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Difficult to Define
Economists like Pareto, Myrdal and Hutchinson think that any search for a precise definition of Economics is a barren enterprise Many economists thought it is needless to waste words in defining Economics However, it is essential for a student to have some definition in mind as working basis
Early Definitions
According to Adam Smith
Economics is concerned with an enquiry into nature and causes of wealth
Thus, all the vices attributed to wealth became attached to the science of wealth (i.e Economics)
Change in Definition
In the last quarter of the 19th Century humanistic character of Economics had come to be well recognized Schaffle in Germany and Droz in France placed the role of man in Economics higher than that of wealth It is now fully recognized that wealth is only a means to an end, the end being human welfare
Marshallian Definition
Marshal said
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
Robbins, Definition
Robbins defined Economics as
Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses
Thus, in Robbins sense, economic activity lies in man s utilization of scarce means having alternative uses, for the satisfaction of multiple ends
Thus, the Robbins definition is superior both to the early definition (science of wealth) and Marshall s definition (science of material welfare)
Individual choices having no social implications cannot form the basis of subject-matter of Economics Economic growth and economic development has not been covered by Robbins definition This definition does not explain problem of unemployment Human touch is entirely missing Robbins has made Economics more abstract and complex and hence difficult and fruitful
Modern Definitions
The credit of bringing about a revolution in economic thinking goes to Lord J.M. Keynes. According to him
Economics studies how the levels of income and employment in a community are determined
In Benham s words
Economics is a study of factors affecting the size, distribution and stability of a country s national income
Fundamental Problems
What to produce?
Quantity and range of goods to produce Resources are limited, we must choose between different alternative collection of goods and services that may be produced
How to produce?
Techniques of production e.g labor intensive, capital intensive
Problem of growth?
Economy must expand or develop to maintain conditions of stability
Macro Economics
It is also called Income Theory
Micro Economics
The word micro means a millionth part In micro economics we analyze small part or component of the whole economy
e.g. individual consumer s behaviour or firm, price of particular product or factor of production, employment in firm or industry
In simple, micro-economic theory studies the behaiour of individual decision making units such as consumers, resource owners and business firms The basic assumption in micro economic analysis is full employment in the economy as whole
Importance of Micro-economics
It tells us how millions of consumers and producers take decisions about the allocation of productive resources among millions of goods and services It explains how through market mechanism goods and services produced in the community are distributed It also explains the determination of the relative prices of the various products and productive services It explains the conditions of efficiency both in consumption and production and departure from the optimum Micro-economics helps in the foumulation of economic policies calculated to promote efficiency in production and the welfare of the masses
Limitation of Micro-economics
It cannot give an idea of functioning of economy as a whole
An individual industry may be flourishing but economy as a whole may be languishing
Macro-economics
Macro economics is concerned with aggregates and averages of the entire economy
E.g national income, aggregate output, total employment, total consumption, savings and investment, aggregate demand, aggregate supply, general level of prices etc.
In macro-economics, we study how these aggregates and averages of the economy as a whole are determined and what causes fluctuations in them Macro-economics also analyses the chief determinants of economic development and the various stages and processes of economic growth
Importance of Macro-economics
It is helpful in understanding and functioning of a complicated economic system
It gives bird s eye view of the economic world
It is useful in framing economic policies for the nation Macro-analysis also occupy an important place in economic theory in its pursuit of the solution of urgent economic problems
These problem relate to aggregate output, employment and national income
Limitations of Macro-economics
Individual is ignored
It is individual welfare which is the main aim of Economics
overlooks
individual
e.g. general price level may be stable but the prices of food grains may have gone spelling ruin to the poor
Some early economists, like J S Mill, Robbins, Craines; were of the view that Economics is just a positive science However, Cairnes and Macfie talked about normative character of Economics
Limitations of Economics
Economics cannot predict the future events since its laws lack definiteness No magic formula by which schemes of social betterment can be tested nor a sovereign remedy to economic ills It is not business of the economist as such to decided whether large armaments are necessary or not
Laws of Economics
Like every other science, Economics, too has drawn its own set of generalizations, which are called laws of Economics The nature of economics law is not indicated by the word
must , as in the case of statute law, or by ought as in the case moral law; But their nature is indicated by phrase other things being equal
Economics laws lacks definiteness and exactitude Economics laws are said to be hypothetical or conditional since their validity depends on fulfillment of certain conditions Economic laws are inevitable and inescapable if some necessary conditions are fulfilled
But these conditions are not always fulfilled Therefore, economic laws lack predictability
Consumers tastes remain unchanged for fairly long periods of time There is a perfect competition in the economy
Methods of Economics
Like other sciences Economics also uses scientific methods. These methods are:
Deductive Method Inductive Method Proper Method
Deductive Method
Economists of Classical School tried to build up the science of Economics from few simple generalizations
e.g. self-interest alone guides men in their daily life and they try to explain and predict all human behavior in terms of self interest
Classical economists by and large supported this method Merits of Deductive Method
Useful in analyzing complex economic phenomenon This method yields exact and true conclusions
Provided the premises on which they are based are true
It is very simple and easy of application When data is not available or inadequate then this method is useful for drawing inferences
This method made Economics dogmatic This method is dangerous when universal validity is claimed for generalizations based on imperfect or incorrect assumptions
Inductive Method
Historic school represents reaction against the dogmatic attitude of followers of deductive method This method insists on the examination of facts and then laying down general principles
Here we go from particulars to generals
Merits
This method can be applied for the verification of conclusions based on deductive reasoning Economic phenomenon is too complex for deductive reasoning. It is better to use inductive method This method is more suitable and useful in the formulations of economics policies
Limitations
This method dangerous when hurried conclusions are drawn on insufficient number of facts
Proper Method
The modern economist does not rely on one method. He uses both. It is said
Induction and Deduction are both needed for scientific thought as the right and left foot are both needed for walking
The deductive method seems to be more suitable in the field of pure theory and inductive method for formulating practical policies
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