Economics-1

BALLB-207

Unit I:
Introduction to Economics

Ms. Lavi Vats

Outline
▪ What is Economics?
▪ Scarcity, Wants and Choices
▪ Consumer and Capital Goods
▪ Deductive Method
▪ Advantages of Deductive Method
▪ Shortcomings of Deductive Method
▪ Inductive Method
▪ Advantages of Inductive Method
▪ Shortcomings of Deductive Method
▪ Economics law and Economics theory
▪ Methodology of Economics theory
Introduction
• Economics is a social science concerned with the
production, distribution, and consumption of goods and
services.
• It studies how individuals, businesses, governments,
and nations make choices on allocating resources to
satisfy their wants and needs, trying to determine how
these groups should organize and coordinate efforts to
achieve maximum output.
 ADAM
SMITH

FATHER
OF
ECONOMICS
Scarcity, Wants and Choices
Scarcity, Wants and Choices

▪ The concept of scarcity is important to understand the problem of

allocation of resources. Example:
 Money, Material
 Water, Air, Sand (unlimited resource becoming scarce)
▪ Multiplicity of wants is fundamental characteristic of human
existence.
▪ People are able to allocate resources to satisfy some of their wants.
▪ The conflict between unlimited wants and scarce resources
constitutes the basis of all economic problems in society.
▪ People have to make a choice between wants and scarce means.
Scarcity, Wants and Choices

▪ Scarcity is a relative phenomena not absolute i.e relative to it’s

use. Example:
 A plot of land can be put under cotton cultivation or wheat
cultivation
 A worker can be employed in textile factory or sugar mill.
▪ So, people have to rank in order of preference to make a choice.
Consumer Goods and Capital Goods
▪ Consumer Goods: Goods
produced for present
consumption.

▪ Capital Goods: Goods used

to produce other goods or
services over time
Methodology of Economics

Methodology of Economics

Methodology of Economic Methodology of Economic

Laws Theory

Deductive Inductive
Method Method
Economic Law and Economic Theory

Economic Law simply describes the relationship between the variables.

It establish cause and effect relationship between the variables. But,
fail to provide explanation of the relation. Ex: There is an inverse
relationship between price and quantity of goods & services.

Economic theory it not only describes the relation ship between the
variables but also explains the reason for it or logical basis of the law.
It derives the law through a process of logical reasoning and explains
the conditions under which the stated generalizations hold true.
.
Deductive Method (Deductive Logic)
▪ Deductive Method consist of arriving at a certain outcome or conclusion from
some fundamental axiom or basic assumption through a process of logical
reasoning.

▪ So, we will start with general assumptions and make predictions through a
process of logical deductions.(GENERAL TO PARTICULAR)

▪ It is also called hypothetical, priori, abstract, positive method.

▪ If real facts confirm the predictions ,it is accepted as economics law. If not, it is
rejected altogether. Example:
• Assumption : Activities of man are guided by Self - Interest.
Prediction: People buy in the cheapest market and sell in the dearest
market.
Advantages
▪ Does not involve much of collection of data, less expensive and time
consuming.
▪ It helps in laying down basic principles of human behavior.
▪ Several forecasts act simultaneously on economic phenomena, making it
complex. It analyses complex economic phenomena and brings exactness to
economic generalizations.
▪ Forecasts are exact, clear cut and impartial due to application of
sophisticated mathematical techniques in the deductive method.
▪ It is universally applicable as based on human behavior..
Shortcomings

▪ It is based on unrealistic assumptions, especially incase of

sophisticated theoretical models with little empirical content. If these
assumptions are removed, economical hypothesis based on them is
refuted.

▪ Conclusion derived through this method have limited applications as

economic environment keeps on changing.

▪ Personal biases and pre conceived notions of economists on several

issues render it inapplicable economic policy.
Inductive Method (Inductive logic)
▪ Under this method empirical information is collected regarding
the behavior of economic units under different conditions then
generalizations are arrived on the basis of extensive research and
observation.
▪ It involves reasoning from particular to general.
▪ The no. of observation has to be large to establish valid and
sound economic laws
▪ It also called historical, concrete, ethical or realistic method.
▪ Example Engel’s law : Income Expenditure on necessities
luxuries
Advantages
i. The economic laws which are arrived at by a process of induction
lead to exact, precise and measurable conclusions.
ii. The results are closer to reality. It gives proper attention to
complexity of economic phenomena.
iii. It gives emphasis to the historical evolution of various concepts
and ideas.
iv. It can be used to check and verify the conclusions of deductive
logic to bring deficiencies in their treatment and to
v. Amplify the conclusions
vi. This method involves less chances of mistakes.
Shortcomings

(i) If conclusions drawn from insufficient data, the generalizations obtained

may be faulty.
 
(ii) The collection of data itself is not an easy task. The sources and methods
employed in the collection of data differ from investigator to investigator. The
results, therefore, may differ even with the same problem.
 
(iii) The inductive method is time-consuming and expensive.
 
Comparison
Conclusion

Both the methods have weaknesses. We cannot rely exclusively on any one of them.
Modern economists are of the view that both these methods are complimentary. They
partners and not rivals. Alfred Marshall has rightly remarked:
 
“Inductive and Deductive methods are both needed for scientific thought, as the right and
left foot are both needed for walking”.
 
We can apply any of them or both as the situation demands.
Economic Theory
Whenever we make an attempt to explain a group of facts, we have
a hypothesis. If this hypothesis can explain new facts and is not
refuted or contradicted by new discoveries, it becomes a theory.
Economic theory is different from economic law in the sense that
latter simply describes the relation ship between the variables
whereas former describes the relationship between the variables and
reason for it or logical basis of the law.
It derives the law through a process of logical reasoning and
explains the conditions under which the stated generalizations hold
true.
Methodology of Economic theory

Defining problem and various

items
Assumptions
Logical deductions
Empirical observations
Conclusion
Methodology of Economic theory
1) Defining problem and various items

The first step in the formulation of an economic theory is to have a

clear perception of the problem
Further various concepts and terms to be used are also defined.
For eg : While studying price of commodity, the terms like
consumers, producers, demand, supply, market have to defined.
Methodology of Economic theory
2) Assumption

A set of assumptions are made.

These assumptions maybe behavioral that is related to the relevant
economic units.
For example: the consumers want to maximize their satisfaction
while producers are interested in maximizing their profits. Here,
rationality of consumers and producers is a crucial assumptions.
Methodology of Economic theory
3) Logical deduction
A process of logical deduction is next step in formulation of an
economic theory which discover the implication of the assumption.
These implications are also called predictions of the theory.
For example: if we assume that man is selfish, it can be logically
detected and predicted that a seller will sell more if it brings more
profit to him.
Methodology of Economic theory
4)Empirical observation
It involve testing the predictions hypothesis against the empirical
evidence of the actual fact.
The aim is to judge whether the predictions are consistent with the
real facts of the world.
For example: the response of consumers to rising prices over a
period can be studied to check the validity of the prediction.
Methodology of Economic theory
5)Conclusion
If the predictions are consistent with the fact, the theory is
established.
On the contrary, if the fact refute the prediction, theory is either
modified or it is discarded in favor of a better and more satisfactory
alternative theory. 
Scope of Economics

Modern Economic
Theory

Microeconomics Macroeconomics
( Price Theory ) ( Income Theory ).

Analysis of
Analysis of
mass or
individual
aggregate
behavior
behavior.
Microeconomics
•The term micro is derived from the Greek word mikros.
•It owes its origin to the classical economist Adam Smith and Alfred
Marshall.
•Microeconomics is that branch of economics which studies an economic
or decision making unit and considered in detail the behaviour of that
particular unit.
• It deals with the analysis of the behaviour and economic actions of small
individual units of the content such as a particular consumer, particular
firm.
Microeconomics

•We also study the role played by different economic organisation

by individual households as consumers and individual firm that
produces in the working of all economic organisation. For
instance: We derive market demand for a good from demand of
individual consumers.
•The theory of price thus constitutes the central theme of
microeconomics.
•Prices depend on the forces of demand and supply
Importance of Microeconomics
1) Working of a free market economy:

It helps to take important economic decision which is based consumer’s

preference i.e likes and dislikes of consumer which helps to decide what to
produce, how to produce and for whom to produce.

2) Optimum Allocation of Resources:

Micro economics helps to explain how the resources are allocated and
used maximum, to produce various goods and services in capitalist economy.
Maximum allocation of resources results in maximum production without
waste of scare resources.
Importance of Microeconomics
3) Price Determination:

Microeconomics helps how prices of goods and services determined in

commodity and factors market. Microeconomics ( i.e Price System) explain
the distribution of goods and services among customers.

4) Economic Policies and Planning:

Microeconomics useful in framing and checking economic policies

including pricing and distribution policies which help for economic welfare
and firm to take investment decision.
Importance of Microeconomics
5) Individual Economic Behaviour:

Microeconomics studies the behaviour of a small unit of the economy

system.

6) International Trade:

Microeconomics also explain the factors affecting exchange rate, elasticity

of demand for exports and imports, gains from international trade etc.
Importance of Microeconomics
7) Public Finance:

Microeconomics helps in analyzing the effect of direct tax and indirect tax
on economic welfare. Micro economics is also useful in explaining the effect
of public expenditure, public borrowing etc.

8) Basis of Welfare of Economics:

Microeconomics explain how maximum use of resources can be made to

increase the welfare of the society by removing ineffciency in production.
Macroeconomics
•Macro is derived from the Greek word macros.
•Keynes, Robert Malthus, Walrus, Knut Wicksell and Irving fisher were
prominent economist who contributed to the development of macroeconomic
analysis.
•Macroeconomic analysis also called income theory is concerned with the
analysis of the economy as a whole and its large aggregates or averages such as
total national income and output, total employment, aggregate demand and
supply and general price.
•These aggregates result from activities in different markets and from the
behaviour of different decision makers such as consumer, government and firms
•Macroeconomic studies the entire economic system or its major components
such as households, business and government.
Macroeconomics
•It deals with total private consumption expenditure, total private investment
expenditure, total government expenditure, total imports and exports of
goods as well as services.
•It seeks the causes and cure for unemployment, inflation and balance of
payment.
•Macroeconomics is not concerned with a particular decision making unit but
with all such units combined together.
•It explains the determination of level, composition of fluctuation (cycles) and
trends (growth) in the overall economic activity that is national income, output
and employment.
Advantages
•Formulation and execution of economic policy
•Functioning of economy
•Helps to understand microeconomics better
•Study of economic development
•Study of welfare
•Theory of inflation and deflation
•International comparison