What is Economics?
Economics is that branch of social science that is concerned with the study of how individuals, households, firms, industries, and government take decisions relating to the allocation of limited resources to productive uses, so as to derive maximum gain or satisfaction.
Simply put, it is all about the choices we make concerning the use of scarce resources that have alternative uses, with the aim of satisfying our most pressing infinite wants and distributing them among ourselves.
Defining economics has always been a controversial issue since time immemorial. Definition of economics by different economists have different viewpoints. Some economists had a viewpoint that economics deals with problems, such as inflation and unemployment while others believed that economics is a study of money,
Therefore, a simple definition of economics is defined by taking four definition
Wealth Definition of Economics
Economics is the study of the nature and causes of nations’ wealth or simply as the study of wealth.Adam Smith
Key Features of Wealth economics definition
- The main objective of Economics is to gain maximum wealth as possible
- The core of economic activity: are production, distribution and consumption.
- It deals with the causes of the creation of wealth in an economy.
- The term ‘wealth’ used in this definition referred to material wealth.
Welfare Definition of Economics
It is a neo-classical definition of economics by Alfred Marshall.
It is the study of mankind in the ordinary business of life. It enquires how he gets his income and how he uses it. In one view, it is a study of wealth and on other hand it is part of study of man.Alfred Marshall
Key features of Welfare economics definition
- It defines Economics as the study of activities related to a human being and their material welfare.
- Marshall clarified that Economics is related to incomes of individuals and its uses for creating material welfare.
- Collectively incomes of a group of individuals form the wealth of a nation and ultimate goal is to increase welfare of individual by their routine activities.
Scarcity Definition of Economics
It is a pre-Keynesian definition of economics by robbins in his book ‘Essays on the Nature and Significance of the Economic Science’ (1932).
Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.Lionel Charles Robbins
Key features of Scarcity economics definition
- It recognized that Economics is a science deal with the economic behaviours of a human being.
- It also focuses on optimum utilisation of scarce resources.
- It provides three basic features of human existence, which are unlimited wants, limited resources, and alternative uses of limited resources
- There is a need for efficient use of scarce resources, and the primary objective of Economics is to ensure efficiency in the use of resources with a purpose to satisfy human wants.
Growth Definition of Economics
This is the modern perspective definition of economics by Samuelson. He provided the growth-oriented definition of economics.
Economics is the study of how man and society choose with or without the use of money to employ the scarce productive resources, which have alternative uses, to produce various commodities over time and distributing them for consumption, how or in the future among various person or groups in society.Paul Samuelson
Key features of Growth economics definition
- It deals with the allocation of scarce resource to be used in productive purposes.
- The selection of the most efficient use of the resources from alternative ways.
- The growth of economies will depend upon the consumption and production in the economy.
- This definition also points towards Economics as a study of an economic system.
Economics have different definition of economics by different economists and social thinkers with different objectives and contexts. All these definitions are correct and none can be taken as universally acceptable.
This is a classical definition of economics by Adam Smith, who is also considered as the father of modern economics.
Nature of Economics
- Economics is a science: Science is an organised branch of knowledge, that analyses cause and effect relationship between economic agents. Further, economics helps in integrating various sciences such as mathematics, statistics, etc. to identify the relationship between price, demand, supply and other economic factors.
- Positive Economics: A positive science is one that studies the relationship between two variables but does not give any value judgment, i.e. it states ‘what is’. It deals with facts about the entire economy.
- Normative Economics: As a normative science, economics passes value judgement, i.e. ‘what ought to be’. It is concerned with economic goals and policies to attain these goals.
- Economics is an art: Art is a discipline that expresses the way things are to be done, so as to achieve the desired end. Economics has various branches like production, distribution, consumption and economics, that provide general rules and laws that are capable of solving different problems of society.
Therefore, economics is considered as science as well as art, i.e. science in terms of its methodology and arts as in application. Hence, economics is concerned with both theoretical and practical aspects of the economic problems which we encounter in our day-to-day life.
Scope of Economics
- Microeconomics: The part of economics whose subject matter of study is individual units, i.e. a consumer, a household, a firm, an industry, etc. It analyses the way in which the decisions are taken by the economic agents, concerning the allocation of the resources that are limited in nature.It studies consumer behaviour, product pricing, firm’s behaviour. Factor pricing, etc.
- Macro Economics: It is that branch of economics which studies the entire economy, instead of individual units, i.e. level of output, total investment, total savings, total consumption, etc. Basically, it is the study of aggregates and averages. It analyses the economic environment as a whole, wherein the firms, consumers, households, and governments make decisions.It covers areas like national income, general price level, the balance of trade and balance of payment, level of employment, level of savings and investment.
The fundamental difference between micro and macroeconomics lies in the scale of study. Further, in microeconomics, more importance is given to the determination of price, whereas macroeconomics is concerned with the determination of income of the economy as a whole.
Nevertheless, microeconomics and macroeconomics are complementary to one another, as they both aimed at maximizing the welfare of the economy as a whole.
From the standpoint of microeconomics, the objective can be achieved through the best possible allocation of scarce resources. Conversely, if we talk about macroeconomics, this goal can be attained through the effective use of the resources of the economy.
Assumptions in Economics
There are certain assumptions in economics about an economic situation to happen in the future. Economists use assumptions to break down complex economic processes and advocate different theories to understand economic variables.
Three important assumptions in economics, are as follows:
- Consumers have rational preferences
- Existence of perfect competition
- Existence of equilibrium
Consumers have rational preferences
This assumption states that consumers act in a rational manner and focus on satisfying their needs.
It is also assumed that the tastes of consumers remain constant for a long period. For instance, a consumer who is vegetarian may not change his/her preferences in the near future.
Existence of perfect competition
According to this assumption, there is perfect competition in an economy, wherein there are numerous buyers and sellers.
It is assumed that homogenous products exist in the market and both buyers and sellers cannot affect prices.
Existence of equilibrium
As per this assumption, equilibrium exists wherein both consumers and entrepreneurs achieve maximum satisfaction.
In a market, there can be two types of equilibrium: industry equilibrium and firm equilibrium. The industry is at equilibrium if profits achieved are normal. On the other hand, a firm is at the state of equilibrium if its profits are maximum.