Chapter 1

Content
Topic Student Learning Outcome
1. Nature and Scope of Candidates should be able to:
Economics
1.1 Introduction to 1.1.1 define economics;
Economics 1.1.2 explain the ideas of economics given by Adam Smith,
Marshall and Lionel Robbins;
1.1.3 compare the merits and demerits of Marshall and Lionel
Robbins;
1.2 Scope and Importance 1.2.1 explain the educational and practical value of economics;
of Economics 1.2.2 analyze the scope of economics in daily life;
1.3 Branches of Economics 1.3.1 differentiate between microeconomics and
1.3.2 macroeconomics; define the concept of descriptive,
theoretical and policy economics;
1.4 Some Basic Concepts 1.4.1 define goods and services;
and Definition 1.4.2 differentiate between economic goods and non-economic
1.4.3 goods;
1.4.4 identify types of goods i.e. • public goods • private goods •
1.4.5 merit goods • demerit goods • free goods;
explain scarcity;
Explain scarcity and resource; * 1.4.6 classify economic
and non-economic wants.
Lecture # 1
Economics
Basic Concept

It is a matter of fact that man born with unlimited wants and man should have to satisfy these
wants. For this purpose one should have to earn money to fulfill his/her needs. On the other side
if needs are limited resources are also scarce. So, one should have to manage his or her unlimited
wants within the context of limited resources which may be money.

All the efforts which man made for his/her well-being and for the satisfaction of his wants are
dealt in economics. The basic objective behind the efforts to satisfy wants is to earn money
which in economic term we can say that to receives income.

In the background of above define forts we can define economics as: “all the activities
performed by man to satisfy his wants are economic activities or economics.”

From the above definition we can say that:

It can only deal with economic activities

It can only deal with human activities

It can take part by people who are rational1.

Origin of Word Economics

According to many economists economics word has been derived from a Greek word
“OIKONOMIS” which means household. We can say that economics is a study of household.

Other economists state that word economics has been derived from POLITICAL ECONOMICS
which consists of three Latin words:

Polis means state

Polika means domestic

Nama means principles

So it is clear that economics is a study of principles of household/home that can be applied to

manage household affairs between expenses and income.

1
Sensible, well advised.
Early Definitions of Economics

The early definition of economics was given by classical school of thought which include
economists like Adam Smith, N.W Senior, Hills, Malthus and David Ricardo. They define
economics as a “Science of Wealth”.

According to Adam Smith: it is a science which inquire nature and a cause of wealth of nation.

Mills define economics as “it is a science of wealth in relation to mass.”

Shortly classical school of thought emphasize only on wealth. So in simple words we can say
that economics is the study of production, consumption and distribution of wealth.

Smith’s Definition of Economics

“It is a science which enquires nature and cause of wealth of nations.”

Criticism

Given definition by Adam Smith was not empty with criticism on the following grounds

 It is a one sided definition as, it only take wealth into consideration while neglect he
human being who are equally important in the context of economics.
 This definition only emphasis on wealth that intend human selfishness.
 Wealth is for man and man is not for wealth. This definition considers wealth as end but
not a mean to an end. This is a wrong concept because wealth is a source of satisfaction.
 In the above definition wealth is used in a narrow sense. Wealth is something tangible,
visible and concrete object while all intangible goods and services have been ignored in
this definition.
 According to Smith’s definition “Science of Wealth” only includes people who are
engaged in production and consumption sector.

Marshal’s Definition of Economics

Marshal a new classical economist comes up with new definition of economics and states
that: “It is a study of mankind in the ordinary business of life. It examines the part of
individual and social action which is mostly connected with the attainment and use of
material requisites of well-being.”

In simple words Marshal’s definition of economics relates wealth and welfare. Generally this
definition is the pretty good definition which relates human activities for earning and spends
this earning for his well-being.

Attributes of Definition
 There are the following attributes2 of Marshal’s definition

1. Study of Mankind

According to Marshal’s definition it only studies the mankind. It ignores the activities of all
mankind. Despite it only studies the activities the activities of rational man.

2. Material Welfare

The aim of human life is material welfare which can only be achieved by wealth. Material
welfare can only be achieved by earning of wealth which brings economic prosperity in human
life.

3. Economic Aspect of Life

This definition only talks about economic aspects of life and didn’t consider the other aspects
like religious political and social aspects. Economic aspect only relates how man can earn and
how he can spend.

4. Study of Physical Activities

According to this definition, economics only study about the material activities such as masons,
carpenters etc but neglect the services of doctors, teachers etc.

5. Economics as a Social Science

Economics is a social science and didn’t study about individual. It only considers the people
living in the society.

Criticism

Prof Lionel Robbins comes up with the strong criticism on Marshal’s definition

 According to him, Marshal considers only material welfare. So according to Marshal only
those activities include in the society which produces material goods but services sector
is totally neglected.
 This definition is classificatory i.e. it classify economic phenomenon into material and
non-material. This definition only includes materials needs in the economic subject.
 The definition is ambiguous in the context of ordinary and extra ordinary business life.
 Welfare is a state of mind and cannot be measured. The correct amount of welfare cannot
be measured and satisfaction derived from purchases cannot be exactly measured but
only assumptions can be made.

2
A quality or feature regarded as characteristic.
  According to Marshal economics is a social science but Robins criticize that economics
studies about all human beings whether they are part of society or not. So it would be
better to call economics as a “science of humans.”

Robbins definition of Economics

Prof. Lionel Robbins state economics in his book “Nature and significance of Economic
Science” in 1932. According to him: “Economics is a science that studies human behavior as
a relationship between ends and scarce means which have alternative uses.”

Attributes of Definition

There are the following attributes of Robbins definition

1. Multiplicity of Ends

It is fact that ends never comes to an end. Needs are always unlimited. This will engage man into
work and keep forwarding to earn to meet unlimited ends.

2. Scarcity of Means

As from the definition it is clear that needs are endless but resources are limited. This refers to an
economic problem. If resources are also unlimited there will be no economic problem and all the
wants will be easily satisfied.

3. Selection of wants.

It is clear from the above attribute that there is scarcity of means and wants are unlimited. So,
rational human being is one who selects the urgent need over limited resources. It means urgency
of needs should be taken into consideration. If all wants are equal there will be no economic
problem.

4. Alternative Uses

Robbins states that all the scarce resources are capable of alternate use.

5. Human Science

Robbins defines economics on broader horizon. According to him economics is a study of

human behavior within and out of the society.

Criticism on definition

Robbins definition also faces criticism by many economists. The main points of criticism are
given below:
  Robbins didn’t suggest how to deal with human behavior that may vary from man to man
and from time to time. So it is not a physical science which deals with matter and energy
which remains unchanged but is a social science which may change from location to
location too.
 Robbins makes economics as a complex science which distracts its utility from common
man.
 He ignores the macro aspect like national income, employment etc.
 Economic growth theory and economic development id missing in the definition of
Robbins. Economic growth tells us about the growth of economy and factors include
bringing rise in national income and productivity of the economy. He only talks about the
resource allocation and consider that resources re given.

Comparison between Marshal and Robbin’s definition of Economics

After discussing the definitions of two eminent economists following differences arise which are
given below:

According to Marshal Economics is a study of action of man in ordinary business life or

economics is a study of all direct activities related to wealth. On the other hand Robbins states
that economics is a study of all the characteristics of human activities.

Marshal’s approach to economics is materialistic and restricts economics to the study of human
behavior. While, Robbins relate human behavior to scarce means.

Marshal classifies human activities into economic and non-economic activities. Robbins
definition is analytical in nature.

Marshal’s definition includes the economic activities o only persons who are member of society.
On the other hand Robbins definition includes the activities of social human beings who are only
concerned with wealth. Robbins definition also includes human behavior related to scarce means.

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