TOPIC 1

NATURE AND SCOPE OF ECONOMICS

Economics is defined as the

social science that deals with
the production, distribution,
and consumption of goods
and services. It also analyses
how a society seeks to
allocate their limited
resources in other to achieve
growth. The term economics
is derived from two words economy and science meaning the science of the economy or
the science of proper utilization of resources. Evolved in the 19th century, the economic
studies have become one of the most significant studies of modern days. From a small
shop to a country, Economics plays a crucial role in the efficient running of both. No
business can flourish without applying the principles of economics. The study of
economics is extensive and varied. The nature and scope of economics depend upon the
interaction of economic agents and how economies work.

Different Viewpoints on Economics

What are the various viewpoints that further justify the nature and scope of economics?

Classical Viewpoints

The fundamental principle of the classical theory is that the economy is self‐regulating,
hence, classical economists focused on the concept of wealth. The classical economists
beginning with Adam Smith defined economics as the science of wealth. Adam Smith
defined it as the “nature and causes of wealth of nations,” whereby it “proposes to enrich
both the people and the sovereign.” Among his followers, J.B. Say in France defined
economics as “the study of the laws which govern wealth;” to Nassau Senior at Oxford,
“the subject treated by political economists - is not happiness, but wealth;” whereas to
F.A. Walker in America, “Economics is that body of knowledge which relates to wealth.”

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According to J.S. Mill, “Writers on Political Economy profess to teach the nature of wealth
and the laws which govern its production, distribution and exchange.” To J.E. Cairnes,
“Political Economy is a science - it deals with the phenomena of wealth.” While B. Price
declared in 1878, “all agreed that it is concerned with wealth.”

Neo-Classical Economics

Basically, among all neoclassical idea propagators, Alfred Marshall falls on the top list. It
is believed that he has given a reputed place to Economics within the domain of Social
Science. The neo-classical school theory led by Alfred Marshall gives economics a
respectable place among social sciences. Marshall laid emphasis on man and his welfare.
Wealth was regarded as the source of human welfare, not an end in itself but a means to
an end. The meaning of A MEANS TO AN END is something done only to produce a
desired result.

According to Marshall “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 well-
being. Thus, it is on the one side a study of wealth; and on the other, and more important
side, a part of the study of man.”

Certain logical inferences can be drawn from Marshall’s definition. First, economics is
concerned with man’s ordinary business of life. It is related to his wealth-getting and
wealth-using activities or, as Marshall put it: It “deals with his [man’s] efforts to satisfy his
wants, in so far as the efforts and wants are capable of being measured in terms of wealth
or its general representative, i.e. money.” Word in parenthesis mine. Secondly,
economics is a social science. It “is a study of men as they live and move and think in the
ordinary business of life.” Overall, we can say that neo-classical Economists laid
emphasis on the overall Human development.

Scarcity

It was Lord Robbins who with the publication of his Nature and Significance of Economic
Science in 1932 not only revealed the logical inconsistencies and inadequacies of the
earlier definitions but also formulated his own definition of economics. According to

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Robbins: “Economics is the science which studies human behavior as a relationship
between ends and scarce means which have alternative uses.” This definition is based
on the following related postulates.

1. Economics is related to one aspect of human behavior, of maximizing satisfaction from

scarce resources.

2. Ends or wants are scarce. When a particular want is satisfied others crop up to take its
place. Multiplicity of wants makes it imperative for human beings to work ceaselessly for
their satisfaction but they are unable to satisfy all.

NATURE OF ECONOMICS

The nature of economics deals with the question that whether economics falls into the
category of science or arts. Various economists have given their arguments in favor of
science while others have their reservations for arts. In the simplest terms, the nature and
scope of Economics is prevalent as an art and science.

Economics as a Science

To consider anything as a science, first, we should know what science is all about?
Science deals with systematic studies that signify the cause and effect relationship. In
science, facts and figures are collected and are analyzed systematically to arrive at any
certain conclusion. For these attributes, economics can be considered as a science.
However, economics is treated as a social science because of the following features:

• It involves a systematic collection of facts and figures.

• Like in science, it is based on the formulation of theories and laws.
• It deals with the cause and effect relationship.

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 • These points validate that the nature of economics is correlated with science. Just
as in science, various economic theories are also based on logical reasoning.

Economics as an Art

It is said that “knowledge is science, action is art.” Economic theories are used to solve
various economic problems in society. Thus, it can be inferred that besides being a social
science, economics is also an art.

Economics as an art is the implementation of theories, concepts and findings to achieve

goals. Thus, the practical application of the scientific economic findings comes under
Economics as an Art. It includes graphs, figures, tables as well as equations. All the
theories in it are well explained with the help of graphical representations. Moreover, all
those theories are perfectly explained defining the relationship between economic
variables and, application of theories etc. Many economists evolved over the year who
presented their divergent views about economics. Some believe that economics can be
seen through the prism of science and some believed its falls in a category of Arts.

SCOPE OF ECONOMICS

The word scope can be understood as “the extent of the area that something deals
with”. Generally, the economic scope covers all the central issues faced by society,

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including economic decline and growth, poverty, unemployment, and etc. Major things
come under the preview of Economics are considered as its nature and scope.
Economists use different economic theories to solve various economic problems in
society. Its applicability is very vast. From a small organization to a multinational firm,
economic laws come into play. The scope of economics can be understood under two
subheads: Microeconomics and Macroeconomics.

Microeconomics

Microeconomics it deals with the applications of economics on an individual economic

activity, industries, and their interaction. It has the following characteristics:

• Elasticity: It determines the ratio of change in the proportion of one variable to

another variable. For example- the income elasticity of demand, the price elasticity
of demand, the price elasticity of supply, etc.
• Theory of Production: It involves an efficient conversion of input into output. For
example- packaging, shipping, storing, and manufacturing.
• Cost of Production: With the help of this theory, the object price is evaluated by
the price of resources.
• Monopoly: Under this theory, the dominance of a single entity is studied in a
particular field.
• Oligopoly: It corresponds to the dominance of small entities in a market.

Macroeconomics

It is the study of an economy as a whole. It explains broad aggregates and their

interactions “top down.” Macroeconomics has the following characteristics:

• Growth: It studies the factors which explain economic growth such as the increase
in output per capita of a country over a long period of time.
• Business Cycle: This theory emerged after the Great Depression of the 1930s. It
advocates the involvement of the central bank and the government to formulate
monetary and fiscal policies to monitor the output over the business cycle.
• Unemployment: It is measured by the unemployment rate. It is caused by various
factors like rising in wages, a shortfall in vacancies, and more.
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 • Inflation and Deflation: Inflation corresponds to an increase in the price of a
commodity, while deflation corresponds to a decrease in the price of a commodity.
These indicators are valuable to evaluate the status of the economy of a country.

Examples of Micro and Macroeconomics

There are numerous examples of Micro and Macroeconomics across factors, aspects and
economic activities. Here is the difference between Micro and Macroeconomics with
example:

Examples of Microeconomics

• Inflation
• GDP
• Unemployment rates
• Economic outputs
• Price Stability
• Goods
• Productivity
• Stability

Examples of Macroeconomics

• Supply
• Demand
• Prices
• Elasticity
• Competition
• Opportunity Cost
• Competitive Advantage
• Consumer Choice
• Welfare Economics

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Basis of
Difference
Between Micro & Macroeconomics
Macro
Economics
It aims to study the economy
Definition as a whole and covers different
market segments.
Takes an expansive
Central approach by studying the
Approach whole economy.
Also called as the income
theory because it describes
Concerned with the changing levels of national
income of an economy during
a certain period of time.
National income, GDP,
Factors distribution, employment,
general price level, money, etc
Preserves stability in the broad
price level and solves the
major
Importance issues of the economy like
deflation, inflation, rising prices
(reflation), unemployment and
poverty, etc.
It helps in strengthening
policies and uniform resource
Applications distribution at the economy
level such as
unemployment, inflation level
etc.
National Income & Savings;
Aggregate Demand;
Examples Inflation Rates, GDP;
Rate of Employment, Poverty,
etc.
Microeconomics
Focusing on an individual level,
Microeconomics studies
a specific market segment
in an economy.
More of an individual-centric
approach as it is concerned
with businesses and households
and analyses consumer behavior,
resource allocation and human
choices.
Referred to as the price theory,
it deals with factor pricing
such as rent, interest, wage,
profits, etc for land, labor, capital
and enterprise and explains how
different prices are decided.
Demand, supply, factor pricing,
product pricing, economic welfare,
production, consumption, etc.
Plays a significant role
in regulating the prices of a
product alongside the prices of
various factors of production
(labor, land, entrepreneur, capital,
etc) within the economy.
It helps in developing policies
to facilitate appropriate
resource
distribution at the firm level.
Individual Income & Savings;
Determining the price of a
specific good or commodity;
Consumer Equilibrium;
Output generated and produced
by a specific firm.
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RELATIONSHIP BETWEEN MICRO AND MACROECONOMICS

The similarities between Micro and Macroeconomics are based on the factor that they
both study the different economic problems.

Microeconomics studies the economic problem of scarcity and choice at an

individual level and how an individual makes these economic decisions and
Macroeconomics expands it further to the economy as a whole thus studying how a
country is able to take large-scale decisions of making economic budgets, tackling
inflation, competition across markets and much more. The relationship between Micro
and Macroeconomics is that they are dependent on each other because
microeconomic variables largely rely on macroeconomic variables and similarly
macroeconomics depend on the microeconomic variables in an economy.

For example, every individual’s income (microeconomic variable) in an economy would

largely affect the national income (macroeconomic variable) and on the other hand, the
overall inflation rate (macroeconomic variable) would also affect the purchasing power of
an individual (microeconomic variable) in an economy.

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