METHODS OF ECONOMIC STUDY AND ECONOMIC LAWS

Economic Laws
Economic laws are a set of generalizations establishing cause and effect relationship
between economic variables. For example, the law of demand states that a change in price
(cause) results in a change in quantity demanded (effect). Law of supply states that to a
change in price (cause) there is a direct change in quantity supplied (effect).

In view of Marshall, "Economic laws or statements of economic tendencies are those

social laws which are related to branches of conduct, in which the strength of the motives
chiefly concerned can be measured by money price". This implies that economic laws are
statements of tendencies regarding human behavior in an economic sphere. Lionel Robbins
defined Economic laws as the "statements of uniformities which govern human behavior
concerning the utilization of limited resources for the achievement of unlimited end".
Economic laws have some basic features. These are:

 Economic laws are mere statements of tendencies which are more or less certain
and definite. Human beings are the subject matter of study of economics. Human
behavior is uncertain to an economic stimulus. Economic laws show the tendency of
human behavior. For example, the law of supply explains that supply tends to rise or
fall due to a rise or fall in price in the market.

 Economic laws are hypothetical. It means that generalizations hold good only under
given assumptions. For examples, law of demand holds only on the ceteris paribus
assumption.

 Economic laws are not as exact as laws of physical and natural sciences. The
subject matter of study in these latter sciences are inanimate matters. In laboratory
controlled experiments, these matters can establish cause and effect relationships
effectively, which is not possible in economics.

 Economic laws lack full predictability. Economic laws deal with economic activities of
a man with free will. Since he is likely to act differently in different economic
situations, the behavior becomes very often uncertain and therefore, difficult to
predict. The behavior of man is generally influenced by hidden, unknown and
unforeseen factors which cannot be measured. Marshall compared economic laws
with laws of tides rather than the exact law of gravitation or astronomy.

Basic Assumptions in Economics

Economists make three basic assumptions about buyers and sellers.

 First, market participants are presumed to be goal oriented that is, interested in fulfilling
their own, personal goals. The assumption of goal-oriented behavior often is taken to
indicate that individuals are self-interested. This assumption, however, does not imply that
market participants care solely about their own pocketbooks. As economists use this term,
the behavior of Nobel Peace Prize winner Mother Teresa could accurately be described as
goal-oriented. Although Mother Teresa ’s actions clearly indicated that she had little interest
in worldly possessions, they did reflect her own personal desire to help the poor of Kolkata.
The assumption of goal-oriented behavior does not rule out altruistic goals.
  The second assumption economists make about market participants is that they engage in
rational behavior. For example, we presume that Toyota’s decision to build a factory in the
United States is the outcome of a careful, deliberative process that weighs the expected
benefits and costs. We presume an individual buys a new home based on knowledge of its
market value and an honest appraisal of what he or she can afford.

 The third, and most important, assumption made by economists about market participants
is that they confront scarce resources. For example, there is simply not enough time,
money or other resources for the typical consumer to satisfy all of his or her desires.
Human beings have relatively limitless desires, and no matter how wealthy they become,
resources will never be plentiful enough to ensure that all their desires can be fulfilled. If
individuals rationally pursue their goals but have limited resources, choices must be made.
Specifically, one must decide which goal to pursue and how far to pursue it.
Microeconomics explores this process of making choices subject to resource constraints.

Methods of Constructing Economic Theory

Every science has to adopt certain methods for deriving a theory. The term “Method”
refers to the techniques and procedures used in the construction and verification of
principles. Economic theory is a hypothesis that has been successfully tested. Its purpose is
to predict and explain. Economic theory includes all those laws and principles which explain,
analyze, predict and establish the cause and effect relationship among economic variables. It
is derived logically in a scientific way. Economic theory describes what, why and how of an
economic phenomena. In construction of economic theory, two methods namely Deductive
Method and Inductive Method are used.

Deductive Method: It is also known as a priori, abstract or analytical method. In this method,
we start with general assumptions and then make particular predictions through a process of
logical deductions. The predictions are made on the basis of certain assumptions. Once
predictions are empirically tested and verified for their accuracy, they are accepted as an
economic theory. Otherwise, predictions are either amended or rejected.

This method is simple as it does not involve much collection of data, and it brings
accuracy and exactness to economic generalizations as it uses mathematics and logic. But,
the conclusions drawn out by this method have limited applicability as the underlying
assumptions keep on changing. Further, conclusions drawn by this method are generally not
based on facts. Thus, there is every possibility of their nonexistence in real life.

Inductive Method: This method is also known as a posteriori, historical or empirical method.
In this method, we start with particular facts and then make general theory based on the
analysis of facts. The general theory is arrived at by collecting large number of observations.

This method is precise, realistic, scientific and reasonable as facts are subject to
scientific analysis, and the method takes into consideration the changes in the conditions
surrounding an economic activity. But, this method is complex, difficult, expensive, and time
consuming and there are chances of personal bias of the investigators.

Classical economists preferred deductive method, but in construction of economic

theory inductive method is more popular among modern econo mists. However, the methods
are not alternative of each other. Prof. Marshall said “Induction and deduction are both
needed for scientific thought as the right and left foot both are needed for walking.” Deductive
method is more useful where facts and data are not available and inductive method is more
suitable where facts and data are available.
Human Wants
The existence of human wants is the basis of all economic activity in a society. All desires,
tastes and motives of human beings are called wants in economics. Wants may arise due to
elementary/ psychological and social causes like food; clothing, housing, or a particular type of
dress and food required as members of society. Wants may also arise due to customs and habits
like drinking tea and chewing.

Further, wants may arise due to advertisements. In the early stages of civilization, wants of
men were few and simple. With advancement of civilization, wants have become unlimited and
also complex. Man tries to satisfy most of his wants through economic activity. Since the
resources are limited, he has to choose between urgent wants and not so urgent wants. A
systematic survey of this process is called consumption. Consumption means using up of goods
and services in the satisfaction of human wants. The economics of consumption is related to a
study of nature of wants and the behavior of demand.

Features of wants: Man is a bundle of desires. There is no limit to human wants. If one set of
wants are fulfilled, immediately another set of wants would be felt. Even the richest man will have
a list of wants to be fulfilled. Thus, human wants have following characteristics.

 Wants are unlimited and they are recurring in nature. Wants are felt again and again, e.g.,
the want for food can be satisfied in a particular time period, but the same want will appear
again after a few hours.

 Every want is satiable, means a single or a particular want can completely be satisfied in
one time.

 Wants are competitive, so a consumer chooses more urgent/ intense wants and distribute
his income on goods in such a manner as to get maximum satisfaction.

 Some wants are complementary in nature, i.e. they have to be satisfied together. Though
they may be a single one, we require many commodities and services to satisfy that want.

 Wants are alternative, means want can be satisfied by two or more goods or by two or more
methods. These alternative goods or methods are called ‘substitutes ’.

 Wants are changing with time, place and person. They are not static in character, e.g.,
wants of a villager in Haryana are different from a businessman living in Bombay; and
wants of our forefathers were different from the wants of the present generation.

 Wants are influenced by advertisements. Effective advertisements through films, journals,

radio and TV will create new wants and the existing wants get modified.

 Wants become habits and customs. If a particular want is satisfied repeatedly by a

commodity, then it becomes a habit.

Classification of Wants: In Economics, wants are classified into three categories.

 Necessities: Necessities are those which are essential for living, for example food, clothing
and shelter.

 Comforts: Comforts refer to those goods and services, which are not essential for living but
which are required for a happy living, for example Television, Sofa-com-bed, Cushioned
revolving chair, Superior varieties of food etc.
  Luxuries: Those goods that are used to show off one ’s higher status in life e.g. Air
conditioner, Diamond - studded jewels, Luxury cars etc. Luxuries can be harmful and
harmless.

Summary
Economics is a science where various facts are systematically collected, classified and
analyzed. Economics is a social science whose subject matter is man who cannot be
controlled and predicted. Chemistry and biology are physical sciences where experiments
can be conducted in a laboratory under controlled conditions. Economics is an art also as it
has several branches which give practical direction to solve economic problems of the
society. Some assumptions frequently made in economic analysis are: Rationality, Scarcity,
Goal orientation.

Economic laws are a set of generalizations establishing cause and effect relationship
between economic variables. Economic laws are statements of tendencies, not as exact as
laws of physical sciences; they are hypothetical and lack full predictability.

Economic theory consists of all those laws and principles which explain, analyze,
predict and establish the cause and effect relationship among economic variables. There are
two methods of constructing an economic theory namely, Deductive method and Inductive
method. In the deductive method, the process of reasoning goes from general assumptions
to particular predictions. And in the inductive method, the process of reasoning goes from
particular facts to general theory. Deductive and Inductive methods are not alternative of
each other. Both the methods are needed for constructing an economic theory.