Chapter -1

Module-1
Introduction to microeconomics

Economics is a science that studies human behavior which aims at allocation of scarce
resources in such a way that consumer can maximise their satisfaction, producers can
maximise their profits and society can maximise its social welfare. It is about making
choice in the presence of scarcity.
Wealth definition- Adam Smith (1776)

• This Definition was introduced by Adam Smith.

• He is also known as Father of Economics.
• According to this definition —

• Economics is a science of study of wealth only

• It deals with production, distribution and consumption
• This wealth centered definition deals with the causes
behind the creation of wealth, and
• It only considers material wealth

Adam Smith
“Economics is the science
of wealth”

Welfare Definition – Alfred Marshall (1890)

• This Definition was put forward by Alfred Marshall.

• According to Alfred Marshall “Economics is the study
of man in the ordinary business of life”.
• It examines how a person gets his income and how he
invests it.
• Thus on one side it is a study of wealth and
• On the other most important side, it is a study of
well-being (welfare).
Alfred Marshall
“Economics is the study of
man in the ordinary
business of life”
 Scarcity Definition – Lionel Robbins (1932)

• This definition was put forward by Robbins.

• According to him “Economics is a science which studies
human behavior as a relationship between ends and scarce
means which have alternative uses.
• Features:
• Human wants are unlimited.
• Alternative use of scarce resources.
• Efficient use of resources.
• Need for optimization(best allocation of resources).

Lionel Robbins
Economics is the aspect
of scarcity in all
economic behaviour

Growth Definition – Paul. A. Samuelson (1948)

• This definition was introduced by Paul.

A. Samuelson
• According to him-” Economics is the
science which studies human behaviour
as a relationship between ends and
scarce means which have alternative
uses”.
• It analyses costs and benefits of
improving patterns of resource
allocation.
This definition is the combination of welfare
Paul. A. Samuelson
and scarcity definition
Economics is concerned with determining
the pattern of employment of scarce
resources to produce commodities ‘over
time’.

Scarcity means shortage of goods and resources in relation to their demand.

Features of Scarcity:

(a)Human Wants are Unlimited: Human beings have wants which are unlimited.
Human want to consume more of better goods and services has always been increasing.
For example, the housing need has risen from a small house to a luxury house, the
need formeans of transportation has gone up from scooters to cars, etc. Human wants
are endless. They keep on increasing with rise in people's ability to satisfy them. They
are attributed to (i) people’s desire to raise their standard of living, comforts and
efficiency; (ii) human tendency to accumulate things beyond their present need, (iii)
multiplicative nature of some wants e.g. buying a car creates want for many other things
- petrol, driver, car parking place, safety locks, spare parts, insurance, etc. (iv) basic
needs for food, water and clothing, (v) influence of advertisements in modern times
create new kinds of wants and demonstration effect. Due to these reasons human wants
continue to increase endlessly.

(b)Resources are Limited: Scarcity of resources is the root cause of all economic
problems. All resources that are available to the people at any point of time for satisfying
their wants are scarce and limited. In economics, however, resources that are available
to individuals, households, firms and society at any point of time are traditionally natural
resources (land). Human resources (labour), capital resources (like machine, building,
etc.) and entrepreneurship are scarce. It implies that resources are scarce in relation to
the demand for resources. The scarcity of resources is the mother of all economic
problems.

(c)Resources have Alternative Uses: Resources are not only scarce in supply but
they have alternative uses. Same resources cannot be used for more than one purpose
at a time.
For example, ₹100 can be put in various alternative purposes such as buying petrol,
notebook, ice-cream, burger, cold drink, etc. Similarly an area of land can be used for
farming or as a playground or for constructing school, college or hospital building or for
constructing residential building, etc. Economics as a social science analyses how people
(individuals and the whole society or economy) make their choices between economic
goals they want to achieve; between goods and services they want to produce and
between alternative uses of their resources which will maximise their gains.

Scarcity is the root of all Economic problem.

Types of Activities:
 Types of
activities

economic non economic

consumption Production exchange distribution investment social religious political charitable

Economic activities are those activities which are related to earn money and wealth
for life. These activities generate new income and increase the flow of goods and services.
For example, production, consumption, investment, distribution.

Consumption:
When we use a commodity, we really use its want-satisfying quality or utility. Hence,
consumption means using up of utilities. When we take a glass of water to quench our
thirst, we are said to consume water. While sitting on chairs in the class-room, the
students are consuming the chairs. A person is sick; he calls in a doctor.He has ‘consumed’
the doctor’s service. Whenever we make use of any commodity or service for the
satisfaction of our wants, the act is called consumption. It deals with wealth-using
activities of man as distinguished from wealth-getting activities, which are dealt with in
Production. Thus, consumption deals with the satisfaction of wants.

Production:
Production in ordinary sense means creation of a commodity. We say the carpenter has
produced the chair. But in Economics it is a wrong view. The carpenter has given shape
to the wood which is a free gift of nature as a result of which it has become more useful
to us than before. He has strictly speaking, created additional utility. So production in
Economics means creation of new utility. Man takes the things given by nature and simply
gives it a new form so that it becomes more useful to us than before.

Exchange:
Production is any activity directed to the satisfaction of other peoples’ wants through
exchange. Exchange services are essential for goods produced. It is through exchange
that goods reaches to its consumers. Transportation, communication Warehousing and
distribution services are included in exchange services:

Distribution:
In simple words, ‘distribution’ implies to give each a share of his labour. Therefore, the
theory of distribution deals with the pricing of factors of production. For instance, the
services of factors of production such as land, labour, capital and entrepreneur are used
to produce certain goods and services. As a result, what so ever is produced that is
distributed among different factors of production in the shape of rent, wages, interest
and profits respectively.

Investment/capital formation:

It refers to the act of adding up to stock physical capital of an economy. Example:

increase in the stock of building, machine, raw material,tools etc.

Non-economic activities are those activities which are not related to earn money and
wealth. These activities neither generate income nor increase the flow of goods &
services. For example, a teacher teaching his own son.

Features of Non- Economic Activities

1. Service motive
2. Self-satisfaction
3. Non-measured in money
4. Social obligation

Let’s discuss:

1.Scarcity:
A. exists because resources are limited while human wants are unlimited.
B. means we are unable to have as much as we would like to have.
C. will likely be eliminated as technology continues to expand.
D. is not an issue addressed in economics.

2. People are forced to make choices because of:

A. unlimited wants and unlimited resources.
B. limited wants and unlimited resources.
C. unlimited wants and limited resources.
D. limited wants and limited resources.
E. irrational wants and limited resources.

3. Which one of the following is the most accurate definition of economics?

A. Economics is the study of stocks and bonds.
B. Economics is the study of how people allocate unlimited resources.
C. Economics is the study of how consumers choose to spend their income.
D. Economics is the study of how society chooses to allocate scarce resources.
4. Economics, according to its definition, studies how people:
A. earn and spend money.
B. invest in the stock and bond markets.
C. make choices in the face of scarcity.
D. supply goods in response to demand.

Assignment: (to be done in the notebook)

1. Define economics.
2. “Economics is about making choices in the presence of scarcity. “Explain.
3. State the fundamental factors that has led to the emergence of economic problem.
4. What are economic activities? Describe types of economic activities.