INRODUCTION- ECONOMICS

The word ‘Economics’ is derived from two Greek words, oikos (a house) and
nomos (to manage) which would mean ‘managing an household’ using
the limited funds available, in the most satisfactory manner possible.
Economics is a social science that examines how people choose among
the alternatives available to them. It is social because it involves people
and their behavior. It is a science because it uses, as much as
possible, a scientific approach in its investigation of choices.
Economics is a study of human activity both at individual and national
level. The economists of early age treated economics merely as the
science of wealth. The reason for this is clear. Every one of us in involved
in efforts aimed at earning money and spending this money to satisfy our
wants such as food, Clothing, shelter, and others. Such activities of
earning and spending money are called Economic activities”.

DEFINATIONS-ECONOMICS

Several economists have defined economics taking different aspects into

account:
a.) Wealth Definition - Adam Smith (1723-1790), Father of Economics,
in his Book “An Inquiry into Nature and Causes of Wealth of Nations”
(1776) defined economics as the practical science of production and
distribution of wealth. He explained how a nation’s wealth is created.
b.) Welfare Definition - Alfred Marshall (1842-1924) wrote a book
“Principles of Economics” (1890) in which he defined “Political Economy”
or Economics is a study of mankind in the ordinary business of life; it
examines that part of individual and social action which is most closely
connected with the attainment and with the use of the material
requisites of wellbeing”.
C.) Scarcity Definition - Lionel Robbins published a book “An Essay on
the Nature and Significance of Economic Science” in 1932. According to
him, “economics is a science which studies human behavior as a
relationship between ends and scarce means which have alternative
uses”. Ends refer to human wants, which are unlimited. Resources or
means, on the other hand, are limited or scarce in supply. The scarce
means are capable of having alternative uses. Hence, anyone will choose
the resource that will satisfy his particular want. Thus, economics,
according to Robbins, is a science of choice.
d. Growth Definition - Professor Paul Samuelson defined economics
as “the study of how men and society choose, with or without the use
of money, to employ scarce productive resources, which could have
alternative uses, to produce various commodities over time, and
distribute them for consumption, now and in the future among various
people and groups of society”.

Methodology of Economics
Economic methodology, broadly conceived, is the study of how economics
functions, how it could function, and how it should function and of the various
presuppositions and conditions of all these. It examines various meta
theoretical key concepts such as theory and model, assumption and
idealization, causation and explanation, testing and progress, rhetoric and
truth, social construction and pluralism; as well as various goals, styles and
constraints of research, such as mathematical modelling and experimentation,
grounded theory and case study, causal and functional explanation, forecasting
and policy, ontological and institutional (academic and otherwise) constraints
on economic inquiry. It also sets out to examine fundamental substantial
concepts such as rationality, choice, routine, trust, institution, evolution,
coordination, equilibrium, path dependence.

Methods:

The usual methods of scientific studies — deductive and inductive, are

available to the economist.

Both methods come from science, viz., Logic. The deductive method involves
reasoning from a few fundamental propositions, the truth of which is assumed.
The inductive method involves collection of facts, drawing conclusions from
them and testing the conclusions by other facts.

Deductive and Inductive:

Deductive:

i. Starts from the general and moves to the particular.

ii. Begins with general assumptions and moves to particular conclusions.

iii. Develops a theory, and then examines the facts to see if they follow the
theory.

Example:

Let there be 360 degrees in circle – (A general assumption)

There are four right angles in circle – (A logical argument)

Therefore, this right angle has 90 degrees – (A particular conclusion)

Inductive:

i. Starts from the particular and moves to the general.

ii. Begins with particular observations and moves to general explanations.

iii. Collects observations, then develops a theory to fit the facts.

Example:

This apple falls to the ground. (A particular observation)

All apples fall to the ground. (More observations)

All objects attract each other. (A general explanation)

Economics can be a very deductive subject, and economists are used to

constructing complicated ‘models’ of human behaviour which begin with a
number of assumptions. However, economics is also an empirical subject,
using inductive methods to explain observed facts.

Thus the downward sloping demand curve, for example, can be deduced from
general assumptions about how people try to maximise their satisfaction from
the purchase of goods and services. On the other hand, demand curves can be
built up empirically, that is by observing actual customers reacting to market
price changes, and when market researchers, census-takers and opinion
pollsters collect necessary information, the data can be used inductively to
make economic predictions.

In practice it can be very difficult to say where deductive ends and inductive
begins. Economists need to use both deductive and inductive in their work.
 Scope of Economics
Economists differ in their views regarding the scope of economics. The scope
of economics’ is a broad subject and encompasses not only its subject matter
but also various other things, such as its scientific nature, its ability to pass
value judgments, and to suggest solutions to practical problems.

According to T. Scitovsky, economics is “a social science concerned

with the administration of scarce resources.” In a like manner, A.
C. Cairn-cross defines economics as a “a social science studying how
people attempt to accommodate scarcity to their wants and how these
attempts interact through exchange”. These four aspects of economics
may now be discussed.

1. Subject matter:

If we take a broad view of the subject matter of economics, we may

say that, Economics is the study of all phenomena relating to wealth
and value. It is one of the social sciences that deal with economic
goods, the creation of wealth through the satisfaction of human
wants, the explanation of wealth, value and price, the distribution of
income and the mechanism of exchange and markets of an
economy.

According to Robbins, economics is the study of the problem of

using available factors of production as efficiently as possible so as
to attain the maximum fulfilment of society’s demands for goods
and services. The ultimate purpose of economic endeavour is to
satisfy human wants for goods and services.

The problem is that, whereas wants are virtually without limit, the
resources—land, labour, capital and organisation—available at any
one time to produce goods and services, are limited in supply, i.e.,
resources are scarce relative to the demands for them.

The fact of scarcity means that we must always be making choices.

If, to take a simple example, more resources are devoted to
producing motor cars fewer resources are then available for
constructing roads or bridges or setting up schools and hospitals.
Thus, economics is a science of scarcity or is a study of the problems
of scarcity.However, economics does not study the behaviour of
human beings in the way other subjects like Physiology or
Psychology study it. Economics is no doubt a Science, but it is not a
pure (exact) science like Physics, Chemistry,

Biology or even Mathematics. Economics is a social science

concerned with how we solve society’s economic problems. Because
of the abundance of economic data and the ample opportunity for
scientific research in the real world, Samuelson calls it ‘the queen of
social sciences’.

But it is not an exact science. It may also be added that, the study of
modern economics is divided into two parts, viz., microeconomics
or price theory (concerned with the behaviour of an economic agent
or unit such as an individual consumer or business firm) and
macroeconomics (concerned with the study of certain broad
aggregates, such as national income, output, the level of
employment, the price level or even the growth rate of the economy
or the study of the economic system in its totality).

2. Science or Art:

For quite a long time there was controversy among economists as to whether
it is a science or an art. The members of the English classical school, such as
Adam Smith, T. R. Mathus and David Ricardo, held the view that it was a pure
science whose task was just to explain the cause of economic phenomena such
as unemployment, inflation, slow growth or even trade deficit.

According to classical writers, economics is simply the study of cause-and-

effect relationship. However, neo-classical and modern economists have
pointed out that economics is both a science and an art. Just to treat
economics as a science is to rob it of its practical value. As Keynes has
commented, “Practical men……. are usually the slaves of some defunct
economist.” So, economics has both a theoretical side and a practical or
applied side. In other words, economics is no doubt a science, but it is both
‘light-bearing and fruit bearing’. Inflation, unemployment, monopoly,
economic growth, pollution, free markets versus central planning, poverty,
productivity and other current issues are all covered in the study of economics.
Economics is a problem- based social science, and the problems with which it is
especially concerned are among the central issues of our times. Economics is
relevant not only to the big problems of society, but also to the personal
problems, such as one’s job, wages, unemployment, the cost of living, taxes
and voting.

3. Positive or Normative:

Another controversial aspect of economics is whether it should be neutral or

pass value judgments. The members of the English classical school were of the
opinion that economists were not supposed to make any normative statement
or pass any value judgment on the desirability or otherwise of the economic
decisions.

Some later members of the classical school even went to the extent of
suggesting that economists should not give any advice on any issue.

This means that economics should stand neutral as regards ends. However, the
same view has been reaffirmed by Robbins, who commented that the function
of the economist is to explore and explain, not to uphold or to condemn. This
simply means that economists should take ends as given. Their task is just to
discover ways and means of achieving these ends (i.e., to find out ways of
accomplishing objectives).

No doubt, by restricting himself to positive aspect of economic science (with its

focus on resource allocation and valuation of commodities and factors)
Robbins has narrowed (restricted) the scope of economics. He denied
economics the right to study welfare.

As he has commented, “Whatever economics is concerned with it is not

concerned with the causes of material welfare as such.” He has also ignored
macroeconomics altogether as also the problems of developing countries like
India.

So, Robbins’ view of economic science is not only one-sided but misleading,
too. The task of economists is not just to explain why certain things happen
(i.e., why there is so much of unemployment in India in spite of her planned
economic development or why there is so inequality in the distribution of
income and wealth notwithstanding the prevalence of the progressive income
tax system).
It is equally vital to pass judgment as to whether certain things are good or bad
from society’s welfare point of view. For example, it is not enough for an
economist to explain the present problem of unequal distribution of income
and wealth in India. It is the task of the economists to condemn this
phenomenon and to suggest certain measures which should be adopted by the
government to solve the inequality problem.

This means that, economics is both a positive and a normative science. While
positive economics is the scientific study of ‘what is’ among economic
relationships, normative economics is concerned with judgments about ‘what
ought to be’ in economic matters. (Normative economic views cannot be
proved false, because they are based on value judgments.)

4. Problem-solving Nature:

The classical economists believed that economics could not solve practical
problems, because there were non-economic (social, political, ethical, religious
and other) aspects of people’s lives.

J.M. Keynes commented in 1923:

“The theory of economics does not furnish a body of settled conclusions

immediately applicable to policy. It is a method rather than a doctrine, an
apparatus of the mind, a technique of thinking which helps its possessor to
draw correct conclusions. “However, this view is not correct. In fact, the
primary function of economists is to formulate policies and to suggest
solutions to economic problems. Acknowledge of economics is essential for
policymaking.

Policy-makers, who do not understand the consequences of their actions are

unlikely to reach their goals. The most important point to note here is that,
economists can suggest solutions to society’s economic problems such as
unemployment, inflation, trade deficit and slow growth.

This is why modern governments take the help of economists for formulating
monetary fiscal and exchange rate policies. Since the New Deal era in the
1930s, economists have moved in the forefront of government policy analysis.
Basic Concepts & Precepts
Economic Problems
Basic Problems Of An Economy
There is a central economic problem that is present across all countries,
without any exception, it is the problem of scarcity. This problem arises
because the resources of all types are limited and have alternative uses. If
the resources were unlimited or if a resource only had one single use, then the
economic problem would probably not arise. However, be it natural productive
resources or man-made capital consumer goods or money or time, scarcity of
resources is the central problem. This central problem gives rise to four basic
problems of an economy.

What are the Central Problems of an Economy?

After the central problems of an economy introduction, it is important to
understand all the underlined aspects of such problems. Following is a
detailed discussion on the central problems that every economy faces.

 Allocation of Resources

A problem that an economy predominantly faces is the allocation of

resources. Due to the scarcity of available resources, it leads to the
troublesome situation of assigning these limited resources to produce
goods and services that can fulfil societal wants maximally.
Thus, it is important to distribute the resources efficiently so that they
can cater to produce several commodities to satisfy the needs of different
socio- economic groups in various manners.
This decision needs to be taken depending on the three central problems
of the economy.

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

To know the answer to what are the central problems of the economy, the
following discussion is necessary.

1. What to Produce
This problem refers to the decisions regarding the selection of different
commodities and the quantities that need to be produced. Labour, land,
machines, capital, equipment, tools and natural means of resources
are limited. So, it is not possible to fulfil society’s every demand.
Therefore, it needs to be decided what goods and services are required to
be produced and what should be the quantity.
Furthermore, the central problems of an economy also depend on the
classification of commodities based on their degree of necessity –
luxury and essential.
In an economy, the produced goods are further classified into two
segments, namely consumer goods and producer goods or capital goods.
Moreover, both these segments are again divided into single-use goods
and durable goods.

Thus, there are two aspects to the problem, “what to produce” –

 What Types of Goods to be Produced?

For example, every economy needs to decide on what consumer goods

like rice, clothes, etc. and what producer goods like tools, machinery, etc.
are required to be produced to meet demand adequately.

 How Much Amount of Goods to be Produced?

The next challenge is to decide, in what quantity goods should be

produced. It is a crucial aspect of any economy, as proportionate
distribution of resources for the production of different goods to maximally
satisfy wants is quintessential.

2. How to Produce
This problem is about the choice of techniques that need to be adopted
and used in the production of goods and services.
The two majorly-used techniques are-

 LIT or Labour-Intensive Techniques

This technique is used with the help of more number of labour and less
involvement of capital.

 CIT or Capital-Intensive Techniques

On the other hand, the CIT technique involves more capital
involvement and less utilisation of labour.
For instance, footwear can be manufactured either in factories where a
large portion of manufacturing is carried out by machines or by skilled
teams of cobblers.
The relative price and availability of labour and capital are the determining
factors while selecting the production technique. Moreover, some socio-
economic objectives also need to be fulfilled by choosing the techniques.
Such objectives are providing employment and enhancing the standard of
living in society. For example, in countries like China, LIT is favoured as an
ample number of labours are available. Contrarily, the United Kingdom will
prefer CIT due to the availability of capital and scarcity of labour.

3. For Whom to Produce

One of the most crucial problems of the economy is to decide which
commodities shall be produced for which sections of society.
For instance, essential goods and services are in demand from all sections
of society, but only certain sections of society have a demand for luxury
commodities. At the same time, choices of goods and services rest on
prevalent tastes and preferences in an economy.
Hence, considerations regarding the socio-economic conditions of a
country or market are highly pertinent to this problem.
Lastly, it is important to know that other than resource allocation,
central problems of an economy have two more aspects – efficient
utilisation of the resource and development of resources. Thus, to explain
central problems of an economy, one needs to delve into its core, i.e.
choices concerning the limited resources available to maximise socio-
economic utility.

Economic agents
Economic agents aíe actoís who inteívene in the economy undeí ceítain íules
deteímined by the economic system and economic institutions. ľhey make
decisions tíying to íesolve an optimization oí choice píoblem. In this píocess,
they mold the economy; foí example, they decide the distíibution of goods and
seívices, taxes, laws, taíiffs, etc.

Anotheí definition of economic agents, also known as economic actoís,

consideís them as decisions makeís who aíe able to íecognize diffeíent
economic factoís, incentives, and motivations of the diffeíent economic
gíoups.

ľhe concept of "economic agents" was cíeated by economist to simplify

and explain economic píocesses. As a concept, it was fiíst used in classical
and neoclassical models wheíe economists constíuct a simplified fíamewoík
íepíesenting the economic píocess by a set of vaíiables and a set of the
logical íelationship between them.

What aíe the fouí economic agents?

In geneíal, economists consideí thíee oí fouí types of economic agents:

Economic agent: families

Families aíe a domestic gíoup defined by the U.S. Census as "a gíoup of two
people oí moíe (one of whom is the householdeí) íelated by biíth, maííiage, oí
adoption and íesiding togetheí; all such people
(including íelated subfamily membeís) aíe consideíed as membeís of one
family".
Families consume, woík and save. ľhey consume to satisfy theií necessities,
they save foí a gíeateí futuíe consumption, they boííow to advance
consumption, and they woík (sacíificing leisuíe) to be able to consume. ľheií
income is distíibuted in consumption, savings, and taxes. ľhey have a dual
íole in the economy. On one side, they aíe consumeís, they demand goods and
seívices; and on the otheí, they own the means of píoduction thíough which
the goods and seívices aíe píoduced.

Economic agent: firms

Fiíms tíy to maximize theií utility (economic benefits) foí theií shaíeholdeís.
ľo achieve this, fiíms use factoís of píoduction (land, laboí, and capital) to
píoduce goods and seívices, cíeating value and wealth. ľhey demand laboí
fíom families foí a salaíy, also they employ capital (machines, vehicles,
computeís, etc) in exchange foí inteíest, and land foí íent. Finally, ľhey offeí
goods and seívices foí the families, otheí fiíms oí the goveínment.

Economic agent: government

Goveínments píovide most of the íules foí how the íest of economic agents
should inteíact. ľhey offeí goods and seívices (mostly public goods and
seívices like íoads oí national secuíity) thíough national companies oí in
association with píivate fiíms.
Goveínment’s demand goods fíom fiíms and laboí fíom families. But also,
they tax them based on its income, píofits, wealth, etc.
ľhey can íegulate píices, limit oí píohibit the consumption of ceítain goods,
cíeate taíiffs, to impoíts, incentivize píoduction, etc. Finally, they distíibute
the wealth thíough social seívices in education, health and poveíty
píogíams.

Economic agent: Central Banks

Centíal Banks manage countíy cuííency, money supply, and inteíest íates.
ľhíough monetaíy policies, they can incíease the money supply in the economy
oí modify the inteíest íates to incentivize oí disincentivize consumption, savings
oí investments.

Marginalism
Marginal and Marginalism

The concept of opportunity cost helps you decide whether to do something, such as
whether to go to college or to a movie. Lots of decisions, though, are not about
whether to do something, but about how much to do something. To deal with these
kinds of decisions, economists use another powerful technique, called marginalism.

Marginal = additional

Economists use the word marginal to mean "extra" or "additional." The marginal
benefit of each Unit is simply the additional benefit you would get if you consumed
it. The Economist defines marginal as the difference made by one extra unit of
something:

Marginalism is a theory of economics that attempts to explain the

discrepancy in the value of goods and services by reference to their
secondary, or marginal, utility. Lots of decisions, though, are not
about whether to do something, but about how much to do something. To deal
with these kinds of decisions, economists use another powerful technique, called
Marginalism.

Marginalism is the economic principle that economic decisions are made and
economic behaviour occurs in terms of incremental units, rather than categorically.
The key focus of marginalism is that asking how much, more or less, of an activity
(production, consumption, buying, selling, etc.) a person or business will engage in is
a more fruitful question to further economic inquiry
than categorical questions. The key insight of marginalism is that people make
decisions over specific units of economic goods (economists say "at the margin"),
rather than in an all-or-none fashion.

Marginal revenue is the extra revenue earned by selling one more unit of
something.

The marginal price is how much extra a consumer must pay to buy one extra unit.

Marginal utility is how much extra utility a person gets from consuming (or
doing) an extra unit of something.

The marginal product of labour is how much extra output a firm would get by
employing an extra worker, or by getting an existing worker to put in an extra hour
on the job.

The marginal propensity to consume (or to save) measures by how much a

household’s consumption (or savings) would increase if its income rose by, say, $1.

The marginal tax rate measures how much extra tax you would have to pay if you
earned an extra dollar.

The Economist goes on to say:

“The marginal cost (or whatever) can be very different from the average cost (or
whatever), which simply divides total costs (or whatever) by the total number of units
produced (or whatever). A common finding in microeconomics is that small
incremental changes can matter enormously. In general, thinking “at the margin” often
leads to better economic decision making than thinking about the averages.”

Time Value of Money

Time value of money’ is central to the concept of finance. It recognizes that the value
of money is different at different points of time. Since money can be put to
productive use, its value is different depending upon when it is received or paid.

In simpler terms, the value of a certain amount of money today is more valuable than
its value tomorrow. It is not because of the uncertainty involved
with time but purely on account of timing. The difference in the value of money today
and tomorrow is referred to as the time value of money.

Meaning of Time Value of Money

The time value of money is one of the basic theories of financial management, it
states that ‘the value of money you have now is greater than a reliable promise to
receive the same amount of money at a future date’.

The time value of money (TVM) is the idea that money available at the present time is
worth more than the same amount in the future due to its potential earning capacity.
This core principle of finance holds that, provided money can earn interest, any
amount of money is worth more the sooner it is received.

The time value of money is the greater benefit of receiving money now rather than
receiving later. It is founded on time preference. The principle of the time value of
money explains why interest is paid or earned? Interest, whether it is on a bank
deposit or debt, compensates the depositor or lender for the time value of money.

TVM with an example

The relevance of TVM depends on how much returns you can generate from the
capital available. Money has immense growth potential and the more you delay
employing this potential, the more you lose the chance to earn on it.

For instance, if a friend or lender gives you two options – to take Rs. 10,000 today or
to take Rs, 10,500 next year. Now, even if this promise is from someone or an entity
you trust implicitly, chances are more that the second option is a raw deal. With more
and more schemes ranging from low-risk to high-risk – tax-saving FDs, ELSS et. –
there is a high chance that you can make at least 7% on this sum, which is Rs. 10,700.
But if the interest rate offered is less than 5%, then you may consider taking the
money next year. So, it depends on the possible returns as per the RBI guidelines or
the market.
 The Opportunity Cost Concept:
Opportunity cost principle is related and applied to scarce resource. When there are
alternative uses of scarce resource, one should know which best alternative is and
which is not. We should know what gain by best alternative is and what loss by left
alternative is. The concept of opportunity cost plays an important role in managerial
decisions. This concept helps in selecting the best possible alternative from among
various alternatives available to solve a particular problem. This concept helps in the
best allocation of available resources. The opportunity cost of any action is simply the
next best alternative to that action - or put more simply, "What you would have done
if you didn't make the choice that you did". The income or benefit foregone as the
result of carrying out a particular decision, when resources are limited or when
mutually exclusive projects are involved. Opportunity cost is not what you choose
when you make a choice —it is what you did not choose in making a choice.
Opportunity cost is the value of the forgone alternative — what you gave up when
you got something.

Example 1:
If a person is having cash in hand Rs. 100000/-, he may think of two alternatives to
increase cash. Option 1: Investing in bank. We will get returns amount 10000/-

Option2: Investing in business. We get returns amount 17000/-

Generally we chose the option 2 because we will get more returns than the option 1.
Here the option 1 is the opportunity cost, that what we have not chosen. The
opportunity cost of a decision is based on what must be given up (the next best
alternative) as a result of the decision. Any decision that involves a choice between
two or more options has an opportunity cost. In managerial decision making, the
concept of opportunity cost occupies an important place. The economic significance
of opportunity cost is as follows:

1. It helps in determining relative prices of different goods.

2. It helps in determining normal remuneration to a factor of production.

3. It helps in proper allocation of factor resources.

 Forms of Economic analysis

Micro vs. Macro

Microeconomics Macroeconomics
Meaning
Microeconomics is the branch of Economics
Macroeconomics is the branch of Economics that
that is related to the study of individual,
deals with the study of the behaviour and
household and firm’s behaviour in decision
performance of the economy in total. The most
making and allocation of the resources. It
important factors studied in macroeconomics involve
comprises markets of goods and services and
gross domestic product (GDP), unemployment,
deals with economic issues.
inflation and growth rate etc.

Area of study
Microeconomics studies the particular Macroeconomics studies the whole economy, that
market segment of the economy covers several market segments

Deals with

Microeconomics deals with various issues Macroeconomics deals with various issues
like demand, supply, factor pricing, product like national income, distribution,
pricing, economic welfare, production, employment, general price level, money,
consumption, and more. and more.

Business Application
It is applied to internal issues. It is applied to environmental and external issues.

Scope
It covers several issues like distribution, national
It covers several issues like demand,
income, employment, money, general price level, and
supply, factor pricing, product pricing,
more.
 economic welfare, production,
consumption, and more.

Significance

It is useful in regulating the prices of a It perpetuates firmness in the broad price

product alongside the prices of factors level, and solves the major issues of the
of production (labour, land, economy like deflation, inflation, rising
entrepreneur, capital, and more) within prices (reflation), unemployment, and
the economy. poverty as a whole.

Limitations

It has been scrutinised that the

It is based on impractical
presuppositions, i.e., in
microeconomics, it is presumed that
there is full employment in the
community, which is not at all feasible.
misconception of composition’ incorporates,
which sometimes fails to prove accurate
because it is feasible that what is true for
aggregate (comprehensive) may not be true
for individuals as well.
Partial vs. General

Partial Equilibrium General Equilibrium

a) Micro economics uses partial equilibrium
analysis based on the assumption, other things
remaining constant.
(b) Partial equilibrium studies the equilibrium of
a consumer, a firm, an industry or a market.
(c) It deals with one or two variables at a
time. So it is a simple method. It is
independent.
(d) Partial Equilibrium is regarded as a
worm's eye-view.
(a) Macroeconomics uses general
equilibrium. It is not based on any`
assumption.
(b) It deals with the equilibrium position of
the economy as a whole.
(c) It deals with all the variables of the
economic system simultaneously. So it is
sophisticated. There is interdependence
between variables.

(d) General Equilibrium is a bird's eye-view.

Static vs. Dynamic Economics

1. Time Element:

In static economic analysis time element has nothing to do. In static economics, all economic
variables refer to the same point of time. Static economy is also called a timeless economy. Static
economy, according to Hicks, is one where we do not trouble about dating.

On the contrary, in dynamic economics, time clement occupies an important role. Here all quantities
must be dated. Economic variables refer to the different points of time.
2 Process of Change:
Another difference between static economics and dynamic economics is that static analysis does not
show the path of change. It only tells about the conditions of equilibrium. On the contrary, dynamic
economic analysis also shows the path of change. Static economics is called a ‘still picture’ whereas
the dynamic economics is called a ‘movie’ of the market.

3. Equilibrium:
Static economics studies only a particular point of equilibrium. But dynamic economics also studies
the process by which equilibrium is achieved. As a result, there may be equilibrium or may be
disequilibrium. Therefore, static analysis is a study of equilibrium only whereas dynamic analysis
studies both equilibrium and disequilibrium.

4. Study of Reality:
Static analysis is far from reality while dynamic analysis is nearer to reality. Static analysis is based on
the unrealistic assumptions of perfect competition, perfect knowledge, etc. Here all the important
economic variables like fashions, population, models of production, etc. are assumed to be constant.
On the contrary, dynamic analysis takes these economic variables as changeable.

Now we can sum up by saying that static and dynamic approaches of economic analysis are not
competitive but complementary of each other. Statics is simpler and easier while dynamics is
nearer to reality. It is useful to study some economic problems through the static analysis while
others may be studied through the dynamic approach.

Positive vs. Normative

Positive and normative are two branches of modern economics. While positive economics deals with
the various economic phenomena, normative economics focuses on what economics should be and
the value of its fairness.
In simpler words, positive economics is regarded as the ‘what’ branch, whereas normative
economics is the ‘should be’ or ‘ought to be’ section of economics. However, before moving forward
to the difference between positive and normative economics, you must know about them in detail.
What is Positive Economics?

Positive economics is the stream of economics that has an objective approach, relied on facts. It
concentrates on the description, quantification, and clarification on economic developments,
prospects and allied matters. This subdivision of economics relies on objective data analysis and
relevant facts and figures. Therefore, it tries to establish a cause-and-effect relationship or
behavioural relationship that can help determine as well as test the advancement of economic
theories.

Here, the study of economics is more objective and focuses more on facts. Moreover, the
statements are precise, descriptive and measurable. Such reports can be quantified with respect to
noticeable evidence and historical references.
A positive economics example is a statement, “Government-funded healthcare surges public
expenditures.” This statement is based on facts and has a considerable value judgement involved in
it. Therefore, its credibility can be proven or dis-proven via a study of the government’s involvement
in healthcare.

What is Normative Economics?

Normative economics deals with prospective or theoretical situations. This division of economics has
a more subjective approach. It focuses on the ideological, perspective-based, opinion-oriented
statements towards economic activities. The aim here is to summarise the desirability quotient
among individuals and quoting factors like ‘what can happen’ or ‘what ought to be’.
Normative economics statements are subjective and rely heavily on values originating from an
individual opinion. These statements are often very rigid and perceptive. Therefore, they are
considered political or authoritarian.
A normative economics example is, “The government should make available fundamental healthcare
to every citizen”. You can understand that this statement is based on personal perspective and
satisfies the need for ‘should be’ or ‘ought to be’.

Difference Between Positive and Normative Economics

1. Meaning

Positive economics means more focus on data, facts and figures rather than personal perspectives.
The statements here are to the point and supported by relevant information.

On the other hand, normative economics focuses more on personal perspectives and opinion rather
than facts and figures. Here the statements are based on an individual’s point of view, and ample
data is always available to support such claims.

2. Perspective

The perspective of these two concepts is a significant point of difference between them. Positive
economics is objective, whereas normative economics is subjective. The focus of positive economics
is on presenting relevant and more focused statements backed by actual data.

Contrarily, normative economics focuses on presenting statements that may or may not be possible
in future. Moreover, in some cases, such statements do not have any credible data to back it up.

3. Function

Their functions can distinguish between positive and normative economics. Positive economics
describes the cause and outcome of relationship among variables. On the other hand, normative
economics provides value judgement.

4. Area of Study

Positive economics is the study of ‘what is’; whereas normative economics describes ‘what should
be’. One branch relies on a factual approach supported by data. Contrarily, normative economics
relies more on personal opinions rather than actual data.
5. Testing

Every statement of positive economics can be tested scientifically and either proven or disregarded.
However, normative economics statements cannot be tested scientifically. It entirely depends on the
belief of an individual.

6. Economical Clarification

Positive economics provides a more scientific and calculated clarification on an economic issue.
However, normative economics also provides such solutions but ones that are based on personal
values.

Short Run vs. Long Run

Short run

 In the short run one factor of production is fixed, e.g. capital. This means that if a firm wants
to increase output, it could employ more workers, but not increase capital in the short run
(it takes time to expand.)
 Therefore, in the short run, we can get diminishing marginal returns, and marginal costs may
start to increase quickly.
 Also, in the short run, we can see prices and wages out of equilibrium, e.g. a sudden rise in
demand, may lead to higher prices, but firms don’t have the capacity to respond and
increase supply.

Long run

The long run is a situation where all main factors of production are variable. The firm has time to
build a bigger factory and respond to changes in demand. In the long run:
 We have time to build a bigger factory.
 Firms can enter or leave a market.
 Prices have time to adjust. For example, we may get a temporary surge in prices, but in the
long-run, supply will increase to meet it.
 The long run may be a period greater than six months/year
 Price elasticity of demand can vary – e.g., over time, people may become more sensitive to
price changes, in short run, people keep buying a good they are used to.

Relation between Economics and Law

Law and economics,” also known as the economic analysis of law, differs from other forms
of legal analysis in two main ways. First, the theoretical analysis focuses on efficiency. In
simple terms, a legal situation is said to be efficient if a right is given to the party who would
be willing to pay the most for it. There are two distinct theories of legal efficiency, and law
and economics scholars support arguments based on both. The positive theory of legal
efficiency states that the common law (judge-made law, the main body of law in England
and its former colonies, including the United States) is efficient, while the normative theory
is that the law should be efficient. It is important that the two theories remain separate.
Most economists accept both.
Law and economics stresses that markets are more efficient than courts. When possible, the
legal system, according to the positive theory, will force a transaction into the market. When
this is impossible, the legal system attempts to “mimic a market” and guess at what the
parties would have desired if markets had been feasible.

The second characteristic of law and economics is its emphasis on incentives and people’s
responses to these incentives. For example, the purpose of damage payments in accident
(tort) law is not to compensate injured parties, but rather to provide an incentive for
potential injurers to take efficient (cost-justified) precautions to avoid causing the accident.
Law and economics shares with other branches of economics the assumption that
individuals are rational and respond to incentives. When penalties for an action increase,
people will undertake less of that action. Law and economics is more likely than other
branches of legal analysis to use empirical or statistical methods to measure these responses
to incentives.

The private legal system must perform three functions, all related to property and property
rights. First, the system must define property rights; this is the task of property law itself.
Second, the system must allow for transfer of property; this is the role of contract law.
Finally, the system must protect property rights; this is the function of tort law and criminal
law. These are the major issues studied in law and economics. Law and economics scholars
also apply the tools of economics, such as game theory, to purely legal questions, such as
various parties’ litigation strategies. While these are aspects of law and economics, they are
of more interest to legal scholars than to students of the economy.

ECONOMIC OFFENCES AND ECONOMIC LEGISLATIONS

Economic offences form a separate category of crimes under Criminal offences. These are
often referred as White/Blue Collar crimes. People belonging generally to upper economic
status are found involved in such crimes with the help of some unscrupulous and corrupt
Government functionaries and advanced technology. Economic offences not only inflict
pecuniary losses on individuals but also damage the national economy and have security
implications as well. The offences of Smuggling of Narcotic substances, Counterfeiting of
currency and valuable securities, Financial Scams, Frauds, Money Laundering and Hawala
transactions etc. evoke serious concern about their impact on the National Security.
Legislation A table listing various Economic Offences, the relevant legislations and concerned
Enforcement Authorities is given above. Enforcement Agencies Economic offences may be
either cognizable or non-cognizable in nature. Local police deal with considerable number of
economic offences falling under the broad category of `Cheating', `Counterfeiting' and
`Criminal Breach of Trust'. A number of special laws regulating customs, excise, taxes,
foreign exchange, narcotic drugs, banking, insurance, trade and commerce relating to export
and import have been enacted in the country, as listed in the preceding table. These laws
are enforced by the respective departmental enforcement agencies created under the
statutory provisions. Legal powers for investigation, adjudication, imposition of fines,
penalties, and arrest and detention of persons under special circumstances are derived from
the same legislations. Officers of the enforcement agencies are also vested with powers to
summon witnesses, search and seize goods, documents and confiscate the proceeds.
Sl. No. Economic Acts / Enforcement
Crimes Legislation Authorities
1 Tax Evasion Income Tax Act Central Board of
Direct Taxes
2 Illicit Trafficking in Customs Act 1962 Collectors of
contraband goods COFEPOSA, 1974 Customs
(smuggling)
3 Evasion of Excise Central Excise Act, Collectors of
Duty 1944 Central Excise
4 Cultural Object’s Antiquity and Art Police/State CB-
Theft Treasures Act, CID/CBI
1972
5 Money Laundering Foreign Exchange Directorate of
Regulations Act, Enforcement
1973; Money
Laundering Act,
2002
6 Foreign Foreign Police/CBI
contribution Contribution
manipulations (Regulation) Act,
1976;
7 Land IPC Police/State CB-
Grabbing/Real CID/CBI
Estate Frauds
8 Trade in Human Transplantation of Police/State CB-
body parts Human Organs CID/CBI
Act, 1994
9 Illicit Drug Narcotic Drugs and NCB/ Police/State
Trafficking Psychotropic CBCID/CBI
Substances Act
1985 & NDPS Act,
1988
10 Fraudulent Banking Regulation Police, CBI
Bankruptcy Act, 1949
11 Corruption and Prevention of State/Anti
Bribery of Public Corruption Act, Corruption
Servants 1988 Bureaux/ Vigilance
Bureaux/CBI
12 Bank Frauds IPC Police/State
Vigilance/CB-
CID/CBI
13 Insurance Frauds IPC Police/State
Vigilance/CB-
CID/CBI
14 Racketeering in IPC Police/State CB-
Employment CID/CBI
15 Illegal Foreign Import & Export Directorate General
Trade (Control) Act,1947 of Foreign
Trade/CBI

16 Racketeering in Passport Act, Police/State CB-

false Travel 1920/IPC CID/CBI
Documents
17 Credit Cards Fraud IPC Police/State CB-
CID/CBI
18 Terrorist Activities PC & related Acts Police/State CB-
CID/CBI
19 Illicit Trafficking in Arms Act,1959 Police/State CB-
Arms CID/CBI
20 Illicit Trafficking in Explosives Act, Police/State CB-
Explosives 1884 & Explosive CID/CBI
Substances Act,
1908
21 Theft of Intellectual Copyright Act, Police/State CB-
Property 1957 (Amendments CID/CBI
1984 & 1994)
22 Computer Copyright Act, Police/State CB-
Crime/Software 1957/I.T.Act, 2000 CID/CBI
piracy
23 Stock Market IPC Police/State CB-
Manipulations CID/CBI
24 Company Frauds Companies Act, Police/CBI
1956/IPC MRTP
Act, 1968