Chapter 1
Introduction to Economics
Abstract
Economics plays a vital role in various parts of life. It helps in improving the standard
of living of the people and their welfare as well. There are many situations with
whom everybody encounters in daily life, economics helps us here, in these
circumstances. This chapter explains the introduction to economics in detail
including nature and the scope of subject. Different definitions of economics by
different school of thoughts are given, and discussed in detail. Methodology and
criteria along with types of economics are briefly explained.
Keywords: Economics, methodology, school of thought, economy
1.1. Nature and Scope of Economics
Recently economics is in every aspect of life. Everybody in the society wishes to be
prosperous and want to enhance his earning and have productive resources and want
to increase his business circle. All society members wish to get more incomes, and
want to have significant role in the market and other economic system. They desire
to boost up their standard of living and want to optimize the utility from consumption
of good and services, they want secure and prosperous future, in these circumstances
people want to increase their information of socio-economic problems and get benefit
from them. Other than these, society members want to respond the bad situations or
at least to properly respond the adverse circumstances. This indicates, their desire to
improve their financial conditions. For all this, proper know how of prevailing
economic trends is needed and such understandings can be established by formal and
informal techniques.
Major part of society learns informally in the society by their overtime practices as
they get undertake several life events. However, one want to develop career in these
various aspects, he must learn these aspects formally (Gopal et al. 2007). In this
regard, people should learn economics in proper way, and it will be possible by
pursuing a formal course structure. They will attain a suitable knowledge of these
issues. So, economics looks like to be boundless procession of new puzzles,
problems, and difficult dilemmas (Samuelson and Nordhaus 2000). In the economics,
we are interested in some basic question and core questions asked in the study of the
allocation issues are given below:
1) What goods and services should be produced? This necessitates a valuation
or grading from most valued to least precious items.
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2) How many entities of each good (or service) should be manufactured? As
everything that is produced, has an opportunity cost.
3) How should those items be manufactured? There are generally certain
methods to manufacture goods. Quantity of items to be manufactured can
have effect on the methods of production of goods and services.
4) When selected items should be manufactured? The time at which this
specific item should be available can impact its worth. Manufactures of any
seasonal goods must have their new apparatus available for selected season.
Economists, accountants and others use the idea of present value to adjust
the worth of these items or goods that would be required in coming time.
Oftenly, items manufactured or used in coming time are taken as low worth.
5) How should items produced be dispersed in the society? Communities
define their ways for sharing and dispersing products among the members.
Methods by which these items are dispersed, may modify incentives that
effect the thinking of consumers. The delivery of these items in the society
to its members may also effect the methods in which certain items are
valued.
1.2. Definition of Economics
It is not an easy job to properly define economics as it is not a static subject. Its
aspects alter overtime and expand as well. But, proper definition is also important
for the understanding of any subject. There are different definitions by different
school of thoughts and experts, some of them are discussed below.
Economics is a social science that is about production, distribution and consumption
of goods and services. The term economics is from ancient Greek word, oikonomia,
“management of household, administration” from oikos, “house” + nomos, “custom”
or “law”, so “rules of the house (hold)”. Recent economic models established out of
the broader field of political economy, are dependent on the usage of a mathematical
techniques, more alike with physical science. It can be said, economics defines, how
economies work and how economic agents act together, collectively. Analysis is
functional all over communities in; business venture, finance and public sector, even
in crime, education, family, health, law, politics, religion, social institutions, war, and
in every field of life. Its scope is widening overtime, and it has been described as the
imperialism of economics. The introduction of further areas exposes the inner side
of economics in recent era. It shows that it could be employed for upgrading the
livelihood of society and its prosperity.
1.2.1. Economics: Science of Wealth
Adam Smith gave the first formal definition of economics, according to Adam,
economics is the science of wealth, and considered it as a science that focus on the
production and consumption of wealth (Smith and Nicholson 1887). However, Mill
(1973) describes economics as the science that can have practical implication of the
production and the distribution of money. Say (1851) defined it as the science that
studies about the wealth. In the classical economics, it was limited to wealth. If the
2. Demand Analysis 3
idea of wealth is defined in wider aspect to incorporate limited availability of items
being used to attain utility, in this way it would become more plausible. But classical
economists did not incorporate other indicators, and it is why this definition becomes
quite narrow. This inadequate definition of economics concentrating on wealth,
appears to limit the scope of economics.
1.2.2. Economics: Science of Material Welfare
Just as the previous economist, Marshall thought this subject is vastly associated with
politics but he put attentions towards political economy. After marginalizing the prior
work on the subject that take economics as subject of wealth, it was mandatory to
give a more plausible definition. Marshall (2009) focused on material welfare rather
than wealth and money. Wealth serve as a source to achieve ends and it is not end in
itself, and he considered, “End is the human welfare.” He defined economics as,
political economy or economics is a study of mankind in the ordinary business of
life. It studies individual and social action which is very close and interlinked with
achievement and use of the material that is basics of well beings. On one aspect,
economics is a subject of wealth, and on the other hand, it is a part of man’s own
study (Alfred 1920). According to this definition, wealth act as agent for the human
welfare. According to Cannan (1903) material welfare of human beings in most
important factor in the economics. A group of economists like Marshall, Cannan,
Pigou, etc. put the economic or material welfare of the people at the center of study,
however money have also an important role. These descriptions of economics are
also subject to criticism. Robbins (1932) criticized welfare definition as it
incorporates physical goods only and it missed the intangible goods. Firstly,
according to him, in reality, the difference among material and non-material things
are completely uncertain. Secondly, while the welfare method focused upon
prosperity, still it considered non-material definition of productivity. Definition by
the neo-classical economist faced other criticisms as well.
1.2.3. Robbins Definition
He defined economics as science of limited availability. According to him,
“economics is the science that studies human behavior as a relationship between ends
and scarce means which have alternative uses” (Robbins 1932). This definition
focused on three core sectors; ends (human wants), rare means, and substitutes.
Human desires are limitless as several wants are fulfilled and others become of
significant important. This is continuous process, it is why consumers rank their
desires to fulfil the imperative needs first.
Contrasting the infinite desires, limited resources are available but their supply is
scarce. It is why, items at hand should be concurrent with the unending desires. This
is an important issue for the economic science. As limited means are also short in
supply and such limited resources might be employed for other uses. The scarcity
definition explained the scope of economics and it has widened the scope of
economics. There is no misunderstanding about the range of economics. Any
problem marked by scarceness of resources and multiplicity of ends, becomes in this
way an economic problem, and as such, a legitimate part of the science of economics.
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Samuelson and Nordhaus (1998) have also defined economics and focused on
economics, scarcity and efficiency. According to them, “Economics is the about how
societies employ limited resources to manufacture precious goods and services and
distribute them among different people.” This definition focused on two indicators;
goods are scarce, and society should use resources efficiently. So, economics is
subject of significant importance subject due to fact and desire of scarcity.
1.3. Economics Schools of Thought
Generally, there are four schools of thought in economics; classical, neo-classical,
new classical and Keynesian (Rothbard 1995). These are explained below.
1.3.1. Classical School
This is considered as the 1st school of economic thought, and it is associated with the
18th century well known economist Adam Smith, and others like Robert Malthus and
David Ricardo. The key idea of founders of this ideology was, markets performs at
optimal level when they are free to move in any direction and state has not much
involvement (Ricardo 1965). This idea is very close to laissez-faire and it firmly trust
on the efficiency of free markets for economic development. Classical economist
said that markets should be left alone to perform based on market force, i.e., demand
and supply, as the price mechanism works as strong 'invisible hand' to allocate
resources to where they are optimally used. In terms of explaining value, these were
quantified based on scarcity and costs of production. In terms of the macro economy,
it is considered that the economy would always return to the full employment level
of real production through an automatic self-adjustment mechanism. It is widely
considered that the Classical period remained until 1870.
1.3.2. Neo-Classical
It is a different from the prior ideology and from this school modern economic theory
evolved. Its techniques are clearly scientific, with rules and hypothesis, and tried to
derive basic principles regarding the behaviour of firms and customers. For example,
neo-classical economics considers that economic agents are rational in their
behaviour, and consumers want to optimize utility and firms seek to optimize profits.
The contrasting objectives of optimizing utility and profits established the foundation
of demand and supply theory. Significant contribution of neo-classical economics
was emphasis on the marginal values, such as marginal cost and marginal utility.
1.3.3. New Classical
It is associated with the work of Lucas (1988). This is about the macroeconomics and
it dates from the 1970s. It is an attempt to describe macro-economic issues by
employing micro-economic principles, like rational behaviour, and rational
expectations.
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1.3.4. Keynesian School
It widely follows the main macro-economic ideas of British economist John Maynard
Keynes. He is considered as one the most significant economist of the 20th century,
despite falling out of favour during the 1970s and 1980s, following the rise of new
classical economics (Moggridge 1976). Keynesian believe that if left alone, free
markets will obviously move towards a full employment equilibrium. This approach
is regarding self-interest that governs micro-economic behaviour. And, it does not
always lead to LR macro-economic development or SR macro-economic stability
(Greenwald and Stiglitz 1987). It is basically a theory of AD, and can be explained
through macro-economic policy in a better way.
1.4. Positive and Normative Economics
Different stakeholders use economics in different ways. For example, a practicing
economist or a policy practitioner employs economic methods and techniques to
draw policy proposals and econometric analysis. Often, these individuals use the
economic methods with suitable knowledge and precise prediction of economic
indicators. Economics is oftenly used for decision making and precise predictions.
So, positive statements are about facts. These are about what the reality is?
Meticulously saying, economics is firmly positive in character and is related with
only positive statements. As positive statements are regarding the evidences, any
discrepancy over these account or study can be handled correctly by employing the
evidences and their examination. This type of economics is regarding the real life
situations. Implications are derived and disputed that are based on these facts.
On the other hand, second type is based on the normative statements. These
statements discuss, what ought to be? These are not related with reality of life but
concerned with, how things ought to function. Contrast to positive, normative
economics cannot be challenged based on fact. For example, if a political leader
announces his party’s vision in election that the unemployment rate should be
brought down to 2%, this is not based on any calculation but it is just a future goal
announced by a party. After coming to power, policy maker must tune the system to
realize this target. Despite dissimilarities between positive and normative economics,
it is a science having both positive and normative features because economics is a
social science.
1.5. Methodology of Economics
Economics is similar to science and it is taken as a social science. It is concerned
with the human conduct. It is why some of the economists says that it cannot be as
exact a science as the natural sciences; like physics, chemistry etc. Basic sciences
can be studied in the laboratory conditions, where indicators can be simply measured
during examination. Though, social sciences like economics cannot be simply
controlled. With the passage of time, this subject has attained development to
establish its standard procedures and it has proved itself efficient, and these
techniques can be employed for well-organized study of analysis. Forecasting can be
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made with suitable precision that produce a sense of confidence and faith. There are
two widely used approaches in the economics.
1.5.1. The Deductive Method
This technique is about moving from general to specific. Several theories or
assumptions about human behavior are taken to be true. With the aid of logical
rationale and analysis, cause and effect relationship are established among the
selected indicators. The following steps are undertaken in the deductive method.
At first, issue is raised and it is suitably specified for the study. Hypothesis and
suitable assumptions are made as these are viable for any economic analysis. When
assumptions have been formulated, then hypotheses are developed and these should
be clearly framed. This step requires likely correlation among the several economic
indicators. Hypotheses are then tested with the help of various tools like
mathematical, economics and econometrics approaches. With the help of above
analysis, proper interpretations for decision making are made.
1.5.2. The Inductive Method
Though this technique has significant points of merit to depend upon, but this this
procedure has some flaws. Classical economists liked this method and it is based on
going from specific to general. Here the appeal is fact, rather than reasoning and an
attempt is made to arrive at conclusions from the known facts of actual life
(McConnell and Brue, 2005). This technique involves following steps:
• Identification of problem
• Data collection regarding the problem under study
• Classification and analyzing data by suitable methods
• Results are drawn from the statistical examination and these are shown in
the way of economic generalization.
1.6. Micro vs. Micro Economics
Distribution of limited available resources to attain optimal utility is called
economics, it is divided into two parts i.e. micro and macro,
1.6.1. Micro Economics
It is about discrete or solo consumer, producer, firm, industry or market. It is also
called price or income theory. It discusses the ingredients of total production. In
accompanying investigation, micro economic method is on micro basis, oftenly
hypothesis of full employment for entire economy is maintained.
[Link]. Importance of Micro Economics
Micro Economics has both theoretical and applied implications. From the theoretical
aspect, it describes the role of free intense economics. It explains, in which way
2. Demand Analysis 7
consumer and producer do decision making regarding millions of products and
services for consumption and production. It also discusses how items are dispersed.
It elaborates, how to find the prices of several items. For practical worth, micro
economics supports in establishing economic policies measured to promote
efficiency in production and welfare of the masses. Its theory helps in understanding,
what would be a hopelessly complicated confusion of billions of facts by
constructing simplified model of behaviors.
[Link]. Limitation of Micro Analysis
a) It misses the idea of complete functioning of the economy.
b) It considers fall employment which is not common event, it is therefore
an unrealistic assumption.
1.6.2. Macro Economics
It assesses the economy as whole (i.e. how the activities of all the entities and firms
in the economy interrelate to produce a particular level of economic performance).
[Link]. Limitation of Macro Analysis
a) It ignores the micro level units like individuals
b) Macro quantifications over looks individuals difference
c) While speaking about the aggregate it is also essential to remember the
nature compound and structure of the components.
1.7. Is Economics a Dismal Science?
It is a derogatory alternative name for economics coined by the Victorian historian
Thomas Carlyle in the 19th century. The term drew a contrast with the use of the
phrase "gay science" to refer to song and verse writing. The phrase "the dismal
science" first occurs in Thomas Carlyle (1853) in favor of reintroducing slavery for
regulating the labor market in the West Indies. According to him, it was dismal in
supply and demand, and declining the duty of human governors to that of letting men
alone. It is not oftenly described correctly that Carlyle gave economics the as a
response to the late 18th century publications of Thomas Malthus. He poorly
forecasted that starvation would result as projected population growth that would be
beyond the rate of increase in the food supply. Carlyle's view was attacked by John
Stuart Mill as making a virtue of toil itself, stunting the development of the weak,
and committing the error which he finds among human beings to an original
difference of nature (Persky 1990).
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