Definition of Economics and

Basic Assumptions
 Introduction
• Economic Analysis
– Relevance of the course

• Why do you need to study it?

– Unlimited needs and want
– Limited resources
– Multiplicity of needs and wants
– Alternative uses of resources
• Decision making/ Choices
 What is Economics?
• Earlier, the term ‘Economics' was used to for
‘Political Economy’.
• The term Economy is derived from the Greek
word ‘oikonomia’
– means management of household.
• Now the question is
– what is economics?
• There are several definitions.
 Definitions of Economics
1. Adam Smith (1776) defined economics as an inquiry into the
nature and causes of the wealth of nations."
2. J.B. Say (1803) defined it as the science of production,
distribution, and consumption of wealth.
3. Thomas Carlyle (1849) stated it as 'the dismal science‘.
4. Alfred Marshall (1890), in his textbook Principles of
Economics extended the analysis beyond wealth and from
the societal to the microeconomic level.
• Marshall explained “Economics is a study of man in the
ordinary business of life.” It enquires how he gets his income
and how he uses it.
– As per this definition , it is on the one side, the study of wealth and
– on the other and more important side, a part of the study of
mankind.
 Definitions of Economics contd..
• According to Lionel Robbins (1932), Economics is a science
which studies human behaviour as a relationship between
ends and scarce means which have alternative uses.

• Broadly, on the basis of different concepts and definitions it

can be concluded that economics includes the study of:
– the economy
– the coordination process
– the effects of scarcity
– the science of choice
– human behavior
– Human beings as to how they coordinate wants and desires, given
the decision-making mechanisms, social customs, and political
realities of society.
 Basic Assumptions of Economics

1. Economic rationality
– Every decision maker in an economic system
behaves in a rational manner and attempts to
maximize his gain/welfare.
– Economic rationality presupposes that every
person knows his interest and selects that course
of action which gives him greatest amount of
satisfaction.
– The assumption of economic rationality does not
carry any moral or ethical implications.
 Basic Assumptions of Economics
2. Ceteris paribus i.e. “Other things being
equal”.
– This is the most widely used assumption of
economics.
– This assumption shows the limitations in the way
of any economic generalization.
– The law of demand, for example, states that a
large quantity of commodity or service will be
demanded at a lower price, other things remain
the same.
 Basic Assumptions of Economics
3. Concept of equilibrium
– equilibrium denotes the state of rest.
– it shows a position of no change or position of
maximum gain.
– The economists assumes that economy has a
natural tendency to reach equilibrium.
 Basic Assumptions of Economics
4. Static economy
• Economics studies the problem of allocation of
resources between goods and services on the
assumption that technology and resources are given in
an economy.
• It implies that economy is producing maximum
amount of national income with the given technology
and resources.
• In other words economics studies a static economy
with a given system of wants, resources and
technology, although in real world situation nothing is
static.