General Principles Of

Economics
(FY.BA.LLB)

Module 01:
Introduction to
Economics
Notes By:Sayyed Bushra Asif
Student Of SY.BA.LLB
A.K.K. NEW LAW ACADEMY.
 MODULE 01. INTROUCTION TO ECONOMICS
Meaning And Definition of Economics:
Meaning of Economics:

The word ‘Economics” originates from the greek work ‘Oikonomikos’

which can divided into two parts.

Oikonomikos

Oikos Nomos

(Home) (Management)

Thus, Economics means ‘Home Management’.

The head of the family faces the problems of the managing the unlimited
wants of the family members within the limited income of the family.
Infact the same is true for a society also.vIf we consider the whole
society as a ‘family’ then the society also faces the problem of tackling
unlimited wants of the members of the society with the limited
resources available in that society. Thus, Economics means the study of
the way in which mankind organizes itself to tackle the basic problems
of the scarcity. All societies have more wants than resources. Hence, a
system must be devised to allocate these resources between competing
ends.

Definition of Economics:

Adam Smith’s Wealth Oriented Definition of Economics:

Adam Smith proposed the definition of Economics as the ‘study of wealth’ in

his famous book, “The Wealth of Nations”. The Scottish economist said
that Economics is a science of wealth that studies the process of
production, consumption, and accumulation of wealth.

Alfred Marshall’s Material Welfare Oriented Definition of Economics:

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According to him ‘Economics is a study of man in the orinary business f
life.It enquires how he gets his income and how he uses it. Thus, it is on
the one side,the study of wealth and on the other and more important
side, a part of the study of man’.

Lionel Robbins Scarcity Oriented Definition:

He says ‘ Econmics is a science which studies human behavior as a

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

Samuelson’s Growth Oriented Definition

Professor Samuelson writes, ‘ Economics is the study of people and

society end up choosing without the use of money, to employ scarce
productive resource that could have alternative uses to produce various
commodities over time and distributing them for consumption, now or
in the future among various persons or groups in the society’.

Scope and Importance of Economics:

Economics as a Science:
Science is a systematic study of knowledge and fact which develops the
correlation-ship between cause and effect. Science is not only the
collection of facts, according to Prof. Poincare, in reality, all the facts
must be systematically collected, classified and analyzed.

There are following characteristics of any science subject, such as;

(i) It is based on systematic study of knowledge or facts;

(ii) It develops correlation-ship between cause and effect;

(iii) All the laws are universally accepted

(iv) All the laws are tested and based on experiments;

(v) It can make future predictions;

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(vi) It has a scale of measurement.

On the basis of all these characteristics, Prof. Robbins, Prof Jordon, Prof.
Robertson etc. claimed economics as one of the subject of science like
physics, chemistry etc. According to all these economists, ‘economics’
has also several characteristics similar to other science subjects.

(i) Economics is also a systematic study of knowledge and facts. All the
theories and facts related with both micro and macro economics are
systematically collected, classified and analyzed.

(ii) Economics deals with the correlation-ship between cause and effect.
For example, supply is a positive function of price, i.e., change in price is
cause but (iii) All the laws in economics are also universally accepted,
like, law of demand, law of supply, law of diminishing marginal utility
etc.

(iv) Theories and laws of economics are based on experiments, like,

mixed economy to is an experimental outcome between capitalist and
socialist economies.

(v) Economics has a scale of measurement. According to Prof. Marshall,

‘money’ is used as the measuring rod in economics. However, according
to Prof. A.K. Sen, Human Development Index (HDI) is used to measure
economic development of a country.
Some economists like Marshall do not regard economics as a pure
science.The main reasons for this are as under:
1)The laws of economics are not universal:The applicability of economic
laws is limited by the differences in physical,social and cultural factors
between different countries. The law of economics are based on bites
and tastes of the people.These laws differ from different
countries.Therefore,The laws of economics are not so universal.
2)The laws of economics are not so exact:The laws of economics are not
so exact as they are conditional and with the phrase,other things
remaining the same.But laws of pure sciences are exactly applicable
under similaw conditions. 3)No possibility of laboratory

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experiments:In economics, experimentation is not possible as the object
of its study of man.The conditions around the man are not fully
controllable.The data available to economicsts from the real world is not
controllable.Hence,Economists is not a pure science.
4)Conflicting views:Mrs. Wooten has remarked, “Wherever six
economists are gathered there are seven opinions”.The lack of
unanimity of opinion among economists proves that it is not a science of
exactness.
5)Difficulties in making predictions:The difficulty in making correct
predictions in economics due to its inexact laws.Therefore, economics
cannot be considered as a pure science.

There is the difference in opinion among economists regarding

economics as a pure science or not.But it can be considered as a Social
Science.

Economics as the Queen of Social Science

 It connected with the activities, i.e : earning and spending money.
 As compare to other social sciences Economics is more scientific
because money is used to measure economic motives/activities.
 Mathematical tools are used to built up economic models.
 Economics has infulences every aspect of human behavior moral,
social and political.It underlines all branches of social sciences.

SUBJECT-MATTER OF ECONOMICS
The modern economists have divided the subject-matter of economics
into two major branches, viz., Micro-economics and Macro-economics.
Economic problems can be analyzed or studied in two ways-

(i) at an individual level, and

(ii) at aggregate level.

The method of studying at an individual level is known as Micro-

economics and that of studying at an aggregate level or collective level is

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known as Macro Economics. In 1933, for the first time Prof. Ragnar
Frisch used the terms Micro and Macro. Since then, the use of these
terms has increased considerably.

An economic system may be looked at as a whole or in terms of its

innumerable decision making units, producing units, individual factors
of production and individual industries. When we analyze the behavior
of any particular decision making unit such as a firm, an industry, a
consumer, it constitutes Micro economics. While an analysis of the
problems of the economy as a whole is Macro-economic study.

Micro-economics is also called Price Theory and Macro-economics is

called Income Theory. The former explains the composition or allocation
of total production-why some things are produced more than the others
and the latter explains the level of total production and why the level
rises and falls.

Economics as an Art:
J.M Keynes says, ‘An art is a system of rule for the attainment of a given
end. Thus, art is the practical application of knowledge for achieving
definite ends. Luigi Cossa, an Italian economist says, ‘A science teaches
us to ‘know’ an art teaches us to ‘do’. Art is the action of purpose. It lays
down precepts or specific solutions for specific problems. Marshall,
Pigou and J.S Mill are reagard economics as an Art.

Economics is regarded as an art due to the following reasons:

1) Solution of the problem: Prof. Pigou remarks ‘Economics is not only
light-giving but also fruit-giving.’ Economics helps us to utilise the scare
resources in the best possible way. It solves the fundamental problem of
choice. Thus, Economics an an art is the practical application of
knowledge.
2)Modern trends:Modern economists are more concerned with solving
the economic problems.They spend a lot of their time to find solution to
the problems of rising prices,depression,unemployment,economic
developmeny,etc.Thus, we can regard economics as an art.Economics as

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an art, tries to promite the welfare of human beings.
3)Verification of economic laws:Verification of economic laws is possible
only if economics is an art.The reason is that art is the practical
application of knowledge.The reality of economical laws can be judged
only if economics is studies as an art.

Prof.Cossa says, ‘Science requires art,art requires science,each being

complentary to the other’.Due to this,economics is considered as a
science as well as an art.Hence,P.A Samuelson in his book ‘Economics”
says ‘Economics is the oldest of the arts,the newest of the science,indeed
the queen of social sciences.

Branches of Economics:

Welfare
Economics

Developmental Micro-
Economics Economics

Branches
of
Economics

Normative Macro-
Economics Economics

Positive
Economics

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Microeconomics:is the study of decisions made by people and businesses
regarding the allocation of resources and prices of goods and services.
The government decides the regulation for taxes. Microeconomics
focuses on the supply that determines the price level of the economy.It
uses the bottom-up strategy to analyse the economy. In other words,
microeconomics tries to understand human’s choices and allocation of
resources. It does not decide what are the changes taking place in the
market, instead, it explains why there are changes happening in the
market.The key role of microeconomics is to examine how a company
could maximise its production and capacity, so that it could lower the
prices and compete in its industry. A lot of microeconomics information
can be obtained from the financial statements.The key factors of
microeconomics are as follows:

 Demand, supply, and equilibrium

 Production theory
 Costs of production
 Labour economics

Examples: Individual demand, and price of a product.

Macroeconomics: is a branch of economics that depicts a substantial

picture. It scrutinises itself with the economy at a massive scale, and
several issues of an economy are considered. The issues confronted by
an economy and the headway that it makes are measured and
apprehended as a part and parcel of macroeconomics.Macroeconomics
studies the association between various countries regarding how the
policies of one nation have an upshot on the other. It circumscribes
within its scope, analysing the success and failure of the government
strategies.

In macroeconomics, we normally survey the association of the nation’s

total manufacture and the degree of employment with certain features
like cost prices, wage rates, rates of interest, profits, etc., by
concentrating on a single imaginary good and what happens to it.The
important concepts covered under macroeconomics are as follows:
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  Capitalist nation
 Investment expenditure
 Revenue

Examples: Aggregate demand, and national income.

Difference between Microeconomics and Macroeconomics:

Basis of Microeconomics Macroeconomics
Comparison
Meaning The branch of economics The branch of
that studies the behavior economics that studies
of an individual the behavior of the
consumer, firm, family is whole economy, (both
known as national and
Microeconomics. international) is
known as
Macroeconomics.
Deals with Individual economic Aggregate economic
variables variables
Business Applied to operational or Environment and
Application internal issues external issues
Tools Demand and Supply Aggregate Demand
and Aggregate Supply
Assumption It assumes that all macro- It assumes that all
economic variables are micro-economic
constant. variables are constant.
Concerned with Theory of Product Theory of National
Pricing, Theory of Factor Income, Aggregate
Pricing, Theory of Consumption, Theory
Economic Welfare. of General Price Level,
Economic Growth.
Scope Covers various issues like Covers various issues
demand, supply, product like, national income,
pricing, factor pricing, general price level,
production, consumption, distribution,
economic welfare, etc. employment, money
etc.
Importance Helpful in determining Maintains stability in
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 the prices of a product the general price level
along with the prices of and resolves the major
factors of production problems of the
(land, labor, capital, economy like inflation,
entrepreneur etc.) within deflation, reflation,
the economy. unemployment and
poverty as a whole.
Limitations It is based on unrealistic It has been analyzed
assumptions, i.e. In that 'Fallacy of
microeconomics it is Composition' involves,
assumed that there is a which sometimes
full employment in the doesn't proves true
society which is not at all because it is possible
possible. that what is true for
aggregate may not be
true for individuals
too.

Positive and Normative Economics:

Positive Economics: explores and explains a study of cause and effect
relationships between economic variables. A positive economics answer
the questions: what is? In other words, it studies the facts as they are not
as they ought to be. It gives knowledge for the shake of knowledge.
Positive economics is a stream of economics that focuses on the
description, quantification, and explanation of economic developments,
expectations, and associated phenomena. It relies on objective data
analysis, relevant facts, and associated figures. It attempts to establish
any cause-and-effect relationships or behavioral associations that can
help ascertain and test the development of economics theories.Positive
economics is objective and fact-based where the statements are precise,
descriptive, and clearly measurable. These statements can be measured
against tangible evidence or historical instances. There are no instances
of approval-disapproval in positive economics.

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Normative economics: provides the roadmap for the betterment of
human life. Neo-classical economists challenge the view that economics
is a positive science. Normative economics studies the facts, not as they
but as they ought to be. Normative economics focuses on the ideological,
opinion-oriented, prescriptive, value judgments, and “what should be”
statements aimed toward economic development, investment projects,
and scenarios. An example of a normative economic statement is: “The
government should provide basic healthcare to all citizens.” As you can
deduce from this statement, it is value-based, rooted in personal
perspective, and satisfies the requirement of what “should” be.

Development economics: is a branch of economics that deals with the

improvement of the economies of developing countries. The discipline
aims at establishing strategies that apply to different developing
countries depending on their unique social, political, and economic
factors. Development economics also explores the unique challenges
that face developing nations thus helps in the analysis of the
opportunities available in these nations and how they can be applied.
Development economics makes use of economic theory, econometric
methods, political science, and demographics in its approaches.

Welfare economics:forms an important part of microeconomics that

analyses the impact of resource allocation and economic policies and
actions on the well-being of people. It studies the structure of
the economy and the markets in connection with the people and society.
In essence, it focuses on how various economic scenarios contribute to
social welfare and how the contribution varies.

Interrelationship of Economics with Political

Science,Management and Governance:
Interrelationship of Economics with Political Science:
 Political Science is the science of political relations,political
interactions and political institutions.Economics is the science of

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 money,wealth,material resources,economic relations and
economic institutions.
 Both are social sciences.Both are related and interdependent
disciplines.Each affects the other.Each borrows as well lends
information,data and knowledge to the other.

Contribution of Political Science to Economics:

1)Stable Government is a condition of Economic Development:The
nature scope and progress of economic development depend upon
the stability of government.Instable government weakness the
economic system.
2)Politics determines Economic Goals:The Government of a State i.e
The political systemselects and define economic goals which are to be
secured fot the people.All economic planning is done by the
government of the State.Political leaders determine economic goals
and policy and the economic experts help them.
3)Political Ideology determine the Economic System:The political
ideology of the power-holders always conditions the economic
system.the economic system has to work with in the environment
generated by political relations.Economics has to closely follow
political relations,goals and policies which are studied by Political
Science.
4)Budget-the back bone of economy is a Political Instrument:Budget
always determines the economic policy and economic health of the
State.Budget is prepared by the government.Budget-making of the
State and budget passing are political exercises and these are the
determinants of the economy of a State.Economics is guided by
Politics and Economics always takes help of Political Science for
securing right economic policies and goals.

Thus,Political Science and Economics are two highly and closely

related interdependent social sciences.The two cannot be
seprated.Their boundaries may overlap and cross.

Interrelationship of Economics With Management:

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A close interrelationship between management and economics had
led to the development of managerial economics. Economic analysis is
required for various concepts such as demand, profit, cost, and
competition. In this way, managerial economics is considered as
economics applied to “problems of choice’’ or alternatives and
allocation of scarce resources by the firms.Managerial economics is a
discipline that combines economic theory with managerial practice. It
helps in covering the gap between the problems of logic and the
problems of policy. The subject offers powerful tools and techniques
for managerial policy making.
To quote Mansfield, “Managerial economics is concerned with the
application of economic concepts and economic analysis to the
problems of formulating rational managerial decisions.Spencer and
Siegelman have defined the subject as “the integration of economic
theory with business practice for the purpose of facilitating decision
making and forward planning by management.”
Microeconomics studies the actions of individual consumers and
firms; managerial economics is an applied specialty of this branch.
Macroeconomics deals with the performance, structure, and behavior
of an economy as a whole. Managerial economics applies
microeconomic theories and techniques to management decisions. It
is more limited in scope as compared to microeconomics.
Macroeconomists study aggregate indicators such as GDP,
unemployment rates to understand the functions of the whole
economy.Microeconomics and managerial economics both encourage
the use of quantitative methods to analyze economic data. Businesses
have finite human and financial resources; managerial economic
principles can aid management decisions in allocating these
resources efficiently. Macroeconomics models and their estimates are
used by the government to assist in the development of economic
policy.

Interrelationship of Economics with Governance:

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Economic transformation can have a strong disruptive effect on
political governance – giving rise, for example, to interest groups that
push for accountable leaders and effective institutions. As countries
get richer, more effective institutions also become more affordable.
Over time, economic transformation can therefore advance core
governance objectives.But this is easier said than done. Economic
development is an inherently political process that challenges vested
interests. Often the surest ways for elites to hold onto power and
profit aren’t in step with measures to spur investment, create jobs
and foster growth. Shrewd power politics can be bad economics.

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