Definition of Economics:

Definition: Economics is that branch of social science which is concerned with

the study of how individuals, households, firms, industries and government take
decision relating to the allocation of limited resources to productive uses, so as to
derive maximum gain or satisfaction.

Economics is the study of the production and consumption of goods

and the transfer of wealth to produce and obtain those goods.
Economics explains how people interact within markets to get what
they want or accomplish certain goals. Since economics is a driving
force of human interaction, studying it often reveals why people and
governments behave in particular ways.

Economic problem arises because of scarcity of resources in relation to demand for

them.

1. Wants are unlimited:

o This is a basic fact of human life.

Human wants are unlimited.
o They are not only unlimited but also grow and multiply very fast.
 Resources are limited:
o The resources to produce goods and services to satisfy human wants are
available in limited quantities. Land, labour, capital and enterprise are the
basic scarce resources.
o These resources are available in limited quantities in every economy, big
or small, developed or underdeveloped, rich or poor. Some economies may
have more of one or two resources but not all the resources.
 o For example, Indian economy has relatively more labour but less capital
and land. The U.S. economy has relatively more land but less labour. No
economy in the world is rich in all the resources.
 Resources have alternative uses:
o Generally a resource has many alternative uses.
o A worker can be employed in a factory, in a school, in a government
office, self employed and so on.
o Like this, nearly all resources have alternative uses. But the problem is
that which resource should be put to which use.

8. “Scarcity” in economics is the short supply of resources in relation to the demand.

Resources of the economy are scarce with the result that the economy can’t produce all
that the society needs.

1. Greater Scarcity Higher Prices

Examples: Petrol, Diamonds
2. Lesser Scarcity  Lesser Prices
Example: Water
3. No Scarcity No Price
Example: Air we breathe

9. Economising of resources means that resources are to be used in such a manner

that the maximum output is realised per unit of input. It also means optimum utilization
of resources.

Central Problems Of An Economy

1. The problem of making a choice among alternative uses of resources is known as

basic or central problem of an economy.
2. There are many central problems of an economy, but according to syllabus we have
to do one, that is;
Problem of Allocation of Resources: Every economy has limited resources which can
alternatively be used to produce different goods and services. Hence, it has to allocate
its available resources in the production of different goods and services in such a
manner that it ideally meets the needs of the society. While allocating resources
optimally, the decisions the following three central problems of an economy are required
to be taken:

1. What to produce?
2. How to produce?
3. For whom to produce?

(a) What to produce?

 1. What to produce refers to a problem in which decision regarding which goods
and services should be produced is to be taken.
2. Since its resources are limited, every economy has to decide what commodities
are to be produced and in what quantities.
3. In view of limited resources when we produce more of a commodity, it means we
will be able to produce less of another. Because more production of one
commodity would force us to withdraw resources from the production of the other
commodity.
4. So, the economy has to choose between capital goods (like machines, tools,
etc.), civil goods (like cloth, watch, radio etc.), consumer goods (like wheat, cloth,
shoes, sugar, etc.), military goods (like guns, bombs, tanks, etc.) necessities of life
(such as food, clothing, housing, etc.) and luxury goods (such as car, colour TV,
etc).
5. The guiding principle for an economy here is to allocate resources in such a way
that gives maximum aggregate utility to the society.

(b) How to produce?

1. How to produce refers to a problem in which decision regarding which technique

of production should be used is taken.
2. Goods and services can be produced in two ways: by using labour intensive
techniques, and by using capital-intensive techniques.
3. Under labour intensive techniques, more of labour and less of capital per unit of
output is used in producing goods and services, while in capital-intensive
techniques more of capital and less of labour per unit of output is used.
4. Thus, the economy has to decide whether the chosen goods and services should
be produced with the help of automatic machines or handicrafts. Every method of
production has its own advantages and disadvantages.
5. For example, on one side use of more capital; i.e., automatic machines,
increases the quantity and improves the quality of production but it results in
unemployment as it requires lesser number of labourers. On the other side,
handicrafts generate more employment but produce smaller amount of production.
6.  The guiding principle for an economy in such a case is to decide about the
techniques of production on the basis of cost of production. Those techniques of
production should be used which lead to the least possible cost per unit of
commodity or service.

(c) For whom to produce?

1.  For whom to produce refers to a problem in which decision regarding which

category of people are going to consume a good, i.e., economically poor or rich.
2.  As we know, goods and services are produced for those who can purchase
them or have the capacity to buy them.
3. Capacity to buy depends upon how income is distributed among the factors of
production. The higher the income, the higher will be the capacity to buy and vice
Versa. So, this is a problem of distribution.
 4. We know that the whole output is distributed among factors of production which
have contributed to it.
5. Since production is the combined efforts of all the four factors of production, viz,
land, labour, capital and enterprise, it is distributed among them in the form of
money income (i.e. rent, wages, interest and profits). Who should get how much
is, thus, the problem.
6. The guiding principle is that the economy must see here that important and
urgent wants of its citizens are being satisfi

Nature of Economics

1. Economics is a science: Science is an organised branch of knowledge,

that analyses cause and effect relationship between economic agents. Further,
economics helps in integrating various sciences such as mathematics, statistics,
etc. to identify the relationship between price, demand, supply and other
economic factors.

o Positive Economics: A positive science is one that studies the

relationship between two variables but does not give any value judgment, i.e. it
states ‘what is’. It deals with facts about the entire economy.
o Normative Economics: As a normative science, economics passes
value judgement, i.e. ‘what ought to be’. It is concerned with economic goals
and policies to attain these goals.
 Economics is an art: Art is a discipline that expresses the way
things are to be done, so as to achieve the desired end. Economics has various
branches like production, distribution, consumption and economics, that provide
general rules and laws that are capable of solving different problems of society.

Therefore, economics is considered as science as well as art, i.e. science in

terms of its methodology and arts as in application. Hence, economics is
concerned with both theoretical and practical aspects of the economic problems
which we encounter in our day to day life.
Scope of Economics

 Microeconomics: The part of economics whose subject matter of study

is individual units, i.e. a consumer, a household, a firm, an industry, etc. It
analyses the way in which the decisions are taken by the economic agents,
concerning the allocation of the resources that are limited in nature.
It studies consumer behaviour, product pricing, firm’s behaviour. Factor
pricing, etc.

 Macro Economics: It is that branch of economics which studies the entire

economy, instead of individual units, i.e. level of output, total investment, total
savings, total consumption, etc. Basically, it is the study of aggregates and
averages. It analyses the economic environment as a whole, wherein the
firms, consumers, households, and governments make decisions.
It covers areas like national income, general price level, the balance of trade
and balance of payment, level of employment, level of savings and
investment.

The fundamental difference between micro and macro economics lies in

the scale of study. Further, in microeconomics, more importance is given to the
determination of price, whereas macroeconomics is concerned with the
determination of income of the economy as a whole.

Nevertheless, microeconomics and macroeconomics are complementary to one

another, as they both aimed at maximising the welfare of the economy as a
whole.
From the standpoint of microeconomics, the objective can be achieved through
the best possible allocation of scarce resources. Conversely, if we talk about
macroeconomics, this goal can be attained through the effective use of the
resources of the economy.