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M.B.A
UNIT- 1
General Foundations of Managerial Economics
Introduction to Economics
Economics is a social science. Its basic function is to study how people-individual, households,
firms and nations- maximize their gains from their limited resources and opportunities. It
studies human behaviour in relation to optimizing allocation of available resources to achieve
the given ends/goals.
The word Economics is derived from the Greek Word Oikonomia which means household
management.
Definitions of Economics
Economics is an ever growing science. Thus it is very difficult to define economics properly. It
is very clear from the words of the following scholars.
Mrs. Barbara Wootten, wherever six economists gathered, there will arise seven opinions
about economics.
J.M.Keynes, Political economy is said to be strangled itself with definitions.
Prof. Jacob Viner, Economics is what economists do.
From the words of above scholars it is clear that the branch of knowledge economics is
blessed with large number of definitions.
The basic definitions of economics can be classified under 4 heads.
a). Wealth Definition b). Welfare Definition c). Scarcity Definition d).Growth Definition
1. Wealth Definition (Prof. Adam Smith, University of Glasgow, Scotland)
The first economist to attempt a scientific definition of economics was Adam Smith, the
Father of Economics. In his famous book An Enquiry in to the Nature and Causes of Wealth of
Nations published in 1776, Adam Smith defined economics as a science of wealth.
The Wealth definition of economics has been severely criticised because it assumed wealth as
an end of human activities. Smiths definition has a tendency to make people selfish as the
welfare aspects of human life were neglected.
2. Welfare Definition (Prof. Alfred Marshall, University of Cambridge)
Prof. Alfred Marshall in his famous book Principles of Economics (1890) defined economics as
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 the use of material
requisites of well-being.
Prof. Lionel Robbins and others criticised this definition on the ground that welfare is
subjective and so it cannot be measured or compared.
3. Scarcity Definition (Prof. Lionel Robbins, University of London)
Prof. Lionel Robbins in his book The Nature and Significance of Economic Science (1932)
gave a new definition to economics. This definition is known as the scarcity definition. Robbins
defined economics in the following lines,
Economics is a science which studies human behaviour as a relationship between ends and
scarce means which have alternative uses.
This definition is base on the following fundamental propositions
a) Human wants are unlimited
b) Means/ resources are limited
c) Resources have alternative uses.
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Nature of Economics
In order to understand the nature of economics we have to indicate the following,
a) Whether economics is a science or an art?
b) If economics is a science, whether it is a positive science or a normative science?
1. Whether economics is a science or an art?
i) Economics as a Science
The systematized body of knowledge regarding a subject is commonly defined as a science. A
science is not a mere collection of facts but indicates a relationship between cause and effect.
Economics is considered as a full-fledged science. Like any other science economics has its
own generalisations, theories or laws of economics which traces out a cause and effect
relationship between two or more phenomena.
ii) Economics as an Art
The practical application of scientific techniques is the Art of Economics.
Economics is a science in its methodology and an art in its application.
It is considered as newest of sciences and oldest of arts and the
Queen of all the social sciences.
2. Whether economics is a positive science or a normative science?
i) Economics as a Positive Science
A positive science is a body of systematized knowledge concerning what is. As per the
nineteenth century experts, economics is a positive science. Positive economics is free from
value judgment i.e, it describes observed facts without saying whether they are good or bad
Examples of positive statements are given below.
1. An additional tax on goods will raise its price.
2. A rise in the price of a commodity will reduce its demand.
ii) Normative Economics
A normative science is a body of systematized knowledge concerning what ought to be.
Normative economics or welfare economics is the study of what ought to be or how the
economic problems should be solved.
Examples of normative statements are given below.
1. The distribution of National Income in India should be more equal.
2. The level of government expenditure should be reduced.
In short, economics is both a positive and normative science
Scope of Economics
The scope of economics means the area or boundary of the study of economics. There are
different views regarding the scope of economics. According to Prof. A.C. Pigou, economics is
a positive science of what is. It is not a normative science of what ought to be. Prof. Viner
states that economics is what economists do.
The scope of economics include the following
1. The subject matter of economics
2. Specialized branches of economics
1. The subject matter of economics
The subject matter of economics is divided in to two.
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a) Micro economics
b) Macro economics.
Micro Economics and Macro Economics
The term micro and macro were coined by Prof. Ragnar Frisch of Oslo University (Norway)
in 1933. The term micro has been derived from the Greek word mikros which means small.
Micro economics is the study of the behaviour of individual economic unit. It is also called
Price theory. It studies economic activities concerning an individual consumer, a firm or an
industry and the study of individual income, the determination of product price, factor price
etc.
Macro economics is the study of the economy as a whole. The term macro has been derived
from the Greek word makros which means large. It studies aggregate facts like national
income, total expenditure, total investment, level of employment, total production, general
price level etc. It is also called the theory of income and employment.
Micro economics
Macro economics
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Managerial Economics
Managerial economics studies how economic theories, concepts and tools of analysis can be
applied to business decision making and to understand the business environment of the
country. It is nothing but the application of economics to the real business activities, so as to
get the desired business result.
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