UNIT I
INTRODUCTION
The themes of economics – scarcity and efficiency – three fundamental economic problems
– society’s capability – Production possibility frontiers (PPF) – Productive efficiency Vs
economic efficiency – economic growth & stability – Micro economies and Macro
economies – the role of markets and government – Positive Vs negative externalities
Introduction to Economics
Any discussion on a subject must start by explaining what the subject is all about i.e., by defining
the subject. In this chapter, we shall define Economics. The questions which Economics actually
discusses will then be taken up in the subsequent chapters. The principal fact about Economics
that we must always remember is that it is a socialscience. If we forget this, we tend to get
bogged down with questions that are not relevant to
Economics and are best left to other disciplines
Meaning:
The word ‘Economics’ originates from the Greek work ‘Oikonomikos’ which can be divided into
two parts:
(a) ‘Oikos’, which means ‘Home’, and
(b) ‘Nomos’, which means ‘Management’.
Thus, Economics means ‘Home Management’. The head of a family faces the problem of
managing the unlimited wants of the family members within the limited income of the family. In
fact, the same is true for a society also. If we consider the whole society as a ‘family’, then the
society also faces the problem of tackling unlimited wants of the members of the society with the
limited resources available in that society.
Thus, Economics means the study of the way in which mankind organizes itself to tackle
the basic problems of scarcity. All societies have more wants than resources. Hence, a system
must be devised to allocate these resources between competing ends.
Economics is a social science. It is called „social‟ because it studies mankind of
society. It deals with aspects of human behavior. It is called science since it studies social
problems from a scientific point of view. The development of economics as a growing science
can be traced back in the writings of Greek philosophers like Plato and Aristotle.Economics was
treated as a branch of politics during early days of its development because ancient Greeks
applied this term to management of city-state, which they called „Polis‟. Actually economics
broadened into a full-fledged social science in the later half of the 18th century
Development of Economics/Definition of Economics
We have now formed an idea about the meaning of Economics. This at once leads to a general
definition of Economics. Economics is the social science that studies economic activities.
,This definition is, however, too broad. It does not specify the exact manner in which the
economic activities are to be studied. Economic activities essentially mean production, exchange
and consumption of goods and services. However, with the progress of civilization, the
complexity of the production, exchange and consumption processes in society have increased
manifold. Economists at different times have emphasized different aspects of economic
activities, and have arrived at different definitions of Economics. We shall now discuss some of
these definitions in detail.
These definitions can be classified into four groups:
1. Wealth definitions,
2. Material welfare definitions,
3. Scarcity definitions, and
4. Growth-centered definitions.
Adam Smith’s Definition
Adam Smith, considered to be the founding father of modern Economics, defined Economics as
the study of the nature and causes of nations’ wealth or simply as the study of wealth. The
central point in Smith’s definition is wealth creation. Implicitly, Smith identifiedwealth with
welfare. He assumed that, the wealthier a nation becomes the happier are itscitizens. Thus, it is
important to find out, how a nation can be wealthy. Economics is thesubject that tells us how to
make a nation wealthy. Adam Smith’s definition is a wealth-centereddefinition of Economics.
Main Characteristics of Wealth Definitions
1. Exaggerated emphasis on wealth: These wealth centered definitions gave too much
importance to the creation of wealth in an economy. The classical economists like Adam Smith,
J.S. Mill, J.B. Say, and others believed that economic prosperity of any nation depends only on
the accumulation of wealth.
2. Inquiry into the creation of wealth: These definitions show that Economics also deals with an
inquiry into the causes behind the creation of wealth. For example, wealth of a nation may be
increased through raising the level of production and export.
3. A study on the nature of wealth: These definitions have indicated that wealth of a nation
includes only material goods (e.g., different manufactured items). Non-material goods were not
included. Hence, non-material goods like services of teachers, doctors, engineers, etc., are not
considered as ‘wealth’.
But this definition was severely criticized by highlighting the points like;
Too much emphasis on wealth,
Restricted meaning of wealth,
No consideration for human feelings,
No mention for man‟s welfare
Silent about economic problem etc…
Alfred Marshall’s Definition
Alfred Marshall also stressed the importance of wealth. But he also emphasized the role of the
individual in the creation and the use of wealth. He wrote: “Economics is a study of man inthe
,ordinary business of life. It enquires how he gets his income and how he uses it. Thus, it ison the
one side, the study of wealth and on the other and more important side, a part of thestudy of
man”. Marshall, therefore, stressed the supreme importance of man in the economic system.
Marshall’s definition is considered to be material-welfare centered definition of Economics.
Features of Material Welfare Definitions
The main features of material welfare-centered definitions are as follows:
1. Study of material requisites of well-being: These definitions indicate that Economics studies
only the material aspects of well-being. Thus, these definitions emphasize the materialistic
aspects of economic welfare.
2. Concentrates on the ordinary business of life: These definitions show that
Economics deals with the study of man in the ordinary business of life. Thus, Economics
enquires how an individual gets his income and how he uses it.
3. A stress on the role of man: These definitions stressed on the role of man in the creation of
wealth or income.
This definition also criticized on the grounds that welfare cannot be measured correctly
and it was ignored the valuable services like teachers, lawyers, singers etc (non-material welfare)
Lionel Robbins’ Definition
The next important definition of Economics was due to Prof. Lionel Robbins. In his book
‘Essays on the Nature and Significance of the Economic Science’, published in 1932, Robbins
gave a definition which has become one of the most popular definitions of Economics.
According to Robbins, “Economics is a science which studies human behaviour as a relationship
betweenends and scarce means which have alternative uses”. It is a scarcity based definition of
Economics.
Main Features of Scarcity Definition
The principal features of scarcity definitions are as follows:
1. Human wants are unlimited: The scarcity definition of Economics states that human wants are
unlimited. If one want is satisfied, another want crops up. Thus, different wants appear one after
another.
2. Limited means to satisfy human wants: Though wants are unlimited, yet the means for
satisfying these wants are limited. The resources needed to satisfy these wants are limited. For
example, the money income (per month) required for the satisfaction of wants of an individual is
limited. Any resource is considered as scarce if its supply is less than its demand.
3. Alternative uses of scarce resources: Same resource can be devoted to alternative lines of
production. Thus, same resource can be used for the satisfaction of different types of human
wants. For example, a piece of land can be used for either cultivation, or building a dwelling
place or building a factory shed, etc.
4. Efficient use of scarce resources: Since wants are unlimited, so these wants are to be ranked in
order of priorities. On the basis of such priorities, the scarce resources are to be used in an
efficient manner for the satisfaction of these wants.
, 5. Need for choice and optimization: Since human wants are unlimited, so one has to choose
between the most urgent and less urgent wants. Hence, Economics is also called a science of
choice. So, scarce resources are to be used for the maximum satisfaction (i.e., optimization) of
the most urgent human wants.
The merits of scarcity definition are; this definition is analytical, universal in application,
a positive study and considering the concept of opportunity cost. But this also criticized on the
grounds that; it is too narrow and too wide, it offers only light but not fruit, confined to micro
analysis and ignores Growth economics etc..
Modern Growth-Oriented Definition of Samuelson
In relatively recent times, more comprehensive definitions of Economics have been offered.
Thus, Professor Samuelson writes, “Economics is the study of how people and society end
upchoosing, with or without the use of money, to employ scarce productive resources that could
have alternative uses to produce various commodities over time and distributing them for
consumption, now or in the future, among various persons or groups in society. It analyses costs
and benefits of improving patterns of resource allocation”. A large number of
moderneconomists subscribe to this broad definition of Economics.
Features of the Modern Growth-Oriented Definition
1. Growth-orientation: Economic growth is measured by the change in national output over time.
The definition says that, Economics is concerned with determining the pattern of employment of
scarce resources to produce commodities ‘over time’. Thus, the dynamic problems of production
have been brought within the purview of Economics
2. Dynamic allocation of consumption: Similarly, under this definition, Economics is concerned
with the pattern of consumption, not only now but also in the future. Thus, the problem of
dividing the use of income between present consumption and future consumption has been
brought within the orbit of Economics.
3. Distribution: The modern definition also concerns itself with the distribution of consumption
among various persons and groups in a society. Thus, while the problem of distribution is
implicit in the earlier definitions, the modern definition makes it explicit.
4. Improvement of resource allocation: The definition also says that, Economics analyses the
costs and benefits of improving the pattern of resource allocation. Improvement of resource
allocation and better distributive justice are synonymous with economic development. Thus,
issues of development of a less developed economy have also been made subjects of the study of
Economics.
To put it summarily, the modern definition of Economics is the most comprehensive ofall
the definitions. All the issues that were highlighted in the earlier definitions are included here. In
addition, the issues of development of a backward economy, as well as those of growth in a
mature capitalist economy, form part of this definition. Economics as it stands today, is built on
the basis of this comprehensive definition
INTRODUCTION
The themes of economics – scarcity and efficiency – three fundamental economic problems
– society’s capability – Production possibility frontiers (PPF) – Productive efficiency Vs
economic efficiency – economic growth & stability – Micro economies and Macro
economies – the role of markets and government – Positive Vs negative externalities
Introduction to Economics
Any discussion on a subject must start by explaining what the subject is all about i.e., by defining
the subject. In this chapter, we shall define Economics. The questions which Economics actually
discusses will then be taken up in the subsequent chapters. The principal fact about Economics
that we must always remember is that it is a socialscience. If we forget this, we tend to get
bogged down with questions that are not relevant to
Economics and are best left to other disciplines
Meaning:
The word ‘Economics’ originates from the Greek work ‘Oikonomikos’ which can be divided into
two parts:
(a) ‘Oikos’, which means ‘Home’, and
(b) ‘Nomos’, which means ‘Management’.
Thus, Economics means ‘Home Management’. The head of a family faces the problem of
managing the unlimited wants of the family members within the limited income of the family. In
fact, the same is true for a society also. If we consider the whole society as a ‘family’, then the
society also faces the problem of tackling unlimited wants of the members of the society with the
limited resources available in that society.
Thus, Economics means the study of the way in which mankind organizes itself to tackle
the basic problems of scarcity. All societies have more wants than resources. Hence, a system
must be devised to allocate these resources between competing ends.
Economics is a social science. It is called „social‟ because it studies mankind of
society. It deals with aspects of human behavior. It is called science since it studies social
problems from a scientific point of view. The development of economics as a growing science
can be traced back in the writings of Greek philosophers like Plato and Aristotle.Economics was
treated as a branch of politics during early days of its development because ancient Greeks
applied this term to management of city-state, which they called „Polis‟. Actually economics
broadened into a full-fledged social science in the later half of the 18th century
Development of Economics/Definition of Economics
We have now formed an idea about the meaning of Economics. This at once leads to a general
definition of Economics. Economics is the social science that studies economic activities.
,This definition is, however, too broad. It does not specify the exact manner in which the
economic activities are to be studied. Economic activities essentially mean production, exchange
and consumption of goods and services. However, with the progress of civilization, the
complexity of the production, exchange and consumption processes in society have increased
manifold. Economists at different times have emphasized different aspects of economic
activities, and have arrived at different definitions of Economics. We shall now discuss some of
these definitions in detail.
These definitions can be classified into four groups:
1. Wealth definitions,
2. Material welfare definitions,
3. Scarcity definitions, and
4. Growth-centered definitions.
Adam Smith’s Definition
Adam Smith, considered to be the founding father of modern Economics, defined Economics as
the study of the nature and causes of nations’ wealth or simply as the study of wealth. The
central point in Smith’s definition is wealth creation. Implicitly, Smith identifiedwealth with
welfare. He assumed that, the wealthier a nation becomes the happier are itscitizens. Thus, it is
important to find out, how a nation can be wealthy. Economics is thesubject that tells us how to
make a nation wealthy. Adam Smith’s definition is a wealth-centereddefinition of Economics.
Main Characteristics of Wealth Definitions
1. Exaggerated emphasis on wealth: These wealth centered definitions gave too much
importance to the creation of wealth in an economy. The classical economists like Adam Smith,
J.S. Mill, J.B. Say, and others believed that economic prosperity of any nation depends only on
the accumulation of wealth.
2. Inquiry into the creation of wealth: These definitions show that Economics also deals with an
inquiry into the causes behind the creation of wealth. For example, wealth of a nation may be
increased through raising the level of production and export.
3. A study on the nature of wealth: These definitions have indicated that wealth of a nation
includes only material goods (e.g., different manufactured items). Non-material goods were not
included. Hence, non-material goods like services of teachers, doctors, engineers, etc., are not
considered as ‘wealth’.
But this definition was severely criticized by highlighting the points like;
Too much emphasis on wealth,
Restricted meaning of wealth,
No consideration for human feelings,
No mention for man‟s welfare
Silent about economic problem etc…
Alfred Marshall’s Definition
Alfred Marshall also stressed the importance of wealth. But he also emphasized the role of the
individual in the creation and the use of wealth. He wrote: “Economics is a study of man inthe
,ordinary business of life. It enquires how he gets his income and how he uses it. Thus, it ison the
one side, the study of wealth and on the other and more important side, a part of thestudy of
man”. Marshall, therefore, stressed the supreme importance of man in the economic system.
Marshall’s definition is considered to be material-welfare centered definition of Economics.
Features of Material Welfare Definitions
The main features of material welfare-centered definitions are as follows:
1. Study of material requisites of well-being: These definitions indicate that Economics studies
only the material aspects of well-being. Thus, these definitions emphasize the materialistic
aspects of economic welfare.
2. Concentrates on the ordinary business of life: These definitions show that
Economics deals with the study of man in the ordinary business of life. Thus, Economics
enquires how an individual gets his income and how he uses it.
3. A stress on the role of man: These definitions stressed on the role of man in the creation of
wealth or income.
This definition also criticized on the grounds that welfare cannot be measured correctly
and it was ignored the valuable services like teachers, lawyers, singers etc (non-material welfare)
Lionel Robbins’ Definition
The next important definition of Economics was due to Prof. Lionel Robbins. In his book
‘Essays on the Nature and Significance of the Economic Science’, published in 1932, Robbins
gave a definition which has become one of the most popular definitions of Economics.
According to Robbins, “Economics is a science which studies human behaviour as a relationship
betweenends and scarce means which have alternative uses”. It is a scarcity based definition of
Economics.
Main Features of Scarcity Definition
The principal features of scarcity definitions are as follows:
1. Human wants are unlimited: The scarcity definition of Economics states that human wants are
unlimited. If one want is satisfied, another want crops up. Thus, different wants appear one after
another.
2. Limited means to satisfy human wants: Though wants are unlimited, yet the means for
satisfying these wants are limited. The resources needed to satisfy these wants are limited. For
example, the money income (per month) required for the satisfaction of wants of an individual is
limited. Any resource is considered as scarce if its supply is less than its demand.
3. Alternative uses of scarce resources: Same resource can be devoted to alternative lines of
production. Thus, same resource can be used for the satisfaction of different types of human
wants. For example, a piece of land can be used for either cultivation, or building a dwelling
place or building a factory shed, etc.
4. Efficient use of scarce resources: Since wants are unlimited, so these wants are to be ranked in
order of priorities. On the basis of such priorities, the scarce resources are to be used in an
efficient manner for the satisfaction of these wants.
, 5. Need for choice and optimization: Since human wants are unlimited, so one has to choose
between the most urgent and less urgent wants. Hence, Economics is also called a science of
choice. So, scarce resources are to be used for the maximum satisfaction (i.e., optimization) of
the most urgent human wants.
The merits of scarcity definition are; this definition is analytical, universal in application,
a positive study and considering the concept of opportunity cost. But this also criticized on the
grounds that; it is too narrow and too wide, it offers only light but not fruit, confined to micro
analysis and ignores Growth economics etc..
Modern Growth-Oriented Definition of Samuelson
In relatively recent times, more comprehensive definitions of Economics have been offered.
Thus, Professor Samuelson writes, “Economics is the study of how people and society end
upchoosing, with or without the use of money, to employ scarce productive resources that could
have alternative uses to produce various commodities over time and distributing them for
consumption, now or in the future, among various persons or groups in society. It analyses costs
and benefits of improving patterns of resource allocation”. A large number of
moderneconomists subscribe to this broad definition of Economics.
Features of the Modern Growth-Oriented Definition
1. Growth-orientation: Economic growth is measured by the change in national output over time.
The definition says that, Economics is concerned with determining the pattern of employment of
scarce resources to produce commodities ‘over time’. Thus, the dynamic problems of production
have been brought within the purview of Economics
2. Dynamic allocation of consumption: Similarly, under this definition, Economics is concerned
with the pattern of consumption, not only now but also in the future. Thus, the problem of
dividing the use of income between present consumption and future consumption has been
brought within the orbit of Economics.
3. Distribution: The modern definition also concerns itself with the distribution of consumption
among various persons and groups in a society. Thus, while the problem of distribution is
implicit in the earlier definitions, the modern definition makes it explicit.
4. Improvement of resource allocation: The definition also says that, Economics analyses the
costs and benefits of improving the pattern of resource allocation. Improvement of resource
allocation and better distributive justice are synonymous with economic development. Thus,
issues of development of a less developed economy have also been made subjects of the study of
Economics.
To put it summarily, the modern definition of Economics is the most comprehensive ofall
the definitions. All the issues that were highlighted in the earlier definitions are included here. In
addition, the issues of development of a backward economy, as well as those of growth in a
mature capitalist economy, form part of this definition. Economics as it stands today, is built on
the basis of this comprehensive definition
