Unit - 1

Unit – 1
Nature & Scope of Economics
 Basis of economics
▪ Scarcity of resources and unlimited human wants.
▪ Make decisions: To use limited resources efficiently & maximize
satisfaction.
 Decision making
▪ Selecting one action from two or more alternative courses of action.
▪ Selecting one from various alternatives.
▪ Choice is due to scarcity of resources.
 Forward planning
▪ It means establishing plans for the future.
 Problems in decision making and forward planning

▪ Uncertainty about the future.

 Economics
▪ Economics examines how people use their scarce resources to
satisfy their unlimited wants.
 Central Problems of an Economy
▪ What to produce?
▪ How to produce? &
▪ For whom to produce?
 Nature of Economics
(Definitions of Economics)
→ There are four broad definitions of economics.
❖ Wealth definition
❖ Welfare definition
❖ Scarcity definition
❖ Growth definition
 (1) Wealth Definition
▪ Adam Smith (1723-1790), in his book, “An inquiry into the Nature
and Causes of the Wealth of Nations” defined economics as, “a
science which studies the nature and causes of wealth of nations”.
▪ According to the definition, the scope of Economics is limited to
earning and spending of wealth.
 (2) Welfare Definition
▪ Prof. Alfred Marshall (1842 – 1924) defined Economics in the
welfare context as follows: “Political economy or 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”.
 (3) Scarcity Definition
▪ Lionel Robbins defined Economics as follows: “Economics is a
science which studies human behaviour as a relationship between
ends and scarce means which have alternative uses”.
 (4) Growth Definition
▪ Prof. Paul. A. Samuelson, a Nobel Laureate defines Economics as,
“the study of how men and society choose, with or without the
use of money, to employ scarce productive resources which could
have alternative uses to produce various commodities overtime
and distribute them for consumption now and in future among
various people and groups of society”.
 Positive vs Normative Economics
▪ Positive Economics
It is an assertion about economic reality that can be supported
or rejected by reference to facts.
Positive science studies ‘what is’.
Positive science deals with things as they are.
✔ Eg: The Indian unemployment rate is 10.99 per cent.
✔ Eg: Price of onion is Rs. 60 per kg.
▪ Normative Economics
▪ It reflects an opinion.
▪ Normative science studies ‘What ought to be’.
▪ Normative science deals with the rightness or wrongness of a
phenomenon.
▪ It makes value judgement (good or bad; right or wrong).
✔ Eg: Indian unemployment rate should be lower.
 Scope of Economics for Engineers (Significance)

1. Utility and Indifference curve analysis

▪ Chief topics covered are:

Utility – Types
Law of diminishing marginal utility
Indifference curve analysis
Consumers’ budget line
2. Demand analysis and Demand forecasting

▪ Chief topics covered are:

Law of demand (↓P; ↑D) and demand determinants
Demand forecasting
Elasticity of demand
Consumer Surplus
3. Production & Supply analysis

▪ Chief topics covered are:

Production function
Law of diminishing returns, Law of returns to scale
Law of supply
Factors affecting supply
4. Cost & revenue analysis

▪ Chief topics covered are:

Cost concepts and classifications
Cost-output relationship (short-run and long-run)
Revenue concepts and curves
Break-even point (BEP)
5. Pricing decisions, policies and practices

▪ Chief topics covered are:

Price determination in various market forms
✔ Perfect Competition
✔ Monopoly
✔ Monopolistic competition
✔ Oligopoly

✔ Duopoly
6. Money and Banking

▪ Banks mobilize funds and channel them to productive uses.

▪ Chief topics covered are:
Money and its functions
Quantity theory of money
Supply of money
Banking – Central bank (RBI) and Commercial banks (functions)
7. National income

▪ National income is the total value a country's final output of all new
goods and services produced during a particular year.
▪ Chief topics covered are:
National income - concepts
Methods of calculating national income
Problems in calculating national income
8. Inflation and Deflation

▪ Inflation - A general increase in prices and fall in the purchasing

value of money.
▪ Deflation - A reduction in the general level of prices in an
economy.
▪ Chief topics covered are:
Inflation and deflation – causes and control measures
 Approaches to Economic Analysis

→ Classical economists analyzed economic problems through

consumption, production, exchange, distribution and public finance.
→ Modern economists analyzed economics through Micro and Macro
analysis.
→ Prof. Ragnar Frisch in 1933, introduced Micro and Macro analysis.
Micro Economics

▪ According to Prof. Boulding, Micro economics is, “the study of

particular firms, particular households, individual prices, wages,
incomes, individual industries, particular commodities”.
▪ The fields covered by micro economics are:
Theory of product pricing
Theory of factor pricing
▪ Therefore, micro economics is also known as ‘Price theory’.
Macro Economics

▪ According to Prof. Boulding, “Macro economics deals not with

individual quantities as such, but with the aggregates of these
quantities, not with individual incomes, but with national income; not
with individual prices but with the price level; not with individual
outputs but with the national output”.
▪ The areas covered by macro economics are: Theory of employment
and income, Theory of general price level, Theory of economic growth
(GDP).
 Economic terms

(a) Utility

▪ Utility is the want satisfying power of a commodity.

▪ It determines the demand for a commodity (↑U; ↑D)
(b) Wealth

▪ Goods are classified as Free goods and Economic goods.

▪ Free goods are those which can be obtained freely or without any price being
paid.
✔ Eg: Air, Sunshine etc.
▪ Economic goods are those which can be obtained only at a price.
✔ Eg: Car, Radio etc.
▪ Wealth refers only to economic goods.
▪ Goods which possess utility, which are scarce and which are transferable or
marketable can be described as wealth.
(c) Capital

▪ Chapman says capital is wealth which aids in the production.

▪ Capital is utilized for the erection of factory, buildings, purchasing
materials and tools.
▪ All capital is wealth, but all wealth is not capital.
(d) Value

▪ The term value is used in Economics as value in use and value in exchange.
▪ By value in use, we mean the use value of an article.
▪ Value in exchange means, the rate at which a given article can be exchanged
for other commodities.
▪ Eg: Water; Diamond
✔ Water has more value in use and less value in exchange.
✔ Diamond has less value in use and more value in exchange (due to scarcity).
 Economic Assumptions

(1) Psychological or Behavioural Assumptions

▪ Rational behavior is systematic and purposive whereas irrational

behavior is unpredictable and erratic.
▪ They refer to rational behavior of individuals (consumers and
producers).
▪ Another assumption is that, all markets are in equilibrium.
(2) Institutional Assumptions
▪ They relate to social, political and economic institutions.
▪ All economic theories have been developed on the assumption of a
capitalist economy (in which production and distribution are
privately owned).
▪ It assumes stable government.
▪ The government’s role is to enforce the “rule of the game” in the
market. The institutional assumptions are the basis of
micro-economic theories.
(3) Structural Assumptions
▪ These assumptions relate to the nature, physical structure or
topography of the economy and the state of technology.
▪ The structural assumptions are used in production functions of
various types.
Static economy
Dynamic economy
▪ Most economic theories are based on the assumption of a static
economy.
(4) Ceteris Paribus Assumption

▪ Another important assumption made in economics is the ceteris

paribus or other things being equal/constant.
▪ In order to consider the impact of one factor at a time, the other
factors are held constant.
✔ Eg: Law of demand D=f(P,Y,A).
✔ If all these factors are included, the Law of Demand would
become complex.
Thank You