Definition of Economics

Economics is concerned with the production, distribution, consumption of goods or services,

transfer of wealth and all the other factors which affect them.

It aims at analyzing, how the economies function and how the agents (people) interacts within the
market and make decisions. It explains that how the limited (scarce) resources are allocated
between many consumers, such that an efficient utilization is being done.

Definition of Finance

Finance is the study of an optimum allocation of assets i.e. the investments to be made by the
organization or individuals so that it will bring the highest possible returns over time.

It is nothing, but the arrangement and management of business funds, in fact, it is the lifeblood of
business without which no entity can survive for a long time. It mainly concentrates on the money
flows, fluctuations in the interest rates, rise/ fall in the prices, variations in markets, etc. It revolves
around three things i.e. money, time and risk involved.

Basis for
Finance Economics
Comparison

Finance means optimization of Economics is the study of how the unlimited

Meaning funds in the best possible wants of the people are satisfied through the
manner. limited resources.

What is it? Subset Superset

Personal Finance, Public

Branches Finance and Corporate Microeconomics and Macroeconomics.
Finance.

Mastering in Finance will

Mastering in Economics will make a person an
Career make a person a 'Financial
'Economist'.
Analyst'.
Basis for
Finance Economics
Comparison

Aim Maximization of Wealth. Optimization of scarce resources.

Definition of Micro Economics

Microeconomics is the branch of economics that concentrates on the behaviour and performance
of the individual units, i.e. consumers, family, industry, firms. Here, the demand plays a key role
in determining the quantity and the price of a product along with the price and quantity of related
goods (complementary goods) and substitute products, so as to make a judicious decision
regarding the allocation of scarce resources, concerning their alternative uses.

Examples: Individual Demand, Price of a product, etc.

Definition of Macro Economics

Macroeconomics is the branch of economics that concentrates on the behaviour and performance
of aggregate variables and those issues which affect the whole economy. It includes regional,
national and international economies and covers the major areas of the economy like
unemployment, poverty, general price level, GDP (Gross Domestic Product), imports and exports,
economic growth, globalisation, monetary/ fiscal policy, etc. It helps in resolving the various
problems of the economy, thereby enabling it to function efficiently.

Examples: Aggregate Demand, National Income, etc.

Basis for
Microeconomics Macroeconomics
Comparison

The branch of economics that studies The branch of economics that studies the
Meaning
the behavior of an individual behavior of the whole economy, (both
Basis for
Microeconomics Macroeconomics
Comparison

consumer, firm, family is known as national and international) is known as

Microeconomics. Macroeconomics.

Deals with Individual economic variables Aggregate economic variables

Business Applied to operational or internal

Environment and external issues
Application issues

Covers various issues like demand,

Covers various issues like, national
supply, product pricing, factor
Scope income, general price level, distribution,
pricing, production, consumption,
employment, money etc.
economic welfare, etc.

Helpful in determining the prices of a Maintains stability in the general price

product along with the prices of level and resolves the major problems of
Importance factors of production (land, labor, the economy like inflation, deflation,
capital, entrepreneur etc.) within the reflation, unemployment and poverty as a
economy. whole.

It has been analyzed that 'Fallacy of

It is based on unrealistic assumptions,
Composition' involves, which sometimes
i.e. In microeconomics it is assumed
Limitations doesn't proves true because it is possible
that there is a full employment in the
that what is true for aggregate may not be
society which is not at all possible.
true for individuals too.
Difference between Positive and Normative Economics

Definition of Positive Economics

Positive Economics is a branch of economics that has an objective approach, based on facts. It
analyses and explains the casual relationship between variables. It explains people about how the
economy of the country operates. Positive economics is alternatively known as pure economics or
descriptive economics.

When the scientific methods are applied to economic phenomena and scarcity related issues, it is
positive economics. Statements based on positive economics considers what’s actually occurring
in the economy. It helps the policy makers to decide whether the proposed action, will be able to
fulfill our objectives or not. In this way, they accept or reject the statements.
Definition of Normative Economics

The economics that uses value judgments, opinions, beliefs is called normative economics. This
branch of economics considers values and results in statements that state, ‘what should be the
things’. It incorporates subjective analyses and focuses on theoretical situations.

Normative Economics suggests how the economy ought to operate. It is also known as policy
economics, as it takes into account individual opinions and preferences. Hence, the statements can
neither be proven right nor wrong.

Basis for
Positive Economics Normative Economics
Comparison

A branch of economics based on A branch of economics based on values,

Meaning data and facts is positive opinions and judgement is normative
economics. economics.

Nature Descriptive Prescriptive

Analyses cause and effect

What it does? Passes value judgement.
relationship.

Perspective Objective Subjective

Study of What actually is What ought to be

Statements can be tested using

Testing Statements cannot be tested.
scientific methods.

Economic It provides solution for the economic issue,

It clearly describes economic issue.
issues based on value.
Definition of Economics

Lionel Robbins definition of economics "A science which studies human behavior as a
relationship between ends and scarce means which have alternative uses".

This definition is based on the following five pillars:

Main Pillars of Robbins's Definition:

(i) The Human wants or ends are unlimited: Human wants referred to as ends by Robbins are
unlimited. They increase in quantity and quality over a period of time. They vary among
individuals and overtime for the same individual. It is not possible to find a person who will say
that his wants for goods and services have been completely satisfied. This is because of the fact
that when one want is satisfied, it is replaced by another and there is then no end to it.

(ii) The ends or wants vary in importance: The ends or wants are of varying importance. They
are ranked in order of importance as: (a) necessaries (b) comforts and (c) luxuries. Man generally
satisfies his urgent wants first and less urgent afterwards in order of their importance.

(iii) Scarcity of resources:

Resources are the inputs used in the production of things which we need. The resources (Land,
labor, capital and entrepreneurship) at the disposal of man are scarce. They are not found in as
much quantity as we need them. Scarcity means that we do not and cannot have enough income
or wealth to satisfy our every desire. Scarcity exists because human wants always exceed what can
be produced with limited resources and time that Nature makes available to man at any one time.
Scarcity is a fact of life. It occurs among the poor and among the rich. The richest person on earth
faces scarcity because he too cannot satisfy all his wants with the limited time available to him.

(iv) According to Robbins: the unlimited ends and the scarce resources provide a foundation to
the field of Economics. Since the human wants are innumerable and the means to satisfy them are
scarce or limited in supply, therefore, an economic problem arises. If all the things were freely
available to satisfy the unlimited human wants, there would not have arisen any scarcity, hence no
economic goods, no need to economic and no economic problem. Scarcity, thus, can be defined as
the excess of human wants over what can be actually produced in the economy.
(v) Economic resources have alternative uses: The fourth important proposition of Robbins
definition is that the scarce resources available to satisfy human wants have alternative uses. They
can be put to one use at one time. For instance, if a piece of land is used for the production of
sugarcane, it cannot be utilized for the growth of another crop at the same time. Man, therefore,
has to choose the best way of utilizing the scarce resources which have alternative uses. The
scarcity resources and choices are the key problems confronting every society.

The choices to be made by it are:

 What goods shall be produced and in what quantity?
 How should the various goods and services be produced?
 How should the goods and services be distributed?

Summing up the foundation of economic science according to Robbins, is based on satisfaction

of human wants with scare resources which have alternative uses.

Merits of Robbins's Definition of Economics:

There are many admirers of Robbins definition. It has the following merits:

(i) Status of a positive science: Robbins tries to make economics a more exact science. According
to him, economics has nothing to do with ends. They may be noble or ignoble, material or non-
material. Economics is not concerned with them as such.
(ii) An analytical definition: Robbins definition makes study of economics analytical. It studies
the particular aspect of human behavior which is imposed by the influence of scarcity.
(iii) A universal definition: Robbins definition is applicable everywhere. It is concerned with
unlimited wants and limited resources which is the problem facing every economy socialistic or
capitalistic.
(iv) Clear on the nature and scope of economics: Robbins definition serves to specify the nature,
scope and subject matter of economics. According to him, an economic problem is characterized
by the possibility of exercising choice between ends an which have alternative uses.
(v) Valuation is the central problem: According to Robbins, valuation is the central problem of
economics. Wherever the ends are unlimited and the resources scare, they give rise to an economic
problem Marshall’s definition does not identity this valuation process.
Criticism on Robbins Definition of Economics or Demerits:
Robbins definition of economics has been bitterly criticized by eminent writers Hicks, Longe,
Durbin, Frazer, etc., on the following grounds:
(i) Reduced economics merely to a theory of value: Robbins’s definition restricts the scope of
economics by treating it as a positive Science only while in reality it is both a positive and a
normative science.
(ii) Scope of economic has been widened: Robbins’s definition has widened the scope of
economics by covering the whole of economic life, while it is concerned with that part of human
life which is connected with the market price.

(iii) Economics has become a colorless science: Robbins’s made economics colorless,
impersonal and abstract. It is in fact a definition of economics for economist only.

(iv) Study of economic growth: The study of economic growth process remains outside the scope
of economics while it is through economic growth that living standards improve.

Summing up: The definition of economics given by Robbins has doubt certain flaws. However,
it is more comprehensive in describing the problem of resource utilization.
Factor of production in economics

i) Land:

It refers to all natural resources which are free gifts of nature. Land, therefore, includes all gifts of
nature available to mankind—both on the surface and under the surface, e.g., soil, rivers, waters,
forests, mountains, mines, deserts, seas, climate, rains, air, sun, etc.

(ii) Labour:

Human efforts done mentally or physically with the aim of earning income is known as labour.
Thus, labour is a physical or mental effort of human being in the process of production. The
compensation given to labourers in return for their productive work is called wages (or
compensation of employees).

Land is a passive factor whereas labour is an active factor of production. Actually, it is labour
which in cooperation with land makes production possible. Land and labour are also known as
primary factors of production as their supplies are determined more or less outside the economic
system itself.
(iii) Capital:

All man-made goods which are used for further production of wealth are included in capital. Thus,
it is man-made material source of production. Alternatively, all man-made aids to production,
which are not consumed/or their own sake, are termed as capital.

It is the produced means of production. Examples are—machines, tools, buildings, roads, bridges,
raw material, trucks, factories, etc. An increase in the capital of an economy means an increase in
the productive capacity of the economy. Logically and chronologically, capital is derived from
land and labour and has therefore, been named as Stored-Up labour.

(iv) Entrepreneur:

An entrepreneur is a person who organises the other factors and undertakes the risks and
uncertainties involved in the production. He hires the other three factors, brings them together,
organises and coordinates them so as to earn maximum profit. For example, Mr. X who takes the
risk of manufacturing television sets will be called an entrepreneur.

An entrepreneur acts as a boss and decides how the business shall run. He decides in what
proportion factors should be combined. What and where he will produce and by what method. He
is loosely identified with the owner, speculator, innovator or inventor and organiser of the business.
Thus, entrepreneur ship is a trait or quality owned by the entrepreneur.

Some economists are of the opinion that basically there are only two factors of production—land
and labour. Land they say is appropriated from gifts of nature by human labour and entrepreneur
is only a special variety of labour. Land and labour are, therefore, primary factors whereas capital
and entrepreneur are secondary factors.
Why the Study of Economics is Important
(i) The study of economics is important because it teaches us how to make rational use of scarce
resources to satisfy our unlimited wants.
(ii) It offers the firm and the government a rational guide in the allocation of scarce resources.
(iii) It enables the government to plan towards national integration and economic growth.
(iv) In choice making it helps us arrange our needs in order of preference.
(v) The study of economics helps us to solve the problems of what to produce, how to produce and
for whom to produce.
(vi) It helps us to offer economic solution to economic problems.
(vii) It equips one to be in a better position to estimate a country's total wealth.
(viii) It helps the individual to build up a body of economic principles and equips him with the
tools of economic analysis.

Economics as a Social Science

Economic is a science and indeed a social science. The functions of science is to establish general
laws covering the behaviour of the empirical objects/events with which the science in question is
concerned, and thereby enable us to collect and gather our knowledge of separately known events
and to make reliable prediction of event as yet unknown. These concern a theory. A theory is a set
of concepts, definitions, and prepositions that presents among variable with the purpose of
explaining and predicting A phenomenon. In short theory represents implication and
generalization of reality and therefore do not completely describe a particular situation. Economics
as a social science studies human behaviour in relation to his economic activities: It is concerned
with the behavior of people in relation to production, distribution and utilization of wealth while
physical or natural sciences studies living and non-living things and its environment. In a nutshell,
economics as social science studies and deals with human behavior relative to their resources while
physical or natural sciences deal with human beings and objects that are subjects to laboratory
experiment. In the study of both economics and physical sciences. The same methodology is used
in conducting a research: -
1) Observations of phenomenon
2. Collection and recording of observation
3. Analysis of recorded observation
4. Classification of recorded observation.
5. Conclusion and prediction from the result of the observation
6. A test of the result against reality
7. Confirmation or rejection of the results of the laws of economics, which is dynamic i.e. subject
to change by individual consumer.

Nature of Economic Problems

The main problem of an economy is that of economizing resources: in this sense economics is the
study of the allocation of scarce resources and alternative ends. In other words the fundamental
problem of economics is scarcity. Human wants are unlimited and the means to satisfy them are
scarce and limited. Thus, economics is concerned with problem of using resources to meet the
unlimited wants of human beings. The solution to these problems of allocation scarce resources
lies in the price system, which exists in every economic system whether it is capitalism, socialism
or mixed economy. In an effort to solve these problems an economist is pre-occupied with the
following different questions:

What to Produce and in What Quantity: The first central problem of an economy is to decide
what goods and services are to be produced and in what quantity. This involves the allocating of
scarce resources in relation to the composition of total output in the economy. Since the resources
are scarce, society has to decide on the goods to be produced.

How to Produce: The next problem of an economist is to decide on how to produce goods and
services with what combinations and what method of production. This method is primarily
dependent upon the available resources within the economy. Further, goods and services can be
produced with different combinations of factors of production. If land is available in abundance it
may have extensive cultivation. But if land is scarce, intensive method of cultivation may be used.
If labour is in abundance it may be labour intensive techniques while in the case of labour shortage,
capital-intensive technique may be used.
For Whom to Produce: This is the allocation of goods among the members of the society. How
should the consumer goods be distributed? How should the capital goods be distributed? The
allocation of consumer goods among the household takes place on the basis of exchange whoever
possess the means to buy the good may have it.