Lesson1

Nature and Scope of

Economics
Outline
1. Definition of Economics

2. Basic concepts

3. Economics: positive science or

normative Science?
Definition of Economics
Adam Smith’s Definition (Wealth Definition)
Adam Smith (1723-1790/UK) was a Scottish
moral philosopher and a pioneer of political
economy. One of the key figures of the
Scottish Enlightenment, Smith is best known
for two classic works: The Theory of Moral
Sentiments (1759), and The Wealth of
Nations (1776).

Adam Smith, known as the Father of Political (because

he was the first person who put all the economic ideas
in a systematic way), defined economics as follows:
“Economics is the science of wealth”.
Alfred Marshall’s Definition (Welfare Definition)
Alfred Marshall (1842-1924/UK) was
one of the most influential economists
of his time. His book, Principles of
Economics, was the dominant
economic textbook in England for many
years.

In his book Principles of Economics, Alfred Marshall

defined economics as “a study of mankind in the
ordinary business of life”. An altered form of this
definition is : “Economics is a study of man’s actions in
the ordinary business of life”.
Lionel Robbins’ definition (Scarcity Definition)
Lionel Charles Robbins, Baron Robbins,
(1828-1984/UK) was a British economist and
head of the economics department at the
London School of Economics.
Books: An Essay on the Nature and
Significance of Economic Science …

Lionel Robbins has defined economics as follows :

“Economics is the science which studies human behaviour as a
relationship between ends and scarce means which have
alternative uses”.
Robbins has given the above definition in his book “An Essay on
the Nature and significance of Economic Science”.
Paul Samuelson’s Definition (Modern Definition of Economics)

Paul Anthony Samuelson (1915-2009/US)

was an American economist, and the first
American to win the Nobel Memorial Prize in
Economic Sciences.
Books:  Economics: An Introductory Analysis;
Foundations of Economics; Microeconomics;
Macroeconomics; Economics Sg. …

Samuelson’s definition is known as a modern definition of

economics.
According to Samuelson,
“Economics is a social science concerned chiefly with the way
society chooses to employ its resources, which have alternative
uses, to produce goods and services for present and future
consumption”.
Basic Concepts
Consumption
Consumption deals with the satisfaction of human
wants like

; ; and

When a want is satisfied, the process is known as

consumption.
In plain language: Consumption = usage ≠ Economics: It
has a special meaning: eg. Consumption of food=
consumption of the services of a lawyer.
Production
Production refers to the creation of wealth.
Strictly speaking, it refers to the creation of
utilities. And utility refers to the ability of a
good to satisfy a want.

Production refers to all activities which are

undertaken to produce goods which satisfy
human wants.
Exchange
In modern times, no one person or
country can be self-sufficient. This gives
rise to exchange. In exchange, we give
one thing and take another. Goods may
be exchanged for goods or for money. If
goods are exchanged for goods, we call it
barter.

Modern economy is a money economy. As goods are

exchanged for money, we study in economics about the
functions of money, the role of banks and we also study
how prices are determined. We also discuss various
aspects of international trade.
Distribution
Wealth is produced by the combination of land, labour,
capital and organization. And it is distributed in the form
rent, wages, interest and profits.
In economics, we are not much interested in personal
distribution. That is, we do not analyse how it is distributed
among different persons in the society. But we are
interested in functional distribution.
→ a businessman demands inputs of land, labour, and
capital because he needs them in the production of goods
that he sells. The theory of distribution is thus related to the
theory of production
 Goods
Anything that satisfies a human want

Material Non-material
Services of

NB. A free good

Free goods Economic goods in one place
eg. Oil, Gas, can become an
eg. Air and sunlight → economic good
Abundant/ Unlimited Uranium→ Scarce/
in another
Not commanding a limited** place
price in the market commanding a dependeing on
price in the market supply and
demad for it
Income
In economics, when we refer to income, generally we mean

income.

For instance you may obtain a regular income by renting your

or or (= wealth)

NB. National income: refers to the value of commodities and services

produced by a country during a year. From the national income of a
country, we can find out whether the country is rich or poor.
Public Finance

Public finance deals with the economics of government. It studies mainly

about the income and expenditure of government. So we have to study about
different aspects relating to taxation, public expenditure, public debt and so
on.

Wealth
In ordinary speech, when we refer to wealth, we mean money.
But in economics, it refers to the those scarce goods which
satisfy our wants and which have money value. We may
consider anything that has money value as wealth in economics.

Market
Public finance deals with the economics of government.
It studies mainly about the income and expenditure of government. So we
have
to study about different aspects relating to taxation, public expenditure,
public debt and so on.
Value
The term value refers to the exchange qualities of a good.
2 kinds of value: a) value-in-use b) value-in-exchange
We are interested in value-in-exchange because they are scarce in relation to
demand and also because they possess a utility. The value of a good changes
according to time and situation; for example Ice has more value in Summer
than Winter.

Price
When value is expressed in money, it is called price.
Genearally , economists make no distinction between value
and price. All prices are related to one another; they form
the price system.

Mivroeconomics vs Macroeconomics
In microeconomics we deal with problems of such as the the output of a single
firm or industry, price of a single commodity..
Macroeconomics studies the economic system as a whole. It allows us to get a
complete picture of the working of the economy.
Economics : positive or normative science ?
Asimakopulos (a canadian economist: 1930-1990) says: “positive
economics can be defined as a body of systematized knowledge
concerning what is, while normative economics tries to develop
criteria for what ought to be”

→ Positive economics is mainly concerned with the description

of economic events and it tries to formulate theories to explain
them.

In normative economics, we give more importance to ethical

judgments. Normative economics is concerned with the ideal
rather than the actual situations.