Definition of economics

1. Definition of economics

2. The word ‘Economics’ has come from the Greek word ‘Oikonomia’ which means ‘Household management’. The practice of economics first began in ancient Greece. The Greek philosopher Aristotle used economics to mean a ‘Science of Home Management’. But with the passage of time the meaning of economics has changed a lot. • According to Adam smith, the father of Economics, “Economics is a science that enquires into the nature and causes of the wealth of nations”. He termed economics as a ‘Science of wealth’. • According to Marshall, “Economics is the study of mankind in the ordinary business of life”.

3. According to the Robbins,a modern economist, “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses”. He termed economics as the ‘Science of Scarcity”. Economics- • -Explore the behavior of financial market including interest rate and stock price • -Examine the distribution of income • -Studies the pattern of trade & impact of trade barrier • -Looks growth in developing country.

4. Help to set the govt. policy that can be used to pursue rapid economic growth, efficient use of resources , full employment, fair distribution of income.  To sum up, economics is a social science that studies how people perform their economic activities and how they attempt to satisfy their unlimited wants by limited resources.

5. Question: Critically analysis the definition of economics given by Marshal & Robbins?

6. MARSHALL’S DEFINITION: • According to Marshall, • “Economics is the study of mankind in the ordinary business of life.” • It explains the part of individual and social action which is closely connected with the attainment and with the use of material requisite of well being

7. If we critically analysis the Marshal’s definition then we can arise some points- Economics is the study of human action relating to the acquisition & the use of wealth Acquisition of wealth is important but more important is the contribution of wealth to man’s welfare He decides the human activities into two parts Activities which contribute to material welfare Activities which don’t contribute to material welfare

8. Criticism: 1. Marshal’s definition is not analytical. It’s just narrow because it divides economics into two parts a. Those which contribute to material welfare b. Those which don’t contribute to material welfare . • 2. It is narrow because it excludes all those activities which don’t contribute material welfare. • 3. According to Robbins the concept of welfare is not fixed and definite one. It differs in different countries at different times.

9. ROBBIN’S DEFINITION: • According to Robbins, • “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” • This definition is based upon on three facts such as : • Unlimited wants: In this definition, ends implies wants and for satisfying wants the man uses resources. In our practical life , there is no limitation of want of people. When one wants is satisfied then another wants corps up.

10. Scarce means: Scarce means implies to resource. That means resources are scarce in relation to wants. In the world resources are limited but wants are unlimited. • Alternative uses of resources: We can’t solve the problem with limited resources but we can make alternative uses. For example: For same land we can produce two product rice and jute. • Criticism: • Robbins definition of economics does not explain the problem unemployment. For some countries this is an urgent problem.

11. 2.Robbins has deducted the world welfare from economics that is not reasonable. • 3.The theory of economic growth or economic development has recently become a very important branch of economics but Robbins definitions does not cover it.

12. Difference between Marshalls and Robbins definition: • Marshalls goal is to material welfare & use of wealth only & Robbins goal is to alternative use of resources consistent with unlimited wants. • Marshall recognized economics is a study of human activities and Robbins recognized economics is a study of science. • Marshall emphasis material welfare of human beings & Robbins emphasis on choice of science.

13. Marshall says it is normative science & Robbins says it is positive science. • Marshall defined on the morality of a person & Robbins economics completely neutral in the question of morality . For this he defined on scientific way. • In Marshall definition emphasis on material thought and Robbins emphasis on both material & immaterial.

14. In the light of above discussion we can say that Robbins definition is better than Marshalls definition because Robbins definition is more scientific and analytical.

15. Question: The branches of economics?

16. There are two branches of economics such as • Micro economics • Macro economics

17. Micro economics: The word ‘Micro’ comes from Greek word “Micros”. The word “micro” means a millionth part. Micro economics is some small part or component of the whole economics. It is the study of the economics actions of individuals and well defined groups of individuals. It is the narrow concept of economics.

18. According to Adam smith, “Micro economics is a branch of economics which concerns with the behavior of individual entities such as consumer, firms, markets etc.” • According to Boulding,“Micro economics is the study of particular firms, particular households, individual prices incomes, individual industries, particular commodities.” • Henderson stated, “Micro economics is the study of economics actions of individuals and well defined groups of individuals.”

19. Thus, micro economic theory studies the behavior of individual decision- making units such as consumers, resource owners and business parts. • Macro economics: The word ‘Macro’ comes from the Greek word ‘Makros’. The word macro means large. Macro economics deals with resources of a country & allocate the resources of various ways. • Macro economics studies the economy in its totality. Macro economics is called income theory. Income theory explain the level of total production & why the level rises or falls.

20. K. E. Boulding Stated, “Macro economics deals not with individuals quantities as such but with aggregates of these quantities, not with individual’s income but with national income, not with individual price but with general price-level; not with individual output but with national output.” • P. A. Samuelson & W. D. Nordhaus defined, “Macro economics is the study of behavior of the economy as a whole. It examines the overall level of a nation’s output, employment and prices.

21. Macro economics’ is concerned with aggregate economics( sum total of economics) such as national income, aggregate output, total consumption, saving, investment, aggregate demand & aggregate supply.

22. SUBJECT- MATTER OF MICRO ECONOMICS Economics system may be looked at as a whole or in terms of its innumerable decision making units. Such as – 1. Consuming units - Individual consumers Individual households.

23. 2. Producing units – • Farms (agricultural firms) • Business firms • Minning concern. • 3. Individual factors of production – • Land • Labour • Capital • Entrepreneurs

24. 4. Individual Industries - • Cotton, textile • Iron and steel • Toys making.

25. IMPORTANCE OF MICRO ECONOMICS

26. Micro economics is very important in economics. It occupies a very important place in the study of economic theory. It has both theoretical and practical importance. The importance of micro-economics are given below- • (1) Theoretical importance of micro economics: • It helps to understand economic activities. • It explains the functioning of a free enterprise economy. • It helps to formulate economic policy

27. It explains the determination of the relative price of various product or products. • It explains the condition of efficiency both in consumption and production. • It explains how through market mechanism goods and services produced in the communities are distributed. • It tells us how consumers and producer in an economy take decision about the allocation of productive resources among goods and services. • (2) Practical importance of micro economics: • It helps to formulate the budget of a country) • It helps to formulate economic policy. • It is related to general welfare • It helps to solve economic problems of a country

28. LIMITATIONS OF MICRO ECONOMICS • Micro economics is not free from all kinds of limitations. Even micro economic analysis suffers from certain limitations. Some of the limitations are as follows: • Only a Part: It cannot give an idea of the functioning of the economy as a whole. For example, an individual industry may be flourishing, whereas the economy as a whole may be languishing. • Unrealistic assumption: Micro economics assumes full employment which is a rare phenomenon, at any rate in the capitalist world. So, it is an unrealistic assumption.

29. DIFFERENCES BETWEEN MICRO AND MACRO ECONOMICS

30. 1.Definition: Micro economics is the branch of economics that studies the individual parts of economics. Macro economics is that branch of economics which studies the entire economy. 2. Meaning : The meaning of Micro is millionth part. The meaning of Macro is large. 3. Origin: The word micro has come from Greek word “mickros. The word macro has come from Greek word “macros. 4. Scope: Micro is a small concept of economics. Macro is a large concept of economics. 5.Analysis: Micro analyses the behavior of any particular decision making unit. Macro analyses the economics problem as a whole.

31. 6.Full employment: In the study of micro economics and assumption of full employment is made. In the study of macro economics this assumption is not made. 7. Supporter: Classical and new classical economists are the supporter of micro economics. Modern economists are the supporter of macro economics. 8. Examples: Particular households, individual wages, behavior of a consumer, individual industries are the example of micro economics. National savings, national income, total investment and so on are the example of macro economics.

32. Topic: Define demand?

33. Simply, demand means desire for anything. But, in Economics, the term demand signifies the ability or the willingness to buy a particular commodity at a given point of time. It refers to how much of a product or service is desired by buyers at various prices during some specified period of time. • According to Bober, “By demand we mean the various quantities of a given commodity or service which consumers would buy in one market in a given period of time at various prices or at various incomes, or at various prices of related goods”. Thus, there are three conditions of demand in economic:

34. (1)Desire for something. (2) Ability to pay for the desired good. (3) Desire for spending money to attain that goods. Question: Discuss the law of demand? The law simply expresses the relationship between quantity of a commodity demanded and its price. The law state that, all else being equal, as the price of a product increases, quantity demanded falls; likewise, as the price of a product decreases, quantity demanded increases. That means, demand varies inversely with price; not necessarily proportionately. If price fall, demand will extend and vice versa.

35. According to Marshall, “The amount of demand increases with a fall in price and decreases with the rise in price”.

36. The law of demand indicates inverse relationship between price and quantity demanded. Thus, demand is the function of price: It can be expressed as D = F (p). Here, D is demand and P means price. • LIMITATIONS OF THE LAW OF DEMAND There are, however, certain exceptions to the law of demand. That is, there are cases in which demand does not contract when price rises and vice versa. The law will hold if the conditions of demand remain the same. These conditions relate to the consumer’s tastes, his income, prices of other

37. goods, possibility of substitutes, expected price change etc. If these conditions change, the law will not hold good. Thus, the following are the exceptions to the law of demand: • Change in taste or fashion: According to the law of demand, when prices fall, demand is expected to increase. But, if in the meantime,the tastes of consumers have undergone a change or if the commodity has gone out of fashion, more may not be demanded if the price falls. • Change in income: If the rate of income in change is more than the price of product, the law of demand may not be effective. For example, if the consumer’s income has gone up, he may be willing to buy more in spite of the rise in price.

38. Change is other prices: The law states that when the price of a commodity such as tea falls then more tea will be purchased. But if the price of coffee falls even more heavily, more tea may not be purchased; instead more coffee may be purchased. • Luxurious goods: Some expensive commodities like diamonds, expensive cars, etc., are used as status symbols to display one’s wealth. The amount demanded of these commodities increase with an increase in their price and decrease with a decrease in their price. • Probability of change in price in future: If a household expects the price of a commodity to increase, it may start purchasing a greater amount of the commodity at present increased price.

39. QUESTION: WHY DEMAND CURVE SLOPES DOWNWARD The demand curve generally slopes downward from left to right. It has a negative slope because the two important variables price and quantity work in opposite direction. As the price of a commodity decreases, the quantity demanded increases over a specified period of time and vice versa, other things remaining constant. The fundamental reasons for demand curve to slope downward are as follows: Law of diminishing marginal utility. The law of demand is based on the law of diminishing marginal utility. when a consumer purchases more units of a commodity,

40. its marginal utility declines. The consumer, therefore, will purchase more units of that commodity only if its price falls. Thus, a decrease in price- brings about an increase, in demand. The demand curve, therefore, is downward sloping. • Income effect. Other things being equal, when the price of a commodity decreases, the purchasing power of the household increases. The demand for a commodity thus increases not only from the existing buyers but also from the new buyers who were earlier unable to purchase at higher price. When at a lower price, there is a greater demand for a commodity by the households the demand curve is bound to slope downward from left to right

41. Substitution effect. The demand curve slopes downward from left to right also because of the substitution effect. For instance, the price of meat falls and the prices of other substitutes, say beef remain constant. Then the households would prefer to purchase meat because it is now relatively cheaper. The increase in demand with a fall in the price of meat will move the demand curve downward from left to right. • Entry of new buyers. When the price of a commodity falls, its demand not only increases from the old buyers but the new buyers also enter the market. The combined result of the .income and substitution effect is that demand extends, as the price falls. The demand curve slopes downward from left to right.

42. Question: What is the elasticity of demand?

43. According to the law of demand , price increases & demand decreases & if price decreases then demand will increase, but the rate of changing price & demand are not equal in all time. • Generally ,for the essential goods changing price may bring slight changes in demand, again in case of luxurious goods demand increases largely with small change in price. The rate of which demand of the commodity rises or falls with the change in the price of the commodity is called the elasticity of demand.

44. According to Marshall, “ The degree of rapidity or slowness with which demand changes with every changes in price is known as elasticity of demand. We can express the elasticity of demand by following formula- ED= Proportional change change of demand/ proportional change of price. • “Elasticity” is a standard measure of the degree of responsiveness (or sensitivity) of one variable to changes in another variable. • Elasticity of Demand measures the degree of responsiveness of demand for a commodity to a given change in any of the independent variables that influence demand for that commodity, such as price of the commodity, price of the other

45. commodities, income, taste, preferences of the consumer and other factors. • Responsiveness implies the proportion by which the quantity demanded of a commodity changes, in response to a given change in any of its determinants. • Mathematically, it is the percentage change in quantity demanded of a commodity to a percentage change in any of the (independent) variables that determine demand for the commodity. • Four major types of elasticity: • Price elasticity, • Income elasticity, • Cross elasticity • Advertising (or promotional) elasticity.

46. Question: Explain the law of diminishing marginal utility?

47. Utility: The consumption of various unit of commodity. Marginal: The term marginal refers to the effects of a small change in consumption. Marginal utility: Marginal utility can be defined as a measure of relative satisfaction gained or lost from an increase or decrease in the consumption of that good or service. • Total utility: The sum total of satisfaction which a consumer receives by consuming the various unity of the commodity.(The more unit of a commodity he consumes, the greater will be his total utility)

48. Law of diminishing marginal utility: “The law of diminishing marginal utility states that, “as a consumer consumes more and more units of a specific commodity, utility from the successive units goes on diminishing.” • Marginal utility can be defined as a measure of relative satisfaction gained or lost from an increase or decrease in the consumption of that good or service. • Satisfaction of human wants follows some very important laws & one of them is the law of diminishing marginal utility. The law refers to the common experience of every customer. Suppose a person starts eating pieces of apple one after another. The first apple gives him great pleasure.

49. By the time he starts eating the second, the edge of his appetite has been blunted, & the second apple, meeting with a less urgent want, less satisfaction, the satisfaction of third apple will be less than that of second apple. The satisfaction of fourth apple will be less than that of third apple & so on. The additional satisfaction will go on decreasing with every apple till it drops down to zero. If the customer is forced to take more the satisfaction may become negative.