MEANING OF ECONOMICS

Economics is the social science that analyzes the production, distribution, exchange and consumption of
goods and services. The word of "Economics" has been derived from the Latin word "Oikonomos" which
means "Household Management". So, it means managing household affairs especially in those matters,
which are related to income and expenses of family. Political economy was the earlier name form the
subject but economists in the later 19th century suggested "Economics" as a shorter term of Economic
Science.
MICRO ECONOMICS
Economics is a vast subject having many branches but it is divided into two main branches,
"Microeconomics and Macroeconomics".
Micro Economics:
Micro means small. Micro Economics deals with small units of the economy or it describes individual
behavior.
For example, the study of a particular firm, particular household, individual prices, wages, income,
demand, supply etc.
Major topics discussed in Microeconomics: i.
Theory of consumer behaviour
ii. Theory of
production iii. Theory
of prices iv. Theory of
firm
V. Theory of income distribution
MACRO ECONOMICS
Macro has been derived from a Greek word Makrus which means large. Macro Economics deals with
large units of the economy. It is also called, "Income Theory". National income, money, business cycle,
public finance, international trade are the examples of macroeconomics.
Major topics discussed in Macroeconomics:
i. Theory of income and employment ii.
Money and banking iii. Public finance
iv. International
NATURE AND SCOPE OF ECONOMICS
Nature and scope of economics can be explained in four ways.
1. Subject matter of economics.
2. Individual or collective behaviour.
3. Does economics relate with goodness or badness of wants?
4. Is economics a science or an art?
1. Subject matter of economics:
Different economists have different opinions regarding subject matter of economics. i.
According to Adam Smith subject matter of economics is wealth.
ii. According to Marshall and his followers the subject matter of economics is to get material welfare.
According to Robbins, scarcity and choice is the subject matter of economics. iv. According to Lord
Keynes, the subject matter of economics is the determination of national income, employment and
rate of interest. 2. Individual or collective behaviour:
Economics is a social science and it deals with whole society. If we study the human behaviour
individually we can neither solve economic problems nor can we derive economic laws. Because the
behaviours of different people are different and as a result we cannot get proper benefit from the
subject.
Therefore, collective economic behaviours are studied instead of individual human behaviours in
economics.
3. Does Economics relates with goodness or badness of wants?
According to neo classical Economist the basic object of economics is to get human welfare while
according to Robbins "Economics has no concern with the goodness or badness of wants. But now in
present time, Economists have admitted the fact that economics is a social science. So economics cannot
isolate itself from goodness or badness of wants.
4. IS ECONOMICS A SCIENCE OR AN ART?
Before we discuss about this question, we should know what is science and what is an art.
Science:
"It is systematic study of facts of certain nature gained through careful observations, experiences or
experiments. Physics, Chemistry and Bio are the examples of science".
There are two types of science.
i. Positive Science (Deals with observed economy). ii.
Normative Science (Deals with desired economy).
Positive Science:
Prof. Lionel Robbins, Senior and Friedman have described economics as a positive science. In positive
science the facts are observed, analyzed and accepted as they are. Positive science is concerned with
"what is". Physics, Geography and Chemistry are the examples of positive sciences.
Examples:
i. There is high unemployment in the country.
ii. Low productivity in agricultural sector.
iii. High interest rates discourage investment.
Normative Science:
Prof. Marshall and Pigou have described economics as a normative science "Facts are observed, analyzed
and stated. with personal opinions and advices. It gives judgment about right and wrong or simply it
states "what should be". Subject of Social Sciences like Psychology, Philosophy are the examples of
normative science.
Example:
i. Unemployment should be reduced. ii.
Productivity level should be increased.
iii. Interest rates should be kept low.
Modern economists regard economics is positive science as well as normative science.
Art:
"The practical application of scientific principles is called an art. Science lays down certain principles
while art puts these principles into practical use".
General Example:
As a medical student studies in his class room that is called science. When he practically operates some
patient that is called an art.
Economic example:
As an economist observes the causes of unemployment in the country would be a science. When Govt.
takes some steps. to reduce unemployment practically that will be an art.
Conclusion:
In the straightway an economist first learns principles and then uses these learning to solve economic
problems. Thus finally we conclude that "Economics is both science as well as an art" CLASSIFICATION OF
ECONOMICS ACCORDING TO Definitions There are three main schools of thought in Economics.
SCHOOLS OF THOUGHT
i. Classical School of Thought ii.
Neo-Classical School of Thought
iii. Modern School of Thought
ADAM SMITH'S DEFINITION OR CLASSICAL SCHOOL OF THOUGHT Introduction:
The first person who introduced "Economics" as a subject was Adam Smith.
He is the founder of classical school of thought.
He wrote a book in 1776 "An Enquiry into the Nature and Causes of the Wealth of Nations" He is
known as the father of "Political Economy" Definition:
According to Adam Smith. "Economics is the science which studies production, distribution,
consumption and exchange of wealth"
Central Idea: "Economics is the science of wealth" Four
aspects of wealth:
There are four aspects of wealth
Exchange of wealth
Production of wealth
Consumption of wealth
Distribution of wealth 1.
Production of Wealth:
Production of wealth means how to produce wealth. Wealth can be produced with the help of four
factors of production i.e land, labour, capital and organization
2. Distribution of Wealth:
Wealth produced by these four factors is distributed among them as follows. Land obtains rent, labour
gets wages, interest to capital and organization gains profit.
3. Consumption of Wealth:
When we use goods and services to satisfy our wants, it is called consumption of wealth. All the goods
and services, which we obtain are the result of consumption of wealth.
4. Exchange of Wealth:
When wealth passes from one person to another person or it transfers from one country to another
country, it is called exchange of wealth.
Every producer exchanges his surplus goods and services with the surplus goods produced by others in
barter economy

CRITICISM / OBJECTION/DE-MERITS

1. Too Much Importance to Wealth

Definition of Economics by Adam Smith gives primary importance to wealth and secondary to human
being. This emphasis has now shifted from wealth to human being Man occupies primary place and
wealth a secondary one The real fact is that man is more important than study of wealth
2. Narrow Meaning of Wealth
In the definition the word "Wealth" means only material goods such as vehicles, industries, raw material,
Banks etc. it does not include immaterial goods like services of doctor, lawyer and teachers. In modern
economies definition the word "Wealth" includes both material and immaterial goods.
3. Concept of Economic Man
According to this main objective of human activities is only to earn more and more wealth in others
words, he earns only for his self-interest and social interest is completely ignored. But Alfred Marshall
and his followers pointed out that economics does not study a man who works only for his own interest,
but a common man.
4. Man Welfare is Missing
The other objection by Marshall is that man's welfare has not been mentioned in Adam's definition of
economies He has stressed much on wealth. Wealth is a means to an end the end being the human
welfare.
5. It Does Not Study Means
The definition lays emphasis on the earning of wealth as an end in itself. It ignores the means for the
earning of wealth.
6. Narrow and Controversial View
Since the word "wealth" did not have a clear meaning of economics by Adam Smith, therefore, the
definition became controversial Alfred Marshall neoclassical economist gave his own definition of
economics and therein he laid emphasis on man and his welfare.
Conclusion:
Although Adam Smith's definition too much criticized by the scholars and religious reformers but one was
it gave identity to economics as a separate subject in the world. No doubt he was real pioneer of
economics and his book is called as The Bible of economics Finally, we conclude that economics is the
sentence of wealth

Prof. ALFRED MARSHALL DEFINITION OR NEO-CLASSICAL SCHOOL OF THOUGHT

Introduction:
Prof. Alfred Marshall from Cambridge University wrote a book in 1890. "The Principles of Economics"
Central Idea:
"Economies’ is the science of material welfare".
Definition:
According to Marshall:
Economics is a study of mankind in the ordinary business of life. It examines that part of individual and
social action which is most closely connected with the attainment and use of material requisites of well-
being.
Main Points:
i. It is the study of ordinary business of life.
ii. Individual and social action.
iii. Attainment and use of material prosperity.
iv. Wealth promotes human welfare.
MERITS OF MARSHALL'S DEFINITION
1. Science of Human Welfare:
Human welfare means to satisfy human wants, which is possible by use of wealth Human beings are most
important, so wealth stands to a secondary position.
2. Better Definition:
Adam Smith stressed only on wealth while Marshall has concentrated on man. In this definition two
things are very important, one is man and the other is his material welfare.
3. To Promote Material Welfare:
Marshall discussed only those activities in economics, which are promoting human welfare. Non-material
activities are excluded from the study of economics like the services of teachers, lawyers, judges etc.
because they do not provide material welfare.
4. Social Science:
Economics is a social science. It studies the activities of the person who lives in this society. It excludes
the activities of the person who are not living in this society. For example, Isolated people like baggers,
people living in jungles etc.

5. Subject Matter of Economics:

According to Marshall the subject matter of economics is to attain material welfare.
6. Based on Modern Economics:
Development is based on planning. Marshall's definition has given much importance to well-being of
humans through planning. Therefore, his definition corresponds to modern economic tendencies.
CRITICISM / OBJECTION/DE-MERITS
Prof. Lionel Robbins has criticized Marshall's definition on the following grounds:
1. It does not cover all economic problems:
In his definition, Marshall discussed only those persons who are living in society and their struggle for
material needs only. It ignores a lot of other problems. which must be brought under discussion in
economies.
2. The idea of welfare is not clear:
Robbins strictly criticizes the use of word "Welfare".
It is difficult to decide what exactly welfare is. It is a vague concept because it varies from person to
person, place to place and time to time.
3. Welfare is not measurable:
Marshall's definition is based on material welfare.
There is no instrument to measure welfare. So, welfare is only the state of mind which cannot be
measured.
4. Classified definition:
Marshall's definition has classified economies in material and non-material things but he discussed only
material side. According to Robbins economics relates with both material as well as non-material things
provided that may have some values.
5. Problem of liking and disliking arises:
Marshall has discussed only those activities, which are good or beneficial for the society. But Robbins
criticizes that economics does not concern the activities that are good or bad. We cannot make moral
judgment on personal liking and disliking.
6. Services neglected:
Marshall has completely ignored services provided by the people and companies like services of doctors,
teachers, lawyers, judges, banks and insurance companies etc. which restrict the scope of economics.

Prof. LIONEL ROBBINS DEFINITION OR MODERN SCHOOL OF THOUGHT

Introduction:

Prof. Lionel Robbins (London School of Economics) wrote a book in 1932 named as "THE NATURE &
SIGNIFICANCE OF ECONOMIC SCIENCES".

Definition:

"Economics is the science, which studies human behaviour as a relationship between ends and scarce
means, which have alternative uses".

Central Idea:

"Economics is the science of scarcity and

choice

Main Points:

Multiple ends: It means human wants are unlimited.

Wants varies in importance: All wants are not equally important. Some are more important and some are
less important.

Scarce means: Resources are quite limited.

Alternative uses of resources: Resources can be applied

on different uses. e.g. Money.

MERITS OF ROBBIN'S DEFINITION

1. Comprehensive and clear:

Robbins has based his definition on simple observable facts of life. We daily observe the problem of
"Scarcity". Nobody can deny the hard fact of "unlimited" wants and "limited" resources.

2. More Scientific:

Robbins definition of economics is more scientific and comprehensive as compared to other definitions of
economics. Because Robbins introduced a better idea of scarcity and it can be measurable.

3. Universal Application:

Robbins laid down the foundation of his definition on some facts and realities, which made it universal.
Because problem of scarcity is felt by everybody at every time and at every place.

4. Wider Scope:

According to this definition, economics has much wider concept. It concerns to all types of human wants,
material and non-material and all types of person living in society or not.
5. It is neutral:

16

According to Robbins, economics is the positive science. It has no normative aspect. An economist is a
neutral scientist. He is not concerned about whether the wants are good or bad. His function is not to
give moral advice on any economic. problem but only to analyze and explain a problem on facts.

DEMERITS OF ROBBIN'S DEFINITION

Robbins definition has been criticized by eminent writers like Hicks, Durbin and Frazer on the following
grounds.

1. Not a pure Science:

Robbins definition makes economics as pure science like physics and chemistry while in reality it is not
true. Economics is related with the human behaviour which varies from time to time and place to place.

2. Ignored macro aspects:

Robbins definition ignores mac aspects, which is important part of economics e.g. ignored public finance,
international trade.

3. Ignore normative aspects:

According to Robbins "Economics has no normative aspect" while it is not correct: Economist has also the
duty to give some right opinions on the matter:

4. Does not cover economic planning and development:

Theory of economic planning and development has recently become a very important branch of
economics but this definition does not cover economic planning and economic development.

5. Unlimited labor:

According to Robbins "All types of resources are limited but in the third world countries, we find that
labor is not limited because rate of unemployment is quite high.

Conclusion:

The definition of economics given by Robbins has no doubt certain flaws. However, it is more
comprehensive in describing the problem of resource utilization.

Comparative study of Marshall and Robbins Definitions of Economics

According to Marshall: “Economics is the science of Material welfare”
According to Robbins: “Economics is the study of human behaviour as a relationship between ends and
scare means which have alternative use.”
Marshall Robbins
Subject Matter of Economics: Subject Matter of Economics:
The subject matter of economics is that of The subject matter of economics is the unlimited
material welfare. wants and limited resources.
Limited Scope: Wider Scope:
Marshall has restricted the scope of economics Robbins has widened the scope of economics. He
only to ordinary person and material requisites. studied the problems of society which arise due
Classificatory Concept: to scarcity of resources.
Alfred Marshall classified economics into two Analytical Concept:
groups, Material and Non-Material. While only Robbins has only analyzed the facts of life. He has
material activities are discussed in economics. not classified material and normative welfare.
Non-Measurable concept: Measurable Concept:
Marshall’s definition is based on material welfare. Robbins definition is based on facts of life i.e.
There is no instrument to measure welfare. limited resources and unlimited wants. Resources
Normative Science: are measurable.
Economics is a normative science, which deals Positive Science:
observations with some remedies and suggestions Economics is free from the responsibility of
according to problems. making value judgement and ignoring personal
Social Science: liking and disliking.
According to Marshall economics is a social Neutral Science:
science that studied the action of that person who According to Robbins economics is a neutral
is living in the society. science and it is theoretical and does not guide us
Corresponds to modern economic theory: in the solution of economic problems.
Marshall’s definition relates to modern economic Does not correspond to modern economic
theories. theories:
Vague Concept: Robbins has made economics an impartial science
Marshall has given much importance to welfare which is free from goodness or badness of wants.
but the idea of welfare is not clear. Clear Concept:
 Useful Subject: It is clear definition because everybody has to
Marshall has made economics a very useful face scarcity.
subject by showing interest in human well-being. No Concept of Welfare:
Macro Concept: Robbin’s definition has no concern with welfare
Due to the concept of Welfare, Alfred Marshall’s and well-being.
definition is nearer to macroeconomics. Micro Concept:
Robbins Definition is based on facts of life that are
limited resources and he explains behaviour.

Microeconomics is a branch of economics focused on the behavior of individual economic units, such as
households, firms, and individual markets. It examines how these units make decisions regarding
resource allocation and how these decisions impact prices, production, and consumption.
Here are some key aspects of microeconomics:
Individual Behavior:
Microeconomics analyzes the choices and actions of individuals and firms in the economy.
Small Units:
It deals with the small units of the economy, such as individual markets, prices, and wages.
Resource Allocation:
A central focus is how individuals and firms allocate scarce resources to meet their needs and wants.
Major Topics:
Microeconomics covers topics such as consumer behavior, production theory, price theory, firm behavior,
and income distribution.
MACRO ECONOMICS
Economics is a vast subject having many branches but it is divided into two main branches,
"Microeconomies and Macroeconomics".
Macro Economics:
Macro has been derived from a Greek word Makrus which means large. Macro Economics deals with a
large economy. It is also called, "Income Theory". National income, money, business cycle, public finance,
international trade are the examples of macroeconomics.
Major topics discussed in Macroeconomics:
i. Theory of income and employment
ii. Money and banking
iii. Public finance
iv. International Trade

COMPREHENSIVE DEFINITION OF ECONOMICS

Prof. John Maynard Keynes wrote a book in 1936, named "General theory of employment interest and
money". According to Prof. Keynes "Economics is a social science which is concerned with proper use and
allocation of resources for achievement and maintenance of growth with stability and efficiency".

ECONOMIC PROBLEM

"Economic problem arises due to scarcity of resources in comparison with human wants" In every day of
life, we observe many economic problems like poverty, unemployment, inflation, unequal distribution of
wealth etc. If we start analyzing them, we will find that every problem has its roots in the fundamental
problem of "Scarcity of Resources".

WHY SCARCITY APPEARS

Scarcity of resources is a relative term. It exists because of two conditions.

i. Mental Condition: It means unlimited wants.

ii. Physical resources. dition: It means limited productive

If any one condition does hold, scarcity will not exist not only the physical condition establishes scarcity
scarci in economic sense but it is the human want also which makes those resources insufficient. Finally,
we conclude that scarcity occurs whenever human wants exceed the available resources.

COMPREHENSIVE DEFINITION OF ECONOMICS

Prof. John Maynard Keynes wrote a book in 1936, named "General theory of employment interest and
money". According to Prof. Keynes "Economics is a social science which is concerned with proper use and
allocation of resources for achievement and maintenance of growth with stability and efficiency".

ECONOMIC PROBLEM

"Economic problem arises due to scarcity of resources in comparison with human wants" In every day of
life, we observe many economic problems like poverty, unemployment, inflation, unequal distribution of
wealth etc. If we start analyzing them, we will find that every problem has its roots in the fundamental
problem of "Scarcity of Resources".

WHY SCARCITY APPEARS

Scarcity of resources is a relative term. It exists because of two conditions.

i. Mental Condition: It means unlimited wants.

ii. Physical resources. dition: It means limited productive

If any one condition does hold, scarcity will not exist not only the physical condition establishes scarcity
scarci in economic sense but it is the human want also which makes those resources insufficient. Finally,
we conclude that scarcity occurs whenever human wants exceed the available resources.

METHODS TO DERIVE ECONOMIC LAWS

Economists use two main methods to derive economic laws:

1. Deductive Method

Introduced by: Classical Economists

Definition:
“The process of reasoning from general to particular or from universal to particular is called the
Deductive Method.”
It is also known as the analytical or abstract method.

Example: Law of Demand (Best use of money through logical reasoning).

Steps in Deductive Method:

i. Collection of general facts

ii. Drawing results through reasoning
iii. Testing the validity of results
iv. Drawing laws and principles

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2. Inductive Method

Introduced by: Modern Economists

Definition:
“The process of reasoning from particular to general or from specific cases to general principles is called
the Inductive Method.”

Steps in Inductive Method:

i. Selection of facts and figures

ii. Analysis of collected facts
iii. Drawing inference from data
iv. Generalizing the results into laws or principles

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Complementary Nature of Both Methods

Economists often use both methods together.

In Deductive Method, logical conclusions are derived from assumptions.

In Inductive Method, real-world data is analyzed to formulate rules.

Both methods are complementary and help in formulating accurate economic laws.

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IMPORTANCE OR VALUE OF ECONOMICS

A. Theoretical Importance / Educational Value

1. Easy to Understand
Economics helps in understanding day-to-day life situations like income and expenditure.

2. Knowledge of Economic Problems

Helps understand issues like poverty, unemployment, inflation, agricultural issues, overpopulation, etc.

3. Awareness about Economic Systems

Provides insight into different systems like Capitalism, Socialism, Mixed Economy, and Islamic Economic
System.

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B. Practical Importance

1. Solution of Economic Problems

Economics helps in identifying causes and finding solutions to major economic problems.

2. Guidance for Consumers

Assists consumers in utilizing limited resources wisely to get maximum satisfaction.

3. Help for Producers

A producer learns how to maximize profits by increasing revenue and reducing production costs.

4. Guidance for Businessmen or Traders

Provides essential knowledge about taxation, international trade, and business planning.

5. Importance for Finance Minister

Essential for planning national budgets and framing fiscal policies.

Helps finance ministers make informed economic decisions.