SUBMITTED TO:

Dr. Eritriya Roy

Assistant Professor, Economics

HNLU, Raipur

SUBMITTED BY:

Abhijeet Audichya

ID No.- 20/2020/2211

SECTION-A

SEMESTER I

B.A.L.LB (Hons.)
Question 1 : Economists are far from being unanimous about the definition of their
subject since the subject covers a wide scope and subject matter. Even if, the
definitions of economics have often helped to convey what economists see as
legitimate problems for economic analysis, as well as the methods of analysis,
approach, and techniques they consider appropriate for doing yet there is lack of
agreement for a universal accepted definition. After critically analyzing the
definitions, you believe that there is still a long road the economists need to travel
to have a uniform accepted definition of economics?

What is your supposition regarding having a separate definition for ‘economics and
law’ in the economics literature?

Answer : There have been many definitions of economics as given by many economists. These
definitions are different from each other in various aspects. These definitions belong to varying
schools of thought. But the first question that arises before discussing these definitions is “Why
do we need definition of economics?”. There are 2 reasons for this question-

1. It prevents the economics from becoming ambiguous and vulnerable to misconceptions.

2. It guarantees the application of economic laws to all the cases fairly.

In this assignment, we shall be discussing the various definitions of economics and its relation
with law as given by some of the most renowned economics and will be critically examining
them. We would also be looking at the interconnection of law and economics and will be giving
the opinion whether there is a need for a separate definition of “economics and law” in the
economics literature.

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 Definitions of Economics
Before moving onto the various definitions of economics as propounded by various economists,
we shall discuss the basic meaning of “Economics”.

The branch of knowledge which studies the economic behavior of an individual is known as
Economics. The activities of production, distribution, consumption and exchange of goods are
dealt with by economics.

The word Economics is made up of 2 Greek words ‘eco’ meaning house and ‘nomos’ meaning
accounts. Now, let us critically analyze the 4 most popular and significant definitions of
Economics.

1. Wealth Definition by Adam Smith: He is considered as the father of Economics. He

defined Economics in his book titled “An Enquiry into Nature and causes of Wealth of
Nations” (1776).
According to Smith, “Economics is that subject matter which is concerned with an enquiry
into nature and causes of wealth (goods and money) of nation and studies the laws of
production, consumption, distribution and exchange of wealth.”

Key Elements : A. It is wealth-oriented definition which studies and deals with

production, consumption and distribution of goods.

B. It is a materialistic definition which gives importance to money and goods only.

C. This definition studies an individual who only care about self-interest of gaining wealth.

D. Invisible Hand- The self-regulation of markets and generation of wealth. When there
is a demand in the market by the consumers and the producers meet that demand by selling
goods, it creates financial gains and eventually adds up to the wealth of the nation.

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 Criticism : a) It does not concern itself with non-materialistic aspects of economics. This
includes activities and services whose value may directly not add up to the economy but
has a direct effect on the economy and wealth.

b) The scope of this definition is very narrow- It focuses mainly on the seller’s side and
neglects the consumer’s side. It does not answer how a buyer earns the money which is
being used to consume goods.
Also, it does not focus on some key aspects of economics like- welfare, scarcity of
resources, poverty and unemployment.

c) Makes Economics a mean science- This definition emphasizes the concept of a selfish
man and not a common man.
This makes economics a subject matter which only focuses on wealth and self-interest of
an individual.

2. Welfare Definition by Alfred Marshall: He was the first economist to lay down the
concept of Economic welfare. He is also regarded as the father of “Welfare Economics”.

He defined Economics in the following words- “Economics is the study of mankind in the
ordinary business of life. It examines that part of an individual which is most closely
connected with the attainment and use of material requisites of well-being.”

Key Elements : A. Focuses on real man- This definition, unlike Smith’s one, focuses on
that individual who lives in a society with other members and takes their services to get
optimum satisfaction.

B. Links welfare and wealth- He mentioned that welfare is the outcome of wealth. Wealth
is used by individuals to buy materialistic goods and services in order to get maximum
welfare.

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 Criticism : a) There is a sort of vagueness in the term “Welfare”. Welfare is a mental
feeling which changes with respect to every person, region and time period. Marshall just
mentions one way of achieving welfare.

b) This definition, according to L. Robbins, is a totally materialistic definition which

emphasizes the concept of Wealth is Welfare unduly to a great extent.
He neglects the non-materialistic goods and services which provide welfare to an
individual.

c) Just like Smith, Marshall also narrows the concept and the subject matter of Economics.
Economics is not just about individual welfare. It includes other concepts like scarcity of
resources, accumulation of wealth and poverty.

3. Scarcity Definition by Lionel Robbins: He, unlike previous economists, completely

interconnected science with economics. He defined Economics as a “science which studies
human behavior as a relationship between ends and scarce means which have alternative
uses.”
This definition was presented by him in his book titled “An essay on the nature and
significance of Economic Science” which was published in 1932.

Key Elements : A. The definition given by Robbins widens the scope of Economics. It
not only covers concepts like wealth, welfare and materialistic goods and services but also
focuses on other economic concepts like scarcity of resources and innumerable wants.

B. This definition makes economics a science subject. This is because it brings forth a
cause an effect relationship between various elements like scarce resources, human
wants/needs and social welfare.

C. It studies human behavior by mentioning that the most urgent wants out of the
individual’s innumerable ones needs to be fulfilled.
It is because the resources are scarce and the individual has to prioritize the needs.

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 Criticism : a) The definition is not universal as it doesn’t apply to the rich and developed
countries as they do not have a shortage of resources. They can easily avail those resources
whose shortage they have.

b) He ignores the aspect of abundance of resources. If a resource is available in plenty

anywhere, it can also become a problem just like scarcity of resources.
For e.g., In a country like India where there is excess of human labor, there is a huge
problem of unemployment.

c) Throws light on the problems but doesn’t give the solutions for resolving them- Robbins
demonstrates the issue of scarcity of resources and unlimited human wants but does not
directly give any measure to be taken to eradicate this problem.

4. Growth Oriented Definition by Paul Samuelson: This definition is regarded as the

modern definition of Economics. It was given by Paul Samuelson in his book titled
“Economics” which was published in the year 1948.

According to him “Economics is the study of how people and society end up choosing
with or without the use of money to employ scarce resources that have alternative uses to
produce various commodities and services and distribute them for consumption for now
and in future among various persons in the society.”

Key Elements : A. The commodities have been mentioned for future use which shows
the dynamism of the subject. It also shows that sustainable development is possible in
economics as well.

B. The definition consists the words “with or without the use of money” which shows that
the subject Economics not only comprises of economic or materialistic activities but also
includes non-economic or non-materialistic activities.

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C. Also, Samuelson has showed that Economics is a science subject through the scientific
approach taken in the definition.

The definition also presents concepts like effective allocation and utilization of scarce
resources which helps in further economic development.

Criticism : a) Although this definition takes into account many aspects of economics like
scarcity of resources and non-economic activities but it fails to consider certain socio-
political and economic factors which affect human beings.

b) Although there is a slight mention of services in this definition, he neglects the role of
service sector in the economic development of a nation.

After discussing and critically examining the various definitions, as propounded by the
economists like Adam Smith and Alfred Marshall, it can be concluded the realm of
economics is wide and vast enough to not come under a single definition.

But the economists have tried to reach as close as possible to the true meaning of
economics through their definitions. Also, it needs to be mentioned that all the economists
have given different perspectives on Economics in their definitions which nearly
differentiates each definition.

One definition which can be considered to be the nearly true definition of Economics is
the one given by Paul Samuelson because he, along with mentioning his perception of
Economics, accommodates the solution of the criticisms faced by the earlier economists.

But, still there is a long way ahead for the economists to reach an unambiguous and
accurate definition of Economics because all the economists, through their definitions, in
some way or the other, have narrowed the scope or the subject matter of Economics
according to their thoughts and viewpoints.

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 Relation of Law and Economics

Law is a set of rules or principles which are recognized and applied by the state in the
administration of justice. These principles may be rational or irrational but when the state passes
a law and it comes into force, it has to be followed by the citizens.

Talking about economics, it is a subject which studies the principles of “laws” related to
economic activities. These activities include production, distribution, consumption and exchange
of goods and services.

A scientific approach or a theory is provided by Economics which helps in predicting the

behavior of individuals and society after a law or statute is passed. This is because Economics
considers individual to be a rational man who takes reasonable care and tries to maximize his
welfare and satisfaction.

Therefore, he, after taking into consideration the investment, return and various laws present in
the society, acts accordingly so as to decrease the liability of paying fines, if any.

In its positive economic study, Law & Economics attempts to justify the actions of politicians,
lawyers, judges, and bureaucrats. The rational choice model, which underlies most of
mainstream economics, has proven to be very effective in describing (and predicting) how
individuals behave under different legal constraints.

If the consequences of divergent legal laws and institutions are identified, the legislative analyst
would be able to distinguish useful rules from inefficient ones and devise policy measures to
enhance the efficacy of the laws. Law & Economics also has the potential to increase the legal
system's efficiency.

In certain cases, the legislation and the economy connect. Whereas private law helps people and
organizations who are able to enter into free market deals, public legislation aims to redress, by
means of economic and social control, the consequences of a free market environment.

Law & Economics incorporates two of the basic social structures of culture into one subject,
facilitating a multi-faceted analysis of critical issues that arise in each subject.

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The economic system must be adapted to evolving circumstances and, if it is to reach the best
possible quality, it must implement new ideas. It follows that the structures must play an
important role in this adaptation and that, in the light of recent innovations, new laws need to be
created or existing laws need to be changed.

Whenever restrictions (direct or indirect) are levied on commercial activity, economic issues are
likely to occur. And, unless unforeseeable and even unpleasant consequences are to follow, it is
obvious that lawyers who are expert economists at the same time must perform a very close
scrutiny of any potential legislation of this type so that the costs may be reduced.

Talking about the question of having a separate definition for economics and law in the
economics literature, it is a right idea. This is because of the following reasons-

1) It is difficult to explain why the relationship between law and economics has never been given
the importance it deserves, even though the lawyer considers a certain knowledge of economics
invaluable and the rational economist finds a certain knowledge of the law equally useful.

2) Economic theory and the ideas of law and economy are used with considerable regularity for
judicial decisions. Legal education has also felt the impact of law and economics, with doctoral
programmes in the subject being offered in a variety of countries.

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 References

 Top 4 Definitions of Economics (With Conclusion). Economics Discussion. Retrieved 6 January

2021, from https://www.economicsdiscussion.net/economics-2/definitions/top-4-definitions-of-
economics-with-conclusion/14134.

 Economics. Investopedia. Retrieved 6 January 2021, from

https://www.investopedia.com/terms/e/economics.asp#:~:text=Economics%20is%20a%20social
%20science,consumption%20of%20goods%20and%20services.&text=Economics%20can%20ge
nerally%20be%20broken,on%20individual%20people%20and%20businesses.

 Rubin, P. Law and Economics - Econlib. Econlib. Retrieved 6 January 2021, from
https://www.econlib.org/library/Enc/LawandEconomics.html.

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 SACE- II

Question-

Taking the example of horizontal consumer demand curve showing infinite change
in quantity demand, what is your opinion about functioning of law of demand and
its other aspects in real life? Also, is it possible to quote legitimate examples for
getting a co-relationship between utility, consumer behavior and demand? Give
proper analytical overview to support your decision.

Answer-

In this assignment we will, mainly, be focusing on horizontal consumer demand curve showing
infinite change in quantity demand and its examples in real life. Later on, in the project, we will
discuss the concepts like demand theory, and relationship between utility, consumer behavior
and demand.

An inverse relationship between price and demand for a product or service is implemented by the
law of demand (which we will discuss in detail in coming pages).

It clearly states that demand decreases as the price of a product grows, provided other variables
remain constant. Often, demand increases as the price declines.

It is possible to graphically demonstrate this relationship using a method known as the demand
curve. Now, let us define elasticity in order to understand demand curves.

Elasticity: An inverse relationship between price and demand exists, according to the Law of
Demand. As prices rise, demand falls and vice versa. Price elasticity of production, in response
to a percentage rise or decrease in price, refers to the percentage change in demand.

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Categories of demand curves:

1) Elastic- When the computed elasticity is higher than 1, demand is defined as elastic,
suggesting a high susceptibility to price changes.

2) Inelastic- If lower than 1 is the computed elasticity, it is implied that there is low tolerance to
price changes and is defined as inelastic demand.

3) Unitary- Proportional demand tolerance implies unitary elasticity. In other words, the percent
change in the demanded amount is proportional to the change in price percentage, so the
elasticity is equal to 1.

As the topic is primarily about perfectly or inelastic demand curve, we shall discuss that.

A perfectly (or infinitely) elastic demand curve applies to the extreme case in which, in response
to some decrease in price at all, the quantity demanded increases by an infinite amount.
Similarly, with every spike in the price, the amount sought drops to zero. A perfectly elastic
demand curve is Horizontal. The figure given below is the horizontal curve showing infinite
change in demand.

P D

Q
The horizontal line indicates that at a certain price, an infinite sum would be requested. The sum
sought is highly sensitive to shifts in values, going from zero for prices close to P to infinity as
prices exceed P.

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We can understand this through an example as well. Say for example, If the price of flights to the
United States reduced, everybody would purchase tickets (i.e., the number requested would rise
to infinity).

And if the price of flights to the United States rose, there would be no single passenger on the
flight (i.e., quantity demanded would decrease to zero). It is an "all or nothing" issue. Now, let
us discuss the demand theory.

Demand Theory: The theory of demand is an economic philosophy that refers to the relation
between customer demand for goods and services and their market prices. This market principle
forms the basis of the demand curve, which compares the quantity of goods available to demand
created by consumers. If there is more of a product or service available, demand decreases and so
does the price of equilibrium.

Demand is essentially the amount of a product or service that buyers are ready and able to
purchase for a specified period of time at a given price. In an economy, people demand goods
and services to meet their needs, such as food, healthcare, clothes, entertainment, housing, etc.
Actual demand, in essence, is when the desire to fulfill a want is accompanied by the capacity
and willingness of the person to pay.

At a certain price, the demand for a commodity represents the enjoyment a person expects from
purchasing the product. This degree of satisfaction is called utility which varies from
customer to customer. The desire for a product or service depends on two factors:

(1) its value in order to fulfill a need or wish

(2) the willingness of the customer to pay for that specific service.

We've been looking at what the market is. We have looked at what the curve of demand is. And
we've looked at what can affect market changes. Now we will look at what is implied by the
economic concept 'aggregate market.'

To put it clearly, aggregate demand is overall demand or the sum that everybody wants in the
country. This is a fairly pretentious vocabulary which economists use. To call it 'absolute
demand' is better, but it is referred to as 'aggregate demand' in economics.

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Now we will also discuss some real-life examples of law of demand which will help us in better
understanding the law of demand.

The factors which influence consumer demand in economics are-

1) Income of people- If the income of people increases (assuming ceteris paribus), the demand
of the goods or services also increases. This is because most of the people now have money
through which they can buy the commodity and the demand of that specific service increase. this
happens vice versa when the income of people decreases.

2) Change in preferences- Changes such as this are primarily due to changes in taste, which
alter the amount of a good desired at any cost.

This can be better understood through an example- In early 2000’s, the mobile phones of
NOKIA company were in huge demand but after the android smartphones came into the market,
the sales of NOKIA declined due to shift in demand of people.

3) Changes in the Prices of Related Goods- Changes in the prices of similar products, such as
replacements or additives, may also influence the market for a commodity. A good or service
that may be used in place of another good or service is a replacement.

You'd expect to see a decline in demand for conventional paper books as downloadable books
become more affordable. For the other commodity, a lower price for a replacement lowers
demand.

4) Changes in Expectations About Future Prices- Although it is clear that a good's price
influences the amount requested, it is also true that demand may be influenced by assumptions
about the future price (or expectations about tastes and desires, profits, and so on).

For example, just before the rainy season, people may rush to the store to buy umbrellas and
raincoats. Or if they know that the price of tea is going to increase in the forthcoming months,
this may increase the demand of tea in the present times.

In terms of price, quantity and consistency, consumer buying choices include tradeoffs. The way
in which certain choices are taken by customers is referred to as Consumer behavior.

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Consumer behavior is important to the pricing and production decisions of a business, so to make
effective pricing and production decisions, it must consider the relationship between elasticity
and marginal utility.

Some real-life examples and applications of law of demand- In real life, the law of
demand functions somewhat differently, but the underlying law stays the same-prices go up,
demand goes down.

1) Policymakers have a worse problem during a recession or the market cycle's

contraction process. When workers are losing employment and homes and having less sales and
resources, they have to boost demand. Expansionary monetary policy cuts interest rates and
thereby decreases the price of everything. If the decline is bad enough, the price doesn't drop
enough to cover the reduced profits.

The government can extend unemployment insurance and cut taxes during times of high
unemployment. As a consequence, when the government's tax income decreases, the debt rises.
Once confidence and demand are restored, as tax collections grow, the deficit could shrink.

2) In case of holidays- Companies may be affected by the rule of demand and they can only
reduce their costs by too much until it has little to no effect on customer demand. During the
holiday season, as tourists hurry to hotel booking outlets such as Trivago and Making my travel
in search of deals, we can see the rule of demand play out. It leads to a big jump in demand as
costs are cut.

However, as we get closer to the holiday, the markdowns must be stronger to entice shoppers to
purchase more items. Utility decreases for customers as their needs are met (shopping list is
finished).

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In other words, when we approach the holidays, costs are higher than the increased utility or
profit from purchasing extra goods. Deep price discounts are the result, especially after the
holidays.

3) Movie tickets- For instance, if movie ticket prices decreased to Rs. 30 each, demand for
movies will likely increase. As long as the cost of going to the cinema approaches the price of
Rs. 30, demand will increase. As soon as buyers are happy that they've seen enough movies,
demand for tickets will decline for the time being.

4) A stronger explanation of the law of demand in motion is given by elastic

materials. These items are particularly sensitive to price changes-exactly as the rule of demand
dictates. So, conceive of bread, ice-cream, butter, or cereal like many items in the store.

Basically, it is possible that any good that has several alternatives and a low-price range is
extremely elastic. Therefore, as the price of a butter brand rises by Rs. 40, buyers can select a
cheaper brand instead.

We can also understand this through a hypothetical example.

Consider a fictional situation in which scalpers (one that sells the ticket in black) on the
secondary market are selling tickets for a celebrity event. Suppose the scalpers expect the event
to be heavily attended and Rs. 800 per ticket is paid. This price point is too high for certain
persons to justify.

The scalpers understand that they were mistaken about expected turnout as the start of the game
approaches. To sell out the event, the amount requested at Rs. 800 is not enough. The ticket price
falls to Rs. 400 on the secondary market, and more people are able to see the game at this price.

The move happened when the prices were altered by ticket vendors, and customers only reacted
to the price change.

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Marginal Utility: The added satisfaction a customer derives by having one more unit of a
product or service is marginal utility. Economists use the principle of marginal utility to assess
how much of a commodity consumer is likely to buy.

Relation between Marginal Utility and Price Elasticity: Price elasticity is related to marginal
utility. The utility a consumer would gain from the consumption of the product or the bought
good is directly linked to the ability of the customer to pay for the item. This suggests that as
demand increases, the marginal utility, as well as the ability of a consumer to pay for the unit,
decreases.

Also, it is possible to quote examples of co-relationship between demand, consumer

behavior and utility. These examples have been discussed below.

1) If, for instance, a customer is hungry and consumes 4 burgers. The greater profit or utility
would be granted to the first burger. The customer becomes more comfortable with each
additional sandwich, and utility decreases.

The first burger, in principle, could fetch a higher price from the customer. However, because of
diminishing utility, by the fourth burger, the customer could be less likely to pay for a burger.

2) Promotional grocery prices also offer cheaper prices on the basis that a certain number of
goods are bought. The nature and popularity of this type of promotional pricing shows the ability
of customers to buy larger volumes at cheaper prices.

However, if they receive more groceries, customers will expect cheaper costs as their needs
reduce as supply increases. When customers first meet their immediate desires, they will
undoubtedly want cheaper costs because they will have decreased their utility.

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 References

 5.2 Polar Cases of Elasticity and Constant Elasticity. Opentextbc.ca. Retrieved 27

January 2021, from https://opentextbc.ca/principlesofeconomics/chapter/5-2-polar-cases-
of-elasticity-and-constant-elasticity/.

 Theory of Consumer's Behavior Utility Analysis | Term Paper | Economics. Economics

Discussion. Retrieved 29 January 2021, from https://www.economicsdiscussion.net/term-
paper/consumer-behaviour-term-paper/theory-of-consumers-behaviour-utility-analysis-
term-paper-economics/27465.

 Consumer demand | Demand curves | Economics Online | Economics Online. Economics

Online | Economics Online. Retrieved 28 January 2021, from
https://www.economicsonline.co.uk/Competitive_markets/Demand_curves.html.

 Theory of Consumer Choice | Boundless Economics. Courses.lumenlearning.com.

Retrieved 28 January 2021, from https://courses.lumenlearning.com/boundless-
economics/chapter/theory-of-consumer-choice/.

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