Nature and Scope of Micro Economics

What is Economics?
• It analyses how human beings make choices in an
effort to maximize utility.
• 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.
• To understand the subject matter of economics, we
tried to look at its different definitions by different
scholars.
 The Classical View of Economics
• The Classical economists viewed economics as a
science of wealth.
• Adam Smith, the father of economics, in his book
titled: ‘An Enquiry into the Nature and Causes of
Wealth of Nations’, defined economics as the science
of wealth.
• According to Adam Smith, economics makes inquiries
into the factors that determine the wealth and growth
of a nation.
• So to Adam Smith what forms the subject matter of
economics is the production and expansion of wealth.
• However, Ricardo shifted emphasis from wealth
production to wealth distribution.
• According to a French classical economist, J. B Say,
economics is the science of production, distribution
and consumption of wealth.
• Other classical economists such J.S. Mill, defines
economics as the law that governs mankind in the
production of wealth.
• The wealth definition means that wealth was
considered to be an end in itself.
• Critics pointed out that economics studies not only
material goods and wealth, but also includes non-material
goods such as services of teachers, doctors, lawyers.
• These services provided by human resources fulfill
human wants and should be regarded as part of wealth.
• Secondly, the classical economists emphasized the
importance of wealth rather than human beings in
economic life.
• The critics observed that wealth was given primary
role while human life was given secondary role, but
on the contrary, human life should play a primary role
and so cannot be sacrificed for wealth.
• According to the classical economists, wage to
labour is the only source of wealth to a nation, but
the critics are of the view that there are other sources
of wealth such as natural resources, human resources
and capital resources.
 Critical Evaluation of the Classical
Economists View
• The classical economists narrowed the scope of
economics by defining it as the science that deals with
only material wealth.
• They do not regard the services of those who produce
non-material goods because their services do not relate
to production of tangible goods.
• This view or conception by the classical economists
attracted a lot of criticisms.
The Neo- Classical View of Economics
• The neo-classical economists led by Alfred Marshal
gave economics a respectable place among social
sciences.
• Marshall defined economics as the study of
mankind in the ordinary business of life; it
examines that part of individual and the social
action which is most closely connected with the
attainment and use of material wellbeing Wealth
was regarded not as an end in itself but a means to
an end because it was seen as the source of human
welfare.
• Major propositions of Marshall’s welfare definition
are economics is the science of material welfare.
• Secondly, economics is a social science because it
is a study of men as they live and move and think
in the ordinary business of life and
• Thirdly that economics is the study of rational
behavior of people as they maximize their material
welfare.
• This means that, Economics is concerned with
economic activities that promote material welfare but
excludes all non-economic activities that are socially
undesirable like stealing, prostitutions, etc.
Critical Evaluation of the Neo-Classical
Economists View
• The neo-classical definition of economics was
criticized by Lionel Robbins because of the
distinction between material and non-material
activities.
• According to Robbins, the use of the word
‘material’ narrows down the scope of economics
because there are many things in the world which
are immaterial, but are useful for promoting
human welfare.
• Robbins regards all goods and services which
command a price as economic activity whether
they are material or non-material.
• To say services are non–material is misleading
because services have value.
• Their definition of Economics from the material
point of view is a misrepresentation of the science
of Economics.
• To the neo-classical economists, economics is
concerned with material welfare.
• According to Robbins, the word welfare should not
be used along with material activities because there
are many activities which are regarded as economic
activities but they do not promote human welfare.
• For example, the production and sale of tobacco,
drugs and alcohol are economic activities but
harmful to human health.
• Robbins has also objected to the word ‘welfare’ in
the neo-classical definition.
• Welfare is a subjective thing and varies from
person to person, from age to age.
• Robbins believes that economics is not concerned
with welfare rather he explains economics as the
problem that have arisen because of scarcity of
resources.
Scarcity and Choice Definition by Lionel
Robbins
• Robbins criticized Marshall’s definition and provided
his own definition in his book, “An Essay on the
Nature and Significance of Economic Science” in
1932.
• According to Robbins, economics is the science which
studies human behaviour as a relationship between
ends and scarce means which have alternative uses.
• This means that economics is a human science. It
involves maximizing satisfaction from scarce resource
and the means available for satisfying these ends
(wants) are scarce or limited in supply.
• Also the scarce means are capable of alternative
uses, that is, the use of scarce resource for one end
prevents its use for any other purpose at that point
in time.
• The ends are of varying importance which
necessarily leads to the problem of choice in
selecting the uses to which scarce resources can be
put to.
• It is the various alternative uses of the resources
that we have to decide on the best allocation of
resources.
• Robbins definition stands on three major facts
namely: Unlimited wants, scarcity of resources and
alternative uses of the resources.
• Robbins economics studies man’s activities in
regards to all goods and services, without
distinguishing them as material and non-material;
provided they satisfy human wants.
• In other words, economic problem is one of
allocating scarce means in relation to numerous
ends.
 Critical Evaluation of Robbins
Definition
• Robbins definition has also been criticized on several
grounds.
• According to the critics, Robbins definition also talks
about welfare which he formally criticized.
• In fact in Robbins definition the idea of welfare is
present because it involves the allocation of resources
to maximize satisfaction. But this maximum
satisfaction is nothing but welfare.
• Also Robbins assumption fails to explain fully
the nature of ‘end’ and the difficulties associated
with it.
• The idea of definite ends is also not acceptable
because immediate ends many act as
intermediaries to further ends.
• It is difficult to separate ends from means
because immediate ends may be the means to
the achievement of further ends.
• Robbins definition is also criticized for not
analyzing the theory of economic growth and
development rather it talks about the theory of
product and factor pricing.
• The theory of economic growth and development
studies how national income and per capita income
increase and what causes the increase.
• Robbins takes the resources as given while the
theory of economic growth is concerned with
reducing the scarcity of resources through
accumulation of capital and wealth.
• Therefore, Robbins definition though applicable to
fully employed economy is not realistic for
analyzing the economic problems of the real world.
• Economic problems arise not only due to scarcity
but due to under, miss or over utilization of
resources.
 Samuelson’s Growth Oriented Definition
• The present trend in the world is the establishment of
welfare states and improvement in the standard of
living through reduction in poverty, unemployment
and income inequality.
• In line with this trend Samuelson has given a
definition of economics based on growth aspects.
• According to Samuelson, “Economics is the study of
how people and society end up choosing with or
without the use of money, to employ scarce
productive resources that could have alternative uses
to produce various commodities over time and
distribute them for consumption, now or in the future,
among various person or groups in the society”.
• Samuelson’s definition is an improvement over
Robbins scarcity definition based on the following
facts:
1.Samuelson regards economics as a social science
which emphasized the problem of scarce resources
and the idea of alternative uses of resources.
2.He emphasized on the consumption and
distribution of various commodities for the present
and future economic growth thereby highlighting
the study of macroeconomics.
3.Samuelson lays emphasis on the use of modern
technique of cost-benefit analysis to evaluate the
development programme for the use of limited
resources.
4.Samuelson’s definition of economics has
superiority over that of Robbins because of the
inclusion of time element thereby making the
scope of economics dynamic.
Nature of Economics