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Economics: Meaning, Nature and Branches of Economics

In general terms, economics is a social science that studies the behaviour patterns of human beings. The basic function
of economics is to study how individuals, households, organizations, and nations utilize their limited resources to
achieve maximum profit. The study of economics is divided into two parts, namely microeconomics and
macroeconomics. Microeconomics is a branch of economics that examines the market behavior of individual consumers
and organizations.

It focuses on the demand and supply, pricing, and output of individual organizations. On the other
hand, macroeconomics analyzes the economy as a whole. It deals with issues related to national
income, employment pattern, inflation, recession, and economic growth. With the advent of
globalization there is a rapid increase in complexities in business decision making. Therefore, it is
important for organizations to have a clear understanding of different economic concepts, theories,
and tools.
Managerial economics is a specialized discipline of economics that deals with the study of
economic theories, logics, and tools used in the process of business decision making. In other
words, managerial economics is a science that is concerned with those economic tools that are
relevant to business decision making.
It applies various economic concepts, such as demand and supply, competition allocation of
resources, and economic trade-offs, to help managers in making better decisions. In addition,
managerial economics enables managers to determine the impact of different economic events on
the performance of an organization.
Meaning of Economics:
Since time immemorial, defining economics
has always been a controversial issue. Different economists have explained the term economics
differently and criticized each others definitions. Some economists believed economics as a study
of money, while others had a notion that economics deals with problems, such as inflation and
unemployment. In such a case, there was no proper definition of economics given.
Therefore, for simplifying the concept, economics is defined by taking four viewpoints, which
are explained as follows:
i. Wealth Viewpoint:
Represents the classical perspective of economics. According to Adam Smith, economics is a
science of wealth. He is regarded as the father of economics and wrote a book entitled An enquiry
into the Mature and the Causes of Wealth of Mahon 1776. In his book, he stated that the main
purpose of all economic activities is to gain maximum wealth as possible therefore; he advocated
that economics is mainly concerned with the production and expansion of wealth.
Further this definition was followed by various classical economists, such as J.B. Say, David
Ricardo, Nassau Senior, and F.A Walker. Although wealth definition was an innovative work of
Adam Smith, it was not free from criticism.
His definition was criticized mainly due to two reasons Firstly, Adam Smith, in his definition,
focused only on maximizing wealth rather than means of earning wealth Secondly, he gave primary
importance to wealth and secondary to man. However, wealth cannot be earned or maximized
without human efforts. In this way, he disregarded the position of human beings.
ii. Welfare Viewpoint:
Represents a neo-classical standpoint of economics. Alfred Marshall, a neo-classical economist
associated the term economics with man and his welfare. He wrote a book Principles of

Economics in 1980. In his book he stated that economics is a science of welfare.


According to him, 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 u most closely connected with the
attainment and with the use of the material requisites of wellbeing.
His definition was a great improvement in the definition of wealth as Marshall elevated the position
of man. However, his definition was not free from criticism. This is because Marshall laid emphasis
on welfare, but the meaning of welfare is different to different individuals. Moreover, the definition
includes only materialistic welfare and ignores non- materialist welfare.
iii. Scarcity Viewpoint:
Refers to the pre-Keynesian thought of economics. Lionel Robbins defined economics as a science
of scarcity or choice in his book An Essay on the Nature and Significance of Economic Science,
which was published in 1932. According to him, Economics is the science which studies human
behaviour as a relationship between ends and scarce means which have alternative uses.
The definition provides three basic features of existence of human beings, namely unlimited wants,
limited resources, and alternative uses of limited resources. According to Robbins, an economic
problem arises because of unlimited human wants and limited resources. His definition was
criticized because it ignored economic growth.
iv. Growth Viewpoint:
Indicates the modern perspective of economics. The main contributor of this definition was Paul
Samuelson. He provided the growth-oriented definition of economics. According to him,
Economics is a study of how men and society choose with or without the use of money, to employ
scarce productive uses resource which could have alternative uses, to produce various commodities
over time and distribute them for consumption, now and in the future among the various people and
groups of society. In his definition, he outlined three main aspects, namely human behavior,
allocation of resources, and alternative uses of resources. Therefore, his definition was similar to the
definition provided by Robbins.
After getting familiar with different definitions of economics, let us now discuss the nature of
economics.

Nature of Economics:
Similar to definitions of economics, there are a number of controversial issues related to its nature.
Some economists believed economics as a science, while other believed economics as a social
science.
Let us now discuss the nature of economics as follows:
i. Economics as a Science:
Refers to the scientific nature of economics. Some economists believed that in economics, a
problem is solved by adopting a scientific approach, which involves collecting and analyzing data
and making related laws and theories For example, various economists examined the concept of
employment and framed relevant theories, such as Says law, Pigous modifications, and Keynes
theory of employment.
Economics is considered as a science because there are similarities between the problem solving
process of economics and science. Apart from this, there is another controversial issue related to
whether economics is a positive or normative science.

Positive science refers to the science that deals with the question of what is, while the normative
science deals with the question of what it should be. Positive science is the description of a concept
whether it is right or wrong. On the other hand, normative science is the evaluation of a concept.
After a very detailed analysis, it is decided that economics is a positive as well as normative
science.
ii. Economics as a Social Science:
Implies that economics is a study of behavior patterns of human beings. The basic function of
economics is to study how individuals, households, organizations, and nations utilize their limited
resources to achieve maximum profit. This function of economics is termed as maximizing behavior
or optimizing behavior. In economics, optimizing behavior refers to selecting the most profitable
alternative from the available alternatives.
Therefore, it can be said that economics is a social science that aims at studying human behavior
with respect to optimal allocation of available resources to achieve maximum profit. For example,
economics covers how individuals allocate their resources (income) to purchase different goods and
services, so that they can achieve maximum satisfaction.
In addition, economics also studies how organizations make their decisions regarding selection of a
product to be produced, production technique, plant location, and price of the product. Apart from
this, economics also covers how nations utilize their resources to fulfill the needs of the society so
that economic welfare can be maximized.

Branches of Economics:
Economics is a wide subject that involves several concepts, which are difficult to be studied under a
single discipline. Therefore, it is classified into two branches, namely, microeconomics and
macroeconomics. Microeconomics deals with the economic problems of a single industry or
organization, while macroeconomics deals with the problems of economy as a whole. Both of these
branches contribute a major part in business analysis and decision-making directly or indirectly.
Let us discuss these two branches as follows:
i. Microeconomics:
Refers to a branch of economics that examines the performance and behavior of individual
organizations and consumers in an economy. Microeconomics covers the study of decision-making
process of individuals, organizations and consumers. Moreover, it focuses on the supply and
demand patterns and price and output determination of individual markets.
In spite of a number of advantages, microeconomics suffers from certain drawbacks, which
are as follows:
a. Assumes full employment condition in an economy, which is unrealistic
b. Deals with the part of economy instead of whole economy
ii. Macroeconomics:
Refers to a branch of economics that studies the performance and behavior of the whole economy.
The word macro was given by Prof. Ragnar Frisch of Oslo University in 1993. Macroeconomics
undertakes the study of economic aggregates, such as changes in employment, national income, rate
of growth.
Gross Domestic Product (GDP), inflation, and price levels. Therefore, it helps in formulating
policies in different economic conditions .and determining the causes of fluctuations in income,

output, and employment. Apart from this, macroeconomics plays a major role in estimating national
income. Thus, it helps in understanding and analyzing the overall performance of an economy.
However, macroeconomics has certain limitations, which are as follows:
a. Ignores the welfare of individuals in an economy
b. Takes into account only aggregate variables, which may not clearly define economic
conditions.

Basic economics questions


What to produce?
This is concerned with how we allocate our scarce resources. Should we produce bananas or
oranges? Capital goods (e.g. factory equipment) or Consumption goods? Petrol powered cars or
solar powered cars? Military weapons or better hospitals? Coal fired electricity or solar electricity?
How to produce?
Again, this is an allocation question and asks what combination of scarce resources will we use to
produce those goods and services that we have decided to produce. Do we use more labour than
capital (labour intensive)? More capital than labour (capital intensive)?
For whom to produce?
This is really concerned with how the goods and services are allocated or distributed to society. If
left to free markets (i.e. markets without government intervention), those with greater economic
power (e.g. the wealthy) will have greater access to goods and services and some members of
society (e.g. the poor) will be unable to purchase some essential goods or services (e.g. health care).
--------------There are two branches that study economics. Microeconomics is the branch of economics that
examines the choices of individuals concerning one product, one firm, or one industry.
Macroeconomics is the branch of economics that examines the behavior of the whole economy at
once.
The basis of all economic decisions is scarcity. The wants and needs of people are unlimited and
the resources available to a society are limited. The basic questions that each society must make
revolve around the allocation of scarce resources.
These essential questions must be answered in every economy to determine the fundamental goals
of the society. How each society handles these questions is determined by the role of government
and the people in the decision-making process. Each group of people makes decisions or fails to
make decisions that control the flow of money, goods, and services. The control of these decisions
determines the type of economy present. How resources are allocated is the process of choosing
which needs will be satisfied and how much of the limited resources will be used to satisfy those
needs. Allocation by definition indicates choice. Therefore, choosing results in trade-offs in
deciding how to use the limited resources. Economics is the science of making effective choices or
decisions by examining the alternatives. Economics is the social science that deals with how
society allocates its scarce resources among the unlimited wants and needs of individuals that make
up that society.