Scope of Economics – Definitions | Nature | Branches

• Term “Economics” owes its origin to the Greek word “Oikonomia” which means “household”. Thus, Economics means “House Management”.
• Several definitions of Economics have been given. For the sake of convenience let us classify the various definitions into four groups:

• Fundamental facts of economics are:

1. 1. Human beings have unlimited wants.
   2. Means to satisfy these unlimited wants are relatively scarce i.e. limited.

• Human wants may be classified into Economic Wants & Non-economic Wants.
• Economics is the study of how we work together to transform scarce resources into goods and services to satisfy the most pressing of our infinite wants and how we distribute these goods and services among ourselves.
• Welfare Definition:

“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 with the use of the material requisites of well-being. Thus, it is on the one side a study of wealth and on the other and more important side a part of the study of the man” – Alfred Marshall

• Marshall’s and Pigou’s definitions of economics are wider and more comprehensive as they take into account the aspect of social welfare.
• According to Robbins,

“Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses”.

• Paul A Samuelson has propounded what has come to be known as the growth-oriented definition of economics.
• Jacob Viner has given a pragmatic definition of Economics.

According to him,

“Economics is what Economists do”.

Economics is the study of choice under conditions of scarcity.

This definition has two parts:

(a) Choice and

(b) Scarcity.

Scarcity is a situation in which the amount of something available is insufficient to satisfy the desire for it. As an individual, for instance, we face scarcity of time and spending power. Given more of either, we could have more of the good and services that we desire. At any given point of time, individuals face numerous scarcities. There are so many things one might like to have – sedan cars, branded clothes, stylish shoes, branded watches, sports equipments, studio apartments, independent bungalow, and so on i.e. individuals have unlimited wants but face the constraint of limited spending power.

Every individual confronts this kind of situation on day to day basis. Because of the scarcities of time and spending power, each of us is forced to make choices. We must allocate our scarce time to different activities – work, play, study, sleep, shopping and more. We must allocate our scarce spending power among different goods and services; housing, food, furniture, travel, and many others. And each time we choose to buy something or do something, we also choose not to buy or do something else.

A little reflection suggests that just like individuals, at any given point of time, a society also faces unlimited wants and limited resources. The limited resources have alternative uses to which they can be put to use. Out of these alternative uses of scarce resources and unlimited wants, society has to make choice. The problem of scarcity and choice forms the core of Economics.

Given this, Economics would mean the study of ways in which mankind organises itself to tackle the basic problem of scarcity of resources. Hence, economics is the study of alternate systems requisite to allocate these resources between competing ends.

In view of allocation of resources, it can be said that; Economics is the study of how we choose to use limited resources with alternative uses to obtain the maximum satisfaction of unlimited human wants.

A subject is considered science if:

• It is a systematised body of knowledge which studies the relationship between cause and effect.
• It is capable of measurement.
• It has its own methodological apparatus.
• It should have the ability to forecast.

If we analyses economics, we find that it has all the features of science. Like science, it studies cause and effect relationship between economic phenomena.

To understand, let us take the law of demand. It explains the cause and effect relationship between price and quantity demanded for a commodity. It says, given that other things remain constant, as price rises, the demand for a commodity falls and vice versa. Here, the cause is price and the effect is change in quantity demanded. Similarly, the outcomes are measurable in terms of money. It has its own methodology of study (induction and deduction) and it forecasts the future market condition with the help of various statistical and non-statistical tools. Thus, a majority of economic laws are of this type and therefore, economics is science.

But it is to be noted that economics is not a perfect science like physical science. The fact is that we cannot rely upon the accuracy of the economic laws. The predictions made on the basis of economic laws can easily go wrong. This is because economists do not have uniform opinion about a particular event.

A discipline of study is termed as art if it tells us how to do a thing that is to achieve an end (objective). It is noteworthy that the final justification for studying economics lies in the possibility of our ability to use it for solving economic problems faced by us.

Prof. J. M. Keynes says that

“An art is a system of rules for the achievement of a given end.”

We know that in practice, economics is used for achieving a variety of goals. Every individual economic unit whether acting as a consumer or a producer or an investor or a supplier of an input or in any other capacity has an economic goal to achieve. It decides its course of action by keeping in mind the end to be achieved and the situation faced by it. Even at national level the authorities formulate a variety of policies. In certain cases they attempt to plan and operate the entire economy so as to achieve a given set of ends.

Therefore, economic laws are widely used and relied upon at all levels of our economic activities. And that makes economics an art. Art is nothing but practice of knowledge. Whereas science teaches us to know, art teaches us to do. Unlike science which is theoretical, art is practical.

If we analyses economics, we find that it has the features of being an art also. Its various branches provide practical solutions to various economic problems. It helps in solving various economic problems which we face in our day-to-day life. From the above discussion, one can easily understand that Economics is not a pure science as other natural sciences.

Economics does follow standard practices adopted by science subjects, since it has human element attached in its processes, it cannot completely satisfy the fundamental requirements of being a science subject.

Economics is both a science and an art. It is science in its methodology and art in its application.

Economics as a positive science – One group of economists led by Lionel Robbins believes that Economics is a positive science. In a positive science we study a phenomenon as it exists. Thus, a positive science deals with things as they are, their causes and effects. But it remains strictly neutral as regards ends.

No normal judgments are passed by a positive scientist.

Positive Economics is the one that simply states facts and uses empirical evidence.

An example of positive statement is:

“According to the law of demand, a lower price will yield more quantity sold”.

Economics as a normative science – A normative science, on the other hand, deals with things as they ought to be. It passes judgment as regards the rightness or wrongness of a phenomenon.

Normative Economics is the one that takes values into account, and results in statements like:

• This tax should be reduced.
• What should be the level of national income?
• What should be the wage rate, how the fruits of national product be distributed among people – all fall within the scope of normative science.

Thus, normative economics is concerned with welfare propositions.

Scope of the subject of economics is vast and ever expanding. It is no more a branch of knowledge that deals only with the production and consumption. However, the basic thrust still remains on using the available resources efficiently while giving the maximum satisfaction or welfare to the people on a sustainable basis. Economics is being extensively used in assessment of impact of climate change in almost every industrial zone, environmental projects, energy plants and investment in renewable energy resources like solar, wind, tidal and others. Economics is also used for assessment of economic efficiency of space mission, analysis of socio-economic problems like expenditure on health-care, eradication of poverty, management of government budget, taxation, investment in industrial production.

Some of the major branches of economics as under:

1. Micro Economics – This is considered to be the basic economics. Micro-economics may be defined as that branch of economic analysis which studies the economic behaviour of the individual unit, may be a person, a particular household, or a particular firm. It is a study of one particular unit rather than all the units combined together. The micro-economics is also described as price and value theory, the theory of the household, the firm and the industry. Most production and welfare theories are of the micro-economics variety.
2. Macro Economics – Macroeconomics may be defined as that branch of economic analysis which studies behaviour of not one particular unit, but of all the units combined together. Macro-economics is a study in aggregates. Hence, it is often called Aggregative Economics. It is, indeed, a realistic method of economic analysis, though it is complicated and involves the use of higher mathematics. In this method, we study how the equilibrium in the economy is reached consequent upon changes in the macro variables and aggregates.
3. International Economics – As the countries of the modern world are realising the significance of trade and commerce with other countries, the role of international economics is getting more and more significant nowadays.
4. Public Finance – The great depression of the 1930s led to the realisation of the role of government in stabilising the economic growth besides other objectives like growth, redistribution of income, etc. Therefore, a full branch of economics known as Public Finance or the fiscal economics has emerged to analyses the role of government in the economy. Earlier the classical economists believed in the laissez faire economy ruling out role of the government in economic issues.
5. Development Economics – After the Second World War many countries got freedom from the colonial rule, their economics required different treatment for growth and development. This led to emergence of new branch of economics known as development economics. Health Economics – A new realisation has emerged from human development for economic growth. Therefore, branches like health economics are gaining momentum. Similarly, educational economics is also coming up.
6. Environmental Economics – Unchecked emphasis on economic growth without caring for natural resources and ecological balance, now, economic growth is facing a new challenge from the environmental side. Therefore, Environmental Economics has emerged as one of the major branches of economics that is considered significant for sustainable development.
7. Urban and Rural Economics – Role of location is quite important for economic attainments. There is also much debate on urban-rural divide. Therefore, economists have realised that there should be specific focus on urban areas and rural areas. Therefore, there is expansion of branches like urban economics and rural economics. Similarly, regional economics is also being emphasised to meet the challenge of geographical inequalities.

There are many other branches of economics that form the scope of economics. There are welfare economics, monetary economics, energy economics, transport economics, demography, labour economics, agricultural economics, gender economics, economic planning, economics of infrastructure, etc.

• Utility is a want satisfying power of a commodity.
• Utility is the same thing as usefulness.
• Utility depends on intensity of wants.
• Utility is also subjective or relative concept.
• Wants vary with time, place, and person and hence utility.
• Utility is numerical score in terms of “Utils” representing the satisfaction that a consumer obtains from the consumption of a particu­lar good.

Cardinal Approach – Cardinal approach assumes that utility can be measured in terms of number like 1, 2, 3, 4 & 5. This approach is given by Marshall.

Ordinal Approach – According to the ______, a consumer has a given scale of preference for different combinations of two goods. It is assumed that consumer can rank the goods like 1st, 2nd, 3rd, 4th. This approach is given by Hicks and Allen.

• Capitalism is an economic system in which all the means of production are owned and controlled by private individuals for profit. In short, private property is the mainstay of capitalism and profit motive is its driving force.
• Government has a limited role in management of the economic affairs under this system.
• Examples of a capitalist economy may include:

1. 1. United States of America (USA)
   2. United Kingdom (US)
   3. Germany
   4. Hong Kong
   5. South Korea etc.

However, many of them are not pure form of capitalism but show some features of being a capitalist economy.

• Capitalist Economy is also known as Free Market Economy or Laissez-Faire Economy.

1. Right of Private Property – The right of private property means that productive factors such as land, factories, machinery, mines, etc. are under private ownership. The owners of these factors are free to use them in the manner in which they like. Government may put some restrictions for the benefit of the society in general.
2. Freedom of Enterprise – This means that everybody engages in any economic activity he likes. More specifically he is free to set up any firm to produce goods.
3. Absence of Government Interference – A purely capitalist economy is not centrally planned, controlled or regulated by the government.
4. Freedom to Choice by the Consumers – This means people in a capitalist economy are free to spend their income as they like. This is known as consumer sovereignty. Consumers are sovereign in the sense producers produce only those goods which consumers wish to buy.
5. Profit Motive – In a capitalist economy it is the profit motive which forces or induces people to work and produce.
6. Competition – Competition prevails among sellers to sell their goods and among buyers to obtain goods to satisfy their wants. Advertisement, price-cutting, discounts etc. are very common methods of competition in a capitalist economy.
7. Inequalities of Incomes – There is generally a wide gap of income between the rich and the poor in the economy which mainly arises due to unequal distribution of property in such economies.
8. Laissez-faire Policies – Capitalism is also characterised by what is known as the policy of laissez-faire on the part of the authorities. Laissez-faire means absence of State intervention in working of the economy.
9. Another salient feature of capitalism is the use of money and credit.
10. Capitalist system is self-regulatory.
11. Process of economic growth is faster under capitalism.
12. It ensures individual freedom giving entrepreneurs incentive to work hard.

Merits of Capitalist Economy:

• Capitalism is self-regulating and works automatically through price mechanism.
• Existence of private property and the driving force of profit motive result in greater efficiency and incentive to work.
• Process of economic growth is likely to be faster under capitalism.
• Resources are used in activities in which they are most productive. This results in optimum allocation of the available productive resources of the economy.
• There is usually high degree of operative efficiency under the capitalist system.
• Cost of production is minimised as every producer tries to maximise his profit by employing methods of production which are cost-effective.
• Capitalist system offer incentives for efficient economic decisions and their implementation.
• Consumers are benefitted as competition forces producers to bring in a large variety of good quality products at reasonable prices. This, along with freedom of choice, ensures maximum satisfaction to consumers. This also results in higher standard of living.
• Capitalism offers incentives for innovation and technological progress.
• Capitalism preserves fundamental rights such as right to freedom and right to private property. Therefore, the participants enjoy maximum amount of autonomy and freedom.
• Capitalism rewards men of initiative and enterprise and punishes the imprudent and inefficient.
• Capitalism usually functions in a democratic framework.

Demerits of Capitalist Economy:

• Capitalism generates vast economic inequality and social injustice under capitalism.
• Under capitalism, there is precedence of property rights over human rights.
• Due to income inequality, pattern of demand does not represent real needs of the society.
• Capitalism leads to formation of monopoly.
• Exploitation of labour is common under capitalism.
• Consumer sovereignty is a myth as consumers often become victims of exploitation.
• Excessive competition and profit motive work against consumer welfare.
• Wide differences in economic opportunities.
• Distortion in the production pattern.
• Capitalism wastes its productive resources.
• Business units produce only those goods and services which are profitable.
• Loss of human values and welfare.
• Increases the wastage of resources as a result of competition.
• Capitalism leads to the formation of monopolies as large firms may be able to drive out small ones by fair or foul means.

In socialist economy, the material means of production i.e. factories, capital, mines etc. are owned by the whole community represented by the State.

Socialist economy is also as command economy or centrally planned economy.

All members are entitled to get benefit from the fruits of such socialised planned production on the basis of equal rights. Here, production and distribution of goods are aimed at maximising the welfare of the community as a whole.

Important Characteristics of Socialistic Economic System

1. Collective Ownership – In a socialist economy, the institutions of private property and inheritance are abolished. There is collective ownership of all means of production except small farms, workshops and trading firms which may remain in private hands. The resources here are used to achieve certain socio-economic objectives.
2. Centrally Planned Economy – A socialist economy is not guided by free working of a market mechanism. There is a central authority to set and accomplish socio-economic goals; that is why it is called a centrally planned economy. Major economic decisions, such as what to produce, when and how much to produce, etc., are taken by the central authority.
3. Absence of Consumer Choice – The right to work is guaranteed but the choice of occupation gets restricted because these are determined by some authority on the basis of certain socio-economic goals before the nation.
4. Equality of Income – A relative equality of income is an important feature. Educational and other facilities are enjoyed more or less equally; thus the basic causes of inequalities are removed.
5. Secondary Role of Price Mechanism – Price mechanism exists in a socialist economy, but it has only a secondary role, e.g., to secure disposal of accumulated stocks. In the absence of the profit motive, price mechanism loses its predominant role in economic decisions.
6. Absence of Competition – Since the state is the sole entrepreneur, there is absence of competition under socialism.

The erstwhile U.S.S.R. was an example of socialist economy from 1917 to 1990.

In today’s world there is no country which is purely socialist.

Other examples include Vietnam, China and Cuba.

North Korea, the world’s most Totalitarian State, is another example of a socialist economy.

Concept of socialist economy was propounded by Karl Marx and Frederic Engels in their work “the Communist Manifesto” published in 1848.

A mixed economy tries to:

• Avoid the ill-effects of both capitalism and socialism
• Secure the benefits of both.

A mixed economic system has been defined as a system in which the public sector and the private sector are allotted their respective roles simultaneously in promoting the economic welfare of the community.

Features of a mixed economy:

(1) Co-existence of Public & Private Sector – The first important feature of a mixed economy is the co-existence of both private and public enterprise. In fact, in a mixed economy, there are three sectors of industries:

(a) Private sector

(b) Public sector

(c) Combined sector/joint sectors:

(2) Planned Economy – A mixed economy is a planned economy, i.e. an economy in which the government has a clear and definite economic plan.

(3) Balanced Regional Development

(4) Dual System of Pricing: For example, in India, the prices of essential commodities like diesel, LPG, are fixed by government. Overall planning is done by the State Authority called Planning Commission in countries like India who have adopted mixed economy.

Merits of Mixed Economy:

• Mixed economy secures the merits of both capitalism and socialism while avoiding the evils of both.
• Mixed economy protects individual freedom. Under the system, individuals have the freedom of consumption, choice of occupation, freedom of enterprise and freedom of expression.
• Price mechanism is allowed to operate under mixed economy.
• Reducing the inequalities of wealth and class struggle is one of the aims of mixed economy.
• Economic fluctuations can be avoided due to centrally planned economy.
• Mixed economy helps under-developed countries to have rapid and balanced economic development.
• In mixed economy cost benefit analysis is used to answer the fundamental questions of economy.

Demerits of Mixed Economy:

• Mixed economy is difficult to operate. Balancing and adjusting the public and private sector is often difficult.
• Excessive controls and heavy taxes are likely to prevail under mixed economy. These will discourage production in the private sector.
• Mixed economy is described by Schumpeter as “Capitalism in the oxygen tent”. According to him it is only a trick of the capitalists to cheat the working class by offering them some temporary advantage like social security, uplift of the depressed classes, etc.

Meaning of Demand – Term “demand” refers to:

• Quantity of a good or service that buyers are willing and
•  Able to purchase at various prices during a given period of time.

It is to be noted that demand, in economics, is something more than desire to purchase, though desire is one element of it.

Effective Demand – Effective demand for a thing depends on:

(i) Desire

(ii) Means to purchase

(iii) Willingness to use those means for that purchase.

Unless desire is backed by purchasing power or ability to pay and willingness to pay, it does not constitute demand.

Law of Demand – Other things being equal (ceteris paribus), when price of a good rises, quantity demanded will fall.

Thus, there is an inverse relationship between price and quantity demanded.

The “other things” which are assumed to be equal or constant are the prices of related commodities, income of consumers, tastes and preferences of consumers, and all factors other than price which influence demand.