BBM 202 Lesson 2: Methods of Economic Study and Economic Laws
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LESSON 2
METHODS OF ECONOMIC STUDY AND ECONOMIC LAWS
____________________________________________________
Structure of the Lesson:
2.1 Economic Laws: Meaning and Features
2.2 Basic Assumptions in Economics
2.3 Methods of Economic Study
2.4 Wants: Meaning, Features and Classification
2.5 Summary
2.6 Self check Questions
2.7 Suggested Readings
Objectives of the Lesson:
Objectives of this lesson are:
To discuss the features of economic laws and the main assumptions in
Economics,
To understand the methods of constructing Economic theory
2.1 ECONOMIC LAWS
Economic laws are a set of generalizations establishing cause and effect
relationship between economic variables. For example, the law of demand states
that a change in price (cause) results in a change in quantity demanded (effect).
Law of supply states that to a change in price (cause) there is a direct change in
quantity supplied (effect).
In view of Marshall, "Economic laws or statements of economic tendencies are
those social laws which are related to branches of conduct, in which the strength of
the motives chiefly concerned can be measured by money price". This implies that
economic laws are statements of tendencies regarding human behavior in an
economic sphere. Lionel Robbins defined Economic laws as the "statements of
uniformities which govern human behavior concerning the utilization of limited
resources for the achievement of unlimited end". Economic laws have some basic
features. These are:
13
, BBM 202 Lesson 2: Methods of Economic Study and Economic Laws
____________________________________________________________________________
Economic laws are mere statements of tendencies which are more or less
certain and definite. Human beings are the subject matter of study of
economics. Human behavior is uncertain to an economic stimulus.
Economic laws show the tendency of human behavior. For example, the
law of supply explains that supply tends to rise or fall due to a rise or fall in
price in the market.
Economic laws are hypothetical. It means that generalizations hold good
only under given assumptions. For examples, law of demand holds only on
the ceteris paribus assumption.
Economic laws are not as exact as laws of physical and natural sciences.
The subject matter of study in these latter sciences are inanimate matters.
In laboratory controlled experiments, these matters can establish cause
and effect relationships effectively, which is not possible in economics.
Economic laws lack full predictability. Economic laws deal with economic
activities of a man with free will. Since he is likely to act differently in
different economic situations, the behavior becomes very often uncertain
and therefore, difficult to predict. The behavior of man is generally
influenced by hidden, unknown and unforeseen factors which cannot be
measured. Marshall compared economic laws with laws of tides rather than
the exact law of gravitation or astronomy.
2.2 BASIC ASSUMPTIONS IN ECONOMICS
Economists make three basic assumptions about buyers and sellers.
First, market participants are presumed to be goal oriented that is, interested in
fulfilling their own, personal goals. The assumption of goal-oriented behavior
often is taken to indicate that individuals are self-interested. This assumption,
however, does not imply that market participants care solely about their own
pocketbooks. As economists use this term, the behavior of Nobel Peace Prize
winner Mother Teresa could accurately be described as goal-oriented. Although
Mother Teresa’s actions clearly indicated that she had little interest in worldly
14
____________________________________________________________________________
LESSON 2
METHODS OF ECONOMIC STUDY AND ECONOMIC LAWS
____________________________________________________
Structure of the Lesson:
2.1 Economic Laws: Meaning and Features
2.2 Basic Assumptions in Economics
2.3 Methods of Economic Study
2.4 Wants: Meaning, Features and Classification
2.5 Summary
2.6 Self check Questions
2.7 Suggested Readings
Objectives of the Lesson:
Objectives of this lesson are:
To discuss the features of economic laws and the main assumptions in
Economics,
To understand the methods of constructing Economic theory
2.1 ECONOMIC LAWS
Economic laws are a set of generalizations establishing cause and effect
relationship between economic variables. For example, the law of demand states
that a change in price (cause) results in a change in quantity demanded (effect).
Law of supply states that to a change in price (cause) there is a direct change in
quantity supplied (effect).
In view of Marshall, "Economic laws or statements of economic tendencies are
those social laws which are related to branches of conduct, in which the strength of
the motives chiefly concerned can be measured by money price". This implies that
economic laws are statements of tendencies regarding human behavior in an
economic sphere. Lionel Robbins defined Economic laws as the "statements of
uniformities which govern human behavior concerning the utilization of limited
resources for the achievement of unlimited end". Economic laws have some basic
features. These are:
13
, BBM 202 Lesson 2: Methods of Economic Study and Economic Laws
____________________________________________________________________________
Economic laws are mere statements of tendencies which are more or less
certain and definite. Human beings are the subject matter of study of
economics. Human behavior is uncertain to an economic stimulus.
Economic laws show the tendency of human behavior. For example, the
law of supply explains that supply tends to rise or fall due to a rise or fall in
price in the market.
Economic laws are hypothetical. It means that generalizations hold good
only under given assumptions. For examples, law of demand holds only on
the ceteris paribus assumption.
Economic laws are not as exact as laws of physical and natural sciences.
The subject matter of study in these latter sciences are inanimate matters.
In laboratory controlled experiments, these matters can establish cause
and effect relationships effectively, which is not possible in economics.
Economic laws lack full predictability. Economic laws deal with economic
activities of a man with free will. Since he is likely to act differently in
different economic situations, the behavior becomes very often uncertain
and therefore, difficult to predict. The behavior of man is generally
influenced by hidden, unknown and unforeseen factors which cannot be
measured. Marshall compared economic laws with laws of tides rather than
the exact law of gravitation or astronomy.
2.2 BASIC ASSUMPTIONS IN ECONOMICS
Economists make three basic assumptions about buyers and sellers.
First, market participants are presumed to be goal oriented that is, interested in
fulfilling their own, personal goals. The assumption of goal-oriented behavior
often is taken to indicate that individuals are self-interested. This assumption,
however, does not imply that market participants care solely about their own
pocketbooks. As economists use this term, the behavior of Nobel Peace Prize
winner Mother Teresa could accurately be described as goal-oriented. Although
Mother Teresa’s actions clearly indicated that she had little interest in worldly
14
