Nature and Scope of Economics

1. Nature and Scope of Economics Course: BBA Subject: Business Economics Unit: I

2. Introduction • The word Economics is derived from the Greek words “OKIOS NEMEIN” meaning household management . • Man is bundle of desires. Goods and services satisfy these wants. But almost all the goods are scarce. To produce goods land, labour, capital and organization are needed. Economic problem arises because of scarcity. • Economics is a study of economic problems. Wants are motive force for economic activity. Wants leads to efforts. Efforts secures satisfaction.

4. Economic Activities • Consumption: Extracting utility from goods and services. • Production: Production of goods and services which posses utility. • Exchange: means buying and selling of goods and services. It is link between consumer and producer. • Distribution: Sharing of income by the four factors of production.

5. Economics Definitions • Wealth Definition. Adam Smith • Welfare Definition. Alfred Marshall • Scarcity Definition. Lionel Robbins • Growth Definition. Paul Samuelson

6. 1.Wealth Definition. • Father of Economics Adam Smith in his book “ Wealth of Nations 1776” defined economics is the study of wealth. • J.B Say, J.S Mill, Walker, B.Price all agreed that Economics is concerned with wealth. • In this definition wealth is given first place, man has given second place

7. Wealth definition criticism: • Walras in his book Elements of pure economics “wealth definition is unscientific one.” • Carlyle. Ruskin, Dickens criticized it as dismal science. • Carlyle “ It was a Gospel of mammon and pig science. • Economics criticized as bread and butter science. • Economics is science of ills and not wealth.

8. 2. Welfare definition. • Alfred Marshall in his book “Principles of Economic Science-1890” defined Economics is the study of man kind in the ordinary business of life. • “Economics is one side a study of wealth; and on the other side more important side a part of study of man • He made economics is a science of human welfare.

9. Welfare definition-points • Mainly concerned with the study of man in relation to wealth. • First place to man, second place to wealth. • It studies man not in isolation but a member of a social group. • Definition considered only material welfare, ignored immaterial welfare.

10. Welfare definition- criticism • Restricted scope of economics –considered only material goods. • Robbins objected the word material and the idea ‘welfare’. There are some goods which do not promote human welfare. Ex. Liquors, cigarettes. • Welfare is subjective, it cannot be measured. • Economics is neutral between ends. No way concerned what is good and what is bad. • Economics is not a social science. Robbins regards as a human science.

11. 3. Scarcity Definition. • Lionel Robbins in his book ‘Nature and Significance of Economic Science-1932 given scarcity definition. • “Economic is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”

12. Scarcity Definition-main Points • Unlimited wants. • Scarce means. • Means have alternative uses.

13. Superiority of scarcity definition • Robbins included material and non material goods ,widens the scope of economics. • He made economics a positive science. • His definition is universal.

14. Growth definition • Economics Noble prize winner (1970) Paul Samuelson proposes a dynamic definition in his book Economics(1948) • Economics is the study of how people and society end up choosing with or without money to employ scarce productive resources that could have alternative uses to produce various commodities and distribute them for consumption, now or in the future among various persons and groups in society. Economic analysis the cost and benefits of improving patterns of resources use.

15. Growth Definition-points • Scarcity : Unlimited wants ,scarcity of resources and alternative uses. • Dynamism: The importance of time is brought in the definition. • Economic growth: His definition gave importance to economic growth • Wide scope: Economic choice exist not only in a monetary economy but also in a barter economy. • Problem of choice: Definition explains problem of choice in present and future in dynamic conditions.

16. Micro- Macro Economics Economics noble prize winner (1969), Ragner Frisch was the first to use the terms micro and macro in economics in 1933. The terms micro and macro derived from Greek. Mikros (small) and makros (large). Micro means individualistic and macro aggregative.

17. Micro Economics. • Micro economics is the study of particular firms, households, individual prices and particular commodity. • Micro economics is based on the assumption of full employment and ‘ceteris paribus’ (other things remain constant). • Micro economics was popularized by David Ricardo, Marshall, J.B Say and J.S Mill. • Micro economics called as ‘ Price Theory.’

18. Macro Economics: • Macro economics is the study of economic system as a whole. • Macro economics studies aggregates values like National Income, National output, general price level, total consumption, saving and investment of a country. • Macro economics is called ‘ Income and Employment theory.’ • J.M Keynes popularized macro Economics • Where micro economics explain a tree in the forest, macro economics explains all the trees in the forest.

19. Static and Dynamic Analysis • The French sociology philosopher Augustine Compte used the terms ‘static and dynamic’ first time in social science. • J.S Mill was the first to use these terms in economics. • Clear and scientific distinction between the two terms made by Ragner Frisch in 1928.

20. Static Analysis • The word ‘static’ derived from the Greek ‘statike.’ which means bringing to a stand still. It means a state of rest or no movement. • According to Clark, where five kinds of changes are conspicuous by their absence. The size of population, the supply of capital, methods of production, forms of business organization and wants of people. • Static economy thus a time less economy where no changes occur. • Static is like a snapshot from a ‘still.’

21. Dynamic Analysis • Dynamic is the study of change . • Economic dynamics is concerned with time lags, rates of change, • Economic dynamics is the running picture of the working of the economy.

22. 5.Deductive-Inductive Methods To study economics, two methods are there.1.Deductive method, 2. Inductive method. Deduction proceeds from general to particular while induction proceeds from particular to general.

23. Deduction method This method deduces conclusions from the truths established by other methods. It involves the process of reasoning from certain laws or principles which are assumed to be true, to analysis of facts. “Deduction as a descending process” in which we proceed from a general to principle to particular. It as ‘a priori’ method and also called it abstract and analytical method Ricardo regarded as the first economist who applied this method. Ex; the law of diminishing returns.

24. Deduction method -merits It is intellectual method, near to reality. This method is simple. The use of mathematics brings exactness. Universal validity.

25. Deduction method – demerits This method based on assumptions. Inadequate data. Lerner criticised this method is simply armchair analysis.

26. Inductive method This method involves the process of reasoning from particular to general. It as an ‘ascending process’. This method involves four stages: 1.observation; 2. formation of hypothesis 3.generalisation; 4. verification. This method was introduced by German historical school Roscher, Hillbrand, and Fedric List.

27. Inductive method-Merits This method proceeds from particular to general, it is thus realistic. Helps in future enquiries. Statistical method. Dynamic.

28. Inductive method-Demerits Statistical numbers can be misused and misinterpreted. Probable. Time consuming and costly method. Differ from investigator to investigator for the same problem.

29. Difference between Economics and Business Economics • Economics is the social science that studies the production, distribution, and consumption of goods and services. Economics aims to explain how economies work and how economic agents interact. Economic analysis is applied throughout society, in business and finance but also in crime, education, the family, health, law, politics, religion, social institutions, and war. Economic textbooks distinguish between microeconomics ("small" economics), which examines the economic behavior of agents (including individuals and firms) and "macroeconomics" ("big" economics), addressing issues of unemployment, inflation, monetary and fiscal policy. Business economics (also called managerial economics), is a branch of economics that applies microeconomic analysis to specific business decisions. As such, it bridges economic theory and economics in practice. It draws heavily from quantitative techniques such as regression analysis and correlation, Lagrangian calculus (linear). If there is a unifying theme that runs through most of business economics it is the attempt to optimize business decisions given the firm's objectives and given constraints imposed by scarcity, for example through the use of operations research and programming

30. Source: • Manquee book managerial economics. • www.Slideshare.com • www.Wikipedia.com • www.Google.com