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 first 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 doesnt 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 Marshalls 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 dont promote social welfare but still
are in the study of economics
4. Economics should study about total human beings but wealth definition doesnt 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 Marshalls 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 worms 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 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 birds 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:
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, Kaltorian 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.

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.
Normative or positive economics
Economics is both positive and normative science. It is the study of facts as well as ideal theories and
principles too. It can be explained as following:
a) Positive economics
Economics is positive science. It is the study of facts or things in reality or existence. In economics the
large number of economic problems or questions like what are produced, how goods are priced and

distributed, how much profit is earned by firms, what different type of resources are available, hoe the
resources are utilized, who are performing different economic activities, why the economic problems are
occurring, why is the country suffering from unemployment, price instability, economic instability, import
dependency and so on are put and answered. There are different theories laws and principles based upon
facts we study in economics. Thats why economics is called positive science
b) Normative economics
Economics is normative science. It is the study of things ought to be. In economics, we study different
ideal theories and principles. They are concerned with different economic problems. They give us ideas for
overcoming of different economic problems. They are helpful to formulate proper policies and plans. They
are helpful to solve the problems of unemployment, import dependency, improper allocation of resources,
price and economic instability, unequal distribution of income and wealth and so on. Economics helps us
to decide how much goods should be produced, hoe much they should be priced, hoe the government
should control money supply, interest rate, public debt, government expenditure etc , how the consumer
should allocate the money to get maximum satisfaction from the expenditure, how the firms should
combine the inputs to earn maximum profit and so on. This all have ethical importance. Thats why
economics is call normative science.
Economics is a science or an art
Economics is both art and science. It is called a science because it is the scientific study of relationships
between economic variables, behavior of consumers and firms, nature of market and economy, effect of
change in one or more economic variables on the others and so on. The different theories, laws and
principles are studied in economics. All of them are generalized and simplified on the basis of facts so as
to make them easily understandable. Therefore, economics is said to be science.
Economics is an art. The different theories, laws are explained with the help of graphs, figures, tables,
charts, equations etc simplifying and generalizing them. Simplification is to make them easily
understandable and generalization is to make them applicable to all economies. In order to explain
theories, laws and relationships between economic variables we make some assumptions. The assumptions
define the conditions for the application of theories, laws and\d the relationships. Thats why economics is
an art.
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
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 in forms 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.
Scarcity and choice
Basic economic issues:
The major causes of economic problems are basic economic issues,

1. Scarcity of resources

The common meaning of scarcity refers to unavailability in the market of a certain commodity. A
commodity is scarce, in economic view, not due to itsd rarity in market but due to its means is limited.
Scarcity explains this relationship between limited resources and unlimited wants and the problem therein.
Scarcity raises national economic problems. There is poverty and human misery due to scarcity. Scarcity
tells us about importance of commodity. The resources are not only scarce but they also have alternative
uses.
The resources mean all of the national resources, artificial resource and human resource itself. However
the main economic problems are abused by scarcity of natural resource. The resources differ from place to
place in their types, quantities and the qualities. They are usable for the production of varieties of goods
and services to satisfy different human wants. But they are very in sufficient to satisfy all of human wants.
Their supply is very limited and changeable with the flight of time. Their quantities and qualities may
decrease if we dont utilize them properly.
2. Choice of best alternatives:Choice is involved in economic activities at both consumption and production levels. The problem of
choice begins with an individuals liking of how much time he would allot for work and how much for
leisure. On the income earned, the choice is between how much to consume now and how much to save for
the future. The chain of choice goes on deeper and deeper referring to the profitable use of resources at the
hand of economic actors.
The choice of best alternative is the selection of best combination of goods producible with the use of all of
the resources available that gives maximum social benefits to the nation. The problem of choice is accused
by limited resources and unlimited human wants. Since, each resource can be put for the production of
varieties of goods; there is the possibility of large number of combination of goods producible in the
country. However, they give more or less social benefit or utility to the nation. As per the requirements,
importance or preference of human needs/ human requirements or importance of the goods the choice of
best alternative is met.

3. Allocation of resources:The allocation of resources means use of the resources dividing them for the production of the combination
of goods that gives the maximum social benefit or utility to the nation. It is called appropriation of the
resources to satisfy most important wants out of their unlimited types. The allocation of the resources is
necessary because of insufficiency of limited resources for the fulfillment of unlimited human wants.
Allocation is usually made to the basis of market demand or peoples preference on the goods. For it the
concepts of demand and supply or the concepts of production possibility curve and preference curve of
people are used.
The resources have alternative uses. One use can be chosen and all other have to be satisfied. Allocation is
related to the choice of how much of resource to be allocated in what sector. The whole body of planning,
programmingand even budgeting is nothing, but the statement of allocation of resources. Resource

allocation occupies central position in economics. Economics is the principle governing the allocation of
scarce means among competing ends.
Production possibility curve (PPC):A production possibilities curve is the graphical illustration of all the combinations of goods and services
that can be produced in a given economy at a given time, if all the available resources in the economy in
the economy are fully and efficiently employed. All points on PPC are points of maximum production
efficiency or minimum production inefficiency; resources are allotted in such a way that it is impossible to
increase the output of one commodity without reducing the output of other.
The PPC has following assumptions and features:a. It is based upon two commodities or two goods model
b. There is no change in technology and production technique
c. All the resources are utilized
d. PPC is downwardly sloped concave curve.
e. PPC shifts upward if the new resources are explored or technology is advanced
To explain the concept of production possibility curve lat assume the country can produce one of the
following combinations of goods utilizing all of the resources available as shown in the table below.
Table:
combinations

butter

15

14

12

In the above table there are six different possible combinations of butter and guns. If we represent them we
obtain the PPC as shown in the graph.

In the above figure, if production of butter is decreased from 15 units to 14 units, then the production of
guns increase from 0 units to 4 units which signifies 1 pound of butter production decrement causes to
increase guns production to 4. If production of butter is decreased from 14 units to 12 units, then the
production of guns increase from 4 units to 7 units, which signifies 2 pound of butter production decrement
causes to increase guns production to 3 and so on.

Shifting of the curve:The rightward shift in PPC indicates increase in production capacity of economy due to improvement in
technology or new resources or both.

Limitations:1. PPC says nothing about which goods people wants and which to provide the most satisfaction but only
indicates about available options.
2. PPC are not related to preferences of consumer or producers so there is no economic efficiency.
3. It does not show if there is efficient use of resources.
Conclusion:1. Opportunity cost is shown by negative slope of PPC.
2. Full employment is shown by maximum production obtained with existing technology ,given that all
available resources are engaged in production
3. There is indication of unemployment, economic growth and investment.