INTRODUCTION TO MICROECONOMICS 3
UNIT-1
INTRODUCTION TO
1 MICROECONOMICS
WHAT ECONOMICS IS ALL ABOUT?
Economics is about economizing; that is, about choice among alternative uses of scarce resources.
Choices are made by millions of individuals, businesses, and government units. Economics examines
how these choices add up to an economic system, and how this system operates. (L.G. Reynolds)
Scarcity is central to economic theory. Economic analysis is fundamentally about the
maximization of something (leisure time, wealth, health, happiness—all commonly reduced to the
concept of utility) subject to constraints. These constraints—or scarcity—inevitably define a trade-
off. For example, one can have more money by working harder, but less time (there are only so
many hours in a day, so time is scarce). One can have more apples only at the expense of, say,
fewer grapes (you only have so much land on which to grow food—land is scarce). Adam Smith
considered, for example, the trade-off between time, or convenience, and money. He discussed
how a person could live near town, and pay more for rent of his home, or live farther away and
pay less, “paying the difference out of his convenience”.
Economics as a subject came into being with the publication of very popular book in 1776,
“An Enquiry into the Nature and Causes of Wealth of Nations”, written by Prof. Adam Smith.
At that time it was called Political economy, which remained operational at least up to the middle
part of the 19th century. It is since then that the economists developed tools and principles using
inductive and deductive reasoning. In fact, the ‘Wealth of Nations’ is a landmark in the history
of economic thought that separated economics from other social sciences.
The word ‘Economics’ was derived from the Greek words ‘Oikos’ (a house) and ‘Nemein’
(to manage), which meant managing a household, using the limited money or resources a household
has.
Let us explain a few important definitions frequently referred to in the economic theory.
3
, 4 INTRODUCTORY ECONOMICS
Adam Smith (June 5, 1723-July 17, 1790) was a Scottish political economist and moral
philosopher. His ‘Inquiry into the Nature and Causes of Wealth of Nations’ was one of the
earliest attempts to study the historical development of industry and commerce in Europe. That
work helped to create the modern academic discipline of Economics and provided one of the
best-known intellectual rationales for free trade and capitalism.
At the age of about fifteen, Smith proceeded to the University of Glasgow, studying moral
philosophy under “the never-to-be-forgotten” (as Smith called him) Francis Hutcheson. In 1740
he entered the Balliol College of the University of Oxford, but as William Robert Scott has said,
“the Oxford of his time gave little if any help towards what was to be his lifework,” and he left
the university in 1746. In 1748 he began delivering public lectures in Edinburgh under the
patronage of Lord Kames. Some of these dealt with rhetoric and belles-lettres, but later he took
up the subject of “the progress of opulence,” and it was then, in his middle or late 20s, that
he first expounded the economic philosophy of “the obvious and simple system of natural
liberty” which he was later to proclaim to the world in his Inquiry into the Nature and Causes
of the Wealth of Nations.
Wealth Definition
The early economists like J.E. Cairnes, J.B.Say, and F.A.Walker have defined economics as a
science of wealth. Adam Smith, who is also regarded as father of economics, stated that economics
is a science concerned with the nature and causes of wealth of nations. That is, economics deal
with the question as to how to acquire more and more wealth by a nation. J.S.Mill opined that
it is the practical science dealing with the production and distribution of wealth. The American
economist F.A.Walker says that economics is that body of knowledge, which relates to wealth.
Thus, all these definitions relate to wealth.
However, the above definitions have been criticized on various grounds. As a result, economists
like Marshall, Robbins and Samuelson have put forward more comprehensive and scientific
definitions. Emphasis has been gradually shifted from wealth to man. As Marshall puts, 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.”
UNIT-1
INTRODUCTION TO
1 MICROECONOMICS
WHAT ECONOMICS IS ALL ABOUT?
Economics is about economizing; that is, about choice among alternative uses of scarce resources.
Choices are made by millions of individuals, businesses, and government units. Economics examines
how these choices add up to an economic system, and how this system operates. (L.G. Reynolds)
Scarcity is central to economic theory. Economic analysis is fundamentally about the
maximization of something (leisure time, wealth, health, happiness—all commonly reduced to the
concept of utility) subject to constraints. These constraints—or scarcity—inevitably define a trade-
off. For example, one can have more money by working harder, but less time (there are only so
many hours in a day, so time is scarce). One can have more apples only at the expense of, say,
fewer grapes (you only have so much land on which to grow food—land is scarce). Adam Smith
considered, for example, the trade-off between time, or convenience, and money. He discussed
how a person could live near town, and pay more for rent of his home, or live farther away and
pay less, “paying the difference out of his convenience”.
Economics as a subject came into being with the publication of very popular book in 1776,
“An Enquiry into the Nature and Causes of Wealth of Nations”, written by Prof. Adam Smith.
At that time it was called Political economy, which remained operational at least up to the middle
part of the 19th century. It is since then that the economists developed tools and principles using
inductive and deductive reasoning. In fact, the ‘Wealth of Nations’ is a landmark in the history
of economic thought that separated economics from other social sciences.
The word ‘Economics’ was derived from the Greek words ‘Oikos’ (a house) and ‘Nemein’
(to manage), which meant managing a household, using the limited money or resources a household
has.
Let us explain a few important definitions frequently referred to in the economic theory.
3
, 4 INTRODUCTORY ECONOMICS
Adam Smith (June 5, 1723-July 17, 1790) was a Scottish political economist and moral
philosopher. His ‘Inquiry into the Nature and Causes of Wealth of Nations’ was one of the
earliest attempts to study the historical development of industry and commerce in Europe. That
work helped to create the modern academic discipline of Economics and provided one of the
best-known intellectual rationales for free trade and capitalism.
At the age of about fifteen, Smith proceeded to the University of Glasgow, studying moral
philosophy under “the never-to-be-forgotten” (as Smith called him) Francis Hutcheson. In 1740
he entered the Balliol College of the University of Oxford, but as William Robert Scott has said,
“the Oxford of his time gave little if any help towards what was to be his lifework,” and he left
the university in 1746. In 1748 he began delivering public lectures in Edinburgh under the
patronage of Lord Kames. Some of these dealt with rhetoric and belles-lettres, but later he took
up the subject of “the progress of opulence,” and it was then, in his middle or late 20s, that
he first expounded the economic philosophy of “the obvious and simple system of natural
liberty” which he was later to proclaim to the world in his Inquiry into the Nature and Causes
of the Wealth of Nations.
Wealth Definition
The early economists like J.E. Cairnes, J.B.Say, and F.A.Walker have defined economics as a
science of wealth. Adam Smith, who is also regarded as father of economics, stated that economics
is a science concerned with the nature and causes of wealth of nations. That is, economics deal
with the question as to how to acquire more and more wealth by a nation. J.S.Mill opined that
it is the practical science dealing with the production and distribution of wealth. The American
economist F.A.Walker says that economics is that body of knowledge, which relates to wealth.
Thus, all these definitions relate to wealth.
However, the above definitions have been criticized on various grounds. As a result, economists
like Marshall, Robbins and Samuelson have put forward more comprehensive and scientific
definitions. Emphasis has been gradually shifted from wealth to man. As Marshall puts, 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.”
