Lecture Note

Economics: Concepts and Scope

Amarendra Das1
What is Economics?
Economics is a discipline that can help us answer these questions.
Economics can actually be defined a few different ways: it’s the study of
scarcity, the study of how people use resources, or the study of decision-
making. Economics often involves topics like wealth, finance, recessions, and
banking, leading to the misconception that economics is all about money and
the stock market. Actually, it’s a much broader discipline that helps us
understand historical trends, interpret today’s headlines, and make predictions
for coming decades.

Definitions
Adam Smith, who is considered as the father of modern economics defines
Economics ‘as the study of the nature and causes of nations' wealth or simply
as the study of wealth. Adam Smith's definition is a wealth-
centred definition of Economics.

Lionel Robins
"Economics is the science which studies human behaviour as a relationship
between ends and scarce means which have alternative uses."

Alfred Marshall
Economics is a study of mankind in the ordinary business of life. It examines
that part of individual & social action which is most closely connected with the
attainment & with the use of material requisites of well-being.

Scope of Economics

Micro vs Macro Economics

The difference between micro and macro economics is simple. Microeconomics
is the study of economics at an individual, group or company level.
Macroeconomics, on the other hand, is the study of a national economy as a
whole.
Microeconomics focuses on issues that affect individuals and companies. This
could mean studying the supply and demand for a specific product, the

1
School of Humanities and Social Sciences, National Institute of Science Education and Research, Bhubaneswar,
Email: amarendra@niser.ac.in
production that an individual or business is capable of, or the effects of
regulations on a business.
Macroeconomics focuses on issues that affect the economy as a whole. Some
of the most common focuses of macroeconomics include unemployment rates,
the gross domestic product of an economy, and the effects of exports and
imports.
Does this make sense? While both fields of economics often use the same
principles and formulas to solve problems, microeconomics is the study of
economics at a far smaller scale, while macroeconomics is the study of large-
scale economic issues.

Microeconomics is the study of particular markets, and segments of the

economy. It looks at issues such as consumer behaviour, individual labour
markets, and the theory of firms.

Macro economics is the study of the whole economy. It looks at ‘aggregate’

variables, such as aggregate demand, national output and inflation.

Micro economics is concerned with:

 Supply and demand in individual markets
 Individual consumer behaviour. e.g. Consumer choice theory
 Individual labour markets – e.g. demand for labour, wage determination
 Externalities arising from production and consumption. e.g. Externalities
Macro economics is concerned with
 Monetary / fiscal policy. e.g. what effect does interest rates have on the
whole economy?
 Reasons for inflation, and unemployment
 Economic growth
 International trade and globalisation
 Reasons for differences in living standards and economic growth between
countries.
 Government borrowing

Fallacy of Composition:
What is true for a part is not true for the whole. In simple terms simple
summation of micro does not yield the macro picture. For example, saving is a
virtue for the individual (micro). But in a country if everyone saves and does
not spend anything, this will lead to cease of all economic activities; thus
saving is not a virtue for the macro.

Other subjects in Economics

Monetary Economics: Deals with money banking, financial market, capital
market etc.

Public Economics: Deals with the public (government) expenditure and tax
collection. Deals with questions like how tax should be collected, principles of
taxation, principles of expenditure, borrowing, implications of borrowing,
centre state fiscal relation etc.

Economics of Growth and Development: This tries to understand why some

nations are rich and others are poor.

International Trade and Finance: This subject tries to answer the question
why trade takes place between countries, is trade beneficial, what are
implications of international trade for big and small countries, determination of
exchange rate, Composition of Balance of payment, measures taken to
maintain correct the imbalance in the balance of payment, role of international
financial institutions like IMF and other regional financial institutions etc.

Environmental Economics: Studies the impact of economic activities on the

environment and how to reduce the effect on environment, what tools (such as
tax, subsidy, regulation etc.) are to be used for this purpose.

Ecological Economics: This studies the economic valuation of ecological or

environmental services and tries to integrate in the economic analysis.

Law and Economics: This subject studies the implications of legal system on
the economic growth.

Institutional Economics: This subject studies the role of formal and informal
institutions in the economic growth of a country.