Definition Nature Scope and Significance of Economics, Wealth Definition, Welfare Definition, Criticism, Scope of Economics, Economics a science or an artScience teaches us to know and an art teaches us to do. Science and art are complementary to each other, A Positive or a Normative Science, Business Economics,Methodology of Economics, Nature of Business Economics, Scope of Business Economics, Divyansh Agrawal, Divyansh Agrawal Shivpuri, PIMR, Prestige Institute of Management, Indore

1. Definition Nature Scope and Significance of
Economics
 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 scarcity of resources
and choices among their alternative uses.
 The resources or inputs available to produce goods are
limited or scarce. This scarcity induces people to make
choices among alternatives, and the knowledge of
economics is used to compare the alternatives for
choosing the best among them.

2. Two major factors are responsible for the emergence of economic problems.
They are: i) the existence of unlimited human wants and ii) the scarcity of
available resources.
Economics deals with how the numerous human wants are to be satisfied
with limited resources. Thus, the science of economics centres on want -
effort - satisfaction.
Economics not only covers the decision making behavior of individuals but
also the macro variables of economies like national income, public finance,
international trade and so on.
The word ‘Economics’ was derived from two Greek words, oikos (a house)
and nemein (to manage) which would mean ‘managing an household’
using the limited funds available, in the most satisfactory manner possible.

3. 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. He
explained how a nation’s wealth is created. 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 though he has no real intention to promote
the society’s interests.

4. Welfare Definition
Alfred Marshall (1842 - 1924) wrote a book
“Principles of Economics”(1890) in which he defined
“Political Economy” or 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”.

5. The important features of Marshall’s definition are
as follows:
 According to Marshall, economics is a study of
mankind in the ordinary business of life, i.e.,
economic aspect of human life.
 Economics studies both individual and social actions
aimed at promoting economic welfare of people.
 Marshall makes a distinction between two types of
things, viz. material things and immaterial things.

6. Criticism
 Consideration of only material things
 Makes a distinction between those things that are
capable of promoting welfare of people and those
things that are not capable of promoting welfare
 No clear cut definition of welfare

7. Welfare Definition
Lionel Robbins published a book “An Essay on the
Nature and Significance of Economic Science” in
1932. According to him, “economics is a science
which studies human behavior as a relationship
between ends and scarce means which have
alternative uses”.

8. The major features of Robbins’ definition are as follows:
a) Ends refer to human wants. Human beings have
unlimited number of wants.
b) Resources or means, on the other hand, are limited or
scarce in supply. There is scarcity of a commodity, if its
demand is greater than its supply. In other words, the
scarcity of a commodity is to be considered only in
relation to its demand.
c) The scarce means are capable of having alternative uses.
Hence, anyone will choose the resource that will satisfy
his particular want. Thus, economics, according to
Robbins, is a science of choice.

9. Criticism
 No distinction between goods conducive to human
welfare and goods that are not conducive to human
welfare. Robbins conclude that economics is neutral
between ends
 Reduced economics to theory of resource allocation
 Does not cover the theory of economic growth and
development

10. Growth Definition
 Prof. Paul Samuelson defined economics 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”.

11.  Samuelson has made his definition dynamic by
including the element of time in it. Therefore, it
covers the theory of economic growth.
 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.
 The definition covers various aspects like
production, distribution and consumption.

12. Scope of Economics
1) Economics a science or an art
2) A positive or a normative science
3) Methodology of economics
4) Subject matter of economics

13. Economics a science or an art
Science teaches us to know and an art teaches us to do.
Science and art are complementary to each other
Science as well as a social science
 Systematized body of knowledge that traces the
relationship between cause and effect
 Should be amenable to measurement
 Economics is a branch of knowledge where the
various facts relevant to it have been systematically
collected, classified and analyzed
 Investigates the possibility of deducing
generalizations as regards the economic motives of
human beings measurable in terms of money
 Economics is also a social science i.e. we study
behavior of men in groups

14. Economics is also an art
 System of rules for the attainment of a given end
 Offers practical guidance in the solution of
economic problems

15. A Positive or a Normative Science
Positive Science
 Describes what it is
 Provides results of economic analysis of a problem
 Based on facts which can be verified by scientific
measurement
Normative Science
 Describes what ought to be
 Makes distinction between good and bad; what
should be done to promote human welfare
 Involves ethical values

16. Methodology of Economics
1) Deductive Method
 Begins with principles that are self evident or based
on strict observations followed by a process of pure
reasoning to the consequences they implicitly
contain
 Useful in analyzing complex economic problems
where cause and effect are inextricably mixed up
provided certain assumptions are valid

17. 2) Inductive Method
 Method mounts up from particular to general
 Observation of particular facts and formulation of
laws and theorems based on observed facts

18. Traditional
Approach
Subject
matter of
economics
Modern
Approach

19. Traditional Approach
Economics is studied under 5 major divisions:
1) Consumption: Satisfaction of human wants through the
use of goods and services
2) Production: Creation of utility or producing things for
satisfying human wants
3) Exchange: The process of buying and selling constitutes
exchange
4) Distribution: The process of determining rent, wage,
interest and profit
5) Public Finance: Study of public revenue and public
expenditure

20. Modern Approach
Study of economics is divided into:
1) Microeconomics
• Analyses economic behavior of any particular decision
making unit such as a household or firm
• Studies the flow of economic resources or factors of
production from the households or resource owners to
business firms and flow of goods and services from
business firms to households
• Studies the behavior of individual decision making unit
with regards to fixation of price and output and its
reaction to the changes in demand and supply conditions
• Also know as price theory

21. 2) Macroeconomics
 Studies the behavior of the economic system as a whole or
all the decision making units put together
 Deals with behavior of aggregates like total employment,
gross national product (GNP), national income, general
price level, etc.
 Also known as income theory

22. Business Economics
 Business Economics, also called Managerial Economics,
is the application of economic theory and methodology to
business.
 Business involves decision-making. Decision making
means the process of selecting one out of two or more
alternative courses of action.
 The question of choice arises because the basic resources
such as capital, land, labour and management are limited
and can be employed in alternative uses.
 The decision-making function thus becomes one of
making choice and taking decisions that will provide the
most efficient means of attaining a desired end, say,
profit maximisation.

23. Economic Theory and
Methodology
Decision Problems in
Business
Business Economic
1) Application of Economic
Theory and Methodology to
solving Business problems
2) Optimal Solution
to Business
Problems

24.  Business economics serves as a bridge between
economic theory and decision-making in the context of
business.
 According to Mc Nair and Meriam, “Business economic
consists of the use of economic modes of thought to
analyse business situations.”
 Siegel man has defined managerial economic (or
business economic) as “the integration of economic
theory with business practice for the purpose of
facilitating decision-making and forward planning by
management.”
 We may, therefore, define business economic as that
discipline which deals with the application of economic
theory to business management.

25. Nature of Business Economics
 The emphasis in business economics is on normative
theory. Business economic seeks to establish rules
which help business firms attain their goals
 However, if the firms are to establish valid decision
rules, they must thoroughly understand their
environment. This requires the study of positive or
descriptive theory.
 Thus, Business economics combines the essentials of
the normative and positive economic theory, the
emphasis being more on the former than the latter.

26. Scope of Business Economics
The following aspects are said to generally fall under business
economics:
 Demand Analysis and Forecasting provides the essential basis
for business planning and occupies a strategic place in managerial
economic. The main topics covered are: Demand Determinants,
Demand Distinctions and Demand Forecasting.
 Cost and production Analysis
Discovering economic costs and the ability to measure them are the
necessary steps for more effective profit planning, cost control and
sound pricing practices.
Production analysis frequently proceeds in physical terms while cost
analysis proceeds in monetary terms. The main topics covered under
cost and production analysis are: Cost concepts and classification,
Cost-output Relationships, Economies and Diseconomies of scale,
Production function and Cost control.

27.  Pricing Decisions, policies and practices
Price is the genesis of a firms revenue and as such its success largely
depends on how correctly the pricing decisions are taken. The
important aspects dealt with under pricing include. Price
Determination in Various Market Forms, Pricing Method,
Differential Pricing, Product-line Pricing and Price Forecasting Profit
Management.
 Profit Management
Business firms are generally organized for purpose of making profits
and in the long run profits earned are taken as an important measure
of the firms success.
In a world of uncertainty, expectations are not always realized so
that profit planning and measurement constitute a difficult area of
business economic. The important aspects covered under this area
are : Nature and Measurement of profit, Profit policies and
Technique of Profit Planning like Break-Even Analysis.

28.  Capital Management
Relatively large sums are involved in the firm’s capital Investments
and the problems are so complex that their solution requires
considerable time and labour. Often the decision involving capital
management are taken by the top management.
Briefly Capital management implies planning and control of capital
expenditure. The main topics dealt with are: Cost of capital Rate of
Return and Selection of Projects.
The various aspects outlined above represent major uncertainties
which a business firm has to reckon with viz., demand uncertainty,
cost uncertainty, price uncertainty, profit uncertainty and capital
uncertainty. We can therefore, conclude that the subject matter of
business economic consists of applying economic principles and
concepts to deal with various uncertainties faced by a business firm.
These various aspects are also considered to be comprising the
subject matter of business economic.

29. Significance of Business Economics
1. Business economic is concerned with those aspects of
traditional economics which are relevant for business decision
making in real life.
These are adapted or modified with a view to enable the
manager take better decisions. Thus, business economic
accomplishes the objective of building a suitable tool kit from
traditional economics.
2. It also incorporates useful ideas from other disciplines such
as psychology, sociology, etc. If they are found relevant to
decision making. In fact, business economics takes the help of
other disciplines having a bearing on the business decisions in
relation various explicit and implicit constraints subject to
which resource allocation is to be optimized.

30. 3.Business economics helps in reaching a variety of business decisions
in a complicated environment. Certain examples are :
 What products and services should be produced?
 What input and production technique should be used?
 How much output should be produced and at what prices it should
be sold?
 What are the best sizes and locations of new plants?
 When should equipment be replaced?
 How should the available capital be allocated?
4.Business economics makes a manager a more competent model
builder. It helps him appreciate the essential relationship
characterizing a given situation.
5. At the level of the firm. Where its operations are conducted though
known focus functional areas, such as finance, marketing, personnel
and production, business economics serves as an integrating agent
by coordinating the activities in these different areas.

31. 6.Business economics takes cognizance of the interaction
between the firm and society, and accomplishes the key role of
an agent in achieving the its social and economic welfare goals.
It has come to be realized that a business, apart from its
obligations to shareholders, has certain social obligations.
Business economics focuses attention on these social
obligations as constraints subject to which business decisions
are taken.
It serves as an instrument in furthering the economic welfare
of the society through socially oriented business decisions.
 Conclusion :
The usefulness of business economics lies in borrowing and
adopting the toolkit from economic theory, incorporating
relevant ideas from other disciplines to take better business
decisions, serving as a catalytic agent in the process of decision
making by different functional departments at the firm’s level,
and finally accomplishing a social purpose by orienting
business decisions towards social obligations.