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Definition Nature Scope and Significance of Economics, Business Economics - Divyansh Agrawal

The document defines economics as the science that studies the production, exchange, and consumption of goods, focusing on the scarcity of resources and human decision-making. It explores various definitions of economics by notable figures, emphasizing concepts such as wealth, welfare, and choice, while differentiating between traditional and modern approaches, including microeconomics and business economics. Business economics applies economic theories to real-world business decision-making, focusing on aspects like demand analysis, cost management, pricing, and capital management, while addressing social responsibilities of businesses.

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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.
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.
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.
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”.
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.
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
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”.
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.
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
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”.
 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.
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
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
Economics is also an art  System of rules for the attainment of a given end  Offers practical guidance in the solution of economic problems
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
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
2) Inductive Method  Method mounts up from particular to general  Observation of particular facts and formulation of laws and theorems based on observed facts
Traditional Approach Subject matter of economics Modern Approach
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
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
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
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.
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
 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.
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.
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.
 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.
 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.
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.
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.
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.