Definitions of Economics
The word economics has been derived from the Greek Word “OIKONOMICAS” with “ OIKOS” meaning a household and “ NOMOS” meaning management.
Wealth Definition of Economics
Adam smith defined Economics as “ An enquiry into the nature and causes of wealth of nations” in his book, entitled „ Wealth of Nations‟. He is regarded as the “Father of Economics”.
Welfare Definition of Economics
Alfred Marshall in his book “Principles of Economics” defined “Political Economy or 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 with the use of the material requisites of well-being. Thus it is on the one side a study of wealth, and on the other, and more important side, a part of the study of man.
Scarcity Definition of Economics
In his publication „Nature and Significance of Economic Science‟ Lionel Robbins formulated his conception of Economics based on the scarcity concept. “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.
Growth Definition of Economics
John Maynard Keynes is known as the Father of Modern Economics. He defined economics as “the study of the administration of scarce resources and of the determinants of employment and income”. In the words of Nobel prize winner Prof. Samuelson, “Economics is the study of how people and society end up choosing with or without the use of money, to employ scarce productive resources that could have alternative uses, it produces various commodities over time and distributes them for consumption, now or in the future, among various persons and groups in society. It analyses costs and benefits of improving patterns of resources allocation.”
Subject matter of economics
Economics has subject mater of its own . Economics tells how a man utilises his limited resources for the satisfaction of unlimited wants. Man has limited amount of time and money. He should spend time and money in such away that he derives maximum satisfaction. A man wants food, clothing and shelter. To get these things he must have money. For getting money he must make an effort. Effort leads to satisfaction. Thus, wants- efforts- satisfaction sums up the subject mater of economics initially in a primitive society where the connection between wants efforts and satisfaction is direct.
Divisions of Economics
The subject matter of economics can be explained under two approaches viz., Traditional approach and Modern approach.
Traditional Approach
It considered economics as a science of wealth and divided it into four divisions viz., consumption, production, exchange and distribution
- Consumption: It means the use of wealth to satisfy human wants. It also means the destruction of utility or use of commodities and services to satisfy human wants.
- Production: It is defined as the creation of utility. It involves the processes and
methods employed in transformation of tangible inputs (raw materials, semifinished goods, or subassemblies) and intangible inputs (ideas, information, know -how) into goods or services. - Exchange: It implies the transfer of goods from one person to the other. It may occur among individuals or countries. The exchange of goods leads to an increase in the welfare of the individuals through creation of higher utilities for goods and services.
- Distribution: Distribution refers to sharing of wealth that is produced among the different factors of production .It refers to personal distribution and functional distribution of income. Personal distribution relates to the forces governing the distribution of income and wealth among the various individuals of a country. Functional distribution or factor share distribution explains the share of total income received by each factor of production viz., land, labour, capital and organisation.
Modern Approach
This approach divides subject matter of economics into two divisions i.e., micro economics and macro economics. The terms „micro-„ and „macro-„ economics were first coined and used by Ragnar Frisch in 1933.
Micro-Economics or Price Theory:
The term „micro-economics‟ is derived from the Greek word „micro‟, which means small or a millionth part. It is also known as „price theory‟. It is an analysis of the behaviour of small decision-making unit, such as a firm, or an industry, or a consumer, etc. It studies only the employment in a firm or in an industry. It also studies the flow of economic resources or factors of production from the resource owners to business firms and the flow of goods and services from the business firms to households. It studies the composition of such flows and how the prices of goods and services in the flow are determined.
A noteworthy feature of micro-approach is that, while conducting economic analysis on a micro basis, generally an assumption of „full employment‟ in the economy as a whole is made. On that assumption, the economic problem is mainly that of resource allocation or of theory of price.
Importance of Micro-Economics: Micro-economics occupies a very important place in the study of economic theory.
- Functioning of free enterprise economy: It explains the functioning of a free enterprise economy. It tells us how millions of consumers and producers in an economy take decisions about the allocation of productive resources among millions of goods and services.
- Distribution of goods and services: It also explains how through market mechanism goods and services produced in the economy are distributed.
- Determination of prices: It also explains the determination of the relative prices of various products and productive services.
- Efficiency in consumption and production: It explains the conditions of efficiency both in consumption and production. Formulation of economic policies: It helps in the formulation of economic policies calculated to promote efficiency in production and the welfare of the masses.
Limitations of Micro-Economics: Micro-economic analysis suffers from certain limitations:
- It does not give an idea of the functioning of the economy as a whole. It fails to analyse the aggregate employment level of the economy, aggregate demand, inflation, gross domestic product, etc.
- It assumes the existence of „full employment‟ in the whole economy, which is practically impossible.
Macro-Economics or Theory of Income and Employment:
The term „macro-economics‟ is derived from the Greek word „macro‟, which means “large”. Macro-economics is an analysis of aggregates and averages pertaing to the entire economy, such as national income, gross domestic product, total employment, total output, total consumption, aggregate demand, aggregate supply, etc. Macro-economics looks to the nation's total economic activity to determine economic policy and promote economic progress.
Importance of Macro-Economics:
- It is helpful in understanding the functioning of a complicated economic system. It also studies the functioning of global economy. With growth of globalisation and WTO regime, the study of macro-economics has become more important.
- It is very important in the formulation of useful economic policies for the nation to remove the problems of unemployment, inflation, rising prices and poverty.
- Through macro-economics, the national income can be estimated and regulated. The per capita income and the people‟s living standard are also estimated through macroeconomic study.
Limitations of Macro-Economics:
- Individual is ignored altogether. For example, in macro-economics national saving is increased through increasing tax on consumption, which directly affects the consumer welfare.
- The macro-economic analysis overlooks individual differences. For instance, the general price level may be stable, but the prices of food grains may have gone up which ruin the poor. A steep rise in manufactured articles may conceal a calamitous fall in agricultural prices, while the average prices were steady. The agriculturists
may be ruined.
What is the Scope of Economics
The scope of economics is defined as the boundary in which the field of study is contained. It is a science of human activities in day-to-day businesses; it is considered an art of persuasion and dealings to buy or sell anything; the only subject that’s considered a science and art altogether.
Economics as Social Sciences
Economics is a social science that deals with the production, growth, inflation, employment activities, and exchange of goods and services in a culture or nation. Robbins and other classical economists argued that Economics is purely a science of wealth and material things. It has nothing to do with non-material things such as services.
Economic matters are easily calculated by profit/loss ratio through the science of calculations and decision-making; the science of economics determines business matters on a scale of money. Economics is purely a social science if there are no humans to make goods that are unknown to consumers yet they produce and assemble goods for mankind creates a strong argument for it being a social science. Men work in groups to produce and sell on a large scale.
Economics as an Art of teaching
Economics is an art that teaches us how to practically implement the laws of nature for the economic well-being of humans and its dependents. Economics tells us how to get out of the problem by implementing the science of Economics. Economics is purely a problem-based subject, be it personal or collective problems.
The financial insecurity and joblessness is a personal problem, while inflation, economic growth, and poverty are a collective problem. People work individually and in groups to indirectly eradicate both the problems; teaching them the art to decipher problems is essential actually to resolve it.
Economics as a base to Identify Problems
Economics is based on identifying the problem and means to solve it; it can be positive or normative science of business. The normative science deals with human emotions and welfare. It deals with ethical norms and emotions rather than facts and calculations.
Positive science is free of emotional decisions; it is neutral in each aspect. Contrary to that, the scope of economics is narrowed down according to Robbins’ definition; the economic choices are a mix of positive and normative to achieve the desired targets.
