Chapter 1

Introduction to Economics
It is very difficult to define economics because economics is very dynamic subject. Its scope
keeps on changing rather expanding. Still for proper understanding of any subject, it
becomes necessary to define it as close as possible. Economics is the social science that is
concerned with the production, distribution and consumption of goods and services. The
term economics comes from the Ancient Greekoikonomia, management of household,
administration from oikos, house + nomos, custom or law, hence rules of the house
(hold). Current economic models developed out of the broader field of political economy
in the late 19th century, owing to a desire to use of an empirical approach more akin to the
physical science.
Economics aims to explain how economies work and how economic agents interact.
Economic analysis is applied throughout society, in business, finance and government, but
also in crime, education, the family, health, law, politics, religion, social institutions, war,
and science. The expanding domain of economics in the social science has been described
as economic imperialism. The above description of economics shows the nature of
economics in modern context. It tells that economics can be used for raising the living
standard of people and their welfare. However, it also wants that economic issues or
economic objectives might become a tool in the hands of people, who want to exploit it for
ulterior motive like separation from others. However, now we can discuss some formal
definitions given by the economists over a period of time.

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. For example, a farmer
can grow paddy, sugarcane, banana, cotton etc. in his garden land. But he has to choose a
crop depending upon the availability of irrigation water.
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. The numerous human wants are to be satisfied through the scarce resources
available in nature. Economics deals with how the numerous human wants are to be
satisfied with limited resources. Thus, the science of economics centers on want - effort satisfaction.
Economics is the study of how people choose to use resources.
Resources include the time and talent people have available, the land, buildings, equipment,
and other tools on hand, and the knowledge of how to combine them to create useful
products and services.
Important choices involve how much time to devote to work, to school, and to leisure, how
many dollars to spend and how many to save, how to combine resources to produce goods
and services, and how to vote and shape the level of taxes and the role of government.
Often, people appear to use their resources to improve their well-being. Well-being
includes the satisfaction people gain from the products and services they choose to
consume, from their time spent in leisure and with family and community as well as in jobs,
and the security and services provided by effective governments. Sometimes, however,
people appear to use their resources in ways that don't improve their well-being.
In short, economics includes the study of labor, land, and investments, of money, income,
and production, and of taxes and government expenditures. Economists seek to measure
well-being, to learn how well-being may increase over time, and to evaluate the well-being
of the rich and the poor. The most famous book in economics is the Inquiry into the Nature
2

and Causes of The Wealth of Nations written by Adam Smith, and published in 1776 in
Scotland.
Although the behavior of individuals is important, economics also addresses the collective
behavior of businesses and industries, governments and countries, and the globe as a
whole. Microeconomics starts by thinking about how individuals make decisions.
Macroeconomics considers aggregate outcomes. The two points of view are essential in
understanding most economic phenomena.

A. DEFINITIONS OF ECONOMICS
Several economists have defined economics taking different aspects into account. 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.
i)

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 nations
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 societys interests.
Criticism: Smith defined economics only in terms of wealth and not in terms of human
welfare. Ruskin and Carlyle condemned economics as a dismal science, as it taught
selfishness which was against ethics. However, now, wealth is considered only to be a mean
to end, the end being the human welfare. Hence, wealth definition was rejected and the
emphasis was shifted from wealth to welfare.
ii) 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 Marshalls definition are as follows:
a) According to Marshall, economics is a study of mankind in the ordinary business of life,
i.e., economic aspect of human life.

b) Economics studies both individual and social actions aimed at promoting economic
welfare of people.
c) Marshall makes a distinction between two types of things, viz. material things and
immaterial things. Material things are those that can be seen, felt and touched, (E.g.) book,
rice etc. Immaterial things are those that cannot be seen, felt and touched. (E.g.) skill in the
operation of a thrasher, a tractor etc., cultivation of hybrid cotton variety and so on. In his
definition, Marshall considered only the material things that are capable of promoting
welfare of people.
Criticism: a) Marshall considered only material things. But immaterial things, such as the
services of a doctor, a teacher and so on, also promote welfare of the people.b) Marshall
makes a distinction between (i) those things that are capable of promoting welfare of
people and (ii) those things that are not capable of promoting welfare of people. But
anything, (E.g.) liquor, that is not capable of promoting welfare but commands a price,
comes under the purview of economics.
c) Marshalls definition is based on the concept of welfare. But there is no clear-cut
definition of welfare. The meaning of welfare varies from person to person, country to
country and one period to another. However, generally, welfare means happiness or
comfortable living conditions of an individual or group of people. The welfare of an
individual or nation is dependent not only on the stock of wealth possessed but also on
political, social and cultural activities of the nation.
iii) Scarcity 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: a) Robbins does not make any distinction between goods conducive to human
welfare and goods that are not conducive to human welfare. In the production of rice and
4

alcoholic drink, scarce resources are used. But the production of rice promotes human
welfare while production of alcoholic drinks is not conducive to human welfare. However,
Robbins concludes that economics is neutral between ends. b) In economics, we not only
study the micro economic aspects like how resources are allocated and how price is
determined, but we also study the macroeconomic aspect like how national income is
generated. But, Robbins has reduced economics merely to theory of resource allocation.
c) Robbins definition does not cover the theory of economic growth and development.

iv)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.
The major implications of this definition are as follows:
a) Samuelson has made his definition dynamic by including the element of time in it.
Therefore, it covers the theory of economic growth.
b) 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.
c) The definition covers various aspects like production, distribution and consumption.

Of all the definitions discussed above, the growth definition stated by Samuelson appears
to be the most satisfactory. However, in modern economics, the subject matter of
economics is divided into main parts, viz., i) Micro Economics and ii) Macro Economics.
Economics is, therefore, rightly considered as the study of allocation of scarce resources (in
relation to unlimited ends) and of determinants of income, output, employment and
economic growth.

Two Major Economic Problems: Scarcity and Unlimited Wants:

The management of societys resources is important because resources are scarce. Scarcity
means that society has limited resources and therefore cannot produce all the goods and
services people wish to have. Just as a household cannot give every member everything he
or she wants, a society cannot give every individual the highest standard of living to which
he or she might aspire.
A pervasive condition of human existence that results because society has unlimited wants
and needs, but limited resources used for their satisfaction. This fundamental condition is
the common thread that binds all of the topics studied in economics.
Scarcity is a perpetual problem facing society due to resources and unlimited wants and
needs satisfied with these resources. Scarcity means that society does not have enough of
everything (resources) for everyone (wants and needs).The BASIC ECONOMIC PROBLEM
arises because resources are scarce, but human wants are unlimited.
Scarcity is one of the most basic economic problems we face. We run into scarcity
because we are a society with unlimited wants, but limited resources. Therefore, we have
to choose. We have to make trade-offs. We have to efficiently allocate resources. We have
to do those things because resources are limited and cannot meet our own unlimited
demands.
Without scarcity, the science of economics would not exist. Economics is the study of
production, distribution, and consumption of goods and services. If society did not have to
make choices about what to produce, distribute, and consume, the study of those actions
would be relatively boring. Society would produce, distribute, and consume an infinite
amount of everything to satisfy the unlimited wants and needs of humans. Everyone
would get everything they wanted and it would all be free. But we all know that is not the
case. The decisions and trade-offs society makes due to scarcity is what economists study.

Three Fundamental Problems of Economic Organizations:

In every economy; economic organizations, irrespective of their type, have to face and solve
three problems of economics. These three problems are as follows,
Problem 1 what commodities are produced & in what quantities.
Problem 2 how goods are produced.
Problem 3 for whom goods are produced.

Description and solution to these problems in various economies is given below.

Problem 1 and its Solution:

In any society there are unlimited wants but resources are limited or resources are scarce.
And these resources have alternative uses. Due to this each society has to decide what they
are to produce using these scarce resources. So each economy has to make choice by
thinking what to produce. For example a economy has to decide whether to produce more
services such as transport or hospitals, or consumable goods such as more clothes, houses
or more capital goods such as roads, buildings etc.
A society has various needs and wants. But the resource it has is always limited. So to
produce one, it has to leave another. Also, the quantity is a matter. That is, the production
of a commodity may low down another commoditys production. So, it is a problem, that
using the limited resources what to produce and in what quantities. The society must have
to consider the most obvious needs of its member to produce or to make the best use of the
resources.
In free economy, price mechanism is used to solve that problem. Price mechanism is
a way that includes thinking about supply and demand, and the decisions which are taken
get based on it. In this case, those commodities are produced for consumers who are ready
to pay and the payment will cover at least the production cost. Then the quantity of the
good is selected both on the resources and the demand.
In mixed economy, the government has got some hands over the production of
goods. Thats why though one has got enough resources and demand, he cannot produce
the thing in the quantity and with the price he wants. The demand and supply along with
the necessity gets importance here.
Problem 2 and its Solution:
An economy can use more labor or more capital when combining the technique of
production. The technique is decided by factors such as the motive of a economy,
availability of resources and so forth.
How to produce refers to the technique that is necessary to produce the goods in the
best way. The best way depends on the production cost, use of resources etc. Each society
has to find out ways to produce a commodity in low production cost and resource saving.
7

As the resources are limited, if these are used in much amount to produce a commodity, it
will become less to produce another. So the society or the economy will have to find out the
best way to produce a commodity which will slow down the production cost, will use less
resources, electricity, man power etc.
In free economy, the goods are produced by keeping many things in mind. Before
going to factory, the demand of the good and the possible amount which may be paid gets
the importance. The production cost is also very important. For good business, it is
necessary to keep the production cost low. In free economy, by price mechanism, the
production of goods is a matter related mainly with the production cost.
In mixed economy, the production of a good is a matter controlled directly by the
government. How the goods will be produced should have to be sound by the government
view. Mainly the price mechanism gets modification by the government in that case.
Problem 3 and its Solution:
Once an economy has produced goods and services, it also has to decide who will consume
those goods. This will be decided by different way by the nature of the economy.
Though the above three problem are common to each economy, an economy can take
different approaches to solve these basic economics problems, and depending on the
approach economies are organized in different way. This is why we find different
economies such as market economy, centrally planned economy and mixed economy and
so forth.
For whom to produce is a problem of distribution. No society can produce a commodity as
much as its peoples need. So, they will have to find ways to distribute the production.
Though they cannot satisfy all, but at least they will have to try to distribute. This also has
to be noticed, that all kind of goods are not for all. Except the fundamental goods or
necessities, other goods get targets to whom they will be distributed.
In free economy, one can produce goods for anyone he wants. That means one can
target a particular section of society to sell his products. That means, the buyer will be the
one who will be able and willing to pay for.
But in mixed economy, the targeted section of society gets some modifications. Here, the
government can raise his voice against the production of ones. If a product is for all, then it
should have to be for the majority buyers. This is the process at all. But sometimes the
production cost of a product gets too higher that the price cannot be low down. In that case,
8

the government raises funds from rich by taxation etc and redistributes to the poor by
subsidies, welfare payments etc.

Production Possibility Frontier:

Production possibility frontier is the graph which indicates the various production
possibilities of two commodities when resources are fixed.
A curve that compares the trade offs between two goods produced by an economy in order
to demonstrate the efficient use of resources. Points along the curve are considered
efficient and obtainable, and show the maximum amount of one good that can be produced
in relation to another. Points within the curve are considered obtainable but inefficient.
Points outside the curve are considered impossible to obtain. A classic
example considers an economy that can produce either guns or butter, and shows how
a government can spend a finite amount of resources on guns (defense), butter (nondefense) or a combination of the two.
The production of one commodity can only be increased by sacrificing the production of
the other commodity. It is also called the production possibility curve or product
transformation curve.

A PPF simultaneously shows all possible combinations of two goods that can be produced
ceteris paribus; commonly it takes the form of the curve on the right. Invariably, in order for
an economy to increase the quantity of one good produced, production of the other good
9

must be sacrificed. Here, butter production must be sacrificed for production of guns. PPFs
are most commonly used to predict how much of the latter must be sacrificed for a given
increase in production of the former.
Assuming that the economy's factors of production do not increase, making more butter
requires that resources be redirected from making guns to making butter. If production is
efficient, the economy can choose between combinations (i.e. points) on the PPF: B if guns
are to be prioritized, C if more butter is needed, D if a mix is required, and so forth.
Hence, all points on the curve are points of maximum productive efficiency (no more
output can be achieved from the given inputs); all points inside the frontier are feasible but
productively inefficient (such as A); all points outside the curve are infeasible for given
resources and thus unattainable in the short run, such as X. In addition, a single point on
the PPF represents perfect allocate efficiency, where the correct combination of both is
produced to maximise social welfare.

Opportunity Cost:
The cost of passing up the next best choice when making a decision. For example, if
an asset such as capital is used for one purpose, the opportunity cost is the value of the next
best purpose the asset could have been used for. Opportunity cost analysis is an important
part of a company's decision-making processes, but is not treated as an actual cost in any
financial statement.
The opportunity cost of a choice is the value of the best alternative forgone, in a situation
in which a choice needs to be made between several mutually exclusive alternatives given
limited resources. Assuming the best choice is made, it is the "cost" incurred by not
enjoying the benefit that would be had by taking the second best choice available. The New
Oxford American Dictionary defines it as "the loss of potential gain from other alternatives
when one alternative is chosen". Opportunity cost is a key concept in economics, and has
been described as expressing "the basic relationship between scarcity and choice". The
notion of opportunity cost plays a crucial part in ensuring that scarce resources are used
efficiently.
The fundamental problem of economics is the issue of scarcity. Therefore we are concerned
with the optimal use and distribution of these scarce resources. Wherever there is scarcity
we are forced to make choices. If we have 20 we can spend it on an economic textbook or
we can enjoy a meal in a restaurant. If we spend that 20 on a textbook, the opportunity
cost is the restaurant meal we cannot afford to pay.
10

Opportunity cost is all about the most basic of economic concepts: trade-offs. It's a notion
inherent in almost every decision of daily life and of investing: if you make a choice, you
forgo the other options for now. And what's been given up can sometimes turn out to have
been the wiser choice, which is why opportunity cost is best measured in hindsight -- after
all, it is impossible to know the end outcome of any investment. Opportunity costs are
a factor not only in consumer decisions, but in production decisions, capital allocation, time
management, and lifestyle choices.
CDs (millions)
A
15
55
512

B
C

unattainable

D
Z

5
attainable
1

F
3

pizzas (millions)

As we want to produce more pizzas, we must produce less CDs, because our resources are
limited (fixed). Attainable points are the points inside and on the curve. They show points
that this economy can produce. Unattainable points are points beyond the PPF curve and
these points cannot be produced. Points on the curve are called efficient. This means all of
the resources are spent on production. At a point such as Z, some of the resources are not
used efficiently, so we call such points inefficient. At point Z, we can produce both more
pizzas and more CDs. f we are on point D and we want to increase CD production, the only
way is to decrease pizza production. So point D is efficient and Z is not.
Opportunity cost: At point C, we produce 2 pizzas and 12 CDs. f we want to increase
pizza production from 2 to 3, we cannot do this without decreasing CD production from 12
to 9. This is because a point such as G is impossible to produce. Then the opportunity cost
of 1 pizza is 3 CDs. One pizza costs us 3 CDs. To get 1 pizza, we give up 3 CDs. We come to
point D. We can also calculate the opportunity cost of one CD in terms of pizzas. At point D,

11

increasing CDs by 3 costs us 1 pizza. So opportunity cost of 1 CD is 1/3 pizza (3CD=1pizza,

1CD=1/3pizza).
Increasing opportunity cost:
Opportunity Cost of 1 pizza is not constant. From point D, if we want to increase pizzas
again by 1, then we have to give up 4 CDs and come to point E. Then the opportunity cost of
1 pizza becomes 4 CDs. Notice that opportunity cost of 1 pizza increases as we produce
more and more pizzas. Opportunity cost increases because as we want to produce more
pizzas, we force the resources that are more specialized for CD production to pizza
production. For example, workers at SONY can produce many CDs easily because they are
experienced in CD production. If we move them to pizza production, they are not
specialized in pizza production so they will make a small amount of pizza. We get a small
increase in pizza production but a large decrease in CD production.

Efficiency and Equity:

Efficiency means that society is getting the most it can from its scarce resources. Equity
means that the benefits of those resources are distributed fairly among societys members.
In other words, efficiency refers to the size of the economic pie, and equity refers to how
the pie is divided. Often, when government policies are being designed, these two goals
conflict.

10 Principles of Economics:
These are the principles on how the economy works and consists of basic concepts and
methods that economists use while doing economics. It offers an overview of what
economics is all about and also explains the unifying central idea of the field of economics.
Ten principles of economics broadly include first seven micro-economic principles and last
three macro-economic principles. Mankiws 10 principles of economics are mentioned
below:
1. People face trade-offs:
Something must be forgiven so as to attain one thing. Trade-offs between two choices is
obvious while making decisions. For example, when a person goes to a theatre to watch
movie, he is trading off the money he can use to visit restaurant, buy books, visit museum
or, get other required things. At the same time he is also giving up time that he can spend
working, playing, skiing, bike riding, studying or, doing some other task.
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2. The cost of something is what you give up to get it:

Decision making encompasses comparison between the costs and alternative course of
action as people face trade-offs.
3. Rational people think at the margin:
Decisions are made on the basis of how much benefit and cost is yielded by a single extra
unit. Decisions are made by rational people once marginal exceeds marginal cost.
Moreover, best decision can only be made by thinking at the margin. For example, decisions
are not made by people whether to work every hour possible or not working at all. Rather
the decisions are made between working fifteen hours a day or twenty hours a day. A
person decides to work for additional five hours if and only if the benefits are provided by
the increase in earnings exceeds the time spend doing nothing.
4. People respond to incentives:
An incentive is commonly some sort of reward or punishment that compels one to act.
Change in cost or benefit induces change in behavior. Incentive is responsible for creating
benefits and cost to pursue people to take decision. For example, when the rate of orange
rises people swing to other fruits rather than orange as buying orange is quite costly as
compared to other fruits. At the same time orange producer will invest more on the
production of oranges as there is more benefit.
5. Trade can make everyone better off:
Specialization is created through trade-offs which brings about improvement in variety,
quality thereby lowering the cost. Larger diversity of goods and services can be transacted
at a lesser cost by trading with others. A particular person or family or society or state or
country can never be better off isolating itself from others. For example: if one state of a
country is specialized in producing potatoes and other is specialized in rice production,
then agricultural production should be prioritized by each state by allocating more
resources towards it so as to improve efficiency. Hence, better quality of agricultural
products can be achieved at a lower cost.
6. Markets are usually a good way to organize economic activity:
H and firms, in market economy are seemed to be directed by an invisible hand which
controls the market to run in an efficient manner. Market is the place where transaction of
goods and services takes place between consumers and producers at an agreed upon price
without any intervention of central planner or the government. For example, the
unsuccessful implementation of communism is because of the unwanted consequences of
centrally planned economy. Since there are few peoples to carry out decisions in the central
economy, the decision regarding the amount of production as well as its cost cannot be
13

made efficiently thereby leading to the misallocation of resources. While in a market

economy individual decision makers interact at the market place to bring about anticipated
upshot.
7.
Government
can
sometimes
improve
market
outcomes:
Markets, however, being a worthy mode to shape economy, there are certain exceptions for
rules and laws. The failure of the market for efficient allocation of the resources brings the
need of government who ensures efficiency and brings about equity. Market failure can
occur because of externality i.e. impact of single person on welfare of onlooker and market
power which is aptitude of an individual person to impact market rates.
8. A countrys standard of living depends on its ability to produce goods and services:
Living standard is directly proportional to the productivity i.e. the more is the productivity
of the country, the more higher will be the living standard of the people. As the growth in
the productivity of the country, there is be growth in the average income thereby
enhancing the living standard of its citizens.
9.
Prices
rise
when
government
prints
too
much
money:
When large quantity of national money is created; the worthiness of money falls on account
of which price rises requiring more money to buy goods and services. Inflation occurs
when too much money is printed i.e. the worthiness of money decreases. For example,
when the government of Zimbabwe printed a lot of money, inflation rate by January end
was 231 million per cent. This resulted in gigantic rise of price discouraging consumers to
save and also prohibiting growth of economy in the forthcoming days.
10. Society faces a short-run trade-off between inflation and unemployment:
In short-run, reduction of inflation often causes unemployment. In other words, when
money supply is increased, the consumption demand for goods and services increases
resulting in upsurge of employment opportunities. However, the price goes up and savings
is minimal. The trade-off between unemployment and inflation is illustrated by Phillips
curve. The trade-off is temporary in nature but still can last for several years. For example,
the current supply of huge package of money in the U.S economy will artificially increase
employment opportunities but will decrease the worthiness of dollar such that goods and
services gets less affordable.
Principle one, two, three and four are relevant to how people make decisions while
principle five, six and seven are relevant to how people interact and last three principles i.e.
principle eight, nine and ten are relevant to how the economy as a whole works.

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Positive and Normative Economics

a) Positive science: It only describes what it is and normative science prescribes what it
ought to be. Positive science does not indicate what is good or what is bad to the society. It
will simply provide results of economic analysis of a problem.
b) Normative science: It makes distinction between good and bad. It prescribes what
should be done to promote human welfare. A positive statement is based on facts. A
normative statement involves ethical values. For example, 12 per cent of the labor force in
India was unemployed last year is a positive statement, which could is verified by
scientific measurement. Twelve per cent unemployment is too high is normative
statement comparing the fact of 12 percent unemployment with a standard of what is
unreasonable. It also suggests how it can be rectified. Therefore, economics is a positive as
well as normative science.

Economics whether positive or normative science:

A positive science explains ''why" and "wherefore" of things. i.e. causes and effects and
normative science on the other hand rightness or wrongness of the things. In view of this,
Economics is both a positive and. normative science. It not only tells us why certain things
happen, it also says whether it is right or wrong the thing to happen. For example, in the
world few people are very rich while the masses are very poor. Economics should and can
explain not only the causes of this unequal distribution of wealth, but it should also say
whether this is good or bad. It might well say that wealth ought to be fairly distributed.
Further it should suggest the methods of doing it.

Economics, a Science or an Art?

Broadly different subjects can be classified as science subjects and Arts subjects, Science
subjects groups includes physics, Chemistry, Biology etc while Arts group includes History,
civics, sociology Languages etc. Whether Economics is a science or an art? Let us first
understand what is terms science and arts really means.
A science is a systematized body of knowledge. A branch of knowledge becomes
systematized when relevant facts hove been collected and analyzed in a manner that we
can trace the effects back to their and project cases forward to their effects. In other words
laws have been discovered explaining facts, it becomes a science, In Economics also many
laws and principles have been discovered and hence it is treated as a science. An art lays
15

down formulae to guide people who want to achieve a certain aim. In this angle also
Economics guides the people to achieve aims, e.g. aim like removal poverty, more
production etc. Thus Economics is an art also. In short Economics is both science as well as
art also.

Micro Economics and Macro Economics:

Microeconomics analyses the economic behavior of any particular decision making unit
such as a household or a firm. When economics is studied at individual level i.e.
consumers behavior, producers behavior, and price theory etc it is a matter of microeconomics. Microeconomics 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. It studies the behavior of
individual decision making unit with regard to fixation of price and output and its
reactions to the changes in demand and supply conditions. Hence, microeconomics is
also called price theory.
Macroeconomics studies the behavior of the economic system as a whole or all the
decision-making units put together. When we study how income and employment is
generated and how the level of countrys income and employment is determined, at
aggregated level, it is a matter of macro-economics. Thus national income, output,
employment, general price level economic growth etc. are the subject matter of macro
Economics. Macroeconomics deals with the behavior of aggregates like total
employment, gross national product (GNP), national income, general price level, etc. So,
macroeconomics is also known as income theory.

Methodology of Economics
Economics as a science adopts two methods for the discovery of its laws and principles,
viz., (a) deductive method and (b) inductive method.
a) Deductive method: Here, we descend from the general to particular, i.e., we start from
certain principles that are self-evident or based on strict observations.
Then, we carry them down as a process of pure reasoning to the consequences that they
implicitly contain. For instance, traders earn profit in their businesses is a general
statement which is accepted even without verifying it with the traders. The deductive
method is useful in analyzing complex economic phenomenon where cause and effect are
inextricably mixed up. However, the deductive method is useful only if certain assumptions
are valid. (Traders earn profit, if the demand for the commodity is more).
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b) Inductive method: This method mounts up from particular to general, i.e., we begin
with the observation of particular facts and then proceed with the help of reasoning
founded on experience so as to formulate laws and theorems on the basis of observed facts.
E.g. Data on consumption of poor, middle and rich income groups of people are collected,
classified, analyzed and important conclusions are drawn out from the results.
In deductive method, we start from certain principles that are either indisputable or based
on strict observations and draw inferences about individual cases. In inductive method, a
particular case is examined to establish a general or universal fact. Both deductive and
inductive methods are useful in economic analysis.

Scope or Subject Matter of Economics:

Scope means the subject matter. It means the area of application
1. Study of wage level and employment level
The macroeconomics deals with wage level and employment level. The level of
employment depends upon demand for labor and supply of labor. Both of these factors
depend upon wage level. There are different theories of employment like classical theory,
Keynesian theory, and other modern theory.
2. The study of price level and output level
Macroeconomics is concerned with determination of equilibrium price level and output
level. The price level means average of the prices of goods and services bought and sold in
the country in a year. The level of output depends upon aggregate demand and price level.
There are different theories of determination of price level and output level. Among them,
Keynesian theory of effective demand is very popular. The theories are the subject matter
of macroeconomics.
3. The study of trade cycle
Macroeconomics is concerned with trade cycle too. It explains how the economics ups and
downs
occur, what are their causes, how the country can overcome fluctuation. There are different
theories of trade cycle. Some of them are Schumpeter theory, Hessian theory, Calders
theory etc.

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4) Study of macroeconomic distribution

The macroeconomics is the study of distribution of income, wealth or resources in the
country among the people. It is the study of different theories, laws and principles of
distribution of income in the form of wage, interest, profit and rent. It gives us knowledge
of effects of high inequality in the distribution of income and wealth. It gives us remedies of
unequal distribution and the economic problems due to the inequality.

Branches of Economics:
The horizon of economics is gradually expanding. It is no more a branch of knowledge that
deals only with the production and consumption.
However, the basic thrust still remains on using the available resources efficiently while
giving the maximum satisfaction or welfare to the people on a sustainable basis. Given this,
we can list some of the major branches of economics as under:
1. Microeconomics:
This is considered to be the basic economics. Microeconomics may be defined as that
branch of economic analysis which studies the economic behavior of the individual unit,
may be a person, a particular household, or a particular firm. It is a study of one particular
unit rather than all the units combined together. The microeconomics is also described as
price and value theory, the theory of the household, the firm and the industry. Most
production and welfare theories are of the microeconomics variety.
2. Macroeconomics:
Macroeconomics may be defined as that branch of economic analysis which studies
behavior of not one particular unit, but of all the units combined together. Macroeconomics
is a study in aggregates. Hence it is often called Aggregative Economics.
It is, indeed, a realistic method of economic analysis, though it is complicated and involves
the use of higher mathematics. In this method, we study how the equilibrium in the
economy is reached consequent upon changes in the macro-variables and aggregates.
The publication of Keynes General Theory, in 1936, gave a strong impetus to the growth
and development of modern macroeconomics.

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3. International economics:
As the countries of the modern world are realizing the significance of trade with other
countries, the role of international economics is getting more and more significant
nowadays.
4. Public finance:
The great depression of the 1930s led to the realization of the role of government in
stabilizing the economic growth besides other objectives like growth, redistribution of
income, etc. Therefore, a full branch of economics known as Public Finance or the fiscal
economics has emerged to analyze the role of government in the economy. Earlier the
classical economists believed in the laissez faire economy ruling out role of the government
in economic issues.
5. Development economics:
As after the Second World War many countries got freedom from the colonial rule, their
economics required different treatment for growth and development. This branch
developed as development economics.
6. Health economics:
A new realization has emerged from human development for economic growth. Therefore,
branches like health economics are gaining momentum. Similarly, educational economics is
also coming up.
7. Environmental economics:
Unchecked emphasis on economic growth without caring for natural resources and
ecological balance, now, economic growth is facing a new challenge from the
environmental side. Therefore, Environmental Economics has emerged as one of the major
branches of economics that is considered significant for sustainable development.
8. Urban and rural economics:
Role of location is quite important for economic attainments. There is also much debate on
urban-rural divide. Therefore, economists have realized that there should be specific focus
on urban areas and rural areas. Therefore, there is expansion of branches like urban
economics and rural economics.
Similarly, regional economics is also being emphasized to meet the challenge of
geographical inequalities.

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There are many other branches of economics that form the scope of economics. There are
welfare economics, monetary economics, energy economics, transport economics,
demography, labor economics, agricultural economics, gender economics, economic
planning, economics of infrastructure, etc.

ECONOMIC GOALS:
Any science moves with certain goals to be achieved. Economics has become now a crucial
branch of knowledge. Being a social science it keeps on revising its goals from time to time.
The list might be quite large, but we would like to focus only on certain major goals of
economics as given under:
1. A low rate of unemployment: People willing to work should be able to find jobs
reasonably quickly. Widespread unemployment is demoralizing and it represents an
economic waste. Society forgoes the goods and services that the unemployed could have
produced.
2. Price stability: It is desirable to avoid rapid increasesor decreases in the average
level of price.
3. Efficiency: When we work, we want to get as much as we reasonably can take out of our
productive efforts. For this, efficient technology becomes quite useful.
4. An equitable distribution of income: When many live in affluence, no group of citizens
should suffer stark poverty. Given this, developing countries are strategizing goals like
participatory growth and inclusive growth.
5. Growth: Continuing growth, which would make possible an even higher standard of
living in the future, is generally considered an important objective.
6. Economic freedom and choice: Any economy should grow and develop in such a
manner that people should get more choices and there should not be any outside pressure
on their choices.
7. Economic welfare: Economic policies should be pursued in such a manner that welfare
of the people or the social benefits gets maximized.
8. Sustainable development: It has become a major challenge for economists to carry on
the process of economic growth in such a manner that the resources are optimally utilized
not only for intergenerational equity but also for sustainable development in quite long
run.
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Importance of Economics:
Importance of microeconomics:
1. Important to the consumers
Microeconomics provides the ways for proper allocation of money on different goods and
services so that they can get maximum utility. There are different theories of consumers
behavior, the theories explain how the consumers should spend the limited money they
have to maximize their satisfaction
2. Important to the firms or businessmen
The firms or businessmen use the microeconomic theories of consumer behavior,
production, cost, market, revenue and so on to make proper economic decisions. The
microeconomics helps them to know the purchasing power of ability to pay, proper
combination of inputs to maximize cost or maximize profit, effects of change in tax rates,
subsidies and so on
3. Important to the government
Government can determine taxes, subsidies, wage level, allowances etc on the basis of
effects of change in these factors on the demand for goods and services. Some goods are
levied while some are subsidized. The salaries and allowances are adjusted on the basis of
relationship between these variables and demand. Interest rate, exchange rate and money
supply too are changed with the help of microeconomic theories.
4. Important for the study of other economic science.
Microeconomics helps us to study of other economic sciences like macro economics, public
finance, monetary economics, labor economics, and international trade economics and so
on. The theories and laws of these economic sciences are based upon micro economics
theories and laws.
Importance of macroeconomics
1. To know the relationship between macro economics variables:
The macroeconomics helps us in the study of relationship between large numbers of macro
economics variables. The variables are Aggregate consumption, Aggregate income,
aggregate saving, Aggregate investment, Aggregate demand, Aggregate supply, Price level
etc.

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2. To know the functioning of economy

Macroeconomics helps us to know how the economy functions, how it is regulated, for it
macro economics provides us the knowledge of product market, labor market, capital
market, land market, international trade market etc. it informs us the country can achieve
equilibrium only if all of the markets are in equilibrium.
3. To correct unfavorable balance of trade and payment
Macroeconomics provides us different theories of international trade. It provides us
different remedies of import dependency and greater outflow of money from the country.
The government or country may adjust custom duty, exchange rate, transaction of gold etc
to promote export and to reduce import.
4. To achieve high economic growth and employment level
With the help of theories and models of economic growth and employment we can induce
investment increase in income and employment opportunities
Thus, these are the importance of micro and macro economics.

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