1.

INTRODUCTION TO
ECONOMICS

ECO 102: ECONOMICS

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 Definition of Economics
There is no one definition of Economics which
has a general acceptance.
• Definitions regarding the science of
Economics have been changing from time to
time, and can be broadly grouped into;
1) Wealth definition
2) Welfare definition
3) Scarcity definition
4) Modern definition
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 1. Wealth/ Classical Definition
• Adam Smith (1723 -1790), the founder of
economics, described it as a body of
knowledge which relates to wealth.
• Accordingly to him if a nation has larger
amount of wealth, it can help in achieving its
betterment.
• He defined economics as;

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 1. Wealth/ Classical Definition
“The study of nature and causes of generating
of wealth of a nation”.
• Adam Smith in his famous book, “An Enquiry
into the Nature and Causes of the Wealth of
Nations” emphasized the production and
expansion of wealth as the subject matter of
economics.

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 1. Wealth/ Classical Definition
• Ricardo, another British classical economist
shifted the emphasis from production of
wealth to the distribution of wealth in the
study of economics.
• J.B. Say, a French classical economist,
described economics as:
“The science which treats of wealth”.

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 1. Wealth/ Classical Definition

• J.S. Mill defined economics is as:

"Practical science of production and distribution
of wealth”.

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 Definition of 'Wealth'

• A measure of the value of all of the assets of

worth owned by a person, community,
company or country. Wealth is the found
by taking the total market value of all the
physical and intangible assets of the entity and
then subtracting all debts.

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 Definition of 'Wealth
• Essentially, wealth is the accumulation of
resources. People are said to be wealthy when
they are able to accumulate many valuable
resources or goods.
• Wealth is expressed in a variety of ways. For
individuals, net worth is the most common
expression of wealth, while countries measure
by gross domestic product (GDP) or GDP per
capita.
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 1. Wealth/ Classical Definition
The main points of the definitions of
economics given by the above classical
economists are that:
(i) Economics is the study of wealth only. It
deals with consumption, production, exchange
and distribution aspects of wealth.

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 1. Wealth/ Classical Definition
(ii) Only those commodities which are scarce
are included in wealth. Non-material goods
such as air, services etc., are excluded from
the category of wealth.

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 Criticisms of the Wealth/Classical
Definition
(i) Too much importance to wealth:
The definitions of economics give primary
importance to wealth and secondary
importance to man. The fact is that the study
of man is more important than the study of
wealth.

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 Criticisms of the Classical Definition of
Economics
(ii) Narrow meaning of wealth:
• The word ‘wealth’ in the classical economist’s
definitions of economics means only material
goods such as chair, book, pen, etc. These do
not include services of doctors, nurses,
soldiers etc.
• In modern economics, the word ‘wealth’
includes material as well as non-material
goods.
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 Criticisms of the Classical Definition of
Economics
(iii) Concept of economic man:
• According to wealth definitions, man works
only for his self-interest Social interest is
ignored.
• Dr. Marshall and his followers were of the
view that economics does not study a selfish
man but a common man.

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 Criticisms of the Wealth/Classical
Definition
(iv) No mention of man’s welfare:
The 'Wealth' definitions ignore the importance
of man’s welfare. Wealth is not be all and the
end all of all human activities.
(v) It does not study means:
The definitions of economics lay emphasis on
the earning of wealth as an end in itself. They
ignore the means which are scare for the
earning of wealth.
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 Criticisms of the Wealth/Classical
Definition
• Since the word 'wealth' did not have clear
meaning, therefore the definition economics
became controversial. It was regarded
unscientific and narrow.
• At the end of 19th century, Dr. Alfred Marshall
gave his own definition of economics and
therein he laid emphasis on man and his
welfare.

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2. Welfare/Neo-classical definition
• Dr. Alfred Marshall (1842 - 1924) in his book,
'Principles of Economics' defined Economics
as:
“Study of mankind in the ordinary business of
life; it examines that part of individual and
social actions which is closely connected with
the attainment and with the use of material
requisites of well being”.

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2. Welfare/Neo-classical definition
• This definition clearly states that Economics is
on the one side a study of wealth and on the
other and more important side a part of the
study of man.
• Marshall’s followers like Pigou, Cannon and
Baveridge (the Neo-classical writers) have also
defined Economics as:
“Study of causes of material welfare”.

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2. Welfare/Neo-classical definition
• The definitions given by Welfare School of
Economists have the following main features
of Economics as Material Welfare:
(i) Wealth is not the be all and the end all of
human activities:
• Economics does not regard wealth as the be
all and the end all of the human activities.

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2. Welfare/Neo-classical definition
• It is only a mean to the fulfillment of an end
which is human welfare.
• Welfare and not wealth is; therefore, of
primary importance to man.
(ii) Study of an ordinary man:
Economics is a study of an ordinary man who
lives in free society. A person who is cut
away from the society is not the subject of
study of Economics.
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2. Welfare/Neo-classical definition
(iii) It does not study all activities of man:
Economics does not study all the activities of
man. It is concerned with those actions which
can be brought directly or indirectly with the
measuring rod of money.
(iv) Study of material welfare:
Economics is concerned with the ways in
which man applies his knowledge, skill to the
gifts of Nature for the satisfaction of his
material welfare.
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2. Welfare/Neo-classical definition
• For a long time, the definition of Economics
given by Alfred Marshall was generally
accepted.
• It enlarged the scope of economics by taking
emphasis that it studies wealth and man rather
than wealth alone.
However, Marshall’s definition was criticized by
Lionel Robbins.

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 Robbins's Criticism:

(i) Narrows down the scope of economics:

• According to Robbins, the use of the word
“Material” in the definition of Economics
considerably narrows down the scope of
Economics.
• There are many things in the world which are
not material but they are very useful for
promoting human welfare.

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 Robbins's Criticism:

• For example, the services of doctors,

lawyers, teachers, dancers, engineers,
professors, etc., satisfy our wants and are
scarce in supply.
• If we exclude these services and include
only material goods, then the sphere of
economics study will be very much
restricted.

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 Robbins's Criticism:

(ii) Relation between economics and welfare:

• The second objection raised by Robbins on
welfare definition is on the establishment of
relation between Economics and Welfare.
• According to him, there are many activities
which do not promote human welfare, but
they are regarded economic activities, e.g.,
the manufacturing and sale of alcohol goods,
etc.
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 Robbins's Criticism:

(iii) Welfare is a vague concept:

• The third objection levied by him was on the
concept of ‘welfare’. In his opinion welfare is a
vague concept.
• It is purely subjective. It varies from man to
man, from place to place and from age to age.

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 Robbins's Criticism:

• Moreover, he says what is the use of a concept

which cannot be quantitatively measured and
on which two persons cannot agree as to what
is conducive to welfare and what is not.
• For example, the manufacturing and sale of
guns, tanks and other war heads, production
of opium, liquor etc., are not conducive to
welfare but these are all economic activities.

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 Robbins's Criticism:

• Hence, these cannot be excluded from the

study of economics.
(iv) Impractical:
The definition of welfare is of theoretical
nature. It is not possible in practice to divide
man’s activities into material and non-
material.

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 Robbins's Criticism:

(v) It involves value judgment:

Finally, the word ‘Welfare' in the definition
involves value judgment

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3. Scarcity definition by Robbins
Lionel Robbins, after criticizing the definitions
given by the Classical and Neo-classical
economists, gave his own definition of
Economics.
According to him;
Firstly, the definition of Economics given by
him is superior to that of others because it
does not contain any reference of the term
material or welfare.

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 3. Scarcity definition by Robbins
• Secondly, it applies as much to the case of an
isolated individual as to the complicated net
working of society.
• Thirdly, it raises the status of Economics to
that of Science.
• Fourthly, it makes Economics a positive
science which deals only with facts, It forbids
the economists to pass any value judgment of
what is good or bad, right or wrong, etc.
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3. Scarcity definition by Robbins
Lionel Robbins claiming his definition of
Economics precise, scientific and superior,
defines Economics as;
"A science which studies human behavior as a
relationship between ends and scarce means
which have alternative uses".

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 Main Pillars of Robbins's Definition:

(i) The Human wants or ends are unlimited:

• Human wants referred to as ends by Robbins
are unlimited. They increase in quantity and
quality over a period of time.
• They vary among individuals and overtime
for the same individual.

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 Main Pillars of Robbins's Definition:
• It is not possible to find a person who will say
that his wants for goods and services have
been completely satisfied.
• This is because of the fact that when one want
is satisfied, it is replaced by another and there
is then no end to it.

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 Main Pillars of Robbins's Definition:

(ii) The ends or wants vary in importance:

• The ends or wants are of varying importance.
• They are ranked in order of importance such
as: (a) necessaries (b) comforts and (c)
luxuries.

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 Main Pillars of Robbins's Definition:
• Man generally satisfies his urgent wants first
and less urgent afterwards in order of their
importance.
(iii) Scarcity of resources:
Resources are the inputs used in the
production of things which we need.

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 Main Pillars of Robbins's Definition:
• The resources (Land, labor, capital and
entrepreneurship) at the disposal of man are
scarce. They are not found in as much quantity
as we need them.
Scarcity means that we do not and cannot
have enough income or wealth to satisfy our
every desire.

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 Main Pillars of Robbins's Definition:
Scarcity exists because human wants always
exceed what can be produced with limited
resources and time that Nature makes
available to man at any one time.
• Scarcity is a fact of life. It occurs among the
poor and among the rich. The richest person
on earth faces scarcity because he too cannot
satisfy all his wants with the limited time
available to him.

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 Main Pillars of Robbins's Definition:

(iv) According to Robbins: the unlimited ends

and the scarce resources provide a foundation
to the field of Economics.
• Since the human wants are innumerable and
the means to satisfy them are scarce or
limited in supply, therefore, an economic
problem arises.

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 Main Pillars of Robbins's Definition:
• If all the things were freely available to satisfy
the unlimited human wants, there would not
have arisen any scarcity, hence no economic
goods, no need to economics and no
economic problem.
Scarcity, thus, can be defined as the excess of
human wants over what can be actually
produced in the economy.

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 Main Pillars of Robbins's Definition:

(v) Economic resources have alternative uses:

• The fourth important proposition of Robbins
definition is that the scarce resources available
to satisfy human wants have alternative uses.
• They can be put to one use at one time.

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 Main Pillars of Robbins's Definition:
• For instance, if a piece of land is used for the
production of sugarcane, it cannot be utilized
for the growth of another crop at the same
time.
• Man, therefore, has to choose the best way of
utilizing the scarce resources which have
alternative uses.

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 Main Pillars of Robbins's Definition:

The scarcity resources and choices are the

key problems confronting every society.
The choices to be made by it are:
• What goods shall be produced and in what
quantity?
• How should the various goods and services
be produced?

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 Main Pillars of Robbins's Definition:

• For whom to produce?

• Thus the foundation of economic science
according to Robbins, is based on satisfaction
of human wants with scarce resources which
have alternative uses.

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 Merits of Robbins's Definition of
Economics:
There are many admirers of Robbins definition.
(i) Status of a positive science:
• Robbins tries to make economics a more
exact science. According to him, economics
has nothing to do with ends. They may be
noble or ignoble, material or non-material.
Economics is not concerned with them as
such.

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 Merits of Robbins's Definition of
Economics:
(ii) An analytical definition:
• Robbins definition makes study of economics
analytical.
• It studies the particular aspect of human
behavior which is imposed by the influence of
scarcity.

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 Merits of Robbins's Definition of
Economics:
(iii) A universal definition:
• Robbins definition is applicable everywhere.
• It is concerned with unlimited wants and
limited resources which is the problem facing
every economy socialistic or capitalistic.

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 Merits of Robbins's Definition of
Economics
(iv) Clear on the nature and scope of economics
• Robbins definition serves to specify the
nature, scope and subject matter of
economics.
• According to him, an economic problem is
characterized by the possibility of exercising
choice between ends an which have
alternative uses.

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 Merits of Robbins's Definition of
Economics
(v) Valuation is the central problem:
• According to Robbins, valuation is the central
problem of economics.
• Wherever the ends are unlimited and the
resources scare, they give rise to an economic
problem Marshall’s definition does not
identity this valuation process.

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 Criticism on Robbin’s Definition
(i) Reduced economics merely to a theory of
value:
Robbins’s definition restricts the scope of
economics by treating it as a positive science
only while in reality it is both a positive and
a normative science.

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 Criticism on Robbin’s Definition
(ii) Scope of economic has been widened:
Robbins’s definition has widened the scope of
economics by covering the whole of economic
life, while it is concerned with that part of
human life which is connected with the
market price.

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 Criticism on Robbin’s Definition
(iii) Economics has become a colorless science:
• Robbins’s made economics colorless,
impersonal and abstract.
• It is in fact a definition of economics for
economist only.

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 Criticism on Robbin’s Definition
(iv) Study of economic growth:
The study of economic growth process remains
outside the scope of economics while it is
through economic growth that living
standards improve.

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Criticism on Robbin’s Definition

If we define Economics as a science of

administration of scare resources, then its
scope becomes too wide and includes the
whole of economics life and not merely that
part of it which is connected with the market
price.

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 4. Latest/Modern Definition:

Keynes employment stability centered definition

• Economics is the study of administration of
scarce resources and also of the
determination of income and employment.
• It studies the causes of economic fluctuations
and how economic stability could be achieved.

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 4. Latest/Modern Definition:
• If one section of the society is made better off
without making the other section worse off,
we can say the economic system is operating
efficiently".
• After considering the various definitions,
Economics can be defined as:

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 4. Latest/Modern Definition:

“A social science which is concerned with the

proper use and allocation of resources for the
achievement and maintenance of growth
with stability and efficiency”.

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 Why a social science subject?
Economics is the study of man and his activities
in relation to his environment.
• Economics is a social science because it
studies human environment, there is no
specific(physical) laboratory.
• Economics deals with the study of the
environment in diverse ways, hence it is a
social science.

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 Why a social science subject?
• If we want to test anything concerning with
economics, then we survey and taking primary
and secondary data and analyze the things
and it is carried out on the society.
• Thus, society is the laboratory for any test of
the subjects concerning with economics.

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 Why a social science subject?
• Most subjects in the sciences have a
constant/specific way of carrying out their
activities.
• Unlike in economics where the issue of say
unemployment or inflation solved in one
country differs from the way it will be
addressed in the other.

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 The Economic Problem
1. What goods and services should an economy
produce?
– should the emphasis be on agriculture,
manufacturing or services, should it be on
education, prisons, or housing?
2. How should goods and services be
produced?
– labour intensive, capital intensive?
3. Who should get the goods and services
produced?
– even distribution? more for the rich? more
for those who work hard?
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 Scope of Economics

‘Scope’ means the sphere of study. We have to

consider what economics studies and what
lies beyond it.
• The scope of economics will be brought out by
discussing the following.

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 Scope of Economics

(a) Subject – matter of economics.

(b) The nature of economics?
(c) Whether Economics is a science or an art?
(d) If Economics is science, whether it is
positive science or a normative science?

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 Subject Matter of Economics

• There is a difference of opinion among

economists regarding the subject-matter of
economics.
• Adam Smith, the father of modern economic
theory, defined economics as a subject, which
is mainly concerned with the study of nature
and causes of generation of wealth of nation.

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 Subject Matter of Economics

• Man is always busy in adjusting his limited

resources for the satisfaction of unlimited
ends.
• The problems that centre round such activities
constitute the subject-matters of economics.
• Paul Samuelson, however, includes the
dynamic aspects of economics in the subject
matter.

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 Subject Matter of Economics

• According to them, "economics is the study of

how man and society choose with or without
money, to employ productive uses to produce
various commodities over time and distribute
them for consumption now and in future
among various people and groups of society”.

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 Subject Matter of Economics

• Economics studies man’s life and work, not the

whole of it, but only one aspect of it.
• It does not study how a person is born, how
he grows up and dies, how human body is
made up and functions, all these are
concerned with biological sciences.

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 Subject Matter of Economics

• Similarly Economics is also not concerned with

how a person thinks and the human
organizations being, these are a matter of
psychology and political science.
• Economics only tells us how a man utilizes his
limited resources for the satisfaction of his
unlimited wants, a man has limited amount of
money and time, but his wants are unlimited.

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 Subject Matter of Economics

• Economic activity is the work that people do

to enhance their quality of life.
• Economic activity is what we do to satisfy our
wants and where money is involved.
Non-Economic Activity
• Any activity undertaken to satisfy personal,
social and religious obligations.
• It is where money is not involved.
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 Subject Matter of Economics

• They are all engaged in what is called

“Economic Activity”.
• They earn money and purchase goods.
Neither money nor goods is an end in itself.
• They are needed for the satisfaction of human
wants and to promote human welfare.

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 Subject Matter of Economics

• To fulfill the wants a man is taking efforts.

Efforts lead to satisfaction.

Thus wants- Efforts- Satisfaction sums up the

subject matter of economics.
• In primitive society, the connection between
wants efforts and satisfaction is close and
direct.
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 Subject Matter of Economics

• But in a modern Society things are not so

simple and straight.
• Here man produces what he does not
consume and consumes what he does not
produce.
• When he produces more, he has to sell the
excess quantity.

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 Subject Matter of Economics

• Similarly he has to buy a product which is not

produced by him.
• Thus the process of buying and selling which is
called as Exchange comes in between wants
efforts and satisfaction.
• Nowadays, most of the things we need are
made in factories.

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 Subject Matter of Economics

• To make them the worker gives his labour, the

land lord his land, the capitalist his capital,
while the businessman organizes the work of
all these.
• They all get reward in money.
• The labour earns wages, the landlord gets
rent, the capitalist earns interest, while the
entrepreneur’s (Businessman) reward is profit.

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 Subject Matter of Economics

• Economics studies how these income - wages,

rent interest and profits-are determined.

This process is called “Distribution.

• This also comes in between efforts and
satisfaction.

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 Subject Matter of Economics

Thus we can say that the subject-matter of Economics

is;
1. Consumption - the satisfaction of wants.
2. Production - i.e. producing things, making an effort
to satisfy our wants
3. Exchange - its mechanism, money, credit, banking
etc.
4. Distribution - sharing of all that is produced in the
country.

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 Subject Matter of Economics

• Micro-Economics – When economics is

studied at individual level i.e. consumer’s
behavior, producer’s behavior, and price
theory etc it is a matter of micro-economics.
• Macro Economics – When we study how
income and employment is generated and
how the level of country’s income and
employment is determined, at aggregated
level, it is a matter of macro-economics.
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 Subject Matter of Economics

• Thus national income, output, employment,

general price level economic growth etc. are
the subject matter of macro Economics.
Microeconomics is a Greek word which means
small.
Macroeconomics is a Greek word which means
large.

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 Nature of Economics

The economists are also divided regarding the

nature of economics. The following questions
are generally covered in the nature of
economics.
(a) Is economics a science or an art?
(b) Is it a positive science or a normative
science?

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 Nature of Economics

Economics is both a science and an art.

• Economics is considered as a science because
it is a systematic knowledge derived from
observation, study and experimentation.
• However, the degree of perfection of
economics laws is less compared with the laws
of pure sciences.

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 Nature of Economics

An art is the practical application of knowledge

for achieving definite ends.
• A science teaches us to know a phenomenon
and an art teaches us to do a thing.
For example, there is inflation in Tanzania.
• This information is derived from positive
science.

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 Nature of Economics

• The government takes certain fiscal and

monetary measures to bring down the general
level of prices in the country.
The study of these fiscal and monetary
measures to bring down inflation makes the
subject of economics as an art.

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 Economics is Positive or Normative
Science?
There again difference of opinions among
economists whether economics is a positive or
normative science.
• Lionel Robbins, Senior and Friedman have
described economics as a positive science.
They opined that economics is based on logic.

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 Economics is Positive or Normative
Science?
Marshall, Pigou, Hawtrey, Keynes and many
other economists regard economics as a
normative science.
• According to them, the real function of the
science is to increase the well-being of man.
• They have given suggestions in their works for
promotion of human welfare.

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 Economics is Positive or Normative
Science?
• For example, Malthus has given suggestions of
checking the rising population. M. Keynes has
suggested measures to remove
unemployment.

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 Economics is Positive or Normative
Science?
• An economist must come forward to give
advice to the problems facing the human
being like depression, unemployment, high
prices, etc., for increasing his welfare.
To conclude, Economics has both theoretical as
well as practical side. In other words, it is both a
positive and a normative science.

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 Positive statement
Positive statements are objective statements
that can be tested or rejected by referring to
the available evidence.
For example:
• A rise in consumer incomes will lead to a rise
in the demand for new cars.
• More competition in markets can lead to
lower prices for consumers.
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 Positive statement
• If the government raises the tax on soda, this
will lead to a fall in profits of the producers.
• A fall in the exchange rate will lead to an
increase in exports overseas.
Describes what exists and how it works.
Only explain what is.
Positive statements can be proved by facts

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 Normative statements
Normative statements are subjective statements
rather than objective statements – i.e. they
carry value judgments expressing an opinion
about what ought to be.
• The government is right to introduce a ban on
smoking in public places
• Production and sale of cigarettes and alcohol
is not desirable for the society

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 Normative statements
• Analyses outcome of economic behavior/
• Evaluate them as good or bad.
• Prescribes courses of action

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 Nature of Economic Laws

Economics, like all other sciences, has drawn its

own set of generalizations or laws.
• Economic laws are nothing more than careful
conclusions and inferences drawn with the
help of reasoning or by the aid of observation
of human and physical-nature.

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 Nature of Economic Laws

• In everyday life, we see man is always busy in

satisfying his unlimited wants with limited
means.

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 Nature of Economic Laws

(1) Laws of economics are less exact. The

nature of economic laws is that they are less
exact as compared to the laws of natural
sciences.
• An economist cannot predict with surety as
to what will happen in future in the
economic domain.

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 Nature of Economic Laws

• He can only say as to what is likely to happen

in the near future.
• The reasons as to why economic laws are not
as exact as that of natural sciences are as
follows:

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 Nature of Economic Laws

First, Natural sciences deal its matter which

lifeless.
• While economics, we are concerned with man
who is endowed with a freedom of or he may
act in whatever manner he likes.
Nobody can predict with certainty his future
actions.

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 Nature of Economic Laws

• This element of uncertainty in human

behavior results in making the laws of
economics less exact than the laws of natural
sciences.
• Secondly, in economics it is very difficult to
collect factual data on which economic laws
are to be based.

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 Nature of Economic Laws

• Even if the data is collected it may change at

any moment due to sudden changes in the
tastes of the people or their attitudes.
• Thirdly, there are many unknown factors
which affect the expected course of action and
thus can easily falsify the economic
predictions.

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 Nature of Economic Laws

• Dr. Marshall wrote that, laws of economics are

to be compared with the laws of tides rather
than with the simple and the exact law of
gravitation.
• The reason for comparing the laws of
economics with the laws of tides by Marshall
is that the laws of tides are also not exact.

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 Nature of Economic Laws

• The rise of tides cannot be accurately

predicted. It can only be said that the tide is
expected to rise at a certain time.
• It may or may not rise. Strong wind may
change its direction to opposite side. They
instead of rising may fall. So is the case with
the laws of economics.

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 Nature of Economic Laws

(2) Economic laws are essentially hypothetical.

Economic laws, are essentially hypothetical.
They are true under certain given conditions.
• If these conditions are fulfilled, the
conclusions drawn from them will be true and
exact as those of the laws of physical sciences.

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 Nature of Economic Laws

• From this statement that laws of economics

are hypothetical, we should not conclude that,
they are useless or unreal.
• Take for instance, the law of gravitation. It
states that bodies tend to-fall to the ground
but the bodies may not fall immediately.

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 Nature of Economic Laws

• Their fall may be retarded by atmospheric

pressure. So is the case with the laws of
Economics.
• The only difference between the laws of
economics and the laws of physical sciences is
that the hypothetical element in the former is
more permanent as compared to the later.

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 Nature of Economic Laws

(3) Economic laws qualitative or quantitative.

Laws of economics are qualitative in nature.
They are not exactly stated in quantitative
terms. They tell the direction of change which
is expected rather than the amount of change.

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 Nature of Economic Laws

(4) Applies on the average in normal

conditions.
Economic laws do not deal with any particular
individual, firm, commodity etc. It takes an
average economic unit and lays down its
economic behavior.

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 Nature of Economic Laws

(5) Laws of economics are more exact than the

laws of other social sciences.
We do admit that the laws of economics are
not 100% exact. They are, however, more
exact than the laws of any other social
science.

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Comparison with Laws of other Sciences

(1) Economic Laws and Physical Laws.

• The laws of economics different from the laws
of physical sciences. The economist deals with
the activities or behaviors of men in society.
• The activities of men are various and
uncertain and no definite conclusion can be
drawn from them.

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Comparison with Laws of other Sciences

• On the other hand, natural sciences deal with

matter and atoms which are constant units.
• They always conform to certain behavior. So
the law derived from them are more definite,
certain and universal.

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Comparison with Laws of other Sciences

(2) Moral Laws and Economic Laws. Moral laws

are laws of human conduct. They emanate
from public opinions. They guide us as to how
we should live in society.
• If you disobey these laws, you can be hated or
at the most ex-communicated by the society.

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 Nature of Economic Laws

• An economic law, on the other hand, tells us

as to how a man should behave when he is
engaged in an economic activity.
• If any body violates an economic law, be can
suffer financial loss. There is no public censure
or punishment by a government.

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Comparison with Laws of other Sciences

(3) Statutory Laws and Economic Laws.

Statutory laws are the laws issued by a state.
It is the duty of the citizens of a country to
obey these Laws.
• They disobey, and then they are punished.
• Economic laws are quite different from that of
statutory laws.

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Comparison with Laws of other Sciences

• An economic law is a statement of a scientific

truth about human behavior in the matter of
the allocation of scarce resources into
unlimited ends.
• You are at liberty to violate an economic law
but that is not the case with statutory laws.

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 Methodology of Economics
An economic theory derives laws or
generalizations through two methods:

(1) Deductive Method and

(2) Inductive Method.

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Deductive Method of Economic Analysis

The deductive method is also named as

analytical, abstract or prior method. The
deductive method consists in deriving
conclusions from general truths, takes few
general principles and applies them draw
conclusions.

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Deductive Method of Economic Analysis

• For instance, if we accept the general

proposition that man is entirely motivated by
self-interest. In applying the deductive
method of economic analysis, we proceed
from general to particular.
The main steps involved in deductive logic are as
under:

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Deductive Method of Economic Analysis
(i) Perception of the problem to be inquired
into:
• In the process of deriving economic
generalizations, the analyst must have a
clear and precise idea of the problem to be
inquired into.
(ii) Defining of terms: The next step in this
direction is to define clearly the technical
terms used analysis.

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Deductive Method of Economic Analysis
(iii) Deducing hypothesis from the
assumptions:
• The third step in deriving generalizations is
deducing hypothesis from the assumptions
taken.
(iv) Testing of hypothesis
• Before establishing laws or generalizations,
hypothesis should be verified through direct
observations of events in the rear world and
through statistical methods.
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Deductive Method of Economic Analysis

• (Their inverse relationship between price and

quantity demanded of a good is a well
established generalization).

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 Merits of Deductive Method
(i) This method is near to reality. It is less time
consuming and less expensive.
(ii) The use of mathematical techniques in
deducing theories of economics brings
exactness and clarity in economic analysis.
(iii) There being limited scope of
experimentation, the method helps in deriving
economic theories.
(iv) The method is simple because it is
analytical.
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 Demerits of Deductive Method
(i)The deductive method is simple and precise
only if the underlying assumptions are valid.
More often the assumptions turn out to be
based on half truths or have no relation to
reality.
• The conclusions drawn from such assumptions
will, therefore, be misleading.

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 Demerits of Deductive Method
(ii) Professor Learner describes the deductive
method as ‘armchair’ analysis.
According to him, the premises from which
inferences are drawn may not
hold good at all times, and places. As such
deductive reasoning is not applicable
universally.

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 Demerits of Deductive Method
(iii) The deductive method is highly abstract. It
require; a great deal of care to avoid bad logic
or faulty economic reasoning.
As the deductive method employed by the
classical and neo-classical economists led to
many facile conclusions due to reliance on
imperfect and incorrect assumptions.

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Demerits of Deductive Method
Therefore, under the German Historical School
of economists, a sharp reaction began against
this method.
They advocated a more realistic method for
economic analysis known as inductive
method.

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Inductive Method of Economic Analysis
Inductive method which also called empirical
method was adopted by the “Historical School
of Economists". It involves the process of
reasoning from particular facts to general
principle.
• This method derives economic generalizations
on the basis of (i) Observations (ii)
Experimentation and (iii) Statistical methods.

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Inductive Method of Economic Analysis

• In this method, data is collected about a

certain economic phenomenon.
• These are systematically arranged and the
general conclusions are drawn from them.

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Inductive Method of Economic Analysis

Main Steps of Inductive Method

(i) Observation.
(ii) Formation of hypothesis.
(iii) Generalization.
(iv) Verification.

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 Merits of Inductive Method

(i) It is based on facts as such the method is

realistic.
(ii) In order to test the economic principles,
method makes statistical techniques. The
inductive method is, therefore, more reliable.
(iii) Inductive method is dynamic.

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 Merits of Inductive Method

• The changing economic phenomenon are

analyzed and on the basis of collected data,
conclusions and solutions are drawn from
them.
(iv) Induction method also helps in future
investigations.

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 Demerits of Inductive Method

(i) If conclusions drawn from insufficient data,

the generalizations obtained may be faulty.
(ii) The collection of data itself is not an easy
task. The sources and methods employed in
the collection of data differ from investigator
to investigator. The results, therefore, may
differ even with the same problem.

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 Demerits of Inductive Method

(iii)The inductive method is time-consuming and

expensive.

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 Conclusion

The above analysis reveals that both the

methods have weaknesses.
• We cannot rely exclusively on any one of
them.
Modern economists are of the view that both
these methods are complimentary. They
partners and not rivals.

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 Conclusion
Alfred Marshall remarked,
“Inductive and Deductive methods are both
needed for scientific thought, as the right
and left foot are both needed for walking”.
We can apply any of them or both as the
situation demands.

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 Importance of the Study of Economics

The importance and utility of the subject of

Economics can be judged from this fact that it
is now considered to be one of the most
important and useful subject as compared to
any other branch of knowledge.
In the words of Durbin;
“Economics is the intellectual religion of the
day”.

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 Importance of the Study of Economics

(1) Intellectual Value

• The knowledge of Economics is very useful
as it broadens our outlook, sharpens our
intellect, and inculcates in us the habit of
balanced thinking.
• The study of Economics makes us realize that
we as human beings are dependent upon
one another for our daily needs.

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 Importance of the Study of Economics

This feeling creates in us the intelligent

appreciation of our position and the spirit of
co-operation with others.
(2) Practical Advantages
The practical advantages of Economics are
much more important than its theoretical
advantages. These advantages can be looked
at from the individual and community point of
view.

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 Importance of the Study of Economics

(3) Personal Stake in Economics

• From personal point of view, the study of
Economics is useful as it enables each of us to
understand better and appreciate more
intelligently the nature and significance of our
money earning and money spending activities.

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 Importance of the Study of Economics

• With the knowledge of Economics, the

consumer can better adjust his expenditure to
his income.
• The study of Economics is also useful to a
producer. It suggests him the ways of bringing
about the most economical combinations of
the various factors of production at his
disposal.

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 Importance of the Study of Economics

• It also helps in solving the various intricacies

of exchange.
• From the study of Economics, one can easily
judge as to why the prices have risen or fallen.
• The knowledge of Economics also explains us
as to how the reward of various factors of
production is determined.

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 Importance of the Study of Economics

• Thus, we find that every’ individual can rightly

hope to become a better and more efficient
consumer, producer and businessman, if he
has the working knowledge of economics.

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 Importance of the Study of Economics

(4) Economics for the Leader

• The study of economics is not only helpful
from the individual point of view but it is also
very useful for the welfare of the community.
• It enables a statesman to understand and
better grasp the economic and social
problems facing the country.

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 Importance of the Study of Economics

• Every government has to tackle different kinds

of economic problems such as unemployment,
inflation, over production, under-production,
imposition of tariffs and control, problem of
monopolies, etc.
• The statesman can successfully solve these
problems, if he has thorough knowledge of the
subject of Economics.

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 Importance of the Study of Economics

• The knowledge of Economics for a finance

minister is also indispensable.
• He has to raise revenue by imposing taxes on
the incomes of the people for meeting the
necessary expenditure of the government.
• Economics here comes to his rescue and
guides him as to how the taxes could be levied
and collected.

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 Importance of the Study of Economics

(5) Poverty and Development

• The greatest advantage of Economics is that it
helps in removing traces of poverty from the
country.
• Take an example, a country may be confronted
with different kinds of problems.

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 Importance of the Study of Economics

• For example, low-per capita income, low

productivity of agriculture, slow development
of industries, fast increase in population,
under-developed means of communication
and transport, etc.
• The study of Economics helps in devising ways
and means and suggesting practical measures
in solving these problems.

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 Importance of the Study of Economics

(6) Economics for the citizen

• Such being, the importance of study of
Economics, it is rightly remarked by Wooten
that “you cannot be in real sense a citizen
unless you are also in some degree an
economist”.
• He is perfectly right in giving the statement.

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 Importance of the Study of Economics

• The world is so fast changing that we are

completely now living in a world dominated by
economic forces and economic ideas.
• If the people of any country do not have the
working knowledge of an economic system;
then the government of that country can
easily hoodwink.

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 Importance of the Study of Economics

 Hoodwink means to deprive somebody of

something by deceit; concealment or
distortion of the truth for the purpose of
misleading.
• But if citizens have knowledge of Economics,
then the government will be very vigilant and
spend the money in a wise manner.

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 Importance of the Study of Economics

• The knowledge of Economics is very useful,

and it is necessary that every citizen, worker,
administrator, consumer, etc., should have at
least working knowledge of it.
• In the words of Sir Henry Clay;
“Some study of Economics is at one a practical
necessity and a normal obligation”.

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 QUESTIONS
1) What is Economics?
2) Why could economics not be defined
precisely?
3) What is Microeconomics? How does it differ
from Macroeconomics
4) What are the fundamental economic
questions of any society?

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 QUESTIONS
5. ‘Scarcity of resources is the mother of all
economic problems’. Discuss with examples
6. Show the relationship among the following
concepts; scarcity, choice and opportunity
cost.
7. With examples, distinguish between a positive
and a normative statement.

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THE END

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