WHAT IS

ECONOMICS ?
Introduction to Economics

1. Origin of Economics
2. What Economics is all about? (Concepts & Definitions)
3. Economics as Science
4. Nature of Economics
5. Economic Problems
6. Production Possibility Curve


Origin of Economics
The word Economics is derived from two Greek
words:
oikos (house) and nomos (management). Therefore
economics evolved as science of House
Management.

1776 : Adam Smith (Father of Economics)
Considered Economics as Science of Wealth.




2. What Economics is all about?

Stages & Definitions of Economics
Wealth
Definition
(Adam
Smith)
Welfare
Definition
(Alfred
Marshall)
Scarcity
Definition
(L. Robbins)
Growth
Oriented
Definition
(Samuelsson)
Wealth Concept :Adam Smith, who is generally
regarded as father of economics, defined
economics as a science which enquires into the
nature and cause of wealth of nation. He
emphasized the production and growth of
wealth as the subject matter of economics.


Characteristics:
# Takes into account only material goods.


Criticism of Wealth Oriented Definition :

# Considered economics as a dismal or selfish science.
# Defined wealth in a very narrow and restricted
sense which considers only material and tangible goods.

# Have given emphasis only to wealth and reduced man
to secondary place in the study of economics.
Welfare Concept :According to A. Marshall Economics
is 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 with
the use of material requisites of well being. Thus, it is
on one side a study of wealth; and on other; and more
important side, a part of the study of man.



Characteristics of Welfare Definition:

# It is primarily the study of mankind.

#Takes into account ordinary business of life It is not
concerned with social, religious and political aspects of
mans life.

#Emphasize on material welfare as the primary concern of
economics i.e., that part of human welfare which is related to
wealth.

#Limited the scope to activities amenable to measurement in
terms of money.

Criticisms of Welfare Oriented Definition :


# Criticized for treating economics as a social science
rather than a human science, Thus welfare definition
restricts the scope of economics to the study of
persons living in organized communities only.

# Criticized because of the distinction made between
economic and non-economic.

# Welfare in itself has a wide meaning which is not
made clear in definition.


Scarcity Concept : According to Lionel
Robbins: Economics is the science which
studies human behavior as a relationship
between ends and scarce means which
have alternate uses


# Economics is a positive science.
# Unlimited ends ( wants ).
# Scarce means.
# Alternative use of means.
# Choice study of human behavior.


Characteristics of Scarcity Oriented Definition:



# Tried to bring the economic problem which forms
the foundation of economics as a social science.
# The scarcity definition of economics is most
universal in nature.
# Has taken both sciences in account i.e. Social and
Human.
# It takes into account all human activities.
# Consideration of neutral science was considered
much logical.
Superiority of Scarcity Definition :


Economics is not a natural science
Ignores Many Key-Concepts
Economics is not a natural science
Scarcity is not the cause of Economic Problem
Not applicable to Underdeveloped Countries
Not Applicable to Rich Countries

Criticism of Scarcity Oriented Definition :

NATURE
OF
ECONOMICS
Economics as Science
For considering any discipline as science it should
have few features like:

There should be objectivity i.e. the phenomenon should
be measurable.

It should have own methodological tools (Laws and
Principles).

It should have ability to forecast.

It should study the cause and effect relationship
between variables

Why Economics should not be
Considered as Science
Economists do not have uniform opinion and approach
for particular event.

The subject matter of Economics i.e. economic behaviour
of man is highly Unpredictable

In Economics Money is used as the measuring rod,which
itself is dependent variable.


Economics as Science
Classification of Science :

a. Positive Science (What is? What was? What will be?)
actual happenings.
Examples of Positive statements :
- India is an over-populated country.
- Prices in Indian economy are constantly rising.

b. Normative Science (What ought to be? What ought to
have been?)
Examples :
- Fundamental principle of economic development should
be the development of rural India
- Agricultural income should also be taxed.
ECONOMICS AS AN ART
Science is a theoretical aspect whereas Art is a practical
aspect. The application of knowledge to attain particular
goal is considered as an Art. According to Keynes An art
is a system of rules for the attainment of a given end
Many economists believe that economics is also an art, as
it helps in solving the many practical problems. It is not
merely theory, it has great practical use. It is both
light-giving and fruit- bearing.

Scope and Subject Matter
of
Economics






























Traditional Approach

According to the traditional approach subject
matter of Economics is related with
Consumption (Satisfaction of Wants),
Production (Creating Utilities),
Exchange& its Mechanism (Money, Credit, Banking)
Distribution (Sharing of all that is produced).


Consumption:
Whenever we make use of any commodity or
service for the satisfaction of our wants, the act
is called CONSUMPTION.

The laws related to consumption are formulated in
this division like,
Law of Demand,
Law of Diminishing Marginal Utility
Law of Equi- Marginal Utility


Production:
Production is the process of converting an input
into more valuable output.
An Input is anything that firm buys for the use
in production process.
The goods produced for the sale through such
process is known as Output.
In this the laws related to production are
formulated like,
Law of Returns to Scale, Law of Variable
Proportion.


Modern Approach

Micro Economics or Price Theory

Macro Economics or Income Theory
Micro Economics or Price Theory




Exchange:
It includes the price determination with
the help of market forces i.e. demand
and supply.

How the price determination takes place
under various market forms such as
perfect market and imperfect conditions.

It also includes the study of money,
banks and financial markets.
Distribution:
Production takes place with the help of various
agents of production known as factors of
production.
Broadly there are 4 factors of production namely
Land, Labour, Capital and Entrepreneur.
The share of these factors of production is given
in the form of Rent, Wages, Interest and Profit.
In this division various theories of distribution are
formulated like,
Marginal Productivity Theory of Distribution, Theory
of Rent, Theories of Profit etc.

Basic Assumptions of Economics

Economic Rationality:
This assumption is related to the fundamental behavior of human
being. It is assumed that every decision maker whether it is a
household or producer will be behaving in Rational Manner.

Capitalist Economy:
Economic analysis, especially Price Theory, is based on the
assumption of capitalist economy. Capitalist Economy is an
economy where there is existence of private property, freedom
of enterprise, profit motive, perfect competition and absence of
government interference. The existence of free market
conditions with free play of demand and supply is necessary
feature of capitalist system.



Basic Assumptions of Economics

Mobility of Resources:
There are no artificial boundaries among economic units. Labor is
free to go to work in the most profitable or enjoyable
employment. Owners of capital can invest their funds where
profits appear most attractive.

Static Economy:
Economics study the allocation of limited (scarce) resources for
satisfying the unlimited needs of human being on the basis of the
assumption that technology and resources are given. Therefore
economics studies a static economy.
Ceteris Peribus:
One of the important assumption used in economics while
formulating policies and laws is, Other things remains constant.



Production
Production is the process of converting an input into
more valuable output. An Input is anything that
firm buys for the use in production process. The
goods produced for the sale through such process is
known as Output.

In economics production indicates production of
wealth or valuable and not merely utility. Thus
production can be defined as the creation or
addition of Value or Wealth. It may consist not
only goods but also services such as services of
doctors, Lawyers, Teachers etc.


Consumption
Whenever we make use of any commodity or service
for the satisfaction of our wants, the act is called
CONSUMPTION. Consumption is also defined as
the destruction of utility.

o Direct (Final) Consumption: For example, wearing
shirt or eating bread or using furniture etc.

o Indirect (Productive) Consumption: For example
using a sewing machine for making clothes.


Entrepreneur
An entrepreneur is a person who brings all the factors
of production together and assigns them the proper
tasks and pays them remuneration after completion of
work. Organizing and Risk taking are the two main
functions of an entrepreneur.

An entrepreneur is the person with vision, originality
and daring. He is the person who takes the decision
about What, How and For Whom to produce. He
anticipates the future demand and Prices.


Functions of an Entrepreneur

Identifying and Initiating
Organising
Directing and Supervising
Risk Taking
Innovation

Standard of Living
The standard of living refers to the necessaries, comforts and
luxuries which a person is accustomed to enjoy. In other words
standard of living of the people means the Quality and Quantity
of their consumption.

Standard of living of Country depends on several factors such as
Level of National Income, Level of Productivity, Size of
population, Distribution of National Income, General Price
Level, Level of Education etc.

Standard of living of an Individual depends on his Income, Size
of Family, Family Tradition, Education, Taste and Preference,
Social Customs, General Price Level etc.


Equilibrium
The word equilibrium is used most frequently in economics.
Equilibrium means state of balance. When forces acting in opposite
direction are exactly equal, the object on which they are acting is
said to be in equilibrium.
For example, a consumer is said to be at equilibrium position
when he is deriving the maximum satisfaction and a producer or
a firm is said to be in equilibrium when it makes maximum profit
or incurring minimum loss.
Stable Equilibrium
Unstable Equilibrium
Neutral Equilibrium
Short Term Equilibrium
Long Term Equilibrium
Partial Equilibrium
. General Equilibrium

The concept of Consumers Surplus was popularized by the
Alfred Marshall.
Consumer surplus is a measure of the welfare that people
gain from the consumption of goods and services, or a
measure of the benefits they derive from the exchange of
goods.
The concept of Consumers Surplus is to be applied
especially to those commodities which are highly useful
but are very cheap
Like Post Card, Match Box, Salt, News Paper etc.
By paying lesser price than what we are prepared to pay as
a price, we get psychological satisfaction of saving some
money. This satisfaction is called as Consumers Surplus

Consumers Surplus
In the words of Marshall The excess of the
price which he (consumer) would be willing to
pay rather than to go without the thing over
that which he actually he does pay is the
economic measure of this surplus
satisfaction.. It may be called Consumers
Surplus

According to J. R. Hicks Consumers Surplus is
the difference between the marginal valuation
of the unit and price which is actually paid to
it

Definition of Consumers Surplus
Consumer Surplus = Price Prepared to Pay Price Paid
OR
Consumer Surplus = Total Utility Total Expenditure

Units of
Orange
Marginal Utility Price Consumer
Surplus
1 50 10 40
2 40 10 30
3 30 10 20
4 20 10 10
5 15 10 05
6 10 10 0
Total
Units
6
Total Utility
165
Total
Expenditure
60
Consumer
Surplus
105
The term utility refers to the Want Satisfying
Power of a commodity or service, assumed by the
consumer to create his demand for that commodity
or service.
It relates to the consumers mental attitude and
experience regarding the given commodity or
service.
Thus utility of commodity may differ from person to
person, time to time and place to place.


Utility

Usefulness
Pleasure
Satisfaction
Utility if Different From

Forms of Utility