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Introduction to Economics

1. What is Economics?

Two Greek roots of the word „Economics‟ are „Oikos‟ meaning „household‟ and „nomus‟
meaning „system of management‟. Oikonomia or oikonomous means “management of
household.” Economics is a science which studies the economic life of the people living in a
country or in the world as a whole. To understand the subject matter of economics, several
economists have defined economics taking different aspects into account.

1.1 Definitions of Economics

There are three well known definitions of economics

a) Adam Smith‟s Definition of Economics (Wealth Definition)

Adam Smith (1723 - 1790), in his book “An Inquiry into Nature and Causes of Wealth of
Nations” (1776) defined economics as the science of wealth. Adam Smith classified his book
into four divisions i.e. production, exchange, distribution and consumption of wealth. Some
other economists like J.B Say, F.A Walker, J.S Mills and other also declared Economics as a
Science of Wealth. He considered that the individual in the society wants to promote only
his own gain and in this he is led by an “invisible hand” to promote the interests of the
society‟s interests. The invisible hand is part of laissez-faire, meaning “let do”, approach to
the market. In other words, the approach holds that the market will find its equilibrium
without government or other interventions forcing it into unnatural patterns.

Criticism: Smith defined economics only in terms of wealth and not in terms of human
welfare. Ruskin and Carlyle condemned economics as a dismal science‟ as it taught
selfishness, greed and materialism which was against ethics. Hence, wealth definition was
rejected and the emphasis was shifted from „wealth‟ to „welfare‟.

b) Alfred Marshall‟s Definition of Economics (Welfare Definition)

Alfred Marshall (1842 - 1924) wrote a book “Principles of Economics” (1890) in which he
defined “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 the material requisites of well being”. The important
features of Marshall‟s definition are as follows:

a) According to Marshall, economics is a study of mankind in the ordinary business of

life, i.e., economic aspect of human life.

b) Economics studies both individual and social actions aimed at promoting economic
welfare of people.
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c) Marshall makes a distinction between two types of things, viz. material things and
immaterial things. Material things are those that can be seen, felt and touched, (E.g.)
land, building, pen, book etc. Non material things are those that cannot be seen, felt
and touched. (E.g.) skill in the operation of a thrasher, a tractor, services of a doctor or
teacher and so on. In his definition, Marshall considered only the material things that
are capable of promoting welfare of people.

Criticism:

a) Marshall considered only material things. But non material things, such as the
services of a doctor, a teacher and so on, also promote welfare of the people.

b) Marshall makes a distinction between (i) those things that are capable of promoting
welfare of people e.g. basic food, shelter, clothing and medical etc. and (ii) those
things that are not capable of promoting welfare of people e.g. gambling, cigarettes
etc that are not capable of promoting welfare but command a price, comes under the
purview of economics.

c) Marshall‟s definition is based on the concept of welfare. But there is no clear-cut

definition of welfare. The meaning of welfare varies from person to person, country to
country and one period to another. However, generally, welfare means happiness or
comfortable living conditions of an individual or group of people. The welfare of an
individual or nation is dependent not only on the stock of wealth possessed but also on
political, social and cultural activities of the nation.

c) Robbins Definition of Economics (Scarcity Definition)

Lionel Robbins published a book “An Essay on the “The Nature and Significance of
Economic Science” in 1932. According to him, “economics is a science which studies
human behaviour as a relationship between (multiple) ends and scarce means which
have alternative uses”. The major features of Robbins‟ definition are as follows:

a) Multiple ends mean „no limits to human wants’. Human wants are unlimited. They
keep on rising. This means that they don‟t come to an end even if they are satisfied.
For example we take food in the morning and we need it again in the evening. Same is
the case of wants for luxuries e.g. TV, air conditioners, cars, mobiles, laptop, furniture
etc. We always want to replace them with the new and better ones.

b) Scarce Means on the other hand, there may be no limit to human wants, but means to
satisfy them are definitely limited. The means can be divided into two parts. Firstly,
the resources in the production sector of the economy i.e. land; labour, capital and
entrepreneurship are quite limited because the prices of these four factors of
production are determined in the market. Secondly, the consumer goods and services
produced as a result of the combination of four factors of production are also limited
because they are also priced in the market. This means that resources are limited in the
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sense that one cannot have as many goods and services as he wished for the
satisfaction of wealth.

c) Alternative Uses of Means or Resources, What Robbins meant to say is that there
are many ways of using the resources. It is always up to the person concerned to give
priority to his/her basic wants. The scarce means are capable of having alternative
uses. For example, a person has Rs. 1000/- With this amount of money he is able to
do anything within this limit. He can buy clothing, food, medicine, furniture etc.
Hence, anyone will choose the resource that will satisfy his particular want. Thus,
economics, according to Robbins, is a science of choice.

Criticism: a) Robbins does not make any distinction between goods conducive to human
welfare and goods that are not conducive to human welfare. In the production of rice
and energy drinks or coke, scarce resources are used. But the production of rice
promotes human welfare while production of energy drinks is not conducive to human
welfare. However, Robbins concludes that economics is neutral between ends.

b) In economics, we not only study the micro economic aspects like how resources are
allocated and how price is determined, but we also study the macroeconomic aspect
like how national income is generated. But, Robbins has reduced economics merely to
theory of resource allocation.

c) Robbins definition does not cover the theory of economic growth and development.

d) Prof. Paul Samuelson Definition of Economics (Growth Definition)

In 1948, he defined economics in his book “Economics, An introductory Analysis” 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 over time, and distribute them for consumption now and in the future
among various people and groups of society”.

The major implications of this definition are as follows:

a) Samuelson has made his definition dynamic by including the element of time in it.
Therefore, it covers the theory of economic growth.

b) Samuelson stressed the problem of scarcity of means in relation to unlimited ends.

Not only the means are scarce, but they could also be put to alternative uses.

c) The definition covers various aspects like production, distribution and consumption.

Of all the definitions discussed above, the „growth‟ definition stated by Samuelson appears
to be the most satisfactory. However, in modern economics, the subject matter of economics
is divided into main parts, viz., i) Micro Economics and ii) Macro Economics.
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“Economics is, therefore, rightly considered as the study of allocation of scarce

resources (in relation to unlimited ends) and of determinants of income, output,
employment and economic growth.”

1.2 The Basic Economic Problem

The existence of scarcity creates the basic economic problem faced by every society, rich or
poor: how to make the best use of limited productive resources to satisfy human needs and
wants. To solve this basic problem, every society must answer these three basic questions:

1. What goods and services will be produced?

For example, an economy must decide whether they should produce kitchen appliances or
weapons, build and fix roads or buy textbooks for schools.

2. How will goods and services be produced?

For example, should we use copper or plastic to make pipes? Should machines be used to
make clothing or should workers make it by hand? Should the power plant be built close to
the ocean or inland? Which fertilizer is best for growing strawberries? There are millions of
decisions that need to be made to figure out how to produce goods and services.

3. Who will consume the goods and services?

Once the goods and services are produced, who will get to consume them? Will people
consume them on a first-come, first-served basis? Should goods be allocated or given out by
height, weight, religion, age, gender race, looks, strength, health or wealth? How the goods
and services should be distributed among the people

1.3 Economic Goals and Societal Values

Societies or communities answer the economic questions in different ways. Societies look at
economic goals and make decisions based on what is most valued.

Some economic goals are listed below,

Economic Efficiency, Making the most of resources without waste is an economic goal.

Economic Freedom, Being able to make choices about which goods and services to
produce and distribute without government interference or intervention is an economic goal.
This freedom allows entrepreneurs to take risks and make choices to start various businesses.

Economic security, Knowing that goods and services will be available when needed.
Having a safety net that protects individuals in a time of economic disaster.

Economic Equity, A fair distribution of wealth.

Economic Growth and innovation, Using new ideas and ways of creating goods and
services leads to growth and a higher standard of living or way of life for all.
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1.4 Classification of Economics

Economics is generally classified into two major categories,

i) Macroeconomics
ii) Microeconomics

i) Macroeconomics

„Macro‟ has been derived from a Greek word „Makros‟ which means „large‟. Therefore, in
Macroeconomics, we study the large aggregates of an economy with a view to focus the
economy as a whole. In macroeconomics we study national income analysis, determination of
aggregate level of employment, aggregate demand, aggregate supply, aggregate consumption,
saving and investment, economic fluctuations, foreign trade, exchange rate, public finance,
inflation, growth and development etc. So macroeconomics is also known as „Income
Theory‟.

ii) Microeconomics

„Micro‟ means a „millionth part of a thing‟. Therefore, in microeconomics we study the

small segments of an economy or, in other words, we take up the individual decision making
units of an economy in microeconomics. For example, we analyse the demand of a product or
of an individual and the equilibrium price of a product rather than discussing the aggregate
demand of the economy and the general price level in a country. Similarly, in micro
economics, we study the determination of price of a factor of production, analysis of an
individual firm or industry, the consumption pattern of a person, choice of technique and
different market situations etc. Micro economics is generally called the „Price Theory”

References
Marshall, A. (1920). 1949. Principles of economics.

Robbins, L. R. B. (1932). The nature and significance of economic science. Macmillan.

Smith, A. (1776). The wealth of nations. New York: The Modern Library.

Samuelson, P. A., & Scott, A. (1967). Economics: an introductory analysis (Vol. 715). New
York: McGraw-Hill.