Meaning and definitions of Economics

Economics refers to that science which studies human activities relating to wealth.
Economics is called ‘Arthashastra’ (अर्थशास्त्र) in Hindi that is made up of two words-
Artha = wealth and Shastra = scientific study. That is, economics is that science, in which
the money related activities of man are studied.

The word ECONOMICS of English language is derived from 2 words of Greek language i.e
.OIKOS (Household) and NEMEIN (management). thus, It means ‘management of
household’.

Definition of Economics

Economics is a developing branch of knowledge. In different periods, different

economists have given different definitions from time to time. We can divide the
definitions of Economics into the following parts –

1- Wealth Definition

Adam Smith, the father of modern economics,

gave the following definition of economics in his book ‘An enquiry into the nature and
causes of wealth of nation‘ published in 1776 defined it as-“Economics is an enquiry into
the nature and causes of the wealth of nations.”

Criticism: Wealth definition of economics is faulty. According to this definition, only

money (all kinds of material things) is studied in economics instead of human welfare.
Hence Carlyle, Ruskin, Maurice etc. Economists have condemned and criticized it by
calling it a DISMAL SCIENCE. or a “Science of Bread and Butter”.

2- Material Welfare Definition

Dr. Marshall has given the following definition of economics in his book ‘Principle of
Economics‘ published in 1890-“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 use of material goods requisites of wellbeing.”
Criticism: Lord Robbins has criticized this definition for many reasons. For example

1) Economics is the study of the economic activities of all human beings. Whether he
lives in society or in solitude

2) Economics studies all economics activities which are concerned with scarce mean,
whether material or non-material.

3) Economics is the study of all types of economic activities whether they increase
welfare or not.

3- Scarcity/Rarity definition

Lord Robbins in his book “AN ESSAY ON THE NATURE AND SIGNIGICANCE OF ECONOMICS
SCIENCE” published in 1932 has given rarity definition of the economics.

According to Robbins – “Economics is a science that studies human behaviour as a

relationship between ends and scarce means which have alternative uses.”

Criticism: Many Economists like Durbin, Fraser, Ely have criticized this definition, saying
that Robbins has reduced economics to simply a theory of value determination or a
science of choice-making. It has nothing to do with the welfare of man and solving his
economic problems. It is an impractical, complex and static definition of economics.

4- Growth Oriented definition

According to modern economists such as Nobel Prize winning economist

Professor Samuelson, Peterson, Ferguson etc. – “Economics is a science that study those
activities of man which he undertakes to maximise his satisfaction by making proper use
of his scares means”
 Published
Name Of Book In Author Definiton

An Enquiry into the nature and causes of wealth of Adam

nation 1776 Smith Wealth Definiton

Dr. Material Welfare

Principles of Economics 1890 Marshall Definition

An essay on the nature and significance of economic Scarcity Related

science 1932 Robbins Definition

Components of Economics

Ragnar Frisch, the famous Norwegian economist and the first Nobel Prize winner
(1969) in economics, in 1933 divided economics into two parts – microeconomics and
macroeconomics.

A) Microeconomics

In English language individual is called MICRO. This word of the English language
is derived from the Greek word (MIKROS), which means-small. In microeconomics, the
economic activities of only one economic unit are studied. Such as the study of the
income of a household or the study of the production of a firm. According to Professor
Boulding “Microeconomics is the study of particular firm, particular household, individual
price, wage, income, industry and particular commodity.”

B) Macroeconomics

In the English language, the population is called MACRO. This word of the English
language is derived from the Greek language word (MAKROS). which means big. In
macroeconomics, economic activities and economic problems are studied at the level of
the economy as a whole. Subjects related to National income and employment and price
level are principal components of macroeconomics.

Scope of Micro Economics/Subject matter of Micro Economics

The field or subject matter of microeconomics is divided into four parts-

1-Theory of Demand

2-Theory of Production

3-Theory of Pricing

4-Theory of factor pricing

1. Theory of Demand–

Theory relating consumer’s demand and his maximum satisfaction is called theory of
Demand. It studies how a consumer distributes his given income on different goods at
the prevailing market price.

2- Theory of production-

Microeconomics also studies theory of production. A firm produces goods and services
by aggregating various factors like land, labour, capital etc. Theory of production studies
production function and laws of production.

3. Theory of Pricing/The principle of Price determination-

Microeconomics also studies theory of price determination. Produced goods are bought
and sold under different market conditions. The demand and supply conditions are also
analysed in this theory.

4- Theory of factor price

Four factors are needed to produce any commodity-Land, Labour, Capital and
Entrepreneurs. The study of dividing the income received by a firm from selling its
output into these four factors (respectively, rent, wages, interest and profit) is also
studied under this factor price theory. It is also called the principle of factor or factor
income.

Importance of the study of microeconomics

The study of microeconomics has the following advantages.

1- Operation of an Economy Microeconomics throws light on the functioning of an

economy. Microeconomics has many uses. the greatest of these is the understanding of
the operation of the economy.

2 Prediction- Theories of microeconomics may be formed on the basis of predictions. But

these predictions are based on certain conditions. For example, if the demand for a
commodity increase, its prices are likely to rise.

3. Economic Policies– Microeconomics helps in the formulation of economic policies.

Price policy is a tool that helps in this task. By its uses we can analyse government
policies which affect the economy.

4- Economic welfare- Knowledge regarding the state of economic welfare can be

obtained through the study of microeconomics. Economic welfare is the main subject of
normative economics. Microeconomics offers suggestion as how economic welfare can
be achieved.

5- Managerial decision- Business firms while taking a managerial decision make use of
microeconomics. In this matter policies formed by analysing cost of production of a
commodity and its demand are of great significance.

6- helpful in international trade- study of microeconomics help in understanding

international trade problem like dis-equilibrium in balance of payment foreign exchange
rate etc.

Nature of Economics

The nature of economics can be divided into two parts. One science as two arts.

A-Economics as a science
According to Professor Seligman, science can be of two types – 1- social science,2-
natural science. Economics is a social science, as it relates to humans. Whereas physics,
chemistry etc. are natural sciences.

The following are the reasons for considering economics as a social science:

1- Systemic study- As a social science, in economics, the chronological study of human

behaviour is done.

2- Scientific laws- The laws of economics such as the law of demand, the law of supply,
etc. are scientific laws. This rules correlate causes and results between various variables.

3. Accuracy of rules each science checks accuracy of its terms. In economics also, the
truth of various rules can be checked.

Economics is a real (POSITIVE) Science and NORMATIVE science.

Economics as a real science-Real science is the science in which the true and real
condition of a subject is studied. As a real science, statements of economics are real
statements. Actual statements are those statements from which it is known that- What
is? What was it and what will happen under special circumstances?

Economics as normative science– Famous economists such as Marshall, Pigu considered

economics as normative science. Normative science is related to ‘What ought to be?’

B-Economics as an Art

The practical application of knowledge for the attainment of a certain purpose is called
art. In economics to achieve different objectives, means are used to practice the
principles of Scripture.

In the end we can say that economics is both science and art.” Economics is a
positive science dealing with Economic facts and an art finding out
the ways and means by which the desired and can be reached.”