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FY BBA
104 - FUNDAMENTALS OF ECONOMICS
Unit – 1

Nature & Scope of Economics (20%)

Contents:
1. Meaning of Economic problem.
2. Early definitions (Wealth, Welfare, Scarcity, Growth).
3. Micro and Macroeconomics (Definition, Importance and Limitations).
4. Economics as a positive or normative science.
5. Scope of Economics.

Introduction:
➢ This chapter focuses on the nature and scope of economics. To understand the subject matter of
economics, we tried to look at its different definitions by different scholars. The basic concepts of
economics are discussed in order to give a better understanding of the definitions. There is also the
need to understand the basic economic problems of any society because other problems revolve
around these problems.

Meaning of economic problem:

➢ All societies face the economic problem, which is the problem of how to make the best use of
limited, or scarce, resources. The economic problem exists because, although the needs and wants of
people are endless, the resources available to satisfy needs and wants are limited.
➢ 5 Basic Problems of an Economy
1. What to Produce and in What Quantities?
2. How to Produce these Goods?
3. For whom is the Goods Produced?
4. How Efficiently are the Resources being Utilized?
5. Is the Economy Growing?

1. What to Produce and in What Quantities?

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➢ This involves allocation of scarce resources. Since the resources of the economy are scarce, the
problem of the nature of goods and their quantities has to be decided on the basis of priorities or
preferences of the society (Capital goods or Consumers goods).

2. How to Produce these Goods?

➢ This problem is primarily dependent upon the availability of resources within the economy (Land,
labour, and capital).
➢ This problem is primarily dependent upon the availability of resources within the economy (producing
capital goods and large outputs-complicated and expensive machines and techniques are required and
vice-a-versa. 5 Basic Problems of an economy.

3. For whom is the Goods Produced?

➢ Actually, this is a problem of distribution of nation’s product I.e., national income among the
factors of production that helps to produce it. It is the factor payments which determines the
distribution of goods among the various individuals in the society.

4. How Efficiently are the Resources being Utilized?

➢ This is one of the important basic problems of an economy because having made the three earlier
decisions, the society has to see whether the resources it owns are being utilized fully or not. In
case the resources of the economy are lying idle, it has to find out ways and means to utilize them
fully.
6. Is the Economy Growing?
➢ The last and the most important problem is to find out whether the economy is growing through
time or is it stagnant.

Conclusion:
➢ All these central problems of an economy are interrelated and interdependent. They arise from
the fundamental economic problems of scarcity of means and multiplicity of ends which lead to
the problem of choice or economizing of resources.

FACTORS RESPONSIBLE FOR ECONOMIC PROBLEM:

1. Unlimited wants,

2. Scarce resources (having alternative uses).

➢ The Economics of Seinfeld says the following regarding the term:

• “Unlimited wants essentially mean that people never get enough, that there is always
something else that they would like to have.”
• “When combined with limited resources, unlimited wants result in the fundamental
problem of scarcity.”

MICRO ECONOMICS AND MACRO ECONOMICS:

Meaning of Micro Economics: -The Micro Economics is the study of particular firms, particular
households, individual prices, wages, income, individual industries and particular commodities. It is related to

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the analysis of price determination and the allocation of resources of specific uses. It is the study of the
economic actions of individuals and small groups of individuals.

DEFINITION:

According to Ackley:

• “Micro Economics deals with the division of total output among industries, products and firms and
the allocations of resources among competing groups. It considers problems of income
distribution. Its interest is in relative prices of particular goods and services.

According to Maurice Dobb:

• “Micro Economics is like looking at the economy through a microscope to find out the working of
markets for individual commodities and the behavior of individual consumers and producers.”

Importance/Utility of Micro Economics:

1. Micro Economics is important to understand the working of a free enterprise economy: -

In free enterprise there is no agency to plan and co-ordinate the working of the economic system.
Here, we cannot assure efficient working of the system. In this connection Lerner has said—” Direct
running of the economy is impossible because the modern economy is so complex that no central
planning body can obtain all the information and give out all the directives necessary for its efficient
operation.”
2. It provides an analytical tool for evaluating the economic policies of the state: -
Price or market mechanism is the tool which helps us in this respect. There are certain public utilities
items like postal services, railways, water, electricity etc., which are run by government which fixes
prices on no profit no loss basis. This study helps the state government in formulating correct price
policies and in evaluating them in proper manner.
3. It is helpful to business executive: -
This study helps the business executive in the attainment of maximum productivity with the resources
available. Further, it helps in knowing of consumer’s demand and in calculation of costs.
4. It is helpful in the efficient use of available resources: -
This approach deals in economizing of scarce resources with efficiency. Proper utilization of available
resources helps in achieving growth and stability.
5. It helps in understanding the various problems of taxation: -
It is the tax which compels to the re-allocation of resources from their optimum. This analysis helps in
the study of distribution of incidence of a commodity tax (excise duty or sales tax) between sellers and
consumers.
6. It is helpful in international trade: -
In the field of international trade, we can know and understand as to how much there will be gain in
international trade and balance of payments and how foreign exchange rates are determined.
7. It is helpful in the construction and uses of simple methods for the understanding of the actual
economic phenomenon: -
In this connection R. A. Bilas has said, “The theoretical approach to Micro Economics utilizes abstract
models in an attempt to see how prices are established and how resources are allocated to various
uses. The use of theory should enable the processor to determine which of many facts are relevant to
the problem being studied.”

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Limitations/Dis-Utility/Dis-Advantages of Micro Economics:

1. This analysis is unrealistic: -

It is based on unrealistic assumptions of full employment in the economy. According to Keynes—” To
assume full employment is not proper. Full employment is not the rule but an exception in the real
world. This study is unrealistic method of economic analysis”. Ackley has said, “it is an elegant method
of Solving Problem.
2. It is the study of parts and neglects the whole: -
As Boulding has said—” It is the study of imprecise picture of the economy
3. It is not only inadequate but misleading also in analyzing several economic problems: -
It is not essential that one principle can be applicable and used in the economy as a whole.
4. This analysis is based on the assumption of LaissezFaire:
But the policy of Laissez Faire is no longer followed and practiced. It has ended with the Great
Depression of 1930. This study can be said as unrealistic. To quote Boulding—”The character and
behavior of aggregate cannot be obtained simply by generalizing from character and behavior of the
individual components.”

Macro Economics:
➢ According to Ackley:
• “Macro Economics deals with economic affairs in the large”, it concerns the overall dimensions of
economic life. It looks at the total size and shape of the functioning rather than working of
dimensions of the individual parts.
• Macro Economics is the study of the causes of unemployment and the various determinants of
employment.

Importance of Macro-Economics:
1. This analysis is indispensable for understanding the working of the economy:
Our main economic problems are related to the behavior of total income, output, employment and the
general price-level in the economy. These are measurable and can help in analyzing the effects, on the
functioning of the economy. As Tinbergen view is “that this concept helps in making the elimination process
understandable.”
2. This concept is extremely useful from the point of economic policy:
In underdeveloped economies the problems of overpopulation, inflation, balance of payments, general
under production etc. The main responsibilities of these governments are to control the over-
population, inflation, general price-level and volume of trade etc.
➢ In this connection Tinbergen has saidsss—” Working with macro-economic concepts is a bare
necessity in order to contribute solutions of the general problems of the time. No government can
solve these problems in terms of individual behavior.”
a) In General Unemployment: he Keynesian theory of employment has set the study of macro-
economics. Employment depends upon effective demand i.e., an aggregate demand and aggregate
supply function. Unemployment is caused by deficiency of effective demand. Effective demand should
be raised by increasing
➢ total investment, total output, total income and total consumption.

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This economics has special importance in studying the causes effects and remedies of general
employment.
b) In Economic Growth: - The economics of growth is also a study of macroeconomics. On the basis of
this economics the resources and capabilities of an economy are evaluated. Under this the plans for
the over-all increase in national income, output and employment is framed and implemented, so as to
raise the economy as a whole.
c) In National Income: - The study of macro-economics is helpful in the construction of National Income
Data. This National Income Data is helpful in forecasting the level of economic activity and to
understand the distribution of income among different groups of people.
d) In dealing with Monetary Problems: - As we are aware that inflation or deflation affects the economy
adversely. They can be solved by adopting monetary, fiscal and direct control measures for the
economy as a whole.
e) In Understanding the Behavior of Individual Units: - Demand for individual products depends upon
aggregate demand in the economy. Unless the causes of deficiency in aggregate demand are analyzed,
it is not possible to understand and decide fully the reason for a fall in the demand of individual
products.
f) In Business Cycle: - The importance of macro-economic lies in analyzing the causes of economic
fluctuations and in giving proper remedies. By seeing the above facts it can be said that Macro-
Economics throws much light on solving the problems of unemployment, inflation economic instability
and economic growth.
➢ As Ackley has said that “Macro-economics is more than a specific method of analysis. It is also a
body of “empirical economic knowledge.”

Limitations of Macro-Economics

1. This analysis is nothing but a fallacy of composition:

➢ In this analysis, these perhaps have been forgotten that what is true of individuals is not
necessarily true of the economy as a whole.
➢ For example: -Savings are a Private Virtue but a Public Vile. If total savings in the economy
increases they may initiate a depression unless they are invested. Similarly, if an individual
depositor withdraws his money from the bank there is no danger but if all depositors do this
simultaneously, there will be a run on the banks and the banking system will be adversely affected.
2. This analysis regards the aggregates as homogeneous without caring about their internal
composition and structure: -
➢ The average wage in a country is the total of wages in all occupations i.e., wages of clerks,
teachers, nurses etc. But the aggregate employment depends on the relative structure of
wages rather than the average wage.
➢ For example: - If the wages of nurses increase but that of clerks fall, the average may remain
unchanged. But if the employment of nurses falls a little and of clerks rises much, aggregate
employment would increase.
3. The aggregate variables which form the economic system may not be of much significance:
➢ For example: - Suppose, the national income of a country is the total of all individual income of
a country in the total of all individual incomes. A rise in national income does not mean that
individual’s incomes have risen. The increase in national income might be the efforts of few
rich people in the country. Thus, a rise in national income of this type has little significance
from the point of view of the community.

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4. An indiscriminate use of this analysis in analyzing the products may be misleading:

➢ For example: - Measures adopted at controlling general prices cannot be applied with much
advantage for controlling prices of individual products.
5. The measurement of this analysis involves a number of conceptual difficulties:
➢ For example: - If micro-economic variables relate to similar individual units their aggregation
into one macro-economic variables may be wrong and dangerous.

Economics as a positive science and economics as a normative science.

➢ Positive economics and normative economics are two standard branches of modern
economics. Positive economics describes and explains various economic phenomena, while
normative economics focuses on the value of economic fairness or what the economy should
be.
➢ To put it simply, positive economics is called the "what is" branch of economics. Normative
economics, on the other hand, is considered the branch of economics that tries to determine
people's desirability to different economic programs and conditions by asking what "should"
be or what "ought" to be.
➢ Positive economics describes and explains various economic phenomena or the "what is"
scenario.
➢ Normative economics focuses on the value of economic fairness, or what the economy "should
be" or "ought to be."
➢ While positive economics is based on fact and cannot be approved or disapproved, normative
economics is based on value judgments.
➢ Most public policy is based on a combination of both positive and normative economics.
I. Positive Economics
➢ Positive economics is a stream of economics that focuses on the description, quantification,
and explanation of economic developments, expectations, and associated phenomena. It
relies on objective data analysis, relevant facts, and associated figures. It attempts to establish
any cause-and-effect relationships or behavioral associations which can help ascertain and
test the development of economics theories.
➢ Positive economics is objective and fact-based where the statements are precise, descriptive,
and clearly measurable. These statements can be measured against tangible evidence or
historical instances. There are no instances of approval-disapproval in positive economics.
➢ Here's an example of a positive economic statement: "Government-provided healthcare
increases public expenditures." This statement is fact-based and has no value judgment
attached to it. Its validity can be proven (or disproven) by studying healthcare spending where
governments provide healthcare.
➢ Here's an example of a positive economic statement: "Government-provided healthcare
increases public expenditures." This statement is fact-based and has no value judgment
attached to it. Its validity can be proven (or disproven) by studying healthcare spending where
governments provide healthcare.
II. Normative Economics
➢ Normative economics focuses on the ideological, opinion-oriented, prescriptive, value
judgments, and "what should be" statements aimed toward economic development,
investment projects, and scenarios. Its goal is to summarize people's desirability (or the lack

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thereof) to various economic developments, situations, and programs by asking or quoting

what should happen or what ought to be.
➢ Normative economics is subjective and value-based, originating from personal perspectives,
feelings, or opinions involved in the decision-making process. Normative economics
statements are rigid and prescriptive in nature. They often sound political or authoritarian,
which is why this economic branch is also called "what should be" or "what ought to be"
economics.
➢ An example of a normative economic statement is: "The government should provide basic
healthcare to all citizens." As you can deduce from this statement, it is value-based, rooted in
personal perspective, and satisfies the requirement of what "should" be.

Stages of development of economics as a subject: -

▪ Stage 1-Wealth concept by Adam Smith.

➢ Wealth concept: - During the 18th and the early part of 19th century, classical economist such
as professor Adam Smith, professor J. B. Say and professor Walker define economics as a
science of wealth. The effective birth of economics as a separate discipline may be traced to
the year 1776, when the Scottish philosopher Adam Smith published An Inquiry into the
Nature and Causes of the Wealth of Nations.
➢ The famous book an ‘inquiry into the Nature and causes of wealth of nations’, was written by
Adam Smith. Adam Smith stated, Economics is concerned with an enquiry into the nature and
causes of wealth of nations, and it is related to the laws of production, exchange, distribution
and consumption of wealth”. The central point office definition is wealth.
➢ This definition further explored that, the wealth offer nation included only Material goods,
Non material goods were not included.
➢ Adam Smith in his definition gave too much importance to the creation of wealth in an
economy. Many economists believed that economic success of any nation depended only on
the accumulation of wealth.
▪ Main points of wealth concept:
1. Exaggerated emphasis on wealth.
2. Inquiry into the creation of wealth.
3. A study of the nature of wealth.
➢ This led Adam Smith to conclude that, for increasing the wealth of a nation, the use of labour
should be primarily for “productive purposes”.
▪ Wealth definition of Adam Smith was criticized on the following grounds:
1. Materialistic concept: This definition laid too much emphasis on Wealth and did not consider
human welfare.
2. Stressed on the concept of Economic Man: This definition based on the concept of Economic
Man that emphasized the main motive of a man is to acquire wealth. However, Other
motivations of a man like Love, affection, patriotism, etc., are neglected.
3. Ambiguous: The definition of wealth is not very clear. In earlier days wealth included only
material goods Such as money, gold, land, silver, Sugar, tea and ghee which are visible. Non
material goods were not included. Hence, non-material goods such as, services of teachers,
doctors and engineers are not considered ‘wealth’ under this definition.

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4. The problem of inequalities in income and wealth: The fruits of economic growth and riches
where not reaching the masses. With growing national income, the rich were becoming richer
and the poor were becoming poorer.
• Stage II- Welfare concept by Alfred Marshall
➢ The welfare definition of economics has been given by neoclassical writers like Marshall, Pigou,
Cannan, etc. in fact it was professor Marshall who tried to correct the hitherto distorted version of
economics that it was a science of wealth and as such he gave more systematic and scientific
definition of the subject.
➢ In defining economics, he laid emphasis on ‘man’ rather than ‘wealth’. He also gave importance to
the ethical aspect of economic activities and thereby tried to 'humanize’ this so called ‘disposal
science’.
➢ Alfred Marshall published his book, “Principles of Economics”, in 1890, Where he provided his
definition of economics as, “Political Economy or Economics is a study mankind in 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 wellbeing. Thus, it is on one
side, a study of wealth and on the other and more important side a part of the study of man”.
▪ Main points of welfare definition:
1. Economics is a study of human activities in the ordinary business of life this in the main
obtained to to income earning an income spending activity.
2. Economics is a social science.
3. Economics does study wealth but in relation to man.
4. The study of economics is concerned with the attainment and use of such material requisites
of wellbeing which promote material welfare.
▪ Criticism of welfare definition:
1. The concept of ordinary business of life is rather vague: It is not clear as to what is meant by
ordinary business of life and what is the difference between ordinary business and
extraordinary business of life? Again, it should be noted that a study of economics is relevant
under all situations - ordinary for extraordinary.
2. Economics is a human science rather than a social science: A social science studies individual
as a member of society. A human science on the other hand will include every human being of
the society whether living in the society or in isolation.
3. The definition is classificatory rather than analytical: The definition classify economic
activities into two parts- 1) those which contribute material welfare and 2) those which do not
contribute to material welfare. According to this definition, economic studies only those
human activities which promote material welfare. But according to professor Lionel Robbins
while excluding the study of non-material human activities that is, excluding the services of
doctors, lawyers, teachers, etc., Marshall has restricted the scope of economics.
4. Criticism of the concept of welfare: Professor Robins has also criticized the relation of
economics as a subject with material welfare. There are many economic activities which are
not conducive to human welfare. For example, sale of alcoholic liquor are economic activities,
but these activities hardly promote welfare. 10 economics is concerned with the means and
not with the causes of material welfare.

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5. welfare cannot be quantitatively measured: For example, two persons may be paying the
same price for a given article, but this does not necessarily mean that they will derive the same
utility or satisfaction from that article.
• Stage III scarcity concept by professor Lionel Robbins
➢ Marshall’s definition was the most popular and accepted definition of ecotage III scarcity concept
by professor Lionel Robbinsonomics at one time. Lionel Robbins had however offered most
scientific definition in his famous book published in 1932, titled “An Essay on the Nature and
Significance of Economic Science”.
➢ According to him, ‘‘Economics is the science, which studies human behaviours as a relationship
between ends
➢ and scarce means which have alternative uses.
▪ Robbins based his definition of economics on the following facts.
1. The ends or wants of an economy are unlimited in number and variety, and they keep
increasing with the passage of time.
2. An economy always has shortage of resources compared with to the wants to be satisfied.
3. It is possible to select between several alternative resources for satisfying a given want.
4. Man has therefore, to choose between wants.
5. Similarly, it is possible to use a given resource for the satisfaction of several alternative wants.
▪ Main points of Scarcity definition:
a) Study of Human Behaviour: The definition has a study of human behaviour instead of a study
of a social man. Economics studies the economic activities of all human beings whether living
in or out of society. Economics studies the behaviour of man both at individual and social level.
b) 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.
c) 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.
d) Universal: This definition is concerned with the problem of unlimited ends (wants) and scarce
means. This problem is found at any place and in any type of economy, that is capitalism,
socialism etc.
e) More Logical Explanation of Economic Problem: This definition has offered a more logical and
precise explanation of the nature of economics. 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 their alternative uses.
▪ Criticism of the scarcity definition:
1. Too wide and to narrow a definition: The definition is too wide because the problem of scarcity and
choice is so universal that it arises practically in every aspect of our life- that is economic, social,
political, religious and so on. Thus, it is desirable that we should study man’s economic life and
economic problems within the society. The definition appears to be too narrow because according to
professor Lionel Robbins economics is concerned only with what is and not with the ends.

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2. Robbins’s definition accepts the concept of welfare through the back door: all the Robins has severely
criticized the “welfare definition”, the concept of welfare does find a place in Robbins ‘s definition.
Thus, for example, it is said in Robbins’s definition that, the resources are scares, having alternative
uses hence, they should be used in production activity in such manner so as to achieve maximum
satisfaction from it.
3. Economics cannot remain neutral between ends: Most of the modern writers, however, do not accept
this view. According to them, economics cannot and should not remain neutral between ends. The
study of economics AIMS at not only to know no the truth for its own sake, but also to provide a
technique for the solution of various economic problems facing the society.
4. Too much emphasis on scarcity aspect: The definition given by Robbins lays too much emphasis on the
scarcity aspect. However, the main problem which has engaged the attention of most of the countries
at present is how to deal with and overcome this scarcity. Accordingly, more and more importance is
being given to the economics of development.
5. Economic problem arises not only under conditions of scarcity but even under conditions of
abundance: For example, during the great economic depression of the 30’s, it was not scarcity, but
abundance of goods that is, overproduction which has created economic problems for governments in
various capitalist countries of the world. Robbins definition, thus fails to take into account the fact that
both under conditions of definition and of abundance, there can be an economic problem.
6. Robbins analysis is mainly micro in character: Robbins’s economic analysis is mainly micro in character.
His analysis studies human behaviour in the context of unlimited ends and scares resources which
have alternative uses. Whereas, in modern times, macroeconomic analysis which studies problems like
national income and employment, economic growth and economic development, etc., has come to
occupy a very significant place in economic literature. Robbins’ analysis, however, appears to have
ignored this important aspect.
7. Robbins’s definition is based on static analysis: In his analysis, unlimited wants and scares means with
alternative uses are assumed to be given. This is, however, a highly static and rigid view of a dynamic
problem. In the modern dynamic society, ends and means seldom remain constant; these are subject
to continuous change with the process of economic growth and economic development. Robbins’s
definition, unfortunately, tends to ignore this vital aspect.

Stage IV: Growth concept by professor Paul Samuelson

➢ Professor Samuelson has given the growth-oriented definition of economics as follows:

➢ “Economics is a study of how people and society end up choosing with or without the use of money, to
employ scarce productive resources that would have alternative uses, to produce various
commodities, and distribute them for consumption, now or in the future, among various persons and
groups in society. It analyses the cost and benefits of improving patterns of resource allocation”.
➢ The following inferences may be drawn from the above definition:
➢ Like Robbins, professor Samuelson also lays emphasize on the scarcity aspect of productive resources
and their alternative uses in the economic life of the society.
➢ It deals with the relative problems of production, consumption and distribution of this scarce
resources.
➢ It gives emphasize on cost -benefit analysis which helps in dealing with the development programming
modern economic analysis.

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➢ The definition is dynamic in content and is also wider in scope so far as it takes into account the future
production and distribution aspects of the economic activity too.
➢ By using the phrase “with or without the use of money”, the definition covers both money and barter
economy in analysingthe problems of economizing or making economic choices.
➢ The definition links together the scarcity and growth aspects of productive resources and so to that
extent it is superior to scarcity definition.

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