Economics is the science that deals with the allocation of limited resources to satisfy unlimited human wants. Think of human wants as being all the goods and services that individuals desire, including food, clothing, shelter, and anything else that enhances the quality of life.
Since we can always think of ways to improve our well-being with more or better goods and services, our wants are unlimited. However, we need resources to produce goods and services, including labor, managerial talent, capital, and raw materials.
Resources are said To be scarce because their supply is limited. The scarcity of resources means that we are constrained in our choices about the goods and services we produce and what human wants we will ultimately satisfy. That is why economics is often described as the science of constrained choice.
Every society has its own way of deciding how to allocate its scarce resources. Some resort to a highly centralized organization. For example, during the Cold War, governmental bureaucracies heavily controlled the allocation of resources in the economies of Eastern Europe and the Soviet Union.
Other countries, such as those in North America or Western Europe, have historically relied on a mostly decentralized market system to allocate resources. Regardless of its market system, every society must answer these questions:
- What goods and services will be produced, and in what quantities?
- Who will produce the goods and services, and how?
- Who will receive the goods and services?
Definition of Economics
Economics’s definition is based on the fundamental concepts of unlimited wants, limited resources, choice problems, and alternative uses.
Professor L. Robbins refers to these concepts in his definition of Economics, which says, “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”
Economics comes from the Greek term “Okonomia” which means household management. Adam Smith is the father of “Economics.” He says “Economics is the Wealth of Nations” in his scholarly work entitled “An Enquiry into the Nature and Causes of the Wealth of Nations,” first published in 1776.
A classical economist L Robins says, “Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”
After that, many economists define the subject as “Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people.”
In the modern conception, the subject defines as “Economics is the study of how human beings coordinate their wants & desires, given the decision-making mechanisms, social customs, and political realities of the society.”
Samuelson’s definition is known as a modern definition of economics. According to Samuelson, Economics is a social science concerned chiefly with the way society chooses to employ its resources, which have alternative uses, to produce goods and services for present and future consumption. The above definition is general in nature. There are many common points in the definitions of Robbins and Samuelson.
Samuelsson’s definition tells us that economics is a social science and it is mainly concerned with the way how society employs its limited resources for alternative uses.
All this we find in the definition of Robbins. But Samuelson goes a step further and discusses how a society uses limited resources for producing goods and services for present and future consumption of various people or groups.
Definition of Economics Given by Professor Marshall
“Economics is the study of mankind in the ordinary business of life.” The ordinary business of mankind means money-earning and money-expending activities. The major discussion of economics is the activities of how to earn money and how it is expended to satisfy different human needs. According to Marshall, a man needs money, but the collection of money is not the principal objective. The main objective of collecting money is human beings and human welfare. Money is the medium through which the goal can be achieved. “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.” In brief, Professor Marshall has emphasized more on human welfare than wealth. According to Marshall, how to earn wealth and how to employ this earned wealth for human welfare is the main objective of economics.
Characteristics of Marshall’s Definition
Ordinary Business of Mankind
According to Prof. Marshall, “Economics is the study of mankind in the ordinary business of life.” All activities of a man regarding income and expenditure are the subject matter of economics.
Social Science
Prof. Marshall has established economics as a social science. According to him, economics studies the economic activities of a social being. The activities of a man who is out of society are not the subject matter of economics.
To Collect Wealth and Uses of Wealth
Prof. Marshall in his definition has not only noted economics as the wealth-getter science but also has established it on the appropriate use of the earned wealth.
Valuation of Money
According to Prof. Marshall, the human activities which are undertaken for satisfying human needs can be measured by money.
Emphasis on Human Welfare
The most important feature of Prof. Marshall’s definition of economics is the emphasis on human welfare. According to Prof. Marshall, the principal object of economics is human welfare. Wealth is only the means of attaining human welfare. By emphasizing human welfare, Prof. Marshall has made economics the study of humanity and human welfare.
Criticism of Prof. Marshall’s Definition
Prof. Marshall has overemphasized human welfare in his definition of economics. But according to L. Robbins, economics is not purely a welfare study. In present life, there are some issues which are not totally related to human welfare, such as wine and other addictive goods, which have no relationship with human welfare but have economic importance. Prof. Marshall has excluded these from economic viewpoints, making his definition incomplete according to L. Robbins.
The Importance of Immaterial Goods Has Been Ignored
Marshall has emphasized the earning of material goods rather than immaterial ones. Human welfare is dependent not only on the earning of material goods but also on some immaterial service works like the service of a teacher, the service of a doctor, the works of an artist, etc. For emphasizing only material goods, Marshall’s definition has been considered narrow.
Ignored the Basic Problem of Human Life
According to modern economists, the basic problem of economics is the problem of scarcity. Satisfying unlimited wants using limited resources is the basic economic problem, which has not been touched upon by the definition of Prof. Marshall.
Economics as Ethics
Prof. Marshall considered economics as somewhat ethical. But it is not ethics. What ought to be or what ought not to be is not discussed in economics. It is a science. As Prof. Marshall termed it the study of ethics, it is out of the norms of science.
Measuring Welfare Through Money
Prof. Marshall has measured welfare through money. However, welfare is not measurable by money. Human peace, contentment, etc. are the states of human minds. Thus, human welfare is not measurable by money. This concept of Prof. Marshall is not applicable.
Economics is Not the Study of Men Out of Society
According to Prof. Marshall, the activities of men out of society are not discussed in economics. But according to L. Robbins, the economic activities of men either within society or out of society are both discussed in economics. From this viewpoint, the definition of Prof. Marshall is partial.
Definition of Economics Given by Adam Smith
Classical economists like Adam Smith and his distinguished followers J.S. Mill, F.A. Walker, David Ricardo, etc., define economics as a science of wealth. Adam Smith is the leader of the classical school of economic thought. According to Adam Smith, “Economics is the study of the nature and causes of a nation’s wealth or simply the study of wealth.” The central point in Smith’s definition is wealth creation. Implicitly, Smith identified wealth with welfare.
Characteristics of Adam Smith’s Definition
Study of Wealth of a Nation
Economics is the study of the wealth of a nation. It deals with the consumption, production, exchange, and distribution of wealth.
Study of Economic Activities
Economics is only concerned with the activities of the economic man, who is involved in earning more wealth. It is not a study of the non-economic man, who is not involved in earning wealth.
The Main Goal is to Earn Wealth
The main goal of human beings is to earn wealth because wealth is the only means for satisfying human wants.
First Place for Wealth
Adam Smith gave the first place to wealth and a secondary place for man in the study of economics. In other words, the subject matter of economics is wealth. He advocated that man is made for wealth.
Only Material Goods Constitute Wealth
The definition emphasizes only material goods constituting wealth in society and ignores non-material goods like free goods (air, water, sunlight), which do not play any role in the creation of wealth in society.
Employed Labor is the Source of Wealth
The source of the wealth of a nation is employed labor whose productivity would be increased through the division of labor in the production and distribution of goods and services.
Criticism of Adam Smith’s Definition
Narrow Meaning of Wealth
Adam Smith considered economics as the science of wealth, including only material goods. This is a narrow sense of defining wealth. In practice, wealth includes both material and non-material goods. Human wants can be fulfilled by using non-material goods or services also.
Too Much Importance to Wealth
Adam Smith gave more importance to wealth than man. He gave first place to wealth and a secondary place to human beings. According to Marshall, wealth is only a means of satisfying human needs. Thus, economics must emphasize the study of man much more than the study of wealth.
No Meaning of Human Welfare
This definition gave no importance to the welfare of society. According to Marshall, the main aim of economics is to increase the welfare of human beings, not to obtain wealth only.
Wrong Assumption of Economic Man
According to Adam Smith, the economic man is one who is involved in earning wealth. But no man can be limited only to earning wealth. Man is equally influenced by moral and spiritual thoughts like love, self-esteem, sympathy, friendship, etc.
Labor is Not the Only Source of Wealth
According to Adam Smith, the main source of wealth is employed labor. In reality, labor alone cannot produce anything. In the production process, there are other factors of production like land, capital, and organization, including labor. Adam Smith has ignored these aspects.
Definition of Economics Given by Prof. L Robbins
The most scientific and authentic definition is given by Prof. L. Robbins in his book entitled “Nature and Significance of Economic Science” in 1931. “Economics is a science that studies human behavior as a relationship between ends and scarce means that have alternative uses.” Prof. L. Robbins’ definition is based on three basic characteristics of human life:
- Human wants are unlimited.
- Human resources are limited.
- Resources have alternative uses.
Characteristics of L. Robbins’ Definition
Wants are Unlimited
Human wants are unlimited and endless. If wants for basic needs like food, clothes, and residence are satisfied, then wants for comparatively lower necessary goods or wants for comforts and luxurious goods arise. If a want for a good is fulfilled, then a want for another good arises. Therefore, human wants are endless.
Resources are Limited
Although human wants are unlimited, the resources for satisfying wants are limited. If resources for satisfying human wants were unlimited, there would be no question of an economic problem. The basic economic problem is scarcity or limited resources.
Alternative Uses of Resources
The means of satisfying human wants have alternative uses. A means of satisfying a human need can be used for several purposes. For example, a piece of land can be used either for producing rice or jute, or it may be used for building a house or a market. In this situation, an individual uses that land depending on the significance of his want. Therefore, a question arises regarding selection or preference.
Criticisms of L. Robbins’ Definition
Ignoring Human Welfare
According to Prof. Boulding, Prof. L. Robbins has discussed only the problem of scarcity, which is applicable not only to the individual but also to collective issues. Thus, L. Robbins’ definition of economics is incomplete.
Ignoring Social Issues
L. Robbins in his definition has discussed individual problems of scarcity but has ignored the dual problems of scarcity. He also ignored the scarcity problems of the state.
Wideness of His Definition
L. Robbins has widened his definition of economics. According to his definition, the activities regarding humanity which have scarcity, like affection and love, are included in the definition of economics. However, these activities have no exchange value, so they cannot be included in the subject matter of economics.
Conversion to Price Determination Theory
Robbins has turned economics into merely the theory of price determination. According to Hicks and other economists, economics cannot be confined to price-determining theory. Thus, L. Robbins’ definition is incomplete.
Absence of Economic Development Issues
At present, economic development issues are highly important, but they have been ignored in his definition.
Absence of Exchange
Concept
In the definition of L. Robbins, the role of exchange has been avoided. According to the economist Cairn Cross, the goods and services only which have exchange value should be included in economics.
Narrow and Broad Definition
The most important defect of the definition of L. Robbins is that it is very narrow in one consideration and very broad in another.
Complexity of Study
L. Robbins’ definition has turned economics into a very complex study for seeking more scientific theories. Robbins has made economics not understandable to the general people.
Meaning of Economics
Economics is a social science which deals with the economic activities of people. People have unlimited wants, but the resources required to satisfy these wants are limited. The scarcity of resources in the presence of unlimited wants gives rise to all economic activities. If the resources were not scarce, there would not be any economic activity at all.
With unlimited resources, a person could get as much as possible without doing any work. Economics is rightly called the study of the allocation of resources for satisfying human wants.
Since people cannot satisfy all wants using limited resources, they have to choose the most and urgent ones from unlimited wants. A person may feel the wants for food, color television, and a host of other items, but he must meet his want for food before anything. The choice problem also arises because a resource has alternative uses.
For example, a piece of land can be used for growing paddy in it, or it can be used for building a market on it, or it can be put to any other use its owner thinks most profitable. Once its owner has put it to one use, it cannot be used for other purposes. The best use of a resource can be assured by utilizing it to meet the most urgent and important wants.
The ideas put earlier can be clarified with specific examples. Any human activity related directly or indirectly to the satisfaction of human wants is called economic activity.
Economic agents and institutions like households, consumers, production firms, banks, etc., participate in economic activities like production, exchange, consumption, etc.
Each economic agent in the economy is presumed to be an independent decision-making unit.
Economics formalized the decision-making processes of different economic agents under different behavioral assumptions about different economic agents.
Suppose a hungry person has some money in her/his pocket. She/he can eat her/his lunch or buy a shirt with his money. Since he is hungry, he decides to eat lunch.
We assume that the person wants to maximize his satisfaction by consuming a bundle of two or more commodities that she/he can buy with her/his money.
Economics sets and explains the decision-making process of satiation (utility) maximizing consumer. In short, Economics provides the guidelines for making the best use of resources in every sphere of an economic person.
Let’s be more specific. In addition to the general applicability of economic principles mentioned earlier, the study of Economics teaches a person five important things: economic reasoning, economic terminology, economic insights, information about economic institutions, and economic policy options.
First, the study of Economics changes the attitude of a person towards life. People trained in Economics analyze everything in terms of costs and benefits. They do something if its benefits exceed its costs and don’t do something if costs exceed benefits.
Second, economics study helps a man appreciate different economic terminologies like GDP, corporations, growth rate, money supply, etc.
Third, the students of Economics gain insights into the functioning of an economy, exchange rate fluctuations, etc. It is almost a miracle that an economy comprising hundreds of thousands of economic agents with diversified and conflicting interests functions spontaneously and systematically without chaos and anomaly.
Fourth, economics appreciates the roles of different economic institutions like corporations, government, and cultural norms in our lives.
Finally, knowledge of Economics enables a person to appreciate the consequences of government economic policies like a rise in the tax rate, a reduction in the budget deficit, etc.
Branches of Economics
Broadly speaking, economics is composed of two branches;
- Microeconomics, and
- Macroeconomics.
The prefix micro is derived from the Greek word ‘mikros,’ which means “small.”
Therefore, microeconomics studies the economic behavior of individual economic decision-makers, such as a consumer, a worker, a firm, or a manager. It also analyzes the behavior of individual households, industries, markets, labor unions, or trade associations. By contrast, the prefix macro comes from the Greek word ‘makros,’ which means “large.”
Macroeconomics thus analyzes how an entire national economy performs. A course in macroeconomics would examine aggregate levels of income and employment, the levels of interest rates and prices, the rate of inflation, and the nature of business cycles in a national economy.
The constrained choice is important in both macroeconomics and microeconomics.
For example, in macroeconomics, we would see that a society with full employment could produce more national defense goods, but it would then have to produce fewer civilian goods. It might use more of its depletable natural resources, such as natural gas, coal, and oil, to manufacture goods today, in which case it would conserve less of these resources for the future.
A consumer might decide to allocate more time to work in a microeconomic setting but would then have less time available for leisure activities.
The consumer could spend more income on consumption today but would then save less for tomorrow. A manager might decide to spend more of a firm’s resources on advertising, but this might leave research and development less available.
Scope of Economics
The horizon of economics is gradually expanding. It is no more a branch of knowledge that deals only with production and consumption.
However, the basic thrust remains on using the available resources efficiently while giving maximum satisfaction or welfare to the people on a sustainable basis. Given this, we can list some of the major branches of economics as under:
Microeconomics
Microeconomics may be defined as that branch of economic analysis that studies the economic behavior of the individual unit. Microeconomics is also described as price and value theory, the theory of the firm, production, and welfare.
Macroeconomics
Macroeconomics is a study in aggregates, and it is, indeed, a realistic method of economic analysis. This method studies how the economy’s equilibrium is reached consequent upon changes in the macro-variables and aggregates.
International Economics
As the modem world countries realize the significance of trade with other countries, the role of international economics is getting more and more significant nowadays.
Public Finance
The great depression of the 1930s led to the realization of the role of government in stabilizing the economic growth besides other objectives like growth, redistribution of income, etc. Therefore, a full branch of economics known as Public Finance or fiscal economics has emerged from analyzing the role of government in the economy.
Development Economics
After the- Second World War, many countries got freedom from colonial rule, and their economics required different treatment for growth and development. This branch developed as development economics.
Health Economics
A new realization has emerged from human development for economic growth. Therefore, branches like health economics are gaining momentum.
Besides that, other branches of economics are Environmental economics, Urban and rural economics, monetary economics, energy economics, transport economics, demography, labor economics, agricultural economics, gender economics, economic planning, the economics of infrastructure, educational economics, etc.
Nature of Economics
Economists are also divided regarding the nature of economics. The following questions are generally covered in the nature of economics:
- a. Is economics a science or an art?
- b. Is it a positive science or a normative science?
Economics as a Science or an Art
Economics is both a science and an art. Economics is considered a science because it is systematic knowledge derived from observation, study, and experimentation.
However, economic laws are less perfect compared to the laws of pure sciences. An art is the practical application of knowledge to achieve specific goals.
A science teaches us about a phenomenon, while an art teaches us how to do something. For example, inflation in Bangladesh is a scientific observation, while government measures to control inflation constitute the art of economics.
After establishing the definition and scope of economics, the question arises: Is economics a positive science or a normative science?
Economics is Positive or Normative Science
Positive science is that science that does not concern with what ought to be. It concerns with what is or what was. It does not make value judgments. In economics, economists do not express their opinion. Instead, they examine the economic phenomenon, examine the relationship between economic facts, and draw conclusions.
For example, if we say that inflation in Bangladesh was 10% last year, it is a positive statement.
Economics as a Normative Science: Normative science is that science that deals with what ought to be. In economics, some economists express their opinions. They do not confine themselves to what is or what was; instead, they also suggest what ought to be.
They give opinions, advice, and suggestions on the basis of positive statements. For example, if we say that inflation in Bangladesh ought to be controlled, it is a normative statement. Economics, therefore, is both a positive and a normative science.
Basic problems of an economic organization
Every economy has to solve the following five interrelated problems:
- What to produce?
- How to produce?
- How to distribute the national income?
- How to ensure growth?
- How to ensure the proper utilization of scarce resources?
What to Produce?
The first function of society is to determine which goods to produce and in what quantities. Given the scarcity of resources, societies face choices between producing necessities like food and shelter versus luxury goods. This decision also involves allocating resources between consumer goods and capital goods, which is critical for economic growth. For example, choosing to invest in infrastructure (capital goods) rather than luxury consumer items affects long-term economic development.
How to Produce?
Society must select from various production methods to achieve efficiency. This choice involves determining the least-cost combination of techniques based on available resources and technological capabilities. For instance, producing cloth can involve labor-intensive handlooms or capital-intensive power looms. Opting for the most efficient method ensures optimal resource utilization and productivity gains, crucial for economic efficiency.
How to Distribute the National Income?
The distribution of national income among community members is a significant economic and political issue. Debates range from advocating for equitable income redistribution to supporting a merit-based system where individuals earn income based on their contributions. Policies and regulations influence income distribution, impacting societal equality and economic stability. For example, progressive taxation and social welfare programs aim to reduce income inequality and support economic cohesion.
How to Ensure Growth?
Achieving economic growth requires strategic decisions to increase investment, replace capital goods, and enhance technological processes. Society must allocate resources towards capital accumulation and technological advancements to sustain growth rates. Neglecting these investments can lead to stagnation and lower living standards over time. For instance, investing in education and research fosters innovation, contributing to long-term economic expansion and competitiveness.
How to Ensure Proper Utilization of Scarce Resources?
Economic problems stem from the scarcity of resources relative to unlimited human wants. Efficiently managing scarce resources involves making choices and prioritizing among competing needs. Economics as a discipline focuses on optimizing resource allocation to maximize societal welfare. For example, sustainable resource management practices ensure that future generations can also meet their needs, balancing present consumption with long-term environmental and economic sustainability.
Understanding these fundamental economic questions guides policymakers, businesses, and individuals in making informed decisions that shape economic outcomes and societal well-being.
Methodology of Economics
Economics is a science in the sense that it employs scientific methods of acquiring and disseminating knowledge. There is, however, a sharp distinction between the methods of acquiring knowledge used in Economics and those used in natural sciences like physics, chemistry, etc.
The natural sciences conduct controlled experiments with inanimate matters and animals in laboratories, whereas Economics experiments with human beings cannot be subjected to such controlled experiments. Moreover, randomness is a latent feature of human behavior.
The science of Economics formalized the systematic pattern of a person’s economic behavior, if any, notwithstanding the wide fluctuations in his behavior.
Nevertheless, Economics uses scientific methods of acquiring knowledge. Broadly speaking, there are two methods of gathering knowledge, viz., deductive and inductive methods.
Our next task is to determine which of the two methods is used in Economics.
Methods in Economics
Deductive method
It is from a generalized statement to a specific conclusion. Example: “Man is mortal” is a generalized statement. “A. Rahim is a man.” Through deductive method, we can conclude that “A. Rahim will die.”
Inductive method
It is from a specific statement to generalization. Example: “A. Rahim died. A. Karim died.” As A. Rahim and A. Karim are human beings, through inductive method, we can conclude that “man is mortal.”
Deductive Versus Inductive Methods
Deductive reasoning starts with general statements. To make inferences for a particular observation in the form of a singular statement, the following example illustrates deductive reasoning :
- Man is Mortal
- Rahim is a man.
- Rahim is Mortal
Most of the mathematical theorems are general statements, and working out the exercises following the theorems constitutes the application of deductive reasoning. Much of scientific knowledge is, however, based on inductive reasoning.
Inductivism requires that knowledge be based on empirical evidence consisting of singular observations. Consider the following example of inductive reasoning :
- A man named Karim died.
- Another man, named Adam died.
- Another man named John died.
- ∴ Man is mortal.
For some time, people thought that the inductive method was the appropriate method of acquiring scientific knowledge. Newton was thought to have arrived at the laws of Physics using inductive methods.
At the end of the nineteenth century, David Hume, a famous philosopher, and friend of Adam Smith, observed a problem in the inductive method. No finite quantity of singular observations could ever prove that any given general statement is true.
Suppose you had the single observation that the sun rose in Dhaka on March 21, 2000. So, what is the proof that it will rise tomorrow?
The entire universe might collapse, or a major natural disaster might destroy the sun tonight. It is impossible to prove the truth of any knowledge on the basic empirical observations.
Economists are aware of the problem of induction, and instead of proving the absolute truth of economic theory (knowledge), they use some acceptable measures of truth for evaluating their theories. The economic theories, though expressed in the forms of general statements, are based on incomplete induction.
They use deductive arguments and the criterion of logical consistency to derive conclusions for particular observations. The discrepancies between the theories’ predictions and real observations are examined, and these theories are confirmed or refuted using the conventional measures of truth.
This method of acquiring knowledge blending the deductive and inductive methods, and using conventional criteria may be called the conventional method.
Format of Economic Theory
The preceding paragraphs gave you some general ideas about the methodology of Economics. Let’s now explain the specific format of an economic theory.
An economic theory starts with a set of assertions or postulates, denoted A= {A1, A2, ………, An} concerning the behavior of an economic agent.
For example, the postulate may be that consumers maximize utility. The second part of a theory consists of a set of testable conditions denoted by C= { C1, C2, C3, ………, Cn}. The testable conditions must be observable.
For example, if consumers maximize utility, they must buy a smaller quantity of a normal good when its price goes up. The increased price of the normal good is observable and hence constitutes the testable conditions of the theory.
The third part of the theory comprises a set of events, E = {E1, E2, ………, En} predicted by the theory.
In this example, the prediction is that the consumer will buy a smaller quantity of the normal good.
Observing the quantities of normal goods bought at different prices allows us to examine whether the theory’s prediction is right.
The logical structure of economic theory can be shown by this arrow diagram; A → (C → E).
It means that if A is true, then C implies E. In this example, if consumers maximize utility (A), then a rise in the price of a normal good (C) will lead to a fall in the quantity of the normal goods bought (E).
If the prediction is found to be correct, then the theory is confirmed, not proved. If the prediction is wrong, then the theory is refuted.
We cannot prove the absolute truth or falseness of a theory. A useful theory must be refutable but is not refuted. Suppose we have a theory saying that ‘it will or will not rain tomorrow.’
This theory cannot be refuted anyway and hence is not interesting at all. To be interesting, all theories must be refutable.
An economic theory cannot be proved or disproved. An economic theory is confirmed if the theory’s prediction is true and refuted if it is wrong.
Positive Versus Normative Analysis
Positive analysis is concerned with the description of economic phenomena as these are.
It analyzes organizations, functions, and interactions of economic agents in the economy. It also deals with the nature and consequences of different economic policies.
The normative analysis is concerned with value judgments about economic agents. The normative analysis discusses how an economic agent should behave, whereas the positive analysis discusses how it behaves.
Normative analysis suggests what policy a government should take, whereas positive analysis discusses the consequences of different policies.
Suppose, for example, and the government proposes enacting a law that determines the minimum wage for workers in the ready-made garments industry in developing countries.
Positive analysis deals with the following aspects of the minimum wage regulation:
- What will be the implications of the minimum wage for the employment level and price of garments?
- Who will be the beneficiaries, and who will be the losers?
- What will be the net effect of minimum wage regulation on the economy as a whole?
- How will the efficiency and equity of the national economy be affected?
The normative analysis is concerned with whether the government should implement the minimum wage act at all.
It will take a host of economic and non-economic factors to make value judgments on this issue.
It should be noted that much of the economic analysis is positive. A few topics in Economics, however, are normative in nature. Finally, we can think of another type of economic analysis, known as the art of Economics.
It discusses applying the knowledge obtained in Positive Economics to achieve the goals determined in Normative Economics. Suppose we have decided to achieve a particular type of distribution of income in the economy.
Given the way the economy works, how can we obtain the specified pattern of distribution of income? The art of Economics provides answers to this type of question.
Types of Economics
Economics is a social science that studies how people satisfy unlimited wants with scarce resources. It involves the analysis of choice and trade through the use of intuitive graphs and mathematical elements. The discipline is divided into two sections: microeconomics (micro) and macroeconomics (macro).
Micro Economics
The word “micro” has been derived from the Greek word “Micros,” which means small or little. Microeconomics deals with the analysis of small individual units of the economy such as buyers, sellers, individual farms, industrial units, or groups of enterprises.
According to Boulding, “Microeconomics is the study of particular firms, particular households, individual prices, wages, incomes, individual industries, and particular commodities.”
Macro Economics
The word “macro” comes from the Greek word “Makros,” which means larger. Macroeconomics discusses the economy of a country as a whole, rather than individual units. It deals with different economic problems collectively. The main objective of macroeconomics is to analyze the total economic system as a whole.
Economist Boulding said, ‘Macroeconomics deals not with individual quantities but with aggregate quantities, not with individual income but with national income, not with individual prices but with price level, not with individual output but with national output.’ Economist Augbum said, ‘Macroeconomics is a branch of economics that deals with the economy as a whole.’
Economic Theories
A set of general principles uses for the analysis of economic activity is called an economic theory. Economic theory enunciates the laws and principles which govern the functioning of an economy and its various parts. There has been a lot of controversy among economists about the true scope of economic theory or its subject matter. Many prominent economists define the subject matter of economics or economic theory.
According to Adam Smith, economics enquires into the nature and causes of the wealth of nations. According to Ricardo, economics studies “how the produce of the earth is distributed,” that is, economics deals with the distribution of income and wealth. According to Marshall, economics is a study of humanity in the ordinary business of life. It examines that part of individual and social action connected with material requisites of well-being.
- Consumerism, the theory that increasing consumption of goods is economically beneficial.
- Keynesianism, John Maynard Keynes’s economic theories, advocated government monetary and fiscal programs intended to stimulate business activity and increase employment.
Difference between Positive economics and normative economics
There are some well-remarked differences between positive economics and normative economics which are discussed below:
- Positive economics is the pure science regarding what is happening. On the other hand, normative economics is the model science of what ought to be.
- Positive economics produces fact and data-based information which has no relationship with value judgment. Normative economics is a science based on ethics. Therefore, in normative economics, good-worse, ought to or ought not to be is highly emphasized here.
- In positive economics, what is fact is preferred most. But in normative economics what ought to be is preferred most.
- As positive economics depends on factual analysis, decisions are taken on the basis of this type of analysis. But in normative economics, decisions are taken on value judgment.
- In positive economics, differences in opinions are resolved through analyzing the facts and data available. On the other hand, in normative economics, questions of personal and social value judgment arise. They cannot be solved through the use of data and facts.
- Sometimes, positive economics and normative economics may have mutually opposite positions. Therefore, statements of positive economics may not be acceptable to normative economics. On the other hand, statements of normative economics may not be acceptable in positive economics.
- Positive economics deals with how economic problems are solved, but normative economics deals with how economic problems should be solved.
The Relation of Economics with other Social Sciences
Economics is a social science, establishing close relationships with other social sciences such as political science, history, sociology, geography, and ethics.
Economics and Political Science
Economics and political science have a close relationship despite their distinct scopes. Economic activities operate under state direction, and the nature of the state shapes a country’s production, distribution, exchange, and consumption.
Likewise, political decisions are often influenced by economic considerations, such as policies promoting different economic systems like monarchy, democracy, or socialism. For example, government regulations on trade and taxation directly impact economic behavior and outcomes within a nation.
Economics and Sociology
Economics and sociology share an intimate connection, with sociology encompassing the broader spectrum of social activities compared to the narrower focus of economics on economic activities. Economics is viewed as a subset of sociology due to its specific focus on how economic factors influence societal dynamics.
This relationship highlights how economic principles, such as supply and demand, intersect with broader social issues like inequality and social mobility. For instance, studying income distribution patterns through an economic lens informs sociological theories on social stratification.
Economics and History
The relationship between economics and history is profound, as historical developments shape economic conditions that, in turn, influence present and future economic activities.
Economic history explores how past events, such as wars or technological advancements, impact economic growth and societal progress. Understanding historical context provides crucial insights into economic trends and challenges. For example, analyzing the Great Depression through both economic and historical lenses reveals the complex interplay of policy decisions and socioeconomic consequences.
Economics and Ethics
Economics and ethics are closely intertwined, with ethics guiding moral considerations in economic decision-making and economic factors influencing ethical judgments.
Ethical principles inform economic policies regarding issues like income inequality or environmental sustainability. Conversely, economic incentives and constraints affect ethical choices, such as corporate social responsibility initiatives or personal financial decisions.
For instance, debates on fair trade practices involve ethical assessments of economic transactions and their social impacts.
Economics and Geography
Economics and geography share a symbiotic relationship, where geographical factors profoundly influence economic development and activities.
Natural resources, climate conditions, and geographical location significantly shape economic outcomes like agricultural productivity or industrial growth. Understanding geographical contexts is essential for comprehensive economic analysis and policy formulation. For example, analyzing the impact of climate change on agricultural yields requires integrating geographical data with economic models to predict food security challenges.
Example Involving Basic Concepts
During a visit to the mall, encountering a sale at a favorite brand satisfies a want by purchasing clothes—an economic activity. Later, at a fast-food restaurant, the need for food prompts a service transaction where an employee takes an order.
If the preferred food item isn’t available due to scarcity, opting for an alternative demonstrates economic decision-making. Paying for the chosen item generates revenue for the fast-food company, illustrating economic exchange and revenue generation in a consumer-driven economy.
Scopes/Subject matter of Economics
The economists are of different opinions regarding the subject matter of economics. Therefore, the subject matter of economics is gradually being wider.
Economics is a Social Science
Economics deals with the activities of social beings, specifically individuals living in society. It does not concern itself with the activities of individuals in isolation. As a social science, economics examines the behaviors and interactions of individuals within a societal context.
Economic Activity
Economics focuses on economic activities, which are activities related to earning and spending money. It excludes activities that do not have a monetary reward or exchange value. Economist Cairn Cross emphasizes this by stating, “Economics studies the part played by money in human affairs.” For instance, selling goods in a market is an economic activity, whereas volunteering without compensation is not considered within the scope of economics.
Satisfying Unlimited Wants with Limited Resources
The primary objective of economic activities is to satisfy human wants, which are unlimited. However, the resources available to satisfy these wants are limited. The core goal of economics is to utilize these limited resources efficiently to produce the maximum amount of goods and services, ensuring their proper distribution to maximize welfare.
For example, allocating limited raw materials to produce various essential goods requires careful planning and distribution to meet the needs of the population.
Analysis of Production, Exchange, Distribution, and Consumption
Economics examines all activities related to satisfying human wants, focusing on the optimal use of limited resources to produce the maximum amount of goods and services. It also addresses the exchange systems introduced to manage the consumption of produced goods. By facilitating the exchange of products, goods, and services, human wants are satisfied.
Thus, economics involves the study of production, exchange, distribution, and consumption processes. For instance, the production of food, its distribution to markets, the exchange between buyers and sellers, and the final consumption by households are all economic activities analyzed within this framework.
Economics is an Impartial Science
Economics is neutral and impartial. According to Professor L. Robbins, economics is an unbiased analysis of human activities, without making value judgments.
It does not concern itself with whether an activity is good or bad. Instead, it focuses on understanding and explaining economic phenomena objectively. For example, economics analyzes the impact of a new tax policy without commenting on whether the policy is fair or unfair.
Economics Provides Solutions to Problems
Economics is both enlightening and practical, generating knowledge about problems and providing solutions. Its scope is broad and continues to expand with societal advancements.
For example, economics offers insights and solutions to issues such as unemployment, inflation, and resource allocation, helping policymakers and individuals make informed decisions to address these challenges.
Why the study of economics is necessary?
At present, the study of economics is very important in our life.
Necessary in Everyday Life
In everyday life, individuals face numerous wants, but the means to satisfy these wants are limited. Economics addresses activities related to managing limited wealth and satisfying unlimited wants. Understanding economics is crucial for making informed decisions on how to allocate resources efficiently to meet various needs.
For example, a family budget helps prioritize essential expenses over luxury items.
Proper Utilization of Wealth
Economics provides guidance on the optimal use of limited resources. By studying economics, individuals learn how to maximize output from available resources and enhance human welfare. For instance, understanding investment options can help individuals grow their savings effectively.
Being Economical
Economics teaches individuals how to be economical by emphasizing the importance of resource management. Given that human wants are unlimited but resources are limited, being economical is essential to satisfy as many wants as possible
For example, consumers may use budgeting techniques to manage their finances and avoid unnecessary expenses.
Production
Knowledge of economics is essential for production. It helps individuals and businesses determine what to produce, how much to produce, and the most efficient production methods.
For example, a farmer uses economic principles to decide which crops to plant based on market demand and production costs.
Trade and Commerce
Economics is crucial for trade and commerce. Understanding market demand, forecasting changes, and other economic knowledge are vital for successful business operations.
Traders and merchants use this knowledge to make informed decisions about inventory, pricing, and market expansion. For example, a retailer analyzes economic trends to decide which products to stock for the upcoming season.
Addressing Social Problems
Many social issues are closely linked to economic problems, such as poverty, unemployment, illiteracy, and labor welfare.
Economics provides the tools to analyze and find solutions to these problems. For instance, economic policies aimed at reducing unemployment can also help alleviate poverty and improve living standards.
For Labor Leaders
Leaders dealing with labor issues need a solid understanding of economics to effectively manage labor organizations and advocate for workers’ rights. This knowledge helps in negotiating wages, benefits, and working conditions. For example, labor leaders use economic data to argue for fair wages and improved workplace safety.
Economics is not just an academic subject but a practical tool that influences everyday decisions, business strategies, and policy-making, ultimately contributing to the well-being of individuals and society as a whole.
