Unit 1: Introduction to Economics

This unit introduces the fundamental concepts of economics, explaining what it is and how
economists approach the study of human behavior related to resources and wants.

1.1 General definition and assumptions of Economics

This section starts by defining economics in a broad sense and then outlines the fundamental
assumptions economists often make to simplify their study of the world.

 General Definition of Economics:

o The Core Problem: Human beings have unlimited wants and needs, but the
resources available to fulfill these wants are limited (scarce). This creates a
fundamental problem of scarcity.
o Making Choices: Because we can't have everything we want, we must make
choices about how to use our limited resources. For example, if you have little
money, you choose between momos, pizza, or a burger, as you can't buy all
three.
o Economics as a Study of Choices: Economics is the study of how society
makes these choices in the face of scarcity. It's not just about money, but about
how people and societies manage scarce resources.
o Origin of the Word: The word "economics" comes from the Greek words
"Oikos" (Household) and "nomos" (study or management). So, it literally
means the management of household affairs with limited funds.
o "Queen of Social Sciences": Economics is often called this because it studies
the economic activities of people living in society.
o Economic Activities: These are activities concerned with the efficient use of
scarce resources to satisfy human wants.
 Assumptions of Economics: Economists make certain assumptions to simplify the
complex real world and make it easier to study.
o a. Rational Man: This assumes that individuals (consumers and producers)
act rationally, meaning they make decisions that give them the maximum
satisfaction (for consumers) or maximum profit (for producers).
o b. Study of Normal Man: Economics focuses on the "average" or "normal"
person who lives in society and conducts economic activities within legal
frameworks. It doesn't study saints, extremely hungry people, or those with
extreme self-restraint, as their behavior might not fit typical economic
patterns.
o c. Equilibrium: Economists often assume that economic activities aim to
reach a state of equilibrium. This is a stable situation where there's no
incentive for anyone to change their behavior because they've already
maximized their satisfaction or profit.
o d. "Ceteris Paribus" (Other Things Remaining the Same): This is a crucial
assumption. When studying the relationship between two variables (e.g., price
and demand), economists assume all other factors that could influence the
outcome remain constant. For example, when studying the demand for coffee,
they assume the price of tea, consumer income, tastes, etc., don't change.
 o e. Perfect Information/Knowledge: This assumes that consumers and firms
have complete and accurate information about all commodities, prices, and
production processes. This allows them to make perfectly rational decisions.
o f. Self-Interest: Economic laws are often based on the idea that individuals
act to satisfy their own self-interest. This pursuit of self-interest drives
economic activities like production, exchange, and distribution.

1.2 Definition of economics given by Adam Smith (Wealth definition of

economics)

Adam Smith, considered the father of modern economics, defined economics primarily in
terms of wealth.

 Definition: Adam Smith, in his book "An Enquiry into the Nature and Causes of the
Wealth of Nations," defined economics as the science that studies the process of
production and consumption of wealth. His followers (J.S. Mill, David Ricardo, J.B.
Say) also emphasized this view.
 Characteristics of Smith's Definition:
o Study of Wealth Only: Economics focuses solely on the production,
consumption, distribution, and exchange of wealth.
o Material Goods as Wealth: Only scarce and useful material goods (like tea,
sugar) were considered wealth. Non-material goods (services of doctors,
teachers) and free goods (air) were not included.
o Causes of Wealth Change: Economics studies what causes wealth to increase
or decrease, leading to economic development.
 Criticisms of Smith's Definition:
o Too Much Importance to Wealth: Critics argued that Smith placed too much
emphasis on wealth as an end in itself, rather than seeing it as a means to
satisfy human needs. Marshall famously said economics studies wealth on one
side and man on the more important side.
o Restricted Meaning of Wealth: Limiting wealth only to material goods was
seen as too narrow. Modern economists consider both material and non-
material goods (services) as wealth if they are scarce and useful.
o Concept of Economic Man: Smith's definition implied a "selfish economic
man" driven purely by self-interest. Modern economists like Marshall argued
that economics studies the "common man," not just a selfish one.
o No Mention of Man's Welfare: The definition focused on wealth
accumulation but didn't explicitly address the welfare or well-being of society.
o No Study of Means: It didn't fully consider wealth as a means to satisfy
human wants.
o Narrow View of Subject Matter: The scope of economics was seen as too
limited, covering only a few areas.
1.3 Marshall’s Welfare definition of economics

Alfred Marshall offered a broader definition, shifting the focus from just wealth to human
welfare.

 Definition: Marshall, in his book "Principles of Economics," defined economics as "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." This definition emphasizes human welfare.
 Characteristics of Marshall's Welfare Definition:
o a. A Study of Mankind: Unlike Smith, Marshall emphasized that economics
studies all economic activities related to the material welfare of humans.
o b. The Ordinary Business of Life: It focuses on the activities of the
"ordinary man" who accumulates wealth to satisfy needs and gain maximum
enjoyment.
o c. Study of Individual and Social Activities: Economics includes both
personal and social actions related to the material well-being of society.
o d. Study of Material Welfare: This definition specifically focuses on
material welfare. Non-material welfare was considered outside its scope.
o e. Normative Science: Marshall's view suggested economics doesn't just
describe (positive science) but also provides answers to "what should be done"
to improve welfare, making it a normative science.
 Criticisms of Marshall's Welfare Definition:
o a. Study of All Types of Economic Activities and Men: Lord Robbins
criticized Marshall for limiting the study to the "ordinary man." Robbins
argued that scarcity problems affect all people (rich, poor, ordinary,
extraordinary), so economics should study everyone's economic activities.
o b. Restricts the Scope of Economics: By focusing only on material welfare,
Marshall's definition was seen as too narrow. Robbins argued that economics
should include all economic goods, material and non-material.
o c. Lack of Clear Concept of Welfare: Critics argued that "welfare" is
subjective, hazy, and changes with time, place, and circumstances (e.g.,
smoking might be welfare for a smoker but negative for a non-smoker).
o d. Economics as Pure Science: Some argued economics is a pure science
with universally applicable laws, not just a social science.
o e. Economics as a Positive Science: Robbins argued that economics should
be a positive science, focusing on cause-and-effect relationships ("what is")
rather than making recommendations ("what should be"). It should analyze,
not prescribe.
o f. A Narrow View of Economic Activities: Robbins believed all activities
involving limited means and choice-making are economic, regardless of
whether they are material or non-material.
o
1.4 Robin’s Scarcity definition of economics

Lionel Robbins provided a definition that became widely accepted, emphasizing scarcity and
choice.

 Definition: According to Robbins, "economics is the science which studies human

behaviour as a relationship between ends and scarce means which have alternative
uses."
 Characteristics of Robbins' Scarcity Definition:
o a. Unlimited Wants/Ends: Human wants (ends) are endless; as one is
satisfied, another emerges.
o b. Scarce Resources/Means: The resources (means) available to satisfy these
wants are limited and insufficient to satisfy all of them.
o c. Means Have Alternative Uses: The central problem is that scarce
resources can be used for multiple purposes. This forces choices about how to
allocate them.
o d. Wants Are of Different Intensity: Not all wants are equally urgent; some
need immediate satisfaction, while others can wait.
o e. Problem of Choice: Because of unlimited wants and scarce resources with
alternative uses, individuals and societies constantly face the problem of
choosing which wants to satisfy first and how to allocate resources.
 Criticisms of Robbins' Scarcity Definition:
o a. Self-Contradictory: Critics argued that Robbins claimed economics is
neutral regarding ends (a positive science) but then defined it as the "science
of choice-making," which implies evaluating ends, creating a contradiction.
o b. Concealed Concept of Welfare: The idea of maximizing satisfaction
(welfare) is implicitly present in the act of making choices, even if not
explicitly stated. Without aiming for satisfaction, choice-making makes no
sense.
o c. Hazy View of Scope of Economics: By saying economics applies
"whenever scarcity problem arises," Robbins' definition could make the scope
of economics too broad, potentially extending to every human activity.
o d. Ineffective Attempt to Make Economics a Positive Science: Prof. Pigou
argued that economics should be a problem-solving science concerned with
material welfare, rather than just a neutral positive science.
o e. Confusion Between Means and Ends in Practical Life: In reality, means
can become ends, and vice-versa. For example, a diploma (an end) can
become a means to secure employment.

1.5 Comparison between Marshall and Robbin’s definition of Economics

This section highlights the similarities and differences between Marshall's welfare-focused
definition and Robbins' scarcity-focused definition.

 Similarities between Marshall and Robbins' Definition:

 oa. Primary Importance to Man: Both definitions place human beings at the
center of economic study.
o b. Both Discuss "Means": Marshall used "wealth," and Robbins used "scarce
means," but both refer to the limited resources available.
o c. Signify Same Meaning in Human Satisfaction: Both ultimately deal with
how to utilize resources (wealth or scarce means) to achieve maximum human
satisfaction or welfare.
o d. Both Study Human Behavior: Marshall states economics studies human
behavior, and Robbins explicitly defines it as the study of human behavior.
 Differences between Marshall and Robbins' Definition:

Feature Marshall’s Definition of Economics Robbins’ Definition of Economics

Nature of Classificatory (classified welfare into Analytical (analyzed wants and
Definition material/immaterial) well-being rather than classifying)
Social science (studies activities of Human science (studies human
Type of Science
people in society) behavior universally)
Considers only material wants of Considers human behavior related to
Focus of Wants
human beings scarce means and alternative uses
Related only with the material Concerned with both material and
Scope of Welfare
welfare of people non-material welfare of people
Resource States that wealth is the resource for States that scarce means are the
Terminology material welfare resources for satisfaction
Popular Name Known as ‘welfare definition’ Known as ‘scarcity definition’
Positive vs. Considers economics as a normative Considers economics as a positive
Normative science (what should be) science (what is)

1.6 Importance, Subject matter and limitation of economics

This final section summarizes what economics studies, why it's important, and what its
inherent limitations are.

 Subject Matter of Economics:

o Economics fundamentally studies how individuals and societies utilize their
limited resources (like time and money) to satisfy their unlimited wants.
o It's about making choices to maximize satisfaction from scarce resources.
o The basic cycle is: Wants → Efforts → Satisfaction. People have wants, they
make efforts to get money/resources, and then use those to satisfy their wants.
 Importance of Economics: Economics is a vital subject because:
o Decision Making: It helps individuals and governments make informed
choices when faced with various options.
o Understanding Consumer Behavior: It provides insights into why
consumers buy what they buy.
o Resource Distribution: It helps in understanding how to allocate scarce
resources efficiently.
o Evaluation: It provides tools to evaluate economic policies and outcomes.
o Forecasting: It helps in predicting future economic phenomena.
 o Market Understanding: It explains how markets work and why they
sometimes fail (market failure).
o Interpreting Financial Events: It provides a framework to understand
economic news and financial aspects of events.
o Foreign Trade and Exchange: It helps in comprehending international trade
and currency exchange.

 Limitations of Economics: Despite its importance, economics has its constraints:

o a. Unrealistic Assumptions: The assumptions and simplifications made in
economic models (like perfect rationality or perfect information) may not
always hold true in the complex real world.
o b. "Ceteris Paribus" in Reality: The assumption that "other things remain
the same" rarely applies perfectly in real-world situations, where many factors
change simultaneously.
o c. Difficulty in Controlled Experiments: Unlike natural sciences, economics
usually cannot conduct controlled experiments due to ethical and practical
limitations, making it harder to isolate variables.
o d. Neglect of Ethics and Distribution: Economics often prioritizes efficiency
and optimization, sometimes overlooking important ethical considerations or
issues of fair distribution of wealth.
o e. Imperfect Information: In reality, information is often incomplete,
inaccurate, or unevenly distributed, leading to less-than-optimal outcomes and
market failures.
o f. Cultural and Historical Context: Economic theories and policies
developed in one cultural or historical context may not be universally
applicable to others.