of tides. It shows that economic laws are less e/act,seldom deficit and lac" universal application. ,ue to the use of statistical analysis and mathematical methodseconomic laws are approaching towards e/actness.(ssumption of Economic +a,sEconomic laws are the statements of human behaviours. This is why, these laws are not as e/act as the laws ofnatural sciences. Economist deals with human behaviours, which are never constant and e/act as the behavioursof natural bodies. In addition to this wea"ness, the human behaviour cannot be put to laboratory testing as thenatural bodies. Important assumptions are mentioned herewith '!" Othe$ /hings Remaining the SameAll the economic laws have the phrase, ##5ther things being equal$$ or ##other things remainingthe same.$$ It shows that the law will apply at certain place and in certain situation. 9or e/ample, if the price of0adbury chocolate falls its demand should increase considerably, but it may not increase because the demand of*INTRODUCTION TO ECONOMICS 1.1chocolate is affected by other factors also. It is the income, tastes, preferences and the price of the substituteswhich will also affect the demand of 0adbury chocolates. In this case, the law of demand will apply only if theincomeoftheconsumers, theirtastes, preferencesandthepriceofsubstitutesdonot change. Thisiswhy,economist has to use the phrase, ##other things remaining the same$$.#" Rationalit& of 0uman Con-uctEconomic laws presume that the consumers are rational. They will spend their limited resources in such a waythat they may get ma/imum satisfaction. It has been our e/perience that all the consumers are not rational intheir behaviour. There are certain consumers who visit a certain shop or certain type of shops or shops in certainarea, "nowing well that these shops have been charging comparatively more price than other shops. This e/tra7ordinary attitude of certain individuals ma"es economic laws ine/act.ME(NING OF (N ECONOM1We find different people engaged in different activities to earn their living. These activities are concerned withthe productionof goods andservices. 9armers, wor"ers, shop"eepers, manufacturers, teachers, doctors,engineers, chartered accountants etc. perform their own piece of wor". All of us are concerned with one or theother activity to earn certain sum of money, so that we can meet the necessities of our own and other membersof our family. All those activities which are paid 3remunerated in Economics terminology4 are called economicactivities. These activities create utilities i.e., goods and services which satisfy human wants. Economy, in thisway, is the sum total of all economic activities of the society.Economy consists of all agricultural, industrial, manufacturing, construction, mining, business and otherproductive activities. It also includes services in private institutions and government departments. Professionalsli"e doctors, lawyers, singers, nurses and managers, etc. are also the members of economy.Every activity which has economic motive constitutes part of economy. According to .rown, ##Economy is thesystem of earning livelihood$$. :oods and services produced by the individuals of the economy determine thenational income of the country. The national income indicates the standard of living of the people. In developedeconomies, the sum total of goods and services produced is very large, so their income and standard of living ishigher. In bac"ward economies, large numbers of hands remain idle and resources une/ploited, so their outputof goods and services is lesser. Their income is low and standard of living is poor.Economies may be classified as village 3rural4 economy, town 3urban4 economy, regional economy, national andeven international 3global4 economy. It may also be classified as traditional and modern economies. It is alsoclassified as developed and developing economy. 5n the basis of ownership, economies are also classified ascapitalistic, socialistic and mi/ed economy.The basic functions of an economy are production, consumption and investment. Production means creation andadditiontoutilities. ;tilitymeanscapacitytosatisfyhumanwants. Everygoodandservice, whichsatisfieshuman wants is said to have utility. 0onsumption means the demand of final goods. Investment is the use ofinitial equipment andcapital toproduce goods andservices. Economy is, therefore, concernedwiththeproduction, consumption, distribution and investment of goods and services.2(SIC OR CEN/R(+ )RO2+EMS OF ECONOM1

. ( (+0 ) (), * DE + >9 > CFigu$e* Shift of )$o-uction )ossibilit& F$ontie$ 5))F69igure' The Production Possibility 9rontier3PP94 shows the schedule of choices along which society can choose to substitute guns for butterThe PP9 shifts in,a$- when an economy$s ability to produce decreases, 3reflecting a decrease in the aggregatenumber of military and civilian goods that can be produced4. This is possible due to some ma%or disaster, such ashurricanes or military invasion. The PP9 of the Iraq probably shifted inward due to the ;! invasions.Mic$oeconomics an- Mac$oeconomicsThe economic theory is classified as 2icro and 2acro economic theory. 2icroeconomic theory, deals with theproblems of allocation of resources in the mar"et economy. In such economy the questions of #what$, #how$ and( Productive efficiency occurs when society cannot increase the output of one goods without cutting back on another goodi.e., an efficient economy is on its production- possibility frontier. ENew PPFGun( thousand )Butter (million pound)Previous PPFDownward shift of PPF2CDFE0 G Inside the PPF (inefficient/ unemployed/under utilization points)Outside the PPF (inability/ scarcity/ resource constrained/ impossible/unobtainable)INTRODUCTION TO ECONOMICS 1.1#for whom$ to produce are decided on the basis of price mechanism. In a mar"et economy goods and servicesare freely bought and sold. 2acro economic theory deals with the fuller utiliation of resources and other general problems of inflation,savings, investment, unemployment etc.Inacapitalist 3i.e., mar"et oriented4economyli"e America, thesefundamental problemsaresolvedbythemar"et,i.e., price mechanism of demand,supply and equilibrium price.9orces of demand and supply guidewhich goods and how much is to be produced and consumed. In a socialist 3i.e., centrally planned4 economy, these problems are solved by the government. It decides whichgoods and how much should be consumed and produced in the economy within a given span of time, say withina given period. In this type of economy all propertyis owned bythe government. It also determinesremuneration of various s"ills.