INTRODUCTION TO ECONOMICS

Economics is the study of relationship between satisfying

unlimited human wants and limited resources, which have
alternative uses. Economics deals with how an individual
as well as society allocate their scarce resources to satisfy
their needs in the order of preference to maximize
satisfaction.
 MEANING OF ECONOMICS

Economics is a social science which studies how the

individuals and organizations engaged in production,
distribution and consumption of goods and services.
Economics is the systematic study of never ending efforts
of man to satisfy his unlimited wants with limited
resources.
ORIGIN OF ECONOMICS
The words "Economics " and "Economy "both came from
two Greek terms- oikos and nemein mean "household
management" -the management of household being the
most familiar field in the economy. With the publication of
Adam Smith's famous book "An inquiry into the nature and
causes of wealth of nations "in 1776, Economics saw the
light of the day.
PROBLEM OF CHOICE
Since it is not possible to satisfy all the unlimited wants
with the limited resources, every society must decide
some way of selecting those wants which can be satisfied.
Thus, a society is facing the problem of choice -choice
among unlimited wants that are to be satisfied.
 WEALTH DEFINITION

INTRODUCTION:
The classical economists beginning with Adam smith
define economics as a science of wealth. He defined it in
his famous book "Wealth of nation”.
F.A. Walker defined "Economics is that body of knowledge
which relates to wealth”.
J. S. Mill "it is in the nature and the laws which governs it's
production, distribution and exchange”.
 FEATURES OF WEALTH DEFINITION :

The important feature of wealth definition are:

1. The main objective of human activity is the acquisition of
wealth.
2. Wealth refers to the goods produced.
3. Man is selfish whose objective is to accumulate more
and more wealth.
4. Economics deal with the activities of wealth production,
consumption, preservation and increasing
CRITICISM OF WEALTH DEFINITION:
Many economists criticized wealth definition :
1. Economics must discuss ordinary man's activities and not
those of economic man.
2. Marshall criticized that wealth is only a mean to an end,
welfare, but not an end itself.
3. Adam Smith's definition covers only materialistic activities
and not non-materialistic activities like service, teacher and
doctor. Due to this the scope of economics is limited.
4. His definition mainly concentrate on production and
neglects distribution side.
DEFINITION OF SCARCITY ECONOMICS

INTRODUCTION
Lionel Robbins explains the scarcity definition in
his book "An Essay on the Nature and
significance of Economics science" in 1932
MAIN FEATURES:
1.Human wants are unlimited: The fulfillment of one want
gives rise to a number of new wants.
2.Means are scarce: The means of a person by which his
wants may be satisfied are limited it leads to economic
problems.
3.Alternative uses of scarce means: Resources are not only
the scarce but also have multiple uses, Ex: electricity can be
used in homes and also in industries, factories etc.
4.Man has, to choose between wants in order of their
preference, problem of choice arises.
SUPERIORITY OF ROBBINS’ DEFINITION
1.It is non-classificatory, as it includes all human
activities whether they promote human welfare or not.
2.This is universally accepted definition. It is applicable
to all types of societies, because the scarcity of
resources is felt by individuals as well as societies.
3.Robbins’ definition of economics is neutral between
ends.
CRITICISM :
1.Robbins has introduced the welfare concept indirectly in his
definition.
2.Another criticisms is that this definition does not distinguish
between ends and means.
3.Scarcity definition has been criticized by economists as to
say economics cannot be neutral between ends.
cont...
Continuation of criticism:
4.Scarcity definition has been criticized by economists as to
say it is not applicable to a dynamic society were changes
take place and the problem of choice can be overcome with
the passage of time.
5.Mr's Joan Robinson took serious objection to scarcity of
resources. How best you utilize them is more important.
6.Robbins’ scarcity definition neglects the more important
problems of growth and stability.
GROWTH DEFINITION
INTRODUCTION:
Growth definition of economics is given by Paul A.
Samuelson, an American Economist and Nobel Prize
winner in 1970. Samuelson’s definition includes the time
element and is dynamic in nature. Hence it is called
growth oriented definition of economics.
DEFINITION
● In the words of Samuelson, “Economics is the study
how people and society choose, with or without the
use of money, to employ scarce and productive
resources which could have alternative uses, to
produce various commodities over time and
distribute them for consumption, now and in the
future, among various people and groups in the
society. It analyses the benefits of improving
patterns of resource allocation”.
IMPORTANT POINTS
1.His definition like Robbins’ agreed that resources are not only limited
but also have several uses.
2.Samuelson’s definition is dynamic in nature as it considers both the
present and future consumption, production and distribution.
3.Growth definition deals with the problem of choice in a dynamic
society. Hence, this definition broadened the scope of economics.
4.Samuelson’s definition is superior to that of Robbins’ because he
shifted the emphasis from the scarcity of resources to income, output
and employment and later to the problems of economic growth.
Samuelson’s definition appears to be most acceptable at the moment.
FUNDAMENTAL PROBLEMS OF AN ECONOMY
There are certain fundamental problems in any type of
economy with which economists are concerned. The following
are the basic economic problems. These are interrelated and
interdependent.
1. What type of goods are to be produced and in what
quantities?
2. How to produce these goods?
3. For whom to produce these goods and services?
4. How efficient the productive resources are in use?
Whether available resources are fully utilized?
5. Is the economy growing or static over a period of time?
1. CHOICE OF GOODS AND QUANTUM OF GOODS:
Goods are of many types. These may be necessary
goods, comfortable goods and luxury goods; or
consumption goods and capital goods. Available
resources are not enough to produce all these goods at
a point of time. Once the type of goods have to be
produced is decided, then their quantities are to be
decided. To decide the amount of production, both
demand and supply aspects have to be taken in to
account and the on the basis of preferences of the
society.
2. CHOICE OF TECHNIQUES:
There are different methods to produce goods i.e.,
labour intensive techniques and capital intensive
techniques. In a labour surplus economy labour
intensive techniques can be applied and if capital
surplus economy capital intensive techniques may be
used.. DISTRIBUTION OF GOODS:
In any country welfare of the people is more important,
whether they are rich or poor. While prod.
DISTRIBUTION OF GOODS:
In any . DISTRIBUTION OF GOODS:
In any country welfare of the people is more important,
3. DISTRIBUTION OF GOODS:
In any country welfare of the people is more important,
whether they are rich or poor. While producing goods,
goods which are useful for poor have to be produced but
not for rich community.
4. OPTIMUM UTILISATION OF RESOURCES:
Scarcity of resources is the main problem. Hence,
efficient use of resources is must. Even underutilization
of scarce resources is also a problem. There is a need to
overcome this underutilization of resources and optimum
utilization of scarce resources is the need.
5. CONTINUOUS CHANGE IN THE ECONOMY:
Continuous change in the economy over a period of
time without any static or stationary situation is essential.
Dynamism in the economy is required for development.
NATURE AND SCOPE OF ECONOMICS
INTRODUCTION
Economic is a extensive and vast subject. To know the scope of
subject, matter and nature of subject, it is necessary to know
the view expressed by economists belonging to classical and
modern thinkers on the subject. All the economic activities start
to satisfy human wants i.e attaining maximum satisfaction with
limited resources. The nature of economic took a shape with
the writing of Adam Smith who is known as father of economic.
The subject of economic is divided into traditional and modern
economic theory.
TRADITIONAL ECONOMICS
•CONSUMPTION: This can be defined as an extracting of
utility from Goods and Services
•PRODUCTION: Production is the process of converting raw
material into finished Goods. The factor which participant in
production as called factor of production like, land, labour,
capital, and organization.
•DISTRIBUTION: It explains how goods and Services are
distributed among various factors of production. Each factor
of production get its reward which is determined in factor
pricing.
•EXCHANGE: It is concerned with exchange of goods. A
good can be exchange for another good and also for money.
•INCOME: Individuals earn income by participating in various
economic activities. Income is a continuous flow.
•EMPLOYMENT: The level of employment is depend on
demand for consumption goods and demand for investment
goods
•ECONOMIC PLANNING: It is essential for utilization of
available resources in order to achieve speedy economic
development of the economy and improve welfare of people.
MODERN ECONOMIC
1.MICRO ECONOMICS
2.MACRO ECONOMICS
MICRO ECONOMICS
INTRODUCTION:
The term ‘Micro’ is derived from the Greek word mikros,
meaning “small.” Microeconomics is that branch of economics,
it studies the economic actions and behavior of individual units
and small groups of individual units.
DEFINITION:
According to K.E.Boulding “microeconomics is the study of
particular firms, particular households, individual prices, wages,
incomes, individual industries and particular commodities”.
SCOPE OF MICROECONOMICS
Marshall popularized microeconomics. The three major
fields covered by microeconomics are : (i) theory of product
pricing, (ii) theory of factor pricing and (iii) theory of welfare. It
studies how the prices of various goods and services are
determined. Microeconomics is also called “price theory”
because it explains pricing in product markets as well as
factor markets. It also examines whether the resources are
efficiently allocated to individual consumers and producers in
an economy. This is related to welfare
IMPORTANCE OF MICROECONOMICS
The following aspects the importance of microeconomics.
1. Microeconomics explains how a free market economy
works to decide about the allocation of productive resources
among many producers to produce goods and services.
2. This analysis is useful to the Government to frame suitable
policies for the efficient use of scarce resources to promote
economic efficiency to achieve economic growth and
stability.
3. Microeconomics can be used to examine the condition of
economic welfare and it suggests the required changes to
bring maximum social welfare.
4. This analysis is also applicable in the field of
international trade and in the determination of exchange
rates.
5. Microeconomics is used to explain the factors which
determine the distribution of incidence or burden of a
commodity between the producers and the consumers.
6. Moreover despite the fact that the models of
microeconomic theory are only crude approximations to
the real world, there is a value in studying analytical
techniques.
MACRO-ECONOMIC SCOPE AND IMPORTANCES

INTRODUCTION:
The term macro-economic is drive from Greek word
"makros" which means large. Macro-economic is also
called as theory of income and employment .

DEFINITION: According to K.E.Boulding,

“macroeconomics studies national income, not individual
income, general price level instead of individual prices
and national output instead of individual output”.
SCOPE OF MACRO-ECONOMIC:
1.Theory of income and employment which is divide into two
theories.
a. Theory of consumption. b. Theory of investment
2. Theory of general price level and inflation.
3. Theory of economic growth.
4. Theory of macro distribution.
5. Theory of business cycle.
IMPORTANCE OF MACRO-ECONOMIC:
•The study of macro-economic is more useful to the government
for formulation and execution of policies for social benefits.
•Macro-economic suggest how a developing countries can use
their resources to maximize growth.
•This study helps to understand the problem of unemployment and
inflation and suggest ways to solve them.
•It helps to evaluate the overall functioning of an economy in order
to distribute national income in different sections of society.
•Macro-economic facilitates international comparisons.
•Macro-economic provides solution to overcome business-cycle.
DIFFERENCE BETWEEN MICRO-ECONOMICS AND
MACRO-ECONOMIC
POSITIVE AND NORMATIVE ECONOMICS
•Positive Economics: According to J.M.keynes, “A positive
science may be defined as a body of systematized knowledge
concerning what it is”. The classical school economists were of
the opinion that economics is purely a positive science which had
no right to comment upon the rightness or wrongness of economic
policy. Further, economist cannot give any final judgment on any
matter.
•Normative Economics: According to J.M.Keynes, “a normative
science may be defined as a body of systematized knowledge
relating to the object of what ought to be, and concerned with the
ideal as distinguished from the actual”.
BASIC CONCEPTS OF ECONOMIC
•GOODS: In economics, all things that have value and satisfy
human wants are called good . These goods are classified as
material goods and non-material goods.
•MATERIAL GOODS AND NON-MATERIAL GOODS: material
goods are tangible. These can be seen, touched and transferred.
For example, water, books, pens etc. non- material goods are
intangible. These do not possess any shape or weight and cannot
be seen, touched and transferred. All types of services of
teachers, doctors, engineers, lawyers etc.
•Material goods are further divided into non-economic (free) and
economic goods.
FREE GOODS AND ECONOMIC GOODS
•FREE GOODS: Non-economic goods are called free goods. Goods
which are freely supplied by the nature and without prices are known as
free goods. The supply of these goods is always abundantly greater
than their demand and therefore, do not have any price. Free goods
possess only value in use, but no exchange value. Example are air,
water and sunshine.
•ECONOMIC GOODS: An economic good is any physical object, natural
or man made or service rendered that can be commanded a price in a
market. They always fall short of the demand for them. These goods
have both value in use and value in exchange such as pens, books,
computers etc. economic goods possess three important characteristics
i.e., utility, scarcity and transferability. Economic goods are divided into
three types i.e., consumer, producer and intermediary.
DIFFERENCE BETWEEN FREE GOODS AND
ECONOMIC GOODS
•FREE GOODS •ECONOMIC GOODS
•Free goods are nature’s gift. •Economic goods are man made.
•Their supply is abundant. •Supply is always less than their
demand.
•They do not have price.
•These goods have cost of production.
•They have value in use and do
not have value in exchange. •These goods have value in use and
also value in exchange.
•Their values are not included
in national income. •Their values are included in national
income.
CONSUMER GOODS
•A consumer good is an economic good purchased by households for
final consumption. Thus, consumer goods are those final goods
which directly satisfy human wants. For example fruits, milk, pens,
clothes, etc. consumer goods are divided into two types: (i)
perishable goods and (ii)durable goods.
•Perishable goods: These are also known as single use consumers’
goods. They lose their value in single use. For example milk, fruits,
etc.
•Durable goods: These are also known as consumers’ goods. The
durable goods yield service or utility over a time rather than being
completely used up at the moment of consumption. Example are
televisions computers and fans.
Producer or capital goods:
•Goods which are used in the production of other goods are
called producer or capital goods. They satisfy human wants
indirectly. For example machine, buildings etc. are capital goods.
•Producer or capital goods are divided into two types:
•Single use capital goods: these goods are used once only in
production process. For example, raw materials, coal, electricity .
•Durable use capital goods: These goods are used for long time in
the process of production. Machines, tools etc. are the durable
capital goods.
INTERMEDIARY GOODS:
•Goods which are under the process of production and semi
finished goods are known as intermediary goods. Examples are
cement, bricks and steel etc. used as intermediary goods in
construction work. The goods which are not yet finished under
different stages of production are known as intermediary goods.
•WEALTH: Wealth means stock of assets held by an individual
or institution that has the potential for yielding income in some
form. Wealth may be held in various forms. These include money,
shares of companies, land etc. the important characteristics of
wealth are: i)utility, ii)scarcity, iii)value in exchange and iv)
transferability.
Circular flow of Income
•Income is a flow from wealth, where as wealth is a stock. In every
economy income flows from household to firm and vice versa. Thus the
factor market and product market are closely related to each other. The
process of circular flow of income makes to understand that income
flows from households to firms and firms to household.
UTILITY
•The concept of utility has great importance in economics. The
want satisfying capacity of a commodity at a point of time is
called utility. It is a subjective and a relative concept.
•TYPES OF UTILITY:
•Form Utility
•Place Utility
•Time Utility
•Service Utility
•FORM UTILITY : If a commodity satisfy a consumer by
its shape, color, size etc. is known as form utility.
•Ex: conversion of wooden log into a chair or table
•
•PLACE UTILITY : When goods Acquire utility with the
change of their place is known as place utility.
•Ex: vegetables has no utility at its production place till
they are brought to the market.
•TIME UTILITY : Goods acquire utility because of time. Businessmen
may store the goods and they may sell when the demand is high.
•Ex: ice-cream, air-conditions have more utility in summer is called
time utility.
•SERVICE UTILITY : Service also have ability to satisfy human
wants.
•Ex: teaching of a good teacher directly help a student to build his/her
career. This is known as service utility.
VALUE
•In economics, the value of any good or service is the power to
command other article or service in exchange. ‘value’ in economics is
classified into two concepts. They are. i) value in use and ii) value in
exchange.
•Value in Use: it refers to the capacity of the good to satisfy human
wants. Thus, utility is the value in use of a good. Free goods have value
in use and they do not have any value in exchange. For example, water
has a greater value in use but no value in exchange.
• value in exchange: It refers to the quantity of other good (or more
usually money) a good can be exchanged for. All economic goods have
value in use and value in exchange. For example if one pen can be
exchanges for a book.
PRICE
•In economics, the meaning of price is different from that
of value. The value of commodity/service expressed in
terms of money is known as price. In other terms the rate
at which a commodity is exchanged is called its price.
For example, if a pen is exchange for 10 rupees, then
the price of the pen is 10 rupees.
CHARACTERISTICS OF HUMAN WANTS
•INTRODUCTION:
• human wants are starting point of all economic activity. they depend on social and economic
conditions of individuals.
•TYPES OF WANTS
•1. unlimited wants
•2. a particular want can be satiable
•3. competition
•4. complementary
•5. substitution
•6. recurring
•7. habit
•8. Want vary with time, place and person
TYPES OF WANTS
. UNLIMITED WANTS: Human wants are unlimited. a person can satisfy
particular want at a point of time if you satisfy one want another want
arises.
2. A PARTICULAR WANT IS SATIABLE : As wants are unlimited, a
person can satisfy particular want at a point of time. Ex: if a person is
thirsty he can satisfy it by drinking a glass of water.
3. COMPETITION: Wants are unlimited whereas resources to satisfy
them are limited. Therefore, a scale of preference is essential to satisfy
wants.
4. COMPLEMENTARY: Satisfaction of a single want requires the use of
various commodities. Ex: writing need is satisfied only when we have a
pen, ink and paper together
5. SUBSTITUTION: A person can satisfy his want with various commodities. Ex:
if a person is hungry, he can eat rice or fruits to satisfy his hunger.
6. RECURRING: When you satisfy a particular want at a point of time, it may
reappear at another time. ex: we take food and our hunger is satisfied. but after
a few hours, we again feel hungry.
7. HABITS: Wants changes into habit. Ex: smoking cigarettes for casual results
into a habit if it is not controlled.
8. WANTS VARY WITH TIME, PLACE AND PERSON: Wants are dynamic in
nature. Hence, they change from time to time, place to place and person to
person.
•Certain wants are more intense whereas other wants are less intense. On this
basis, Human wants are divided into (i) necessities, (ii) comforts and (iii)
luxuries.
WELFARE
Welfare is an important concept in economics. It refers to
the satisfaction that an individual or society derives from
wealth , welfare is subjective concept and cannot be
measured objectively. Wealth and welfare are
inter-related. Welfare depends on the distribution of
wealth and income among different sections of people in
the society.