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
 
  1. 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 Marshallinto 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, mis  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 scope 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 α 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