Definition of Economics What is Economics? Economics is the social science that studies the production, distribution and consumption of goods and services. The term economics comes from the Greek for “kiosks” means house and “moss” means custom or law, hence the term economics means “rules or laws of household”. Adam Smith’s Definition of Economics: Adam Smith wrote a book in 1776 whose title was “Wealth of Nations”. In his book he discussed the word Wealth’ through its four aspects: production of wealth, exchange of wealth, distribution of wealth and consumption of wealth.

Therefore it can be said according to Adam Smith: “Economics is a science of wealth”. Criticism on Adam Smith Definition of Economics: As Adam Smith declared economics as a Science of Wealth. Some economists of 19th Century criticized this definition. The main criticisms on the definition of Adam Smith are given in brief as under. 1 . Too Much Importance to Wealth: Adam Smith gives primary importance to wealth and secondary to human being. This emphasis has now shifted from wealth to human being. Man occupies primary place and wealth a secondary one. The real fact is that man is more important than study of wealth. Narrow Meaning of Wealth: In the definition the word “Wealth” means only material goods such as vehicles, industries, raw material, Banks etc. It does not include immaterial goods like services of doctor, lawyer and teachers. 3. Concept of Economic Man: According to this main objective of human activities is only to earn more and more wealth. In others words he earns only for his self interest and social interest is completely ignored. But Alfred Marshall and his followers pointed out that economics does not study a man who works only for his own interest, but a common man. 4.

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Man Welfare is Missing: The other objection by Marshall is that mans welfare has Economics By eyeshade wealth. Wealth is a means to an end, the end being the human welfare. 5. It Does Not Study Means: The definition lays emphasis on the earning of wealth as an end in itself. It ignores the means for the earning of wealth. Alfred Marshall Definition of Economics: According to Alfred Marshall, “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 use of material requisites of well being”.

Criticism on Welfare Definition of Economics by Alfred Marshall: 1 . Narrow down the Scope of Economics: According to Proof. Lionel Robbins the use of the word “Material” in Marshal’s definition narrows down the scope of economics. There are many things in the world, which are non material but they are very significant for promoting human welfare. For example the services of doctors, lawyers, teachers, engineers, professors etc. These thing satisfy our wants and are scarce in supply. If we exclude these services from the economics, then its cope will be very much restricted.

Therefore, in the actual study of economics principles, both the material and immaterial things are taken into accounts. 2. Relation between Economics and Welfare: Robbins hardly criticized Marshal’s definition due to the reason of the relation between economics and welfare. Robins said that there are many activities which do not promote human welfare but they can satisfy their wants and therefore, can be regarded economic activities, for example the manufacturing and sale of alcohol goods or opium etc. 3. Welfare is a Vague Concept: Professor Robins raised another objection about Welfare”.

In Robbins opinion, welfare is a vague concept. It is purely subjective. It differs from man to man, from place to place and from age to age. Robins says that what is the use of a concept which cannot be quantitatively measured and on which two persons cannot agree as to what is conducive to welfare and what is not. 4. Involves Value Judgment: Robins object that the word “Welfare” involves value judgment. According to Robbins the work of the economists is not to Judge the value of a commodity whether it promotes welfare or not. Economists are forbidden to pass any decision. 5.

Impractical: The definition of economics by Alfred Marshall is of theoretical nature. Alfred Marshall definition of economics is not possible in practice to divide human activities. Lionel Robbins Definition of Economics: November 1898 – 15 May 1984) a British economist gave his own definition of economics in his book “An Essay on the Nature and Significance of Economic Science” published in 1932. Lionel Robbins has given scarcity definition of economics in these words, “Economics is a Science that studies human behavior as a relationship between limited resources and unlimited wants which have alternative uses”.

Criticism on Robbins Definition of Economics: Robbins definition of economics criticized by some modern economists like Hicks, Durbin, Frazer on the following grounds 1 . Make Economics a Pure Science: According to Proof. Robbins economics is a pure science and has not normative aspect. Mrs.. Woolen says “It is very difficult for economists to divert their discussions of all normative significance”. That is why Robbins definition becomes colorless, impersonal. 2. Human Touch is Missing: In Robbins definition the human touch is entirely missing.

It does not take in to account the systematic thinking, human sympathy, imagination and the variety of human life. 3. Valuation Theory: It is objected that Robbins has reduced economics merely to valuation theory. According to Frazer, Robbins reduced economics merely to a theory of value but is much more than that. 4. Ignores Macro Aspect: Another criticism is that it ignores the macro aspect of economics, Keynesian economics which studied how the level of national income and employment are determined. So Robbins fails to explain the problems of overpopulation unemployment economic growth and national income. . Does not Covers Economics of Growth: The economic growth theory or economic velveteen theory has been overlooked in Robbins definition. Economics of growth explains how an economy grows and the factors, which bring about an increase in national income and productivity of the economy. Robbins takes the resources as given and discusses only their allocation. Modern Definition of Economics: Modern Growth-oriented Definition of Samuelsson: In relatively recent times, more comprehensive definitions of Economics have been offered.

Thus, Professor Samuelsson writes, “Economics is the study of how people and society end up choosing, with or without the use of money, to employ scarce reductive resources that could have alternative uses to produce various among various persons or groups in society. It analyses costs and benefits of improving patterns of resource allocation”. Micro Economics & Macro Economics Approaches: Microeconomics: Microeconomics is the study of decisions that people and businesses make regarding the allocation of resources and prices of goods and services. This means also taking into account taxes and regulations created by governments.

Microeconomics focuses on supply and demand and other forces that determine the price levels seen in the economy. For example, microeconomics would look at how a specific company could maximize its production and capacity so it could lower prices and better compete in its industry. Microeconomics Approach: 1 . Determination of demand pattern: The study of microeconomics has several uses. It determines the pattern of demand in the economy, I. E. , the amounts of the demand for the different goods and services in the economy, because the total demand for a good or service is the sum total of the demands of all the individuals.

Thus, by determining the demand patterns of every individual or family, microeconomics determines the demand pattern in the country as a whole. 2. Determination of the pattern of supply: In a similar way, the pattern of supply in the country as a whole can be obtained from the amounts of goods and services produced by the firms in the economy. Microeconomics, therefore, determines the pattern Of supply as well. 3. Pricing: Probably the most important economic question is the one of price determination. The prices of the various goods and services determine the pattern of resource allocation in the economy.

The prices, in turn, are determined by the interaction of the forces of demand and supply of the goods and services. By determining demand and supply, microeconomics helps us in understanding the process of price determination and, hence, the process of determination of resource allocation in a society. 4. Policies for improvement of resource allocation: As is well-known, economic development stresses the need for improving the pattern of resource allocation in the country. Development polices, therefore, can be formulated only if we understand how the pattern of resource allocation is determined.

For instance, if we ant to analyze how a tax or a subsidy will affect the use of the scarce resources in the economy, we have to know how these will affect their prices. By explaining prices and, hence, the pattern of resource allocation, microeconomics helps us to formulate appropriate development policies for an underdeveloped economy. The study of microeconomics starts with the individual consumers and producers, policies for the correction of any wrong decisions at the micro-level are also facilitated by microeconomics.

Macroeconomics: Macroeconomics is the income theory that explains the level of total production and why the level rises and falls. Macroeconomics is the field of economics that studies the behavior of the economy as a whole and not Just on specific companies, but entire industries and economies. This looks at economy-wide phenomena, such as Gross National Product (GAP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels. For example, macroeconomics would look at how an increase/decrease in net exports would affect a nation’s capital account or how GAP would be affected by unemployment rate.

Macroeconomics Approach: 1 . Income and employment determination: The determination of national income and total employment in the country are vital concerns of macroeconomics. Since the volume of unemployment is simply population minus the number of people employed, unemployment is determined as soon as the employment level is known. 2. Price level: The determination of the general price level is discussed in macroeconomic theories. Upward movement of the general price level is known as inflation. Thus, if we want to understand the process of inflation and find ways of controlling it, we must resort to the study of macroeconomics. . Business cycles: The economic booms and depressions in the levels of income and employment follow one another in a cyclical fashion. While income rises and employment expands during boom periods, they shrink during depressions. Since depressions bring business failures and unemployment in their wake, economists have sought remedies to depressions. Discussion of business cycles in general and anti-depression policies in particular falls within the scope of macroeconomics. 4. Balance of payments: The balance of payments theory is also a part of macroeconomics.

The difference between the total inflow and the total outflow of reign exchange is known as the balance of payments of a country. When this balance is negative (I. E. , outflow exceeds inflow), the country faces a lot of economic hardships. The causes and remedies of such balance of payments problems are discussed in macroeconomics. 5. Government policies: The effects of various government policies on the economic variables like national income or the general price level are also studied in macroeconomics. [It should be noted that, we are talking of the macroeconomic effects of government policies.

The effects of these policies on the micro-units (for instance, the effects of taxes on the output of an individual firm), are the subject- any modern economic system, the analysis of these effects is of obvious importance. 6. Interrelations between markets: Probably, the most important contribution of macroeconomic theories is to show that different markets of the economic system (for example, the commodity market, the labor market, the bond market, the money market, etc. ) are interrelated. Any disturbance in one of these markets affects all the others.

Significance of Economics Study Today all over the world people have become highly economic minded. They have legalized that the study of economics can provide them a solution to their economic and social problems. Today economics is more useful than any other branch of knowledge because it makes human welfare its direct and primary concern. Following are the main significance of the study of economics. 1 . Useful for the Producer: Economics is very useful for the producer. It guides him that how he should combine the four factors of production and minimize the cost of production. 2.

Useful for the Consumer: The consumer can adjust his expenditure of various goods in better way if he knows the principles of economics. He will spend his income according the law of Queue-Marginal utility in order to get maximum satisfaction. 3. Poverty and Development: It helps in removing the poverty from the country. Under developed countries are facing many problems like unemployment, over population low per capita income and low production. Economics is very useful in solving these problems. 4. Useful for the Leader: Its study is helpful for the leaders to understand the economic problems if they have a knowledge of Economics. . Useful for the Finance Minister: Finance minister prepares the yearly budget of the country. Economics guides him that how he should frame the tax policy and monetary policy. 6. Useful for the distribution of National Income: From the study of economics one can easily Judge that how the income should be distributed among the four factors of production. For this purpose Marginal productivity theory is suggested by economics. 7. Cultural Value: A person’s education cannot be considered complete unless he has some knowledge of economics. The things which happen daily around us have an economics. 8.

Importance for a Common Man: The study of economics is very useful for every citizen. It enables him to understand and criticize the economic policies of the government. He can also guide the government. 9. Economic Planning: In the modern age the importance of economic planning cannot be ignored. Through planning we can utilize our natural resources in better way and can improve our economic condition. 10. Importance for Labor: It guides the workers that how they can get maximum wages from the employer. It enables them to get the right of trade union, collective bargaining and fixation of working hours. 1 1 .

Solution for Economic Crises: It guides the nations that how they can save homeless from the economic crises. The advanced countries desire is that there should be economic stability and full employment without inflation to achieve these objectives, economics is very useful for them. 12. Inspires for Development: The study of advanced countries economy inspires the less development countries that they can also improve their economics conditions. 13: Intellectual Value: Economics has great intellectual value, because it broadens our out-look, sharpens our intellect and inculcate in us the habit of balanced thinking. 4. Optimum Use of Resources: In the third world countries there is a lot of wastage of resources which is the main cause of their poverty. The study of economic development will enable them to make the optimum use of their resources. 15. Creates the Sense of Responsibility: Economics develop the sense of responsibility among the citizens by explaining the various problems and their solutions. 16. Useful for International Trade: Its study is very useful for international trade. It helps the importers and exporters to earn maximum profit. A businessman can easily understand the trade policies of various countries.