1.

NATURE OF ECONOMICS
DEFINITION OF ECONOMICS

The term economics is derived from the word �oeconomicus� by Xenophon in 431 B.C.
It is derived from two words economy and science. Economy means proper utilization
of resources. It means economics is the science of economy or science of proper
utilization of resources. It is comprised of theories, laws, principle related to
utilization of resources so as to solve the economic problems, satisfy the human
wants or need and so on. However, the economics is defined in different ways by
different economists.
There are mainly three definitions of economics:-
a. classical or wealth definition (Adam Smith)-1776 A.D
b. neo-classical or welfare definition (Alfred Marshall )-1890 A.D
c. modern or scarcity and choice definition (Lionel Robbins)-1932 A.D
a. classical or wealth definition (Adam Smith)-1776 A.D
The famous classical economist Adam smith for the firs time defined economics as
�science of wealth�. The definition was given in the book �an enquiry to the nature
and the causes of wealth of nations� published in 1776 A.D. the book is popularly
known as �wealth of nations�. According to smith, labor is the main source of
income or wealth. More wealth is accumulated only if more labor is used. Economics
explains the human behavior and activities they do for wealth. This definition was
based upon the assumptions of full employment, perfect competition, no governmental
interventions, money just as a medium of exchange and so on.
This definition has following main proposition:-
i. economics is science of wealth
ii. labor is the only source of income
iii. there is perfect competition in product as well as labor market
iv. the government should not interfere the activities of people and business
organizations

v. this definition is influenced by physiocracy and mercantilism.

Criticism:-
Wealth definition has over emphasized wealth. Economics is science of human
activities rather than only wealth. Adam smith considers only material things or
wealth as subject matter of economics but human beings require some immaterial
things like self esteem or dignity, social prestige, national identity and so on
too. The immaterial things are called essential things for human satisfaction.
Wealth definition is based upon the theory of subsistence wage which is known as
iron law of wage. The law was against the workers and in favor of employers. Adam
smith doesn�t explain about scarcity
of resource and choice of best alternative for the use of resources. The problem of
scarcity and choice is burning issue in the modern economics but he fails to
explain about the problems of scarcity and choice. The wealth definition is based
upon assumptions of full employment and perfect competition but none of these two
is in existence. This definition is based upon the assumption of no intervention of
government in economic activities of people and business organization but we find
in every country more or less governmental intervention.
b. neo-classical or welfare definition (Alfred Marshall )-1890 A.D
In 1890, Alfred Marshall, a famous neo-classical economist and a great contributor
to micro economics defined economics as the science of material welfare. Here, the
material welfare means the quantities of physical goods consumed by people. if the
people are consuming large quantities of goods, they are said to have high level of
welfare into two types
1. material welfare
2. immaterial welfare
According to him, only the material welfare is the subject matter of economics. He
assumes every person is rational and s/he uses the resources in his/her possession
very properly so as to maximize their own welfare. Economics is therefore the
science that studies the rational behavior revealed by the people. Major
propositions of Marshall�s welfare definition are:-
1. Economics is science of material welfare
2. Economics is social science i.e. science of mankind
3. Economics is the study of rational behavior of people revealed for maximization
of material welfare.
Criticisms:-
This definition of economics a science of material welfare was assumed correct
until the arrival of Lionel Robbins. He criticized the definition under the
following aspects:-
1. Classificatory activities of Marshall into material non material welfare,
economics and non economic goods is only classificatory not analytical because
single human cannot be material as well as non material according to the nature and
purpose of work.

2. Non material activities like feeling of social service, human desire also
satisfy human needs. This idea has not been prioritized
3. Non welfare consumption like harmful drugs, tobacco, and alcohol don�t promote
social welfare but still are in the study of economics
4. Economics should study about total human beings but wealth definition doesn�t
study about isolated people like saints, nuns, monks etc.
c. modern or scarcity and choice definition (Lionel Robbins)-1932 A.D
According to Lionel Robbins, economics is the science of scarcity of the resources
and the choice of best alternative for their utilization. The resources are limited
in supply. Each resource is usable for different purposes. The wants or need of
people are unlimited. The wants differ in importance. They differ from place to
place, from time to time and from person to person. Some wants are more important
whereas some are not. All wants cannot be fulfilled because of insufficiency of
resources. Therefore, we have to go on utilizing the resources in such a way, so
that, our more wants can be fulfilled leaving no one in most important wants
unfulfilled. For it, we must select best ways for the utilization of the resources.
We should have the complete information of resources available, needs of the
country and their importance and ways for the utilization of resources. This
definition is given in 1930 A.D after WWI. During third decade of the twentieth
century, the European countries were badly in need of large quantities of resources
for rehabilitation, construction of infrastructures, renovation etc. they were
destructed in war. This definition is both normative and positive in nature. The
major propositions are:-
1. there is unlimited human needs or wants
2. there is scarce means of resources
3. there are alternative use of resources
4. there is need of choice
Criticisms:
The definition is criticized in the following ways:-
1. economic problems arises not only due to scarcity but due to under, miss or
over utilization of resources
2. economic problems arises due to inequality too
3. there is political consideration
4. needs and resources may vary
Superiority of Robbins definition over Marshall�s definition:-
1. the definition is scientific
2. the definition is universally accepted
3. the definition has wide scope
4. the definition has science of choice
Microeconomics:-
The term microeconomics is derived from the word micro economy and science. The
term micro is also derived from the Greek word micros which means small or tiny.
Microeconomics is defined as the science of small or tiny part of the economy. It
provides us the detail information of microeconomics units. The units are single
consumer or consumer of a firm or an industry. A single firm or firms belonging to
an industry is called worm�s eye view of an economy. In microeconomics we study
about the relationships between microeconomic variables like utility, cost of
purchasing, demand, supply, price, cost of production, and revenue from sale,
profit or loss and so on, it is the study of behavior of consumers and firms.
Scope of microeconomics:-
The scope of microeconomics means its subject matter. it means area of application
too. The scopes are:-
1. study of consumers behavior
-cardinal utility theory
� ordinal theory
-revealed preference theory
-cardinal behavior theory
2. Study of production and cost function
Mathematically.
Q=output (quantity)
C=cost of production
K=capital
Q=f (K and other inputs)
C=f (Q)
Therefore, C 8 input
3. Study of price and output determination
Profit=revenue-cost
Markets = monopoly, duopoly, oligopoly, monopolistic competition and perfect
competition
4. Study of microeconomic distribution
Factors of production-land, labor, capital and organization
Factor wages-rent, wage, interest, profit
Macroeconomics
Macroeconomics is derived from the word macro, economy and science. The term
�macro� is also derived from Greek word �macros� which means large or big.
Therefore, macroeconomics can be defined as the science of large segment of the
economy or economy as a whole. It provides bird�s eye view of the economy. It gives
general features of the economy. It is study of features of economic problems,
causes and remedies of the problems in different sectors. The sectors are divided
into household sectors, government sector, foreign trade sector, business sector.
In macroeconomics we study about the relationship between macro economic variables,
the variables are:
a) Aggregate consumption
b) Aggregate income
c) Aggregate saving
d) Aggregate investment
e) Aggregate demand
f) Aggregate supply
g) Price level
In macroeconomics we study about the causes and remedies of trade and payment,
price instability, Inequality etc
Scope or subject matter of macroeconomics: