Economics - XI 1

Basic concept of Economics
Definition of Economics Economics is a social science. It studies economic activities of man, living in an organized society. It is a dynamic science. Therefore, there is no universally acceptable definition of economics. Some modern ecomist have said that it is not easy to define economics definitely. According to Barbara Wotton : “Whenever Six economists are gathered there are seven opinions.” Similarly, according to Jacob Viner, “Economics is what economists do.” However, for systematic study of any science we need its definition. The definition of economics can be classified into three groups i.e. I. Wealth definition of economics (Classical) II. Welfare definition of economics (neo – classical) III. Scarcity definition of economics (Modern) Wealth definition of economics : This is the oldest definition of economics. This definition is related with classical school of economics. Adam Smith is regarded as a leader of classical economists. He is regarded as a leader of classical economists. He is well known as the father of economic science because he made economics as an independent science. In 1776 AD, Adam Smith wrote a famous book “Wealth of Nations”. In that book he defined economics as “Economics is an enquiry into the nature and causes of wealth of Nations.” In other words, according to Adam Smith, economics is a science of wealth. Criticisms of wealth definition: The wealth definition of economics has been criticized on the following grounds:  Narrow definition : This definition has narrowed the scope of economics. According to this definition, economics studies only those human beings who are engaged in production and consumption of wealth. Those who are not engaged in such activities such as retired man cannot fall within the scope of economics. But it is quite wrong.  Emphasis on wealth : This definition has given more emphasis on wealth and it ignores the importance of man. But in reality wealth is only a means to satisfy human wants. Wealth is produced for man but not man for wealth. Therefore, man is a primary and wealth is only for secondary importance. Incomplete and inadequate : This definition is incomplete and inadequate. It lacks analytical approach. It does not explain the nature of economic problems. According to Adam Smith the ultimate objective of man is to earn wealth. But according to critics, the ultimate objective of man is to get satisfaction rather than to earn wealth.

Welfare definition of economics: This definition is related with neo-classical school of economics. Dr. Alfred Marshall is regarded as a leader of neo-classical economists. He was a professor of economics at Cambridge University. In
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Economics - XI 2 1890 AD, Marshall published a book “Principles of Economics”. In that book he defined economics as “Economics is a study of mankind in ordinary business of life.” It enquires how a man earns income and how he uses it. Thus, it is the study of wealth in other hand and on the other hand, it is the study of mankind. Features of Welfare definition:  Economics is the study of economic aspect of mankind.  Economics studies economic welfare of mankind. It does not study the whole human welfare.  Economics is a social science. It is concerned with the economic aspect of social life. Criticisms of Welfare definition: The welfare definition of economics has been criticized on several grounds. The main criticisms were made by Robbins. The criticisms are as follows:  Classificatory : The welfare definition is classificatory rather than analytical. It classifies economic phenomena into material and non – material. Similarly, human activities are divided into economic and non – economic activities. But according to Robbins, such type of classification is unscientific and illogical.  Narrow scope : This definition has narrowed the scope of economics because this definition includes only material things and excludes non – material things from the scope of economics. But it is difficult to separate material and non – material things.  Connection between economics and welfare : This definition has tried to establish connection between economics and welfare. But according to Robbins economics has nothing to do with welfare.  Pure social science : The welfare definition takes economics as purely a social science. It means that economics doesn’t study the man living outside society. But this is not true.  Measurement of Welfare : According to Marshall, welfare can be measured quantitatively. The measuring rod is money but according to critics, welfare cannot be measured quantitatively because it is a mental feeling. It varies from individual to individual. Scarcity definition of economics : This definition is related with modern school of economics. Lionel Robbins is regarded as a leader of modern economists. In 1932 AD, he published a book, “The Nature and Significance of Economic Science.” In that book he has given a new definition of economics called Scarcity definition. According to Robbins, “Economics is the science which studies human behavior as a well as relationship between unlimited ends (wants) and scarce means which have alternative uses. Features of Scarcity definition :  Unlimited wants or ends : According to Robbins, human wants are unlimited. If one want is satisfied another wants crop up. Therefore, it is difficult to satisfy all these wants at the same time.  Scarce means or resources :
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Economics - XI 3 Means to satisfy human wants are limited and scarce. The economic problems arise due to the scarcity of resources. These resources are scarce in relation to their demands.  Alternative uses : The scarce means have alternative uses. For example : Money can be put to several uses ether for buying food, buying books or going to cinema, etc. Problem of choice : Due to the scarce and alternative uses of means there arise the problems of choice. We have to choose between most urgent want to less urgent want.

Criticisms of scarcity definition: Though the scarcity definition of economics is regarded superior than other definitions but still this definition is not free from criticism. Therefore, this definition has been criticized on the following grounds:  Inclusion of material welfare : Robbins critcised the welfare definition given by Marshall but the material welfare enters in his definition through back door. Ignores present day problems : According to critics, this definition is unable to address the hot issues of modern economy like unemployment, povertiy, economic growth, economic development, etc. Incomplete definition : The critics objected that the Robbins definition of economics has given unnecessary emphasis to scarcity problem. But according to them economic problems arise not only from scarcity but it also may arise form abundance. For Eg : During depression of 1930s economic problems had arosed due to over production or abundance. It doesnot cover macro – economics : The scarcity definition of economics does not cover macro – economics but macro – economics is an important parts of economics. Pure Science : Robbins definition converse economics in a pure science. As a pure science, economics is concerned with the formulation of economic laws having nothing to do with practice. But it is quite wrong because economists are not only tool makers but also tool users. Social aspect : Robbins definition of economics ignored the social aspect of human life. But economics is a social science. It is concerned with the study of economic activities of man living in a society.

Comparison of Robbins and Marshall’s definition :
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Economics - XI 4

Marshall’s 1. Classificatory: Marshall’s definition of economics is classificatory because it classifies goods into material and non – material goods and includes only material goods in the scope of economics. 2. Social science: According to Marshall economics is a social science. It studies only those human beings who are living in an organized society. 3. Normative Science: Marshall’s definition is based on the concept of Normative economics. Normative science give value judgement. It shows rightness or wrongness of things. 4. Non – neutral: According to Marshall economics is non – neutral. It helps to solve practical problems. It is concerned for improving human life. 5. Narrow scope: Marshall’s definition of economics has narrowed the scope of economics.

Robbins 1. Analytical: Robbin’s definition of economics is analytical. It deals all types of goods and all kinds of human activities.

2. Human science: According to Robbins economics is a human science. It studies all human beings whether they are in society or out of society. 3. Positive Science: Robbins definition is based on the concept of positive science. It explains facts as they are. It doesn’t give value judgement. 4. Neutral: According to Robbins’ economis is neutral. It is neutral between wants and resource utilization.  5. Broad Scope : Robbins’ definition of economics has broaden the scope of economics.

Superiority of Robbins’ definition of economics: Robbins’ definition of economis is regarded superior definition than others on the following grounds:  Scientific definition: Robbins’ definition of economics is regarded as more scientific and analytical. It is not classificatory. Marshall’s definition of economics is classificatory. Therefore, Robbins’ definition is regarded more scientific and satisfactory. Universal application: Robbins’ definition of economics has universal application. It is applicable to both planned and unplanned economy. Similarly, it is applicable to all economic system i.e. capitalist, socialist and mixed economy. Positive Science: Robbins’ regarded economics as a positive science whereas Marshall regarded economics as a normative science. Positive science describes the things as they are and does not say what is good and what is bad. On the other hand, normative science says

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Economics - XI 5 what is good or what is bad. Robbins’ definition is regarded superior to Marshall’s definition on these grounds as well.  Science of choice: The best part of the Robbins’ definition is that it regards economics is a science of choice. Choice is necessary to solve economic problems. This is the realistic situation since means are always limited in relation to wants. An individual has to make choice to get maximum satisfaction from the limited means. Wider scope: Robbins’ definition has widened the scope of economics because Robbins’ says that all types of human wants material and non – material come within the sphere of economics.

Subject Matter of Economics: There are two approaches regarding the subject matter of economics i.e.  Traditional approach  Modern approach According to Traditional approach the subject matter of economics are – Consumption, production, exchange, distribution and public finance.  Consumption: Consumption is one of the important branches of economics. Consumption means to satisfy human wants through the use of goods and services. Production: Production is defined as the creation of utility. The goods and services are produced form consumption. Exchange: It studies how goods are exchanged between different parties. Here, we study the determination of price of goods and services under different markets. Distribution: Here, we study the distribution of national product among the various factors of production i.e. land, labour, capital and organization. Public finance: It studies income and expenditure aspect of the government.

But according to modern approach the whole subject matter of economics is classified into two parts:   Micro – economics: Macro – economics:

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Economics - XI 6 Micro – economics is the study of individual units whereas macro – economics is the study of economy as a whole. All traditional theories such as – consumption, production, exchange, distribution fall under micro – economics. In macro – economics we study the factors that determine a country’s national income, saving, investment, consumption, etc. Concept of Positive and normative economics: Positive economics: Positive economics is an exploration of state of things as they are. It is concerned with the description of economic events. It tries to follow scientific principles to formulate theories. It doesn’t give value judgement. According to David Begg, “Positive economics deals with objective or scientific explanation of the working of the economy.” Therefore, positive economic deals how the economy actually behaves. The objective of positive economics is to explain how society makes decisions about consumption, production and exchange of goods and services. Normative economics: Normative economics is an evaluation of state of things as they ought to be. It is based on subjective value judgement. Therefore, normative economics explain rightness or wrongness of things. According to David Begg, “Normative economics offers prescriptions or recommendations based on personal value judgement.” Neo – classical economists believe on normative economics. We can make distinction between positive and normative economics by a statement, “The poor are malnourished, and the government must provide food subsidy to the poor.” Here the first part of the statement “The poor are malnourished” is a positive economics and the second part of the statement “The government must provide food subsidy to the poor” is a statement of normative economics. Concept of micro – economics and macro – economics: Micro – economics: The word ‘micro’ is derived from Greek word ‘mikros’ meaning small. Therefore, micro economics is the study of the behavior of individual units of an economy. For Eg : Individual consumer, individual producer, households, individual price, individual market, etc. According to Edwin Mansfied: “Micro – economics deals with the economic behavior of individual units such as: consumers, firms and resource owners.” According to K.E. Boulding: “Micro – economics is the study of particular firms, particular household wages, individual prices, incomes, individual industries, particular commodities.” Thus, micro – economics studies the small components of the national economy. But it doesn’t study economy as a whole. Micro – economics is also called price theory. Macro – economics: The word ‘macro’ is derived from Greek word ‘makros’ meaning large. Therefore, macro – economics is concerned with the analysis of economy as a whole or its large aggregates such as national income, national product, total employment, total consumption, total investment, monetary policy, fiscal policy, general price level, etc. According to Edwin Mansfied: “Macro – economics deals with behavior of economic aggregates such as gross national product and level of employment.”

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Economics - XI 7 According to K.E. Boulding: “Macro – economics is that part of economics which studies the overall averages and aggregates of the system.”

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