Definition of Economics
There are three representative definitions of economics, which encompass major dimensions
of the subject. They are as follows:
• Adam Smith defined economics as the Science of Wealth’. (Material Definition)
• Economics is a study of mankind in the ordinary business of life; it 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’. (Welfare Definition)
• Professor Robbins in his ‘Nature and Significance of Economic Science (1932)’ defined economics as ‘the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.’ (Behavioral Definition) Macro and Micro Economics Ranger Frisch used the terms macro and micro economics first in 1953. The subject matter of economics and its various concepts can be classified either in ‘microeconomics’ or mac- roeconomics’ for the sake of convenience of study. Microeconomics is the study of units whereas macroeconomics is the study of aggregates. As its name implies, microeconomics is concerned mainly with small segments of the
total economy, i.e., behaviour and decision of individual consumer or producer or group of consumers and producers that form a market unit. Microeconomics is about production or consumption of an individual unit, demand and supply of an individual unit, price and output determination of an individual unit, etc. On the other hand Macroeconomics is the study of ‘whole’ or ‘aggregate’ such as national income, aggregate saving, aggregate demand, aggregate supply, etc. Positive versus
Normative economics In Economics, mainly there are two types of approaches- positive and normative; the former
ECONOMICS : AN INTRODUCTION
approach deals with “what is” and the latter with “what should be”. In positive economics we describe, explain and understand the economic phenomena “as they are” while in nor- mative economics we study “what should be” and we conjecture, suggest and do value judg-
ments to take certain stands on various issues and judge the worth of economic policies and stances as good or bad, desirable or undesirable. So, normative approach is which deals with “what should be” or “if” and “then” conditions. Fundamental Questions for an Economy Economics broadly deals with anything, which has a price or monetary value. This mon- etary value arises out of two factors:
1. Unlimited wants and desires of the people.
2. Limited/Scarce availability of resources.
Since unlimited needs and wants of the masses have to be satisfied out of the scarce and limited resources available, Economics tries to find out the most efficient allocation of the scarce resources so that the needs and desires are satisfied to the best possible extent. The answers of three fundamental questions of economics determine the allocation of scarce resources among its alternative uses. The three fundamental questions are as follows:
1. What to produce?
2. How to produce?
3. For whom to produce?
The three fundamental questions of econom-ics are resolved differently in different economic systems. The more important economic systems are Socialism, Capitalism and Mixed Economy. Under a Socialist regime, all the resources are collectively owned. Under Socialism, the ques-
tions, what, how and for whom to produce are decided by the central planners keeping in view various factors, such as the priorities of the economy and supply and demand condi- tions. They assign different quantity of resources to different products depending on expect
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