Contents of the Lecture

• What is Economics.
• Different definitions of Economics
• What is Economic Problem.
• Centrals Problems of an Economy
Different definitions of Economics:

i):: Adam Smith: Adam Smith was the founder of classical school of
thoughts. He defined economics in the following words.
“ Economics is the science of wealth.”

ii): Alfred Marshall defines economics as

“ A study of men as they live and move and think in the ordinary
business of life” He argued that economics on one side, is a study of
wealth( how create, accumulate and distribute) and on the other side, is
a study of man.

iii): Lionel Robbins defines economics as

“Economics is a science which studies human behavior as a relationship
between ends(unlimited wants) and scarce means which have
alternative uses.
Economics is a social science since it studies the actions of human beings.

Economics studies the ordinary business of life since it takes into account the
money- earning and money- spending activities of man

Economic Problem
 Sometimes called the basic or central economic problem

The problem of deciding or choosing how to satisfy unlimited wants with

limited resources.

The difference between unlimited wants and limited resources is economic

problem.

With wants being unlimited and resources scarce, we individually and

collectively cannot satisfy all our wants. This gives rise to the problem of how
to use scarce resources to attain maximum satisfaction.
Central Problems of An Economy
The scarcity of resources gives rise to various basic economic problems which have
to be solved by an economy. These basic economic problems are also called central
problems of the economy.

The four basic economic problems or central problems faced by an economy are as
follows:
1. What to produce
2. How to produce
3. For whom to produce
4. What Provision (if any) is made for economic growth?

1. What to produce?

This implies that society has to decide which goods and in what quantities are to
be produced, “Guns or butter” has been the popular way of describing this
dilemma of choice posed by the scar­city of resources. But this choice between war
goods and goods for civilian consumption is not the only problem of choice faced
by the society. The society has to choose among hundreds of consumer goods themselves
and decide about allocation of resources between them. Of special mention in this
regard is the choice between necessities and luxuries.

Once society has decided which goods shall be produced, it must then give proper
weights to each of the good it selects to produce. Sup­pose society has decided to produce
wheat, hospitals, schools and cloth. The fact that resources are scarce means that society
cannot produce unlimited amounts of even these se­lected goods.

2. How to Produce?
This means with what combination of resources a society decides to produce goods. A
combi­nation of resources (or factors) implies a technique of production. Usually, there
are various alterna­tive techniques of producing a commodity and the society has to
choose among them, each tech­nique using a different combination of resources like
labour and capital.

For instance, cotton cloth can be produced with either handlooms, or power looms or
automatic looms (as used in modern textile mills). Production with technique of
handlooms involves the use of more labour relatively to capital and therefore represent a
labour-intensive technique.
On the other hand, the production of cloth with automatic looms of the modem
textile mills involves use of more capital relative to labour and hence represents a
capital-intensive technique of production. Likewise, alternative techniques involving
different degrees of capital and labour intensity are available in case of other
commodi­ties. Obviously, the choice between different techniques would depend on
the available supplies of different factors of production and their relative prices.

Scarcity of resources demands that goods should be produced with the most efficient
method. If the economy uses its resources inefficiently, the output would be smaller
and there would be unnec­essarily sacrifice of goods that otherwise would have been
available.

3. For whom to produce?

For whom to produce implies how the national product is to be distributed among the
members of the society. Productive resources and the resulting output being scarce, we
cannot satisfy all wants of all the people. Therefore, a society has to decide who should
get how much from the total output of goods and services.
in a free market economy who would get how much of national output depends on
his money income. The greater the money income a person enjoys, the greater the
amount of goods he would be able to buy from the market. Therefore, the greater the
inequalities in the distribution of money incomes, the greater the inequalities in the
distribution of national output. Therefore, this raises the question as to how a free
market economy decides about the distribution of money incomes.

Money income can be obtained in two ways. First, it can be obtained through work that
is, selling one’s labour service. Wages (and salaries) represent the incomes from work.
Differences in wages earned by various people arise due to differences in production
activities, skill, education.

Second, income can be made from property such as land, factories and other forms of
capital. Rent, interest and profits are the examples of income from property. Differences
in the ownership of property in a free market economy cause differences in incomes
from property.

4. What provision should be made for economic growth?

Both an individual and a society would not like to use all its scarce resources for current
con­sumption only. This is because if all resources are used for producing consumer
goods only and no provision in terms of allocating some resources for investment,
that is, for production of capital goods, is made, the future resources or productive
capacity would not increase.

This implies that incomes or standards of living of the people would remain stagnant.
Indeed, if no such provision is made for future, the future productive capacity and
hence the levels of living may decline. For, in the absence of this provision, the stock of
capital would fall due to depreciation as a result of its use for producing consumer
goods in a period.

The focus should be long term instead of short term. It follows that provision for capital
accumulation and technological progress implies sacrifice of some current
consumption. Therefore, a society has to decide how much saving and investment (that
is, how much sacrifice of current consumption) should be made for future economic
progress.
Thank you