Nature and scope of economics

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Nature and scope of economics

  1. 1. Nature andScope ofEconomicsByArihant Jain
  2. 2. Introduction• The word Economics is derived from the Greek word ―OKIOS NEMEIN‖ meaning household management• Man is a bundle of desires. Goods and services satisfy these wants. But almost all the goods are scares• To produce goods factors of production are needed and these are all scarce 5/5/2012 Arihant Jain P.G.D.M. 2
  3. 3. The Study of Economics• Economics is the study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided.• It is the study of economic problems. Wants are motive for economic activity. Wants leads to efforts and which lead to satisfaction 5/5/2012 Arihant Jain P.G.D.M. 3
  4. 4. Why Study Economics?• To learn a way of thinking• Three fundamental concepts: – Opportunity cost – Marginalism, and – Efficient markets 5/5/2012 Arihant Jain P.G.D.M. 4
  5. 5. Contd… Opportunity Cost • the best alternative that we forgo, or give up, when we make a choice or a decision • arises because time and resources are scarce. Marginalism • In weighing the costs and benefits of a decision, it is important to weigh only the costs and benefits that arise from the decision Efficient Market • is one in which profit opportunities are eliminated almost instantaneously • Profit opportunities are rare because, at any one time, there are many people searching for them 5/5/2012 Arihant Jain P.G.D.M. 5
  6. 6. Economic Definitions• Adam Smith gave the Wealth Definition• Alfred Marshall gave the Welfare Definition• Lionel Ribbons gave the Scarcity Definition• Paul Samuelson gave the Growth Definition 5/5/2012 Arihant Jain P.G.D.M. 6
  7. 7. Wealth Definition• Adam Smith (Father of Economics) in his book ―Wealth of nations 1776‖ defined economics is the study of wealth• J.B. Jay, J.S. Mill, Walker, B Price all agreed with Adam Smith• In this definition wealth is given the first place and man is given the second place 5/5/2012 Arihant Jain P.G.D.M. 7
  8. 8. Meaning of wealth• Around the industrial revolution, merchants were the most powerful class in Western Europe, and wealth for them meant money only. Since money at that time was in the shape of gold, merchants declared gold as the only wealth,• This definition rendered merchants as the only productive class, as they created it by trade,• This definition harmed the interests of newly emerging class of petty industrialists and their hard working workers,• Adam Smith as spokesman of the emerging class widened the definition to include all material goods,• Activities which did not result in material goods production were unproductive. 5/5/2012 Arihant Jain P.G.D.M. 8
  9. 9. Causes of wealth ofnations: Capitalism• Traders were not the only cause of wealth,• Freedom of trade and enterprise were the greatest causes of wealth because:i) Human beings are born selfishii) They have self interest,iii) It is not the benevolence but self interest which guides economic activityiv) So left to themselves, each individual would maximise his self interest (income/wealth),v) When all the adult citizens of a nation maximise their self interest, the wealth of nation would grow the fastest,vi) So why should the mercantilists or anybody else impose restriction on the freedom of individuals, 5/5/2012 Arihant Jain P.G.D.M. 9
  10. 10. Exceptions (Criticism)• While an invisible hand guides societies which rely on self interest, there are certain exceptions where it does not work. These are:• Defense• Public utilities• Law order and justice 5/5/2012 Arihant Jain P.G.D.M. 10
  11. 11. Science of welfare• Adam Smith’s prophesy that self interest would be beneficial to all did not materialise after the industrial revolution,• The revolution divided the society between haves and have-nots, including unemployd• Criticism turned reformist and revolutionary,• Marshall attempted to offer a compromise and a new definition:― Political economy or economics is the 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 range of our enquiry becomes restricted to that part of social welfare which can be brought directly or indirectly into relashhionship with measuring rod of money‖, Pigou. 5/5/2012 Arihant Jain P.G.D.M. 11
  12. 12. Criticism of welfaredefinition• Economics is not restricted to material things, non material things like health and education, entertainment are also important,• Welfare is subjective and varies from person to person,• It is difficult to segregate material welfare from other types of welfare,• The concept of welfare is not fixed but subject to change and interpretation,• It differs from time to time, country to country 5/5/2012 Arihant Jain P.G.D.M. 12
  13. 13. Science of scarcity• According to Lionel Ribbons Economics is ―the science which studies human behavior as a relationship between ends and scarce means which have alternative uses‖. So all goods and services commanding a price fall under the scope of economics.• Unlimited human wants: Necessities, comforts and luxuries’• Necessities:a) Necessities of existenceb) Necessities of efficiency, andc) Necessities of convention. 5/5/2012 Arihant Jain P.G.D.M. 13
  14. 14. Contd…• Comforts and luxuries are :• A) Related to time, place• B) No watertight compartmentalization as a luxury may be comfort or even a necessity for someone or at different periods of history.• Criticism;• It fails to explain why labour despite being scarce remains unemployed / underemployed• It also fails to explain situations of abundance• Is neutral to ends• Ignores welfare 5/5/2012 Arihant Jain P.G.D.M. 14
  15. 15. Science of growth anddevelopment• ―Economics is the study of how men and society chose, 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 future amongst various people and groups of society‖ 5/5/2012 Arihant Jain P.G.D.M. 15
  16. 16. The Scope of Economics• Microeconomics is the branch of economics that examines the functioning of individual industries and the behavior of individual decision- making units—that is, business firms and households.• Macroeconomics is the branch of economics that examines the economic behavior of aggregates— income, output, employment, and so on—on a national scale 5/5/2012 Arihant Jain P.G.D.M. 16
  17. 17. The Diverse Fields of Economics Examples of microeconomic and macroeconomic concerns Production Prices Income EmploymentMicroeconomics Production/Output Price of Individual Distribution of Employment by in Individual Goods and Services Income and Wealth Individual Industries and Businesses & Businesses Price of medical Wages in the auto Industries care industry Jobs in the steel How much steel Price of gasoline Minimum wages industry How many offices Food prices Executive salaries Number of How many cars Apartment rents Poverty employees in a firmMacroeconomics National Aggregate Price National Income Employment and Production/Output Level Total wages and Unemployment in salaries the Economy Total Industrial Consumer prices Output Producer Prices Total corporate Total number of Gross Domestic Rate of Inflation profits jobs Product Unemployment Growth of Output rate 5/5/2012 Arihant Jain P.G.D.M. 17
  18. 18. The Method ofEconomics• Positive economics studies economic behavior without making judgments. It describes what exists and how it works.• Normative economics, also called policy economics, analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe courses of action. 5/5/2012 Arihant Jain P.G.D.M. 18
  19. 19. Contd…• Positive economics includes: – Descriptive economics, which involves the compilation of data that describe phenomena and facts. – Economic theory, which involves building models of behavior. • An economic theory is a general statement of cause and effect, action and reaction 5/5/2012 Arihant Jain P.G.D.M. 19
  20. 20. Contd…• Empirical economics refers to the collection and use of data to test economic theories.• Many data sets are available to facilitate economic research. They are collected by both government agencies and private companies, 5/5/2012 Arihant Jain P.G.D.M. 20
  21. 21. Criteria for judgingeconomic outcomes• Economic growth, or an increase in the total output of an economy.• Economic stability, or the condition in which output is steady or growing, with low inflation and full employment of resources.• Efficiency, or allocative efficiency. An efficient economy is one that produces what people want at the least possible cost• Equity, or fairness of economic outcomes 5/5/2012 Arihant Jain P.G.D.M. 21
  22. 22. Economic System• The manner or the structure through which the economy of a country operates is known as Economic System• Variety of Economic Systems• They differ from each other not only in details but also in broader outlines• Types of Economic Systems: – Capitalist – Socialist and – Mixed Economy 5/5/2012 Arihant Jain P.G.D.M. 22
  23. 23. Capitalism• All economic activities are guided by market forces• Policy of laiseez-faire (absence of state intervention). Privately owned resources• What to Produce, how to produce and for whom to produce power rests with the producers• Profit maximization is the main aim 5/5/2012 Arihant Jain P.G.D.M. 23
  24. 24. Merits and Demerits Capitalism Merits Demerits Fast Hides Self impleme- real High rate of Inequalities ntation of need of obsolescenceregulatory in income efficient the and wealth decisions society 5/5/2012 Arihant Jain P.G.D.M. 24
  25. 25. Socialism• Originated due to drawbacks of capitalism• Just opposite to capitalism• The merits of capitalism become the demerits and merits thus become the demerits• It aims at removing the inequalities of income and wealth, inequalities of economic opportunities, unemployment and waste of productive resources 5/5/2012 Arihant Jain P.G.D.M. 25
  26. 26. Mixed Economy• Merits of capitalism and Socialism are taken and a Mixed economy is formed• Generally adopted by countries with low per capita income and is underdeveloped or is developing (India)• Some sectors are kept in Government control 5/5/2012 Arihant Jain P.G.D.M. 26
  27. 27. 5/5/2012 Arihant Jain P.G.D.M. 27

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