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Economics

Economics is the science that deals with production, exchange and consumption of various commodities in economic systems.

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.

According to Alfred Marshall, economics is a study of mankind in the ordinary business of life, i.e., economic aspect of human life.

 According to Adam smith, economics as “an inquiry into the nature and causes of the wealth of nations.”

Scope means province or field of study. In discussing the scope of economics, It also covers the subject matter of economics are :- 

Economics - 

A Science and an Art

 a) Economics is a science: 

Science is a systematized body of knowledge that traces the relationship between cause and effect.

 b) Economics is also an art: 

An art is a system of rules for the attainment of a given end. A science teaches us to know; an art teaches us to do. Science and art are complementary to each other and economics is both a science and an art.

Positive and Normative Economics -

 Economics is both positive and normative science.

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.

Normative science: 

It makes distinction between good and bad. It prescribes what should be done to promote human welfare. Therefore, economics is a positive as well as normative science.

 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.

 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.

Subject Matter of Economics

Economics can be studied through 

 a) traditional approach and 

(b) modern approach.

Traditional Approach: 

Economics is studied under five major divisions namely consumption, production, exchange, distribution and public finance.

1. Consumption:

 The satisfaction of human wants through the use of goods and services is called consumption.

2. Production: 

Goods that satisfy human wants are viewed as “bundles of utility”. Hence production would mean creation of utility or producing (or creating) things for satisfying human wants. For production, the resources like land, labour, capital and organization are needed.

3. Exchange: 

Goods are produced not only for self-consumption, but also for sales. They are sold to buyers in markets. The process of buying and selling constitutes exchange.

4. Distribution: 

The production of any agricultural commodity requires four factors, viz., land, labour, capital and organization. These four factors of production are to be rewarded for their services rendered in the process of production. The land owner gets rent, the labourer earns wage, the capitalist is given with interest and the entrepreneur is rewarded with profit. The process of determining rent, wage, interest and profit is called distribution.

5. Public finance:

 It studies how the government gets money and how it spends it. Thus, in public finance, we study about public revenue and public expenditure.

b) Modern Approach :- 

The study of economics is divided into: i) Microeconomics and ii) Macroeconomics.

1. Microeconomics ,:- 

analyses the economic behaviour of any particular decision making unit such as a household or a firm. It studies the behaviour 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.

Importance of Microeconomics

1. To understand the working of the economy.
2. To provide the tools for economic policies.
3. To help in the efficient employment of resources.
4. To help in understanding the problems of taxation.
5. To examine the conditions of economic welfare.
6. To construct and use of models for actual economic phenomena.

2. Macroeconomics

 studies the behaviour of the economic system as a whole or all the decision-making units put together. Macroeconomics deals with the behaviour of aggregates like total employment, gross national product (GNP), national income, general price level, etc. So, macroeconomics is also known as income theory.

Importance of Macro-Economics

1. It is helpful in understanding the functioning of a complicated economic system. It also studies the functioning of global economy. With growth of globalization and WTO regime, the study of macro-economics has become more important.
2. It is very important in the formulation of useful economic policies for the nation to remove the problems of unemployment, inflation, rising prices and poverty.
3. Through macro-economics, the national income can be estimated and regulated. The per capita income and the people’s living standard are also estimated through macroeconomic study.