Economics:

The Scope and

Method of Economics
 Economics The study of how individuals and
societies choose to use the scarce resources that
nature and previous generations have provided.

Economics is the study of how individuals and societies choose

to use the scarce resources that nature and previous generations
have provided. The key word in this definition is choose.
Economics is a behavioral, or social, science. In large measure, it
is the study of how people make choices. The choices that people
make, when added up, translate into societal choices.
Scope of economics is the further elaboration of the definition of economics,
so the scope of economics is discussed under the following headings

1. Subject matter of economics

2. Economics as a social science
3. Economics as a science or an art
4. Economics as a positive or normal science
Different economists have different opinions regarding the subject matter of
economics.

Adam smith says economics is a science of wealth.

According to Marshall Economics is the science of material welfare. He gave primary

importance to man and secondary importance to wealth.

But Robbins says that we have unlimited wants and limited resources which have
alternative uses. Thus in spite of difference of opinion we say that:
Economics is basically a science of wealth because it is only
wealth which a man can use for human welfare and also to
satisfy unlimited wants. There would be no concept without
money.

Robbins definition is most acceptable in the world these days.

So we will discuss subject matter of economics with reference
to Robbins definition as below
Economics as a social science

In economics we study the human behavior of the people who are living
society, so economics is a social science for example if a person goes to
market and buys more commodity with lower price and less with higher
price. The economist will see the aggregate behavior of the people, not of
that every single person.

After judging the aggregate behavior of the people, the economists will
formulate a law that other things being equal with higher price less is pur-
chased and with lower price more is purchased. So as the case of other
laws of economics. They are all based on the action of the person taken in
aggregate. Thus we concluded that economics is a social science.
Economics as a social science
In economics we study the human behaviour of the people who are living in society, so
economics is a social science for example if a person goes to market and buys more
commodity with lower price and less with higher price. The economist will see the
aggregate behaviour of the people, not of that every single person.

After judging the aggregate behaviour of the people, the economists will formulate a
law that other things being equal with higher price less is purchased and with lower
price more is purchased. So as the case of other laws of economics. They are all based
on the action of the person taken in aggregate. Thus we concluded that economics is a
social science.
Economics is a science or an ART
The question is whether economics is theoretical in nature or it
has some practical side too. Science means a systematic
body of knowledge relating to some aspect of nature and based
on fact.

In science we assemble some facts, then observe it and then

experimented, from which certain laws, principles
rules etc. are derived that are generally correct and
are commonly followed in everyday life.
According to this explanation economics is said to be science. So economics
is well disciplined body of knowledge and based on facts. These facts are
carefully collected observed and analysed and from these facts economic
laws principles are drawn. That happens to be correct and is followed in
economic struggle.

If we define science as a relationship between cause and effects, even then

economics qualify to be a science i.e. when unlimited wants and limited
resources (cause) economics problem.(effect)is created to solve which a
particular behaviour is adopted by man. Economics studies this very
economic problem and behaviour
Economics as a positive (pure) or Normative science
This is difference of opinion that whether economic is positive or normative science.

Robbins and Senior are of the view that economics is positive science. They ar-
gued it is based on facts and logic. Economics studies facts, observes it and ana-
lyses these facts and make principles.

Malthus Pigno etc. say that economics is a normative science. They say that real
function of science is to increase the well beings of human being. They have given
suggestions in their theories to promote welfare

Frazer says, economics is positive as well as normative science. He says

economists should come forward to give suggestion to the people about the problems
they are facing now days. i.e. inflation, unemployment, unequal distribution of
wealth, birth rate etc.
 Why Study Economics?

• To Learn a Way of Thinking

•Three fundamental concepts:

 Opportunity cost
 Marginalism
 Efficient markets
Why Study Economics?

• To Learn a Way of Thinking

Opportunity Cost

opportunity cost The best alternative that we

forgo, or give up, when we make a choice or a
decision.

(scarce - Limited)
Why Study Economics?

• To Learn a Way of Thinking

Marginalism
Marginalism, The process of analyzing the
additional or incremental costs or benefits
arising from a choice or decision.

Sunk Costs, Costs that cannot be avoided

because they have already been incurred.
Why Study Economics?
• To Learn a Way of Thinking

Efficient Markets—No Free Lunch

efficient market A market in which profit opportunities

are eliminated almost instantaneously.

The study of economics teaches us a way

of thinking and helps us make decisions.
Why Study Economics?

• To Understand Society

Industrial Revolution The period in England during

the late eighteenth and early nineteenth centuries in
which new manufacturing technologies and improved
transportation gave rise to the modern factory sys-
tem and a massive movement of the population from
the countryside to the cities.

The study of economics is an essential part of the study of society.

Why Study Economics?

• To Understand Global Affairs

An understanding of economics is essential

to an understanding of global affairs.

• To Be an Informed Citizen

To be an informed citizen requires a basic

understanding of economics.
The Scope of Economics

• Microeconomics and Macroeconomics

microeconomics The branch of economics that

examines the functioning of individual industries
and the behavior of individual decision-making
units—that is, firms and households.

macroeconomics The branch of economics

that examines the economic behavior of
aggregates—income, employment, output, and
so on—on a national scale.
Economic Systems: Economics explores different economic systems and how soci-
eties organize their production, distribution, and consumption of goods and services.
This includes studying market economies, command economies, mixed
economies, and alternative economic systems.

International Economics: International economics examines economic interactions

between countries, including international trade, foreign exchange markets, balance
of payments, trade policies, and globalization. It explores the benefits and costs of
international trade, the determinants of trade patterns, and the implications
of globalization for national economies.

Development Economics: Development economics focuses on the economic

development and growth of countries, particularly in low-income and develop-
ing regions. It investigates factors influencing economic development, such as capital
accumulation, technological progress, human capital, institutions, and policies
aimed at reducing poverty and promoting sustainable development.
Labor Economics: Labor economics studies the behavior of workers,
employers, and labor markets. It examines issues related to wages,
employment, unemployment, labor market policies, human capi-
tal formation, and the distribution of income.
Public Economics: Public economics analyzes role of government in
the economy and the impact of public policies on resource allocation,
efficiency, and equity. It covers topics such as taxation, public spend-
ing, public goods, externalities, income redistribution, and social wel-
fare programs.
Environmental Economics: Environmental economics studies the
interactions between the economy and the environment. It examines
issues such as pollution, natural resource depletion, climate change,
environmental regulation, and the valuation of environmental
goods and services.
Financial Economics: Financial economics focuses on the
behavior of financial markets, financial institutions, and financial
instruments. It explores topics such as asset pricing, risk manage-
ment, financial intermediation, monetary policy, and the function-
ing of financial systems.
Health Economics: Health economics examines the allocation
of resources in the healthcare sector and the impact of healthcare
policies on health outcomes, healthcare costs, and access to health-
care services. It addresses issues such as healthcare financing,
healthcare delivery, health insurance, and healthcare reform.
 • The Diverse Fields of Economics

TABLE 1.2 The Fields of Economics

Behavioral uses psychological theories relating to emotions and
economics social context to help understand economic decision
making and policy. Much of the work in behavioral
economics focuses on the biases that individuals have
that affects the decisions they make.
Econometrics applies statistical techniques and data to economic
problems in an effort to test hypotheses and theories.
Most schools require economics majors to take at
least one course in statistics or econometrics.

Continued...
 • The Diverse Fields of Economics

TABLE 1.2 The Fields of Economics

Economic focuses on the problems of low-income countries. What can be
development done to promote development in these nations? Important
concerns of development for economists include population
growth and control, provision for basic needs, and strategies
for international trade.
Economic history traces the development of the modern economy. What
economic and political events and scientific advances caused
the Industrial Revolution? What explains the tremendous
growth and progress of post-World War II Japan? What
caused the Great Depression of the 1930s?

Continued...
 • The Diverse Fields of Economics

TABLE 1.2 The Fields of Economics (continued)

Environmental studies the potential failure of the market system to account
economics fully for the impacts of production and consumption on the
environment and on natural resource depletion. Have
alternative public policies and new economic institutions been
effective in correcting these potential failures?
Finance examines the ways in which households and firms actually pay
for, or finance, their purchases. It involves the study of capital
markets (including the stock and bond markets), futures and
options, capital budgeting, and asset valuation.
The Method of Economics

positive economics An approach to economics that

seeks to understand behavior and the operation of sys-
tems without making judgments. It describes what exists
and how it works.

normative economics An approach to economics

that analyzes outcomes of economic behavior, evaluates
them as good or bad, and may prescribe courses of
action. Also called policy economics.
The Method of Economics

• Descriptive Economics and Economic Theory

descriptive economics The compilation of data that describe
phenomena and facts.

economic theory A statement or set of related statements

about cause and effect, action and reaction.
The Method of Economics

• Theories and Models

model A formal statement of a theory, usually a mathematical

statement of a presumed relationship between two or more vari-
ables.

variable A measure that can change from time to time or from

observation to observation.

Ockham’s razor The principle that irrelevant detail should be cut

away.
The Method of Economics
Theories and Models
All Else Equal: Ceteris Paribus

ceteris paribus, or all else equal A device

used to analyze the relationship between
two variables while the values of other vari-
ables are held unchanged.

Using the device of ceteris paribus is one part of the process of

abstraction. In formulating economic theory, the concept helps
us simplify reality to focus on the relationships that interest us.
The Method of Economics
Economic Policy

Criteria for judging economic outcomes:

1. Efficiency
2. Equity
3. Growth
4. Stability
The Method of Economics
Economic Policy

Efficiency
Efficiency In economics, allocative efficiency. An
efficient economy is one that produces what people
want at the least possible cost.

Equity

equity or economic equality is the concept or idea of

fairness in economics, particularly in regard to
taxation or welfare economics.
The Method of Economics
Economic Policy

Growth

economic growth An increase in the total

output of an economy.

Stability

stability A condition in which national output is

growing steadily, with low inflation and full
employment of resources.