Ch#1

The Nature and scope of Economics

 Economics
• Economics is the study of how best to allocate the scarce
resources among competing uses.
• is the social science concerned with how individuals,
institutions, and society make optimal (best) choices under
conditions of scarcity.

• Origin of the word Economics is derived from Greek word

Okionomia which means Household management or
management of house affairs. e.g How people earn
income and resources and how they spend them on
necessities, comforts and luxuries
 3-school of thought of Economics

• Classical School of thought (Adam smith)

• Neo-classical school of thought (Alfred
marshall)
• Modern School of thought(Robbins)
 Classical School of thought (Adam smith)

• (Adam smith) Founder of Economics, wrote

book in 1776 named Nature and causes of
Wealth of Nations
• (Economics is a Science of wealth)
• It studies 4 important aspects of Wealth
 Production of Wealth
• Means how to produce Wealth
• 4-FOP
1. Land
2. Labour
3. Capital
4. Organization
• Produces G&S which are called production of
Wealth
 Consumption of Wealth
• How to consume Wealth, after getting it.
• People consume Wealth to achieve their
necessities of life in such a way to get a
maximum utility.
 Distribution of Wealth
• Wealth, which is produced by 4-FOP is
distributed among these 4-FOP
• Land---Rent
• Labour—Wages
• Capital—Interest
• Organization--Profit
 Exchange of Wealth
• That Wealth, which receives 4-factors in terms
of reward.
• They consume on the purchase of G&S so,
Exchange happens.
 Neo-classical school of thought (Alfred marshall)

• (Alfred marshall) Wrote book 1890 “Principles of

Economics”
• “Economics is the Science of material Welfare”.
• “Economics is on one side, a study of Wealth and on
other, study of man”
1. Study of ordinary business of life
2. Study of material welfare
3. Economics is a social science
 Modern School of thought (Robbins)

• (Robbins) Wrote book 1932 (Nature and

significance of Economics science)
• Economics is a Science of scarcity and choice
• Economics is a science, which studies human
behavior as a relationship between ends and
scarce means, which have alternative uses.
• Ends :
• Human wants are unlimited
• They create problem of choice
• When a want is satisfied other arises to take its
place
• scarce means:
• means(sources) are limited to satisfy these
unlimited wants
• These means have alternative uses
Inspite of many problems in Robbin’s definition
is scientific, comprehensive, universal,
purposeful.
 Economics
• Studies the allocation of scare recourses
among people.
 Theories, Principles, and Models

• Economists use the scientific method to

establish economic theories—cause-effect
generalizations about the economic
behavior of individuals and institutions
• Observing real-world behavior and outcomes.
• Based on those observations, formulating a
possible explanation of cause and effect
(hypothesis).
• Testing this explanation by comparing the
outcomes of specific events to the outcome
predicted by the hypothesis.
• Accepting, rejecting, and modifying the
hypothesis, based on these comparisons.
• Continuing to test the hypothesis against the facts. As
favorable results accumulate, the hypothesis evolves
into a theory. A very well-tested and widely accepted
theory is referred to as an economic law or an
economic principle—a statement about economic
behavior or the economy that enables prediction of
the probable effects of certain actions.
• Combinations of such laws or principles are
incorporated into models, which are simplified
representations of how something works, such as a
market or segment of the economy
• Economic principles and models are highly
useful in analyzing economic behavior and
understanding how the economy operates.
 Economists develop economic principles and models at two levels

• Micro-economics
• Word comes from the Greek word “Mikros meaning
small
• “is the branch of economics based on economic
behavior of small economic unit, consumers, workers,
savers, Managers, firms, individuals & markets and so
on”
• Production of individual industries and business
• Price of individual G&S
• Individual income
 Macro-economics

• Word comes from the Greek word “Makros

meaning large
• “is the study of the whole economy of the
aggregates like national income, Employment,
AD&AS, Absolute level of prices and so on.
 Positive and Normative Economics

• Positive economics deals with factual

statements (“what is”);
normative economics involves value
judgments (“what ought to be”).
 Positive economics
• Positive economics focuses on facts and cause-and-
effect relationships. It includes description, theory
development, and theory testing (theoretical
economics).
• Positive economics avoids value judgments, tries to
establish scientific statements about economic behavior,
and deals with what the economy is actually like.
• Such scientific-based analysis is critical to good policy
analysis
 Normative economics,
• Economic policy, on the other hand, involves
normative economics, which incorporates
value judgments about what the economy
should be like or what particular policy actions
should be recommended to achieve a
desirable goal (policy economics).
 Basic Economic Problem
• The fundamental economic problem is the issue
of scarcity and how best to produce and
distribute these scare resources.
• Five 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?

• What does a society do when the resources

are limited? It decides which goods/service it
wants to produce. Further, it also determines
the quantity required.
 2. How to Produce these Goods?
• The next basic problem of an economy is to
decide about the techniques or methods to be
used in order to produce the required goods.
This problem is primarily dependent upon the
availability of resources within the economy.
 3. For whom is the Goods Produced?

• The third basic problem to be decided is the

allocation of goods among the members of
the society. The allocation of basic consumer
goods or necessities and luxuries comforts and
among the household takes place on the basis
of among the distribution of national income.
4. How Efficiently are the Resources being Utilized?

• 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.
 5. 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. 
• Economic growth takes place through a higher
rate of capital formation which con­sists of
replacing existing capital goods with new and
more productive ones by adopting more
efficient production techniques or through
innovations.
 Economics relevance to business
organizations????????
• To know the Importance of Economics in Business,
first we should talk about economics.
• Economics is the science that deals with the study
of scarce resources that society needs to exist. Its
production, distribution and reuse. These
resources can be goods like; Food, clothing,
technology, housing, etc. And among the services
we can highlight; Health, education, housing,
potable water, electricity and entertainment.