Definition and scope of economics Economist Adam Smith His theory Defined as Science of wealth Wealth denotes earning

g and spending (Wealth Concept) Criticism It appears that economics is made to make man rich and selfish. It gives an impression as though human wants are satisfied only through earning and spending. Other activities like singing , dancing, sports are ignored which also involves choice and economic activity Neglects Man altogether. Wealth is made for man and not man for wealth. Wealth is a mean to an end and not end itself Satisfaction of human wants based on non-material things ignored Concept of welfare is subjective and cannot be measured. In real life we do not distinguish goods and services as welfare and non-welfare (e.g cigerettes is not conducive to welfare, but economists study about production and distribution of same!) The definition reduces economics to the theory of value, lacking human touch.( think why economics should have human touch!) Economics is not entirely a positive science. It should offer solutions to practical problems to the welfare of mankind Welfare concept is introduced indirectly. When a man takes a choice amongst the scarce resources, the choice is made with his welfare in his mind. Means and ends are not separable and should be given equal importance. It focuses more on means than on ends, Ends can become means also. Economic problems can also arise during plenty and not only

Marshall

A study of mankind in the ordinary business of life. Attainment and use of material requisites of well being [Welfare concept]

Lionel Robbins

A science that studies human behaviour as a relationship between ends and scarce means which have alternative uses Man has unlimited wants (ends) and has scarce resources (means) of time and money. +ves: There is nothing good and bad in economics It elevates economics to the status of pure science Concept of opportunity costs introduced Introduces the concept of Scale of Preferences Indicates the difference between Technical problems (problem of choice! More means to an end) and economic problem ( scare means leading to preferences) No differentiation of economic and noneconomic activity. All activities are economic activities.

through scarcity. (e.g Great Depression. Learn about Great depression!!!) The definition is narrow and Macro economics is not included in the definition.

SCOPE OF ECONOMICS Having seen the definitions, what can be the scope of Economics? (add all the above) It studies the man in the ordinary business of life and how he earns his income and how he spends it to satisfy his wants It is concerned with not only his individual action , but also social actions It studies how wealth is produced with limited resources in order to satisfy human wants It studies about the problem of multiplicity of wants and scarce resources It studies how wealth is produced, consumed, exchanged and distributed.

DIVISIONS OF ECONOMICS and what it studies CONSUMPTION PRODUCTION Characteristics Factors of of human production wants viz Land, Labour, Behaviour of Capital and consumer Organisation( Diminishing in other utility and words consumer Management surplus ) EXHANGE Trade, commerce, Money and Banking DISTRIBUTION Reward for factors of production Rent, Wages, Interest and profit ( Land, Labour, Capital and Organisation) Studies about pricing for each factors of production PUBLIC FINANCE!! Income and expenditure and Financial Administration of state. ( Taxation, Expenditure, Budgeting and Financial Administration) ( Separate Branch from Economics)

Remember : These divisions are inter related and Inter dependent! Can you summarise the Importance of and significance of Economics based on above! (Page 9 of Sankaran) Understand what is Positive and Normative Science. Positive Science says what it is and Normative Science says What it Ought to be (Ideals). Positive explains the causes and effect of what it is . Normative prescribes norms and standards with cause and effect analysis. For eg. If the question is what determines the rate of interest, it is a positive enquiry. If the question is what should be fair rate of interest, then it is normative. Normative statements depend upon our value judgement of what is good and bad.

There are differing opinions amongst economists whether Economics should be positive or should be normative. Methods of Economic Analysis (understand this from the text book and remember) 1. Deductive (Observation/ Reasoning and assumptions/ instance and testing by means of further observations/ hypothesis and generalisation) 2. Inductive (through experimentation and through statistical form) Various economic theories are proposed through these methods. Both have merits and demerits. Both are required for a scientific thought. It should act as complimentary to each other method. What is Business Economics Business Economics or Managerial Economics is concerned with the application of Economic theory and its methods to the analysis of decision making problems faced by Business Firms What is the normal decision making problems? Usually the question of resource allocation. What to produce, how much to produce, for whom to produce, where to produce, how it shall be produced ( what combination of factors of production or production technique to be used,) , distribution methods, standards of quality, Investment decision, what price to be fixed, Advertising decision, long run production decision

What are the underlying economic theories Broadly Macro and Micro o MICRO- Consumer Satisfaction, preference of goods , consumer behaviour, demand theory, analysis of cost and production, theory of determination of price and output under different market structures, scale of operations required, capital theory and investment decision analysis and capital budgeting. o MACRO- Level of overall economic activity, National Income and employment, aggregate demand conditions, Government policies ( Both fiscal and monetary do you remember the difference?), rate of inflation, exchange rate and balance of payments affecting business

Economic Methods used o Optimisation techniques using Differential Calculus, Linear programming, Statistical tools, forecasting techniques such as regression analysis,

Business Firms : Includes public sector enterprises DECISION MAKING PROCESS Establish Objective Defining the Problem Identifying possible courses of Action

Considering Legal and Social constraints

Evaluation of Alternative courses and selecting the best

Considering Financial, Technological, Infrastructural, Environmental and Input constraints

Implementing and Monitoring the Decision

BASIC CONCEPTS IN BUSIENSS ECONOMICS ( UNDERSTAND THIS THOROUGHLY)

RESOURCE ALLOCATION MARKET COORDINATION-Changes in the market demand , supply and prices of goods without any central coordinating authority MANAGERIAL COORDINATION OPPORTUNITY COST PRODUCTION EFFICIENCY o UNDERSTAND THE DIFFERENCE BETWEEN TECHNICAL EFFICIENCY (PRODUCTION) AND ECONOMIC EFFICIENCY ( INCLUDES SOCIETY AS A WHOLE. E.g effect of environmental pollution cost) MARGINAL ANALYSIS TIME VALUE OF MONEY ( CONCEPT OF DISCOUNTING) CONCEPT OF EXTERNALITIES ( NEGATIVE ( HARMFUL) POSITIVE (BENEFICIAL) E.G POLLUTION)

BUSIENSS OBJECTIVE S OR GOALS OF THE FIRM PROFIT MAXIMISATION BY FIRM UTILITY MAXIMAISATION BY MANAGERS MAXIMISATION OF SALES REVENUE ( NOT VOLUME, BUT VALUE) SATISFACTION THEORY OF FIRMS