Unit 1: Nature and Scope of Economics Weightage (20%)
- Meaning of Economic Problem
-Early Definitions of Economics (Wealth, Welfare, Scarcity, Growth)
-Micro and Macroeconomics (Definition, Importance and Limitation)
-Economics as a Positive or Normative Science
-Scope of Economics
➢ INTRODUCTION:
In recent years, the science of economics has assumed greater significance in view of the fact that
knowledge of economics is being used for initiating and accelerating growth in the economies of the
world. Besides, the nature of so many other problems such as inflation, food, stagnation and recession,
population ex-plosion, adverse balance of payments and so on that confront the economies of today
cannot be understood and solution for them cannot be provided without the adequate knowledge of the
science of economics.
The science of economics in the form in which we have it today is just two hundred years old.
It has made a remarkable progress during this period. J.N. Keynes is right when he says that "Political
Economy is said to have strangled itself with definitions." Economics has been variously defined by
different economists from time to time. This is partly because "economics is an unfinished science." It
is still in the process of growth and development. Therefore, the old definitions of economics have
become irrelevant. Now that the science of economics has sufficiently developed, we can provide an
adequate and satisfactory definition of economics.
➢ CHANGING PERSPECTIVES OF ECONOMICS (Definitions of Economics)
• Economics as a Study of Wealth:
Adam Smith in his well-known book 'Wealth of Nations’ defined economics ‘as an enquiry into the
wealth of nations.’ Thus, Adam Smith laid emphasis on the expansion of wealth and riches of a
society as a subject matter of economics. Another classical economist David Ricardo shifted the
emphasis from the expansion of wealth to the distribution of wealth. Ricardo writes, “The produce of
the earth all that is derived from its surface by the united application of labour, machinery and capital
is divided among three classes of the economy namely, the proprietor of the land, the owner of the
stock of capital necessary for its cultivation and the labourers by whose industry it is cultivated". He
further writes. "To determine the laws which regulate this distribution is the principle problem in
political economy".
That economics is a science of production and distribution of wealth has been severely criticised by
men of letters, especially Carlyle and Ruskin who prompted by emphasis on wealth in economics called
it as ‘Gospel of Mammon’ and a dismal science. They alleged that economists had ignored the higher
values of life and sought to enquire how to increase the material wealth and riches of the people
and a nation. In our view this interpretation of wealth by Carlyle and Ruskin is not correct.
Wealth consists of material goods and not gold and diamond and these goods satisfy the wants of the
people. To achieve maximum satisfaction of wants of the people to promote their welfare is the
ultimate objective of economics.
, However, the view that economics is a science of wealth suffers from two main shortcomings. In the
concept of wealth, Adam Smith and Ricardo included only the material goods and ignored the
importance of services such as education, health and several others which also satisfy human wants.
Several modern economists, especially Prof. Amartya Sen, a Nobel Prize winner in economics have
emphasised the role of education, health and good administration and have shown that they greatly
raise the productivity of man and promote economic growth of the nations. In view of their vital
importance in raising production and productivity, good health, education and skills have in fact been
called human capital by modern economists and investment in human capital or investment in man is
as important as investment in physical capital.
• Economics as a Science of Material Welfare of Man
Another drawback in making economics a "science of wealth" by classical economists may be noted.
By laying conspicuous emphasis on wealth and put man to the secondary place in economic studies
they did not lay adequate stress on man's behaviour in relation to wealth. Nor did they emphasise
the end or ultimate objective of economics which is the promotion of human and social welfare. As
a matter of fact, wealth is only a means to an end, the end being the welfare of man and so society.
The credit goes to Alfred Marshall, a prominent English economist, for shifting the emphasis from
wealth to man and also from wealth to welfare. According to him, economics is "on the one side a
study of wealth; and on the other; and more important side, a part of the study of man". He further
writes, economics examines that part of individual and social action which is most closely connected
with the attainment and with the use of material requisites of well-being".
• Economics as a Study of Allocation of Scarce Resources
A leading British economist Lionel Robbins in the early thirties put forward an alternative view of
economics. He pointed out that the economic problem arises because of scarcity of resources in
relation to human wants. The scarcity of resources and unlimited wants of the people necessitates
choice regarding what wants to be satisfied and, therefore, the particular allocation of scarce resources
among various goods and services. He thus writes, “Economics is the science which studied human
behaviour as a relationship between ends and scarce means which have alternative uses". Thus.
Robbins lays stress on three facts, namely (1) human wants are unlimited, (2) the resources to satisfy
these wants are scarce, and (3) the scarce resources have alternative uses.
Thus, according to Robbins, Economics is a science of choice. It deals with how the resources of a
society are allocated to the satisfaction of various of human wants. Whenever, productive resources
are scarce and wants for them are unlimited, the question of choice arises. Thus Robbins writes, “when
time and means for achieving ends are limited and capable of alternative application and the ends
are capable of being distinguished in order of preference, the behaviour necessarily assumes the
form of choice.”
But, in recent years even Robbins view has been challenged on the grounds that it ignored normative
aspects, unemployment of resources, distribution of income among population, economic stability,
etc. Robbins’ view does not cover the important problem of economic growth.
, ➢ THE ECONOMIC PROBLEM: SCARCITY AND CHOICE
Economics is mainly concerned with the achievement and use of material requirements to satisfy human
wants. Human wants are unlimited and productive resources such as land and other natural resources,
skilled labour, raw materials, capital equipment with which to produce goods and services to satisfy those
wants are scarce or limited. Thus, goods and services which satisfy human wants are scarce because
productive resources with which to produce goods and services are scarce. The problem of scarcity of
resources is felt not only by individuals but also by the society as a whole. With wants being unlimited
and resources scarce, we individually as well as collectively cannot satisfy all our wants. This gives rise
to the problem of how to use scarce resources to attain maximum possible satisfaction of the people.
This is generally called the economic problem as it lies at the root of all economic problems faced by
the society. Every economic system, be it capitalist, socialist or mixed, has to contend with this central
problem of scarcity of resources relative to wants for them.
Thus, the economic problem derives from the scarcity of resources relative to human wants.
This gives rise to the struggle of man for existence and efforts by him to increase his well-being.
That the scarcity of resources in relation to human wants is the fundamental economic problem can be
easily understood in the context of poor and developing countries like India where quite a large number
of populations lives at a bare subsistence level. Despite of the affluence and riches, developed societies
too face the problem of scarcity. Their wants for goods and services have been multiplying during the
course of economic growth so that their present wants still remain ahead of their resources and capacity
to produce.
• Unlimited Wants: The economic problem arises not merely due to the limited resources and capacity
to produce alone but also due to unlimited human wants. So long as human wants for goods and
services remain ahead of the resources, both natural and acquired, the economic problem of scarcity
would be there.
If Americans today, were too content to live at the level of the Indian middle-class people, all their
wants would be fully satisfied with their available resources and capacity to produce. In that situation
they would face little or no scarcity and economic problem for them would disappear. However, the
affluent and developed countries of the U.S. and Western Europe face the problem of scarcity even
today as their present wants remain ahead of their increased resources and capabilities
to produce.
• Scarcity of Resources and the Problem of Choice
Whereas wants of the people are unlimited means to satisfy those wants are limited. Now, the goods
and services are scarce because the resources to produce them are scarce. If we cannot have all the
goods and services, we would like to have we must choose what goods services are produced to
satisfy the wants of the people and what wants be left unsatisfied. Scarcity of resources requires
that efficient and optimum use of resources be made so that maximum possible satisfaction of the
people is achieved. Further. since all wants cannot be satisfied due to scarcity of resources, we face
the problem of choice. If it is decided to use more resources in one line of product then some
resources must be withdrawn from another commodity. Thus, the problem of choice from the
viewpoint of the society as a whole refers to which goods and in what quantities are to produced
- Meaning of Economic Problem
-Early Definitions of Economics (Wealth, Welfare, Scarcity, Growth)
-Micro and Macroeconomics (Definition, Importance and Limitation)
-Economics as a Positive or Normative Science
-Scope of Economics
➢ INTRODUCTION:
In recent years, the science of economics has assumed greater significance in view of the fact that
knowledge of economics is being used for initiating and accelerating growth in the economies of the
world. Besides, the nature of so many other problems such as inflation, food, stagnation and recession,
population ex-plosion, adverse balance of payments and so on that confront the economies of today
cannot be understood and solution for them cannot be provided without the adequate knowledge of the
science of economics.
The science of economics in the form in which we have it today is just two hundred years old.
It has made a remarkable progress during this period. J.N. Keynes is right when he says that "Political
Economy is said to have strangled itself with definitions." Economics has been variously defined by
different economists from time to time. This is partly because "economics is an unfinished science." It
is still in the process of growth and development. Therefore, the old definitions of economics have
become irrelevant. Now that the science of economics has sufficiently developed, we can provide an
adequate and satisfactory definition of economics.
➢ CHANGING PERSPECTIVES OF ECONOMICS (Definitions of Economics)
• Economics as a Study of Wealth:
Adam Smith in his well-known book 'Wealth of Nations’ defined economics ‘as an enquiry into the
wealth of nations.’ Thus, Adam Smith laid emphasis on the expansion of wealth and riches of a
society as a subject matter of economics. Another classical economist David Ricardo shifted the
emphasis from the expansion of wealth to the distribution of wealth. Ricardo writes, “The produce of
the earth all that is derived from its surface by the united application of labour, machinery and capital
is divided among three classes of the economy namely, the proprietor of the land, the owner of the
stock of capital necessary for its cultivation and the labourers by whose industry it is cultivated". He
further writes. "To determine the laws which regulate this distribution is the principle problem in
political economy".
That economics is a science of production and distribution of wealth has been severely criticised by
men of letters, especially Carlyle and Ruskin who prompted by emphasis on wealth in economics called
it as ‘Gospel of Mammon’ and a dismal science. They alleged that economists had ignored the higher
values of life and sought to enquire how to increase the material wealth and riches of the people
and a nation. In our view this interpretation of wealth by Carlyle and Ruskin is not correct.
Wealth consists of material goods and not gold and diamond and these goods satisfy the wants of the
people. To achieve maximum satisfaction of wants of the people to promote their welfare is the
ultimate objective of economics.
, However, the view that economics is a science of wealth suffers from two main shortcomings. In the
concept of wealth, Adam Smith and Ricardo included only the material goods and ignored the
importance of services such as education, health and several others which also satisfy human wants.
Several modern economists, especially Prof. Amartya Sen, a Nobel Prize winner in economics have
emphasised the role of education, health and good administration and have shown that they greatly
raise the productivity of man and promote economic growth of the nations. In view of their vital
importance in raising production and productivity, good health, education and skills have in fact been
called human capital by modern economists and investment in human capital or investment in man is
as important as investment in physical capital.
• Economics as a Science of Material Welfare of Man
Another drawback in making economics a "science of wealth" by classical economists may be noted.
By laying conspicuous emphasis on wealth and put man to the secondary place in economic studies
they did not lay adequate stress on man's behaviour in relation to wealth. Nor did they emphasise
the end or ultimate objective of economics which is the promotion of human and social welfare. As
a matter of fact, wealth is only a means to an end, the end being the welfare of man and so society.
The credit goes to Alfred Marshall, a prominent English economist, for shifting the emphasis from
wealth to man and also from wealth to welfare. According to him, economics is "on the one side a
study of wealth; and on the other; and more important side, a part of the study of man". He further
writes, economics examines that part of individual and social action which is most closely connected
with the attainment and with the use of material requisites of well-being".
• Economics as a Study of Allocation of Scarce Resources
A leading British economist Lionel Robbins in the early thirties put forward an alternative view of
economics. He pointed out that the economic problem arises because of scarcity of resources in
relation to human wants. The scarcity of resources and unlimited wants of the people necessitates
choice regarding what wants to be satisfied and, therefore, the particular allocation of scarce resources
among various goods and services. He thus writes, “Economics is the science which studied human
behaviour as a relationship between ends and scarce means which have alternative uses". Thus.
Robbins lays stress on three facts, namely (1) human wants are unlimited, (2) the resources to satisfy
these wants are scarce, and (3) the scarce resources have alternative uses.
Thus, according to Robbins, Economics is a science of choice. It deals with how the resources of a
society are allocated to the satisfaction of various of human wants. Whenever, productive resources
are scarce and wants for them are unlimited, the question of choice arises. Thus Robbins writes, “when
time and means for achieving ends are limited and capable of alternative application and the ends
are capable of being distinguished in order of preference, the behaviour necessarily assumes the
form of choice.”
But, in recent years even Robbins view has been challenged on the grounds that it ignored normative
aspects, unemployment of resources, distribution of income among population, economic stability,
etc. Robbins’ view does not cover the important problem of economic growth.
, ➢ THE ECONOMIC PROBLEM: SCARCITY AND CHOICE
Economics is mainly concerned with the achievement and use of material requirements to satisfy human
wants. Human wants are unlimited and productive resources such as land and other natural resources,
skilled labour, raw materials, capital equipment with which to produce goods and services to satisfy those
wants are scarce or limited. Thus, goods and services which satisfy human wants are scarce because
productive resources with which to produce goods and services are scarce. The problem of scarcity of
resources is felt not only by individuals but also by the society as a whole. With wants being unlimited
and resources scarce, we individually as well as collectively cannot satisfy all our wants. This gives rise
to the problem of how to use scarce resources to attain maximum possible satisfaction of the people.
This is generally called the economic problem as it lies at the root of all economic problems faced by
the society. Every economic system, be it capitalist, socialist or mixed, has to contend with this central
problem of scarcity of resources relative to wants for them.
Thus, the economic problem derives from the scarcity of resources relative to human wants.
This gives rise to the struggle of man for existence and efforts by him to increase his well-being.
That the scarcity of resources in relation to human wants is the fundamental economic problem can be
easily understood in the context of poor and developing countries like India where quite a large number
of populations lives at a bare subsistence level. Despite of the affluence and riches, developed societies
too face the problem of scarcity. Their wants for goods and services have been multiplying during the
course of economic growth so that their present wants still remain ahead of their resources and capacity
to produce.
• Unlimited Wants: The economic problem arises not merely due to the limited resources and capacity
to produce alone but also due to unlimited human wants. So long as human wants for goods and
services remain ahead of the resources, both natural and acquired, the economic problem of scarcity
would be there.
If Americans today, were too content to live at the level of the Indian middle-class people, all their
wants would be fully satisfied with their available resources and capacity to produce. In that situation
they would face little or no scarcity and economic problem for them would disappear. However, the
affluent and developed countries of the U.S. and Western Europe face the problem of scarcity even
today as their present wants remain ahead of their increased resources and capabilities
to produce.
• Scarcity of Resources and the Problem of Choice
Whereas wants of the people are unlimited means to satisfy those wants are limited. Now, the goods
and services are scarce because the resources to produce them are scarce. If we cannot have all the
goods and services, we would like to have we must choose what goods services are produced to
satisfy the wants of the people and what wants be left unsatisfied. Scarcity of resources requires
that efficient and optimum use of resources be made so that maximum possible satisfaction of the
people is achieved. Further. since all wants cannot be satisfied due to scarcity of resources, we face
the problem of choice. If it is decided to use more resources in one line of product then some
resources must be withdrawn from another commodity. Thus, the problem of choice from the
viewpoint of the society as a whole refers to which goods and in what quantities are to produced
