Santos Leslie C.

HM 2-3

Economics is the social science that describes the factors that determine
the production, distribution and consumption of goods and services.

The term economics comes from the Ancient Greek from (oikos,
"house") and (nomos, "custom" or "law"), hence "rules of the house (hold
for good management)".[1] 'Political economy' was the earlier name for the
subject, but economists in the late 19th century suggested "economics" as a
shorter term for "economic science" to establish itself as a separate discipline
outside of political science and other social sciences.

physiocrats a member of an 18th-century group of French economists who

believed that agriculture was the source of all wealth and that agricultural products
should be highly priced. Advocating adherence to a supposed natural order of social
institutions, they also stressed the necessity of free trade.

Mercantilism is the main economic system used during the sixteenth

to eighteenth centuries. The main goal was to increase a nation's
wealth by imposing government regulation concerning all of the
nation's commercial interests.

Laissez-faire is an economic system in which transactions between private

parties are free from government interference such
as regulations, privileges, tariffs, and subsidies. The phrase laissez-faire is part of
a largerFrench phrase and literally translates to "let (it/them) do", but in this
context usually means to "let go".

Scarcity is the fundamental economic problem of having seemingly unlimited

human wants in a world of limitedresources. It states that society has insufficient
productive resources to fulfill all human wants and needs.

Microeconomics is a branch of economics that studies the behavior of

individuals andfirms in making decisions regarding the allocation of limited
resources.
 Macroeconomics (from the Greek prefix makro- meaning
"large" and economics) is a branch of economics dealing with the
performance, structure, behavior, and decision-making of an economy
as a whole rather than individual markets. This includes national,
regional, and global economies.

Nature and scope of economics

1. 1. Nature andScope ofEconomicsByArihant Jain

2. 2. Introduction The word Economics is derived from the Greek word OKIOS
NEMEIN meaning household management Man is a bundle of desires. Goods and
services satisfy these wants. But almost all the goods are scares To produce goods
factors of production are needed and these are all scarce 5/5/2012 Arihant Jain P.G.D.M.
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3. 3. The Study of Economics Economics is the study of how individuals and societies
choose to use the scarce resources that nature and previous generations have provided. It
is the study of economic problems. Wants are motive for economic activity. Wants leads
to efforts and which lead to satisfaction 5/5/2012 Arihant Jain P.G.D.M. 3
4. 4. Why Study Economics? To learn a way of thinking Three fundamental concepts:
Opportunity cost Marginalism, and Efficient markets 5/5/2012 Arihant Jain P.G.D.M.
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5. 5. Contd Opportunity Cost the best alternative that we forgo, or give up, when we
make a choice or a decision arises because time and resources are scarce. Marginalism
In weighing the costs and benefits of a decision, it is important to weigh only the costs
and benefits that arise from the decision Efficient Market is one in which profit
opportunities are eliminated almost instantaneously Profit opportunities are rare
because, at any one time, there are many people searching for them 5/5/2012 Arihant Jain
P.G.D.M. 5
6. 6. Economic Definitions Adam Smith gave the Wealth Definition Alfred Marshall gave
the Welfare Definition Lionel Ribbons gave the Scarcity Definition Paul Samuelson
gave the Growth Definition 5/5/2012 Arihant Jain P.G.D.M. 6
7. 7. Wealth Definition Adam Smith (Father of Economics) in his book Wealth of
nations 1776 defined economics is the study of wealth J.B. Jay, J.S. Mill, Walker, B
Price all agreed with Adam Smith In this definition wealth is given the first place and
man is given the second place 5/5/2012 Arihant Jain P.G.D.M. 7
8. 8. Meaning of wealth Around the industrial revolution, merchants were the most
powerful class in Western Europe, and wealth for them meant money only. Since money
at that time was in the shape of gold, merchants declared gold as the only wealth, This
definition rendered merchants as the only productive class, as they created it by trade,
This definition harmed the interests of newly emerging class of petty industrialists and
their hard working workers, Adam Smith as spokesman of the emerging class widened
the definition to include all material goods, Activities which did not result in material
goods production were unproductive. 5/5/2012 Arihant Jain P.G.D.M. 8
9. 9. Causes of wealth ofnations: Capitalism Traders were not the only cause of wealth,
Freedom of trade and enterprise were the greatest causes of wealth because:i) Human
beings are born selfishii) They have self interest,iii) It is not the benevolence but self
interest which guides economic activityiv) So left to themselves, each individual would
maximise his self interest (income/wealth),v) When all the adult citizens of a nation
maximise their self interest, the wealth of nation would grow the fastest,vi) So why
should the mercantilists or anybody else impose restriction on the freedom of individuals,
5/5/2012 Arihant Jain P.G.D.M. 9
10. 10. Exceptions (Criticism) While an invisible hand guides societies which rely on self
interest, there are certain exceptions where it does not work. These are: Defense Public
utilities Law order and justice 5/5/2012 Arihant Jain P.G.D.M. 10
11. 11. Science of welfare Adam Smiths prophesy that self interest would be beneficial to
all did not materialise after the industrial revolution, The revolution divided the society
between haves and have-nots, including unemployd Criticism turned reformist and
revolutionary, Marshall attempted to offer a compromise and a new definition:
Political economy or economics is the 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 with the use of the material requisites of well-being. The range of
our enquiry becomes restricted to that part of social welfare which can be brought
directly or indirectly into relashhionship with measuring rod of money, Pigou. 5/5/2012
Arihant Jain P.G.D.M. 11
12. 12. Criticism of welfaredefinition Economics is not restricted to material things, non
material things like health and education, entertainment are also important, Welfare is
subjective and varies from person to person, It is difficult to segregate material welfare
from other types of welfare, The concept of welfare is not fixed but subject to change
and interpretation, It differs from time to time, country to country 5/5/2012 Arihant Jain
P.G.D.M. 12
13. 13. Science of scarcity According to Lionel Ribbons Economics is the science which
studies human behavior as a relationship between ends and scarce means which have
alternative uses. So all goods and services commanding a price fall under the scope of
economics. Unlimited human wants: Necessities, comforts and luxuries Necessities:a)
Necessities of existenceb) Necessities of efficiency, andc) Necessities of convention.
5/5/2012 Arihant Jain P.G.D.M. 13
14. 14. Contd Comforts and luxuries are : A) Related to time, place B) No watertight
compartmentalization as a luxury may be comfort or even a necessity for someone or at
different periods of history. Criticism; It fails to explain why labour despite being scarce
remains unemployed / underemployed It also fails to explain situations of abundance Is
neutral to ends Ignores welfare 5/5/2012 Arihant Jain P.G.D.M. 14
15. 15. Science of growth anddevelopment Economics is the study of how men and
society chose, with or without the use of money, to employ scarce productive resources
which could have alternative uses, to produce various commodities over time and
distribute them for consumption now and in future amongst various people and groups of
society 5/5/2012 Arihant Jain P.G.D.M. 15
16. 16. The Scope of Economics Microeconomics is the branch of economics that examines
the functioning of individual industries and the behavior of individual decision- making
unitsthat is, business firms and households. Macroeconomics is the branch of
 economics that examines the economic behavior of aggregates income, output,
employment, and so onon a national scale 5/5/2012 Arihant Jain P.G.D.M. 16
17. 17. The Diverse Fields of Economics Examples of microeconomic and macroeconomic
concerns Production Prices Income EmploymentMicroeconomics Production/Output
Price of Individual Distribution of Employment by in Individual Goods and Services
Income and Wealth Individual Industries and Businesses & Businesses Price of medical
Wages in the auto Industries care industry Jobs in the steel How much steel Price of
gasoline Minimum wages industry How many offices Food prices Executive salaries
Number of How many cars Apartment rents Poverty employees in a
firmMacroeconomics National Aggregate Price National Income Employment and
Production/Output Level Total wages and Unemployment in salaries the Economy Total
Industrial Consumer prices Output Producer Prices Total corporate Total number of Gross
Domestic Rate of Inflation profits jobs Product Unemployment Growth of Output rate
5/5/2012 Arihant Jain P.G.D.M. 17
18. 18. The Method ofEconomics Positive economics studies economic behavior without
making judgments. It describes what exists and how it works. Normative economics,
also called policy economics, analyzes outcomes of economic behavior, evaluates them
as good or bad, and may prescribe courses of action. 5/5/2012 Arihant Jain P.G.D.M. 18
19. 19. Contd Positive economics includes: Descriptive economics, which involves the
compilation of data that describe phenomena and facts. Economic theory, which
involves building models of behavior. An economic theory is a general statement of
cause and effect, action and reaction 5/5/2012 Arihant Jain P.G.D.M. 19
20. 20. Contd Empirical economics refers to the collection and use of data to test
economic theories. Many data sets are available to facilitate economic research. They are
collected by both government agencies and private companies, 5/5/2012 Arihant Jain
P.G.D.M. 20
21. 21. Criteria for judgingeconomic outcomes Economic growth, or an increase in the total
output of an economy. Economic stability, or the condition in which output is steady or
growing, with low inflation and full employment of resources. Efficiency, or allocative
efficiency. An efficient economy is one that produces what people want at the least
possible cost Equity, or fairness of economic outcomes 5/5/2012 Arihant Jain P.G.D.M.
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22. 22. Economic System The manner or the structure through which the economy of a
country operates is known as Economic System Variety of Economic Systems They
differ from each other not only in details but also in broader outlines Types of Economic
Systems: Capitalist Socialist and Mixed Economy 5/5/2012 Arihant Jain P.G.D.M.
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23. 23. Capitalism All economic activities are guided by market forces Policy of laiseez-
faire (absence of state intervention). Privately owned resources What to Produce, how to
produce and for whom to produce power rests with the producers Profit maximization is
the main aim 5/5/2012 Arihant Jain P.G.D.M. 23
24. 24. Merits and Demerits Capitalism Merits Demerits Fast Hides Self impleme- real High
rate of Inequalities ntation of need of obsolescenceregulatory in income efficient the and
wealth decisions society 5/5/2012 Arihant Jain P.G.D.M. 24
25. 25. Socialism Originated due to drawbacks of capitalism Just opposite to capitalism
The merits of capitalism become the demerits and merits thus become the demerits It
 aims at removing the inequalities of income and wealth, inequalities of economic
opportunities, unemployment and waste of productive resources 5/5/2012 Arihant Jain
P.G.D.M. 25
26. 26. Mixed Economy Merits of capitalism and Socialism are taken and a Mixed economy
is formed Generally adopted by countries with low per capita income and is
underdeveloped or is developing (India) Some sectors are kept in Government control
5/5/2012 Arihant Jain P.G.D.M. 26

Economics as a Social Science: An Approach to Nonautistic Theory, a highly readable

critique of economic theory based on a wide range of research, endeavors to restore economics to
its proper role as a social science. Contrary to conventional economic theory, which assumes that
people have no free will, this book instead bases economics on the realistic assumptions that
human beings can choose; that we are complex beings affected by emotion, custom, habit, and
reason; and that our behavior varies with different circumstances and times. It embraces the
findings of history, psychology, and other social sciences, as well as the insights from great
literature on human behavior, rejecting the rigid mathematical axioms that define how economics
is understood and practiced today.

The rise of mercantilist and physiocrats

In the transition to modern times (16th18th cent.), European overseas expansion led to the
growth of commerce and the economic policies of mercantilism, a system that inspired a
substantial body of literature on the subject of economic nationalism. In the late 17th and the
18th cents., protest against the governmental regulation characteristic of mercantilism was
voiced, especially by the physiocrats. That group advocatedlaissez-faire, arguing that business
should follow freely the "natural laws" of economics without government interference. They
regarded agriculture as the sole productive economic activity and encouraged the improvement
of cultivation. Because they considered land to be the sole source of wealth, they urged the
adoption of a tax on land as the only economically justifiable tax.