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Basic concept of Economics
Definition of Economics
Economics is a social science. It studies economic activities of man, living in an
organized society. It is a dynamic science. Therefore, there is no universally acceptable
definition of economics. Some modern ecomist have said that it is not easy to define
economics definitely. According to Barbara Wotton : Whenever Six economists are
gathered there are seven opinions. Similarly, according to Jacob Viner, Economics is
what economists do. However, for systematic study of any science we need its
definition. The definition of economics can be classified into three groups i.e.
I. Wealth definition of economics (Classical)
II. Welfare definition of economics (neo classical)
III. Scarcity definition of economics (Modern)
Wealth definition of economics :
This is the oldest definition of economics. This definition is related with classical
school of economics. Adam Smith is regarded as a leader of classical economists. He is
regarded as a leader of classical economists. He is well known as the father of economic
science because he made economics as an independent science. In 1776 AD, Adam Smith
wrote a famous book Wealth of Nations. In that book he defined economics as
Economics is an enquiry into the nature and causes of wealth of Nations. In other words,
according to Adam Smith , economics is a science of wealth.
Criticisms of wealth definition :
The wealth definition of economics has been criticized on the following grounds:
Narrow definition :
This definition has narrowed the scope of economics. According to this
definition, economics studies only those human beings who are engaged in
production and consumption of wealth. Those who are not engaged in such
activities such as retired man cannot fall within the scope of economics. But it is
quite wrong.

Emphasis on wealth :
This definition has given more emphasis on wealth and it ignores the
importance of man. But in reality wealth is only a means to satisfy human wants.
Wealth is produced for man but not man for wealth. Therefore, man is a primary
and wealth is only for secondary importance.

Incomplete and inadequate :
This definition is incomplete and inadequate. It lacks analytical approach.
It does not explain the nature of economic problems.

According to Adam Smith the ultimate objective of man is to earn wealth. But
according to critics, the ultimate objective of man is to get satisfaction rather than
to earn wealth.
Welfare definition of economics:
This definition is related with neo-classical school of economics. Dr. Alfred Marshall is
regarded as a leader of neo-classical economists. He was a professor of economics at
Cambridge University. In 1890 AD, Marshall published a book Principles of
Economics. In that book he defined economics as Economics is a study of mankind in
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ordinary business of life. It enquires how a man earns income and how he uses it. Thus,
it is the study of wealth in other hand and on the other hand, it is the study of mankind.

Features of Welfare definition:
Economics is the study of economic aspect of mankind.
Economics studies economic welfare of mankind. It does not study the whole
human welfare.
Economics is a social science. It is concerned with the economic aspect of social
life.

Criticisms of Welfare definition:
The welfare definition of economics has been criticized on several grounds. The main
criticisms were made by Robbins. The criticisms are as follows:
Classificatory :
The welfare definition is classificatory rather than analytical. It classifies
economic phenomena into material and non material. Similarly, human
activities are divided into economic and non economic activities. But
according to Robbins, such type of classification is unscientific and illogical.
Narrow scope :
This definition has narrowed the scope of economics because this
definition includes only material things and excludes non material things
from the scope of economics. But it is difficult to separate material and non
material things.
Connection between economics and welfare :
This definition has tried to establish connection between economics and
welfare. But according to Robbins economics has nothing to do with welfare.
Pure social science :
The welfare definition takes economics as purely a social science. It
means that economics doesnt study the man living outside society. But this is
not true.
Measurement of Welfare :
According to Marshall, welfare can be measured quantitatively. The
measuring rod is money but according to critics, welfare cannot be measured
quantitatively because it is a mental feeling. It varies from individual to
individual.

Scarcity definition of economics :
This definition is related with modern school of economics. Lionel Robbins is
regarded as a leader of modern economists. In 1932 AD, he published a book, The
Nature and Significance of Economic Science. In that book he has given a new
definition of economics called Scarcity definition. According to Robbins, Economics is
the science which studies human behavior as a well as relationship between unlimited
ends (wants) and scarce means which have alternative uses.

Features of Scarcity definition :
Unlimited wants or ends :
According to Robbins, human wants are unlimited. If one want is satisfied
another wants crop up. Therefore, it is difficult to satisfy all these wants at the
same time.
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Scarce means or resources :
Means to satisfy human wants are limited and scarce. The economic
problems arise due to the scarcity of resources. These resources are scarce in
relation to their demands.

Alternative uses :
The scarce means have alternative uses. For example : Money can be put
to several uses ether for buying food, buying books or going to cinema, etc.

Problem of choice :
Due to the scarce and alternative uses of means there arise the problems of
choice. We have to choose between most urgent want to less urgent want.

Criticisms of scarcity definition:
Though the scarcity definition of economics is regarded superior than other definitions
but still this definition is not free from criticism. Therefore, this definition has been
criticized on the following grounds:

Inclusion of material welfare :
Robbins critcised the welfare definition given by Marshall but the material
welfare enters in his definition through back door.

Ignores present day problems :
According to critics, this definition is unable to address the hot issues of
modern economy like unemployment, povertiy, economic growth, economic
development, etc.

Incomplete definition :
The critics objected that the Robbins definition of economics has given
unnecessary emphasis to scarcity problem. But according to them economic
problems arise not only from scarcity but it also may arise form abundance.
For Eg : During depression of 1930s economic problems had arosed due to
over production or abundance.

It doesnot cover macro economics :
The scarcity definition of economics does not cover macro economics
but macro economics is an important parts of economics.

Pure Science :
Robbins definition converse economics in a pure science. As a pure
science, economics is concerned with the formulation of economic laws
having nothing to do with practice. But it is quite wrong because economists
are not only tool makers but also tool users.

Social aspect :
Robbins definition of economics ignored the social aspect of human life.
But economics is a social science. It is concerned with the study of economic
activities of man living in a society.
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Comparison of Robbins and Marshalls definition :

Marshalls Robbins
1. Classificatory:
Marshalls definition of economics is
classificatory because it classifies goods
into material and non material goods and
includes only material goods in the scope
of economics.
1. Analytical:
Robbins definition of economics is
analytical. It deals all types of goods and
all kinds of human activities.
2. Social science:
According to Marshall economics is a
social science. It studies only those human
beings who are living in an organized
society.
2. Human science:
According to Robbins economics is a
human science. It studies all human beings
whether they are in society or out of
society.
3. Normative Science:
Marshalls definition is based on the
concept of Normative economics.
Normative science give value judgement. It
shows rightness or wrongness of things.
3. Positive Science:
Robbins definition is based on the concept
of positive science. It explains facts as they
are. It doesnt give value judgement.
4. Non neutral:
According to Marshall economics is non
neutral. It helps to solve practical
problems. It is concerned for improving
human life.
4. Neutral:
According to Robbins economis is neutral.
It is neutral between wants and resource
utilization.
5. Narrow scope:
Marshalls definition of economics has
narrowed the scope of economics.
5. Broad Scope :
Robbins definition of economics has
broaden the scope of economics.

Superiority of Robbins definition of economics:
Robbins definition of economis is regarded superior definition than others on the
following grounds:

Scientific definition:
Robbins definition of economics is regarded as more scientific and
analytical. It is not classificatory. Marshalls definition of economics is
classificatory. Therefore, Robbins definition is regarded more scientific and
satisfactory.

Universal application:
Robbins definition of economics has universal application. It is applicable
to both planned and unplanned economy. Similarly, it is applicable to all
economic system i.e. capitalist, socialist and mixed economy.

Positive Science:
Robbins regarded economics as a positive science whereas Marshall
regarded economics as a normative science. Positive science describes the
things as they are and does not say what is good and what is bad. On the other
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hand, normative science says what is good or what is bad. Robbins definition
is regarded superior to Marshalls definition on these grounds as well.
Science of choice:
The best part of the Robbins definition is that it regards economics is a
science of choice. Choice is necessary to solve economic problems. This is the
realistic situation since means are always limited in relation to wants. An
individual has to make choice to get maximum satisfaction from the limited
means.
Wider scope:
Robbins definition has widened the scope of economics because Robbins
says that all types of human wants material and non material come within
the sphere of economics.
Subject Matter of Economics:
There are two approaches regarding the subject matter of economics i.e.
Traditional approach
Modern approach
According to Traditional approach the subject matter of economics are Consumption,
production, exchange, distribution and public finance.

Consumption:
Consumption is one of the important branches of economics. Consumption
means to satisfy human wants through the use of goods and services.

Production:
Production is defined as the creation of utility. The goods and services are
produced form consumption.

Exchange:
It studies how goods are exchanged between different parties. Here, we
study the determination of price of goods and services under different
markets.

Distribution:
Here, we study the distribution of national product among the various
factors of production i.e. land, labour, capital and organization.

Public finance:
It studies income and expenditure aspect of the government.

But according to modern approach the whole subject matter of economics is classified
into two parts:

Micro economics:
Macro economics:

Micro economics is the study of individual units whereas macro economics is
the study of economy as a whole. All traditional theories such as consumption,
production, exchange, distribution fall under micro economics. In macro
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economics we study the factors that determine a countrys national income,
saving, investment, consumption, etc.

Concept of Positive and normative economics:
Positive economics:
Positive economics is an exploration of state of things as they are. It is concerned
with the description of economic events. It tries to follow scientific principles to
formulate theories. It doesnt give value judgement. According to David Begg, Positive
economics deals with objective or scientific explanation of the working of the economy.
Therefore, positive economic deals how the economy actually behaves. The objective of
positive economics is to explain how society makes decisions about consumption,
production and exchange of goods and services.

Normative economics:
Normative economics is an evaluation of state of things as they ought to be. It is
based on subjective value judgement. Therefore, normative economics explain rightness
or wrongness of things. According to David Begg, Normative economics offers
prescriptions or recommendations based on personal value judgement.
Neo classical economists believe on normative economics.
We can make distinction between positive and normative economics by a statement,
The poor are malnourished, and the government must provide food subsidy to the poor.
Here the first part of the statement The poor are malnourished is a positive economics
and the second part of the statement The government must provide food subsidy to the
poor is a statement of normative economics.

Concept of micro economics and macro economics:
Micro economics:
The word micro is derived from Greek word mikros meaning small. Therefore,
micro economics is the study of the behavior of individual units of an economy. For Eg :
Individual consumer, individual producer, households, individual price, individual
market, etc.
According to Edwin Mansfied: Micro economics deals with the economic
behavior of individual units such as: consumers, firms and resource owners.
According to K.E. Boulding: Micro economics is the study of particular firms,
particular household wages, individual prices, incomes, individual industries, particular
commodities.
Thus, micro economics studies the small components of the national economy.
But it doesnt study economy as a whole. Micro economics is also called price theory.

Macro economics:
The word macro is derived from Greek word makros meaning large.
Therefore, macro economics is concerned with the analysis of economy as a whole or
its large aggregates such as national income, national product, total employment, total
consumption, total investment, monetary policy, fiscal policy, general price level, etc.
According to Edwin Mansfied: Macro economics deals with behavior of
economic aggregates such as gross national product and level of employment.
According to K.E. Boulding: Macro economics is that part of economics which
studies the overall averages and aggregates of the system.