What is Scope of

economics? Economics

Assumptions Nature of
in Economics Economics
What is Economics?
WHAT COMES TO YOUR MIND WHEN YOU HEAR?
Interactive Class Atmosphere
Words that best describe economics:
1. P_o_u_ _i_o_
2. _ _c_an_ _
3. C_ _su_p_io_
4. _ _o_o_i_ S_s_e_s
5. _ _a_ci_ _
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Economics is the science that deals with production,
exchange and consumption of various commodities in
economic systems. It shows how scarce resources can be
used to increase wealth and human welfare. The central
focus of economics is on the scarcity of resources and
choices among their alternative uses.
Meaning of Economics
The term “Economics” owes its origin to the Greek
word “Oikonomia”, which can be divided into two
parts: oikos means home and nomos means
management.
Stressing the important points

Thus, in earlier times, economics

was referred to as home
management where the head of a
family managed the needs of family
members from his limited income.
• Till the 19th century, Economics
was known as “Political Economy.”
The book named “An Inquiry into
the Nature and Causes of the
Wealth of Nations” (1776) usually
abbreviated as ‘The Wealth of
Nations’, by Adam Smith is
considered as the first modern work
of Economics.
Stressing the important points
To stimulate our discussion, we relate to current issues!!!
Economics Definition
Defining economics has always been a controversial
issue since time immemorial. Definition of economics by
Wealth Definition of Economics
different economists have different viewpoints. Some Welfare Definition of Economics
economists had a viewpoint that economics deals with
Scarcity Definition of Economics
problems, such as inflation and unemployment while
others believed that economics is a study of money. Growth Definition of Economics
Therefore, a simple definition of economics is defined
by taking four definition.
Wealth Definition of Economics
This is a classical definition of
economics by Adam Smith, who is
also considered as the father of
modern economics.
 Economics is the study of
the nature and causes of
complex nations’ wealth or simply
as the study of wealth.
Adam Smith
Key Features of Wealth
Economics Definition
• The main objective of Economics is to
gain maximum wealth as possible;
• The core of economic activity are
production, distribution and
consumption;
• It deals with the causes of the creation
of wealth in an economy;
• The term wealth used in this
definition referred to material wealth.
Key features of Welfare
Economics Definition
• It defines Economics as the study of
activities related to a human being and
their material welfare.
• Marshall clarified that Economics is
related to incomes of individuals and
its uses for creating material welfare.
• Collectively, incomes of a group of
individuals form the wealth of a nation
and ultimate goal is to increase
welfare of individual by their routine
activities.
Welfare Definition of Economics

It is a neo-classical definition of
economics by Alfred Marshall. It is the
study of mankind in the ordinary
business of life. It enquires how he
gets his income and how he uses it. In
one view, it is a study of wealth and on
other hand it is part of study of man.
Alfred Marshall
Key features of Scarcity Economics
Definition
• It recognized that Economics is a science deal with
the economic behaviors of a human being.
• It also focuses on optimum utilization of scarce
resources.
• It provides three basic features of human existence,
which are unlimited wants, limited resources, and
alternative uses of limited resources
• There is a need for efficient use of scarce resources,
and the primary objective of Economics is to ensure
efficiency in the use of resources with a purpose to
satisfy human wants.
Scarcity Definition of Economics

It is a pre-Keynesian definition of economics

by Robbins (1932) in his book “Essays on the
Nature and Significance of the Economic
Science”.

Economics is a science which studies human

behavior as a relationship between ends and
scarce means which have alternative uses.
Lionel Charles Robbins
Paul Samuelson
Growth Definition of Economics
This is the modern
perspective definition of
economics by Samuelson. He
provided the growth-oriented
definition of economics.
Paul Samuelson

Economics is the study of how man and

society choose with or without the use of
money to employ the scarce productive
resources, which have alternative uses, to
produce various commodities over time and
distributing them for consumption, how or
in the future among various person or
groups in society.
Key features of Growth
Economics Definition
• It deals with the allocation of scarce
resource to be used in productive
purposes.
• The selection of the most efficient use of
the resources from alternative ways.
• The growth of economies will depend
upon the consumption and production
in the economy.
• This definition also points towards
Economics as a study of an economic
system.
Economics is the study of choice
under conditions of scarcity.
Economics have different definition by different
economists and social thinkers with different objectives and
contexts. All these definitions are correct, and none can be
taken as universally acceptable.
Difference Between
Micro and Macro
Economics
Economics is broadly classified into two types:

Microeconomics is a branch of economics that studies the behavior of individual consumers and
organizations in the market. It focuses on the demand and supply, pricing, and output of individual
organizations.

Macroeconomics examines the economy as a whole and deals with issues related to national
income, employment pattern, inflation, recession, and economic growth.
Microeconomics deals with the economic
problems of a single industry or
organization, while macroeconomics deals
with the problems of an economy as a
whole.
 What is Microeconomic?
Microeconomics is a branch of economics that deals with the study of the
economic behavior of individual organizations or consumers in an economy.
Moreover, microeconomics focuses on the supply and demand patterns and
price and output determination of individual markets.

Microeconomics lays emphasis on decisions related to the selection of

resources, the amount of output to be produced, and the price of products of
an organization. Thus, it can be said that the focus of microeconomics is
always at the individual level.
Consumerism After
COVID-19? Post-
Pandemic Consumer
Behavior Changes

To stimulate our discussion, we relate to

current issues!!!
Stressing the important points:
• Price Determination: Micro-economics plays an important role in price
determination and volume of production, allocation of resources etc.

• Helps in Individual Decisions: Microeconomics studies the individual

units. Hence, economic decisions in respect to individual units may be
taken easily, with its help. A consumer may take decision in what
quantity a commodity is to be purchased, at various prices. Similarly, a
firm or an industry can take decisions decision regarding volume of
production at various levels, taking production costs into
consideration.

• It Teaches the Art of Economizing: microeconomic principles deal

with the economizing of scarce resources and show how to use them
efficiently.
Limitations of Microeconomics
Microeconomics is very important and useful for
economics analysis. Below are the following
limitations of microeconomics:
• Unrealistic and Impractical Assumptions:
Microeconomics is based on several unrealistic and
impractical assumptions and hence the conclusions
drawn are not correct and their desired use does
not become possible. The entire microeconomics is
based on the assumption of full employment even
in a short-term analysis, which is unrealistic.
Microeconomic theories assume laissez faire policy
and pure capitalism in their behavioristic models.
Today there is no pure capitalism, so most of the
microeconomic theories have no significant
relevance to practice. Situation perceived by
assumptions like perfect competition, full
employment, full dynamism, etc. are not visible in
real life.
 Limitations of Microeconomics

• Ignorance of Macro Economy: Microeconomics studies specific economic units

separately from the rest of the whole economy. It explains only a part and not the
whole of working of an economic system. Hence, complete knowledge of specific
areas becomes possible but drawing of conclusions regarding the whole economy is
not possible by it.
 Limitations of Microeconomics

• Unusable for Studies of Certain Economic Problems: Microeconomics is not useful for study of
certain economic problems. For solution and study of modern problems, Government recognizes
national level as the base, which is related to macroeconomics. Intervention of Government is
consistently increasing in various economic activities. Employment policy, tariff policy, distribution of
income and wealth, export-import policy, industrialization, economic planning and population are
subjects of national importance. Their study is possible only in macroeconomics and not in
microeconomics.
Limitations of Microeconomics

• By assuming independence of wants and production in the

system, microeconomics has failed to consider their
“dependence effect” on economic welfare.
Limitations of Microeconomics

• Microeconomics misleads when one tries to generalize from

the individual behavior. It is improper to portray the
character and behavior of aggregate simply by generalizing
from character and behavior of the individual components
What is Macroeconomics?
WHAT COMES TO YOUR MIND WHEN YOU HEAR?
What is Macroeconomics?

Macroeconomics is a branch of economics that mainly

deals with the economic behavior of various units
combined together.

Macroeconomics focuses on the growth of an economy

as a whole by undertaking the study of various economic
aggregates, such as aggregate supply and demand,
changes in employment, gross domestic product (GDP),
overall price levels, and inflation.
Scope of Macroeconomics

• According to Prof. Chamberlin, “The macro model deals with

aggregative relatives.”

• According to Gardna Ackley, “Macroeconomics concerns with

such variables as the aggregate volume of the output of an economy
with the extent to which its resources are employed, with the size of
national income and with the general price level.”
Scope of Macroeconomics

• According to Prof. K. E. Boulding, “Macroeconomics deals

not with individual quantities as such but with aggregates of
their quantities, not with individual incomes, but with national
income, not with individual prices, but with price level, not
with individual output but with national output.”

• According to M.H. Spencer, “Macroeconomics is concerned

with the economy as a whole or large segment of it. In
macroeconomics, attention is focused on such problems as the
level of unemployment, the rate of inflation, the nation’s total
output and other matters of economy-wide significance.”
Stressing the
important points:

The following points explain the importance of

macroeconomics:
• Macroeconomics helps in understanding the functioning of an
economic system and provides a better view of the world’s
economy.
• It enables nations to formulate various economic policies.
• It helps economists in finding solutions to economic problems by
providing various economic theories.
• It helps in bringing stability in prices by supporting detailed
analysis of fluctuations in business activities.
• It helps in identifying the causes of the shortage in the balance of
payment and determining remedial measures.
Assumptions in There are certain assumptions in economics about an economic
situation to happen in the future. Economists use assumptions to
Economics break down complex economic processes and advocate different
theories to understand economic variables.
Three important assumptions in
economics, are as follows:
• Consumers have rational
preferences
• Existence of perfect competition
• Existence of equilibrium
 Consumers Have
Rational Preferences

This assumption states that

consumers act in a rational
manner and focus on satisfying
their needs.

It is also assumed that the tastes

of consumers remain constant for
a long period. For instance, a
consumer who is vegetarian may
not change his/her preferences in
the near future.
Existence of Perfect
Competition
According to this assumption, there is
perfect competition in an economy, wherein
there are numerous buyers and sellers.

It is assumed that homogenous products

exist in the market and both buyers and
sellers cannot affect prices.
Existence of
equilibrium
As per this assumption, equilibrium
exists wherein both consumers and
entrepreneurs achieve maximum
satisfaction.

In a market, there can be two types of

equilibrium: industry equilibrium and
firm’s equilibrium. An industry is at
equilibrium if profits achieved are
normal. On the other hand, a firm is
at the state of equilibrium if its profits
are maximum.
Nature of Economics:
as a Science, Art,
Social Science
Nature of economics is
broadly categories into 3
types: Economics as a
science, Economics as an
art and Economics as a
social science.
Economics as a
Science
A subject is considered science if:

• It is a study of the relationship

between cause and effect.
• It is capable of measurable and
based on facts.
• It has its own methodological
apparatus.
• It should have the ability to
forecast.
After being analyzed,
economics has all the
features of science.

Like science, it has a cause and effect relationship

between economic phenomena. For instance, Law of
demand explains the cause and effect relationship
between price and quantity demanded a commodity.

Similarly, the outcomes are measurable in terms of money.

It has its own methodology of study (induction and

deduction).

It forecasts the future market condition with the help of

various statistical and non-statistical tools. Thus, majority
of economic laws are of this type and
therefore, economics as a science.
Critics
Economics as a science but not a
perfect science like physical
science. The fact is that we cannot
rely upon the accuracy of
the economic laws. The
predictions made on the basis
of economic laws can easily go
wrong.

In other words, the subject matter

of economics is the economic
behavior of man which is highly
unpredictable.
Two nature of
Positive Normative
economics as Economics Economics
a science:
Positive Economics

A Positive Economics or science that is based

on cause and effect relationship between variables
but it does not pass value judgment. In other
words, it states “what is”.

Positive statements are about facts. They state

what the reality is. Economics should be neutral
between ends. It is not for economists to pass
value judgments and make pronouncements on
the goodness or otherwise of human decisions.
 As normative economics or science, economics
involves value judgments. It is prescriptive in
nature and describes “what ought to be” or
“what should be the things”.

Normative Normative economics is concerned with

normative statements. In this case, economics is
not concerned with facts rather it is concerned
Economics with how things should be.

For example, the questions like what should be

the level of national income, what should be the
wage rate, how much of national product be
distributed among people – all fall within
the scope of normative economics. Thus,
normative economics is concerned with welfare
propositions.
Why
Economists
Disagree?
 Art is a branch of study that
deals with expressing or
applying the creative skills and
Economics as imagination of humans to
perform a certain activity.
an Art
Similarly, economics also requires human imagination
for the practical application of scientific laws,
principles, and theories to perform a particular
activity.

Art is a system of rules for the achievement of a given

end. We know that in practice, economics is used for
achieving a variety of goals.

Every individual economic unit has an economic goal

to achieve. It decides its course of action by keeping
in mind the end to be achieved and the situation
faced by it. Therefore, economic laws are widely used
and relied upon at all levels of our economic
activities. And that makes economics an art.
Economics is an art:
• Art tells us how to do the thing i.e. to achieve an
objective. Economics is also used for achieving a variety
of goals.
• For e.g. All policies etc made in economics has the
ultimate objective of solving economic problems.

• Art is the practical application of theoretical knowledge

Like Art, Economics also practices its theoretical laws.
• For e.g. The various policies are made only after
having theoretical knowledge of the society and
country as a whole. Hence, economics is also an art.
 Economics as a Social Science
Economics is also considered as social
science as it deals with studying the
behavior of human beings and their
relationships in society. This is
because of the exchange of goods
takes place within the society and
among different societies to satisfy
the needs and wants of people.
Economics is a social
science:
• Economists develop models, or
theories, which are simplified
representations of the real world.
• Models help economists to
understand, explain, and predict
real-world economic phenomena.
Like other social scientists, economists
usually do not perform laboratory
experiments. They typically examine
what has already occurred in order to
test their theories.

Economic theories, like all scientific

theories, are simplifications—and
hence are “unrealistic.”
Economists, as do all scientists, employ
assumptions. One important economic
assumption is “all other things being equal.”

Models are evaluated on their ability to

predict and not on the realism of
assumptions.

Economic models relate to behavior, not

thought processes.
Interactive Class Atmosphere
Words that best describe macroeconomics:
1. _ _o_omi_ G_o_t_
2. _n_la_io_
3. U_e_p_o__en_
4. _gg_ega_e
5. N_ _iona_ In_o_e
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