Sunday, July 20, 2008

Definition,Nature and Scope of Economics

(Question taken from ISC Economics published by Frank Bros for class XI.Suitable for students of ISC Schools.Chapter I,Definition,Nature and Scope of Economics )

1.Explain the nature and scope of Economics.

Introduction
Economics is a social science concerned with answering economic questions. It seeks to explain, systematically, a large variety of questions pertaining to the economic behavior of individuals and groups.

Each leading economists has defined economics a little differently.

Adam Smith : His definition of economics is wealth oriented. His concept of Economic Man said that man tries to increase his economic gain for this self interest.

Alfred Marshall : His definition of economics not only included wealth but also the ordinary business of life. That is he said economics is not only about earning wealth but also about spending money.

Lionel Robbins : His definition of economics says that human want are unlimited but resources to satisfy those want are limited. So, Robbins’s definition says economics studies the relationship between ends and scarce means.

Paul Samuelson : Samuelson’s definition of economic is somewhat similar to that of Robbins. While Robbins was concerned with the relationship between want and means for the short term, Samuelson was concerned with this relationship in the long run.

Nature and Scope of Economics

Nature of Economics :

Is the nature of economics like an art or a science?

Economics as a science: Economics is considered to be as social science. A social science is a science which studies human activities. A subject is called a science if:
a)There is a systematic body of knowledge which traces the relationship between cause and effect.
b)There is observation of facts, systematic collection, classification and analysis of facts.
c)There is a making of generalization on the basis of relevant facts and formulating laws and theories.
d)These theories are subjected to real world observations.

Subjects like Chemistry and Physics are called science because it meets all the above characteristics. Economics can also be called a science since it meets these features of a science. Like in other sciences, economic theories are deduced by logical reasoning. For example, like in Newton’s Law of Gravitation in Physics, in economics, the Law of Demand states that, other things remaining the same, there will be an increase in demand if there is a reduction in the price.

Like in other sciences, in economics too there is observation of facts and an analysis of the same. Like other sciences in economics too theories are subjected to real world observations. The truth of economic theories can be challenged when these are subjected to real world observations. Since the methods of economics are scientific it is called a science. Economics is a Positive Science and a Normative Science. This is because it is concerned not only with the cause and effect relationship but also with the cause and desired effect relationship.

However, like in other sciences, laboratory experiments are not possible. Also the laws of economics are not universally applicable like other sciences. Therefore while economics is a science, it is not an exact science.

Economic as an Art : Economics is also an art. It is an art. It is an art because it is not only theoretical but also practical. Science is about knowledge. Art is the application of knowledge.
Applying this definition of art we can say economics is an art because the various branches of economics like consumption, distribution, money banking provide us with rules which can be used to solve the economic problems of society. Economics is an art because it uses the laws of economics (science) to solve everyday economic problems.

Thus, economics is both a science and an art.

Scope of Economics :

Economics has two major branches. These are Micro Economic and Marco Economics.

Micro Economics : Micro economics is the study of the study of the economic activity of the individual, households firms and industries. Micro economics examines how the individual, household , firm or industry earn and spend their income.

Macro Economics : Macro economics is the study of the economy as a whole. It seeks to explain the economic functioning of a state, country or the world. It addresses questions pertaining to employment and economic output of the country.

Thus the scope of economics covers the entire gamut of activities in the world.

Long Answers

3.Critically examine the ‘scarcity’ definition of economics.
Lionel Robbins is credited with the ‘scarcity’ definition of economics. Robbin’s definition is called the scarcity definition of economics because he said economics studies human behaviour as a relationship between ends (requirements of humans) and scarce means (resources) which have alternate uses.
The key point of this definition are :
a)Human wants are unlimited. Not only are the wants unlimited but they keep increasing over time. If one want is satisfied another want comes up. Because of this multiplicity of wants it is not possible to satisfy all wants. But since some needs are more intense than other, humans can satisfy the more intense wants first.
b)Scarce Means : The means which are needed to satisfy wants are limited. There is limited supply of money, land and labour which are required to satisfy wants. Since means are limited, these limited means can only satisfy some some wants leaving other less important wants unsatisfied.
c)Alternate uses of means: Not only are the means (resources) scarce but they can be put to alternate uses. For example land can be used to grow vegetables or wheat. Since means are scarce, they can be used to satisfy only some wants and not others.
d)Choice : Since wants are unlimited and means are limited human beings have to make a choice between which need to satisfy and which to leave unfulfilled.
e)Economics as a science : Robbins called economics as a science. That is it contains systematic knowledge which can solve the economic problems arising out of unlimited wants and scarce means.

Merits of the scarcity definition of Economics:

a)Logical:It is logical that wants are unlimited and resources needed to
satisfy these are limited. Robbins said that economic problems arise due to the imbalance between wants and resources.
b)Universal : The scarcity definition is economics is universal and
applies to the rich and poor and is applicable everywhere.
c)Human Science: The scarcity definition makes economics a human
science and not just a social science ( social science applies to a group of people living in a community). The scarcity definition applies to all individuals whether living together or in isolation.
d)Wider view of economic activity : The scarcity definition describes
economics as a wider activity involving both goods (products) and services ( like banking).
e)Positive Science : The scarcity definition of economics make it
positive science since it does not decide tell the individual on what
action to be taken but leaves decision making to them.

Criticism of scarcity definition Economics:

a)Narrow view of economics: The scarcity definition of economics has been criticized because it does not tell the individual on what choice the individual must make. It leaves decision making to the individual (positive science). Some economists feel that economics must be a normative science and it must tell individuals on the best course of action.
b)Restricted scope : An objection against the scarcity definition of economics is that it is restricted to studying the theory of resource allocation ( applying scarce resources to meet unlimited wants). It does not take into account other important economic problems like unemployment, economic growth and development.
c)Static definition : According to critics, Robbins definition of economics makes it static. That is, it considers only the currently available resources and their efficiency. In the real world, however, the availability of resources and their efficiency increases leading to greater availability of means.
d)Economics as only a science: This definition treats economics only as a science. The science of using available resources to satisfy want. However, economics is not only a since but also an art of solving economic problems.
e)Scarcity not the only economic issue : Economists point out that economic issues arise not only from scarcity (as assumed by the scarcity theory) but also from abundance. The scarcity definition does not address this.

4. What is the growth oriented definition of economics? Explain the main virtues of this definition?

Prof. Paul Samuelson gave a “growth oriented” definition of economics. This definition was required in order to overcome the shortcomings of the “scarcity definition” of economics. The scarcity definition of economics does not address issues like economic growth.
The ‘growth oriented definition of economics is : “ Economics is the study of how people and society chose, with or without the use of money, to employ scarce productive resources, which have alternative uses, to produce various commodities over time and distribute them for consumption now or in the future among various people or groups in society.

The main virtues (positive factors) of this definition are :

a)Emphasis on economic problems : Like the scarcity definition, this definition of economics too emphasizes economic problems which arise due to scarce resources and unlimited wants.
b)Long term perspective : The scarcity definition takes into account only current wants and current resources. However, the growth definition take a long term view of economics since wants expand over time and the amount of resources available also changes over a period of time. A long term perspective of this definition is the main difference between this definition and the scarcity definition.
c) Dynamic Approach : By taking growth as an integral part of economics, this definition has made economics a dynamic and ever changing subject.
d)Universal : The growth definition of economics emphasizes economic problems as a universal problem and applies to barter transactions and transactions using money.
e)Comprehensive : The growth definition of economics makes it comprehensive as it address more issues than the scarcity definition. It also future oriented as it recognizes that wants and means changes over a period of time.
f)Broader Perspective : The growth definition of has broadened the subject matter of economics by including consumption, production, exchange, distribution and economic growth.

5.Which definition of economics is the best? Give reason in support of
your answer.
The “Growth Oriented” definition of economics is the best. This is the best because of the following reasons:
a)It encompasses the wealth definition of Adam Smith while at the same time it does not emphasize on materialism or take a narrow view of wealth.
b)It covers the welfare definition of Alfred Marshall but at same time does not regard economics as a social science. It is not restricted like the welfare definition of economic which treats economics as a subject only as social welfare. The growth oriented definition of economics covers all economic subjects whether they are concerned with the welfare of the people or not.
c)The “growth oriented” definition of economics covers all aspects of the “scarcity definition” of economics yet at the same time improves it by saying that that wants increase over a period of time and resources and their efficiency also changes over a period of time.

Thus, the “growth oriented” definition of economics is the best at it not only addresses the weaknesses of the other definition of economics but also recognizes that economics is a broader subject which includes consumption, production exchange , distribution and economic growth.

6.Differentiate between micro economics and macro-economics.

Micro Economics : Micro economics is the study of the study of the economic activity of the individual, households firms and industries. Micro economics examines how the individual, household , firm or industry earn and spend their income. Micro economic is concerned with how the pricing for products is fixed and how the output is shared between those who cooperate to produce the output.

Macro Economics : Macro economics is the study of the economy as a whole. It seeks to explain the economic functioning of a state, country or the world. It addresses questions pertaining to employment and economic output of the country. Macro economics is concerned with the explanation for the total output of goods in the country, employment of resources for the production of goods. It also deals with the fluctuation of output and employment levels in the country. It seeks to explain why the economy grows fast at time and slower at other times. Macro economics is the theory of national income, employment, total consumptions,savings, investment, general price level and economic growth.

7.Economics is both a science and an art. Discuss.

Economics as a science: Economics is considered to be as social science. A social science is a science which studies human activities. A subject is called a science if:
a)There is a systematic body of knowledge which traces the relationship between cause and effect.
b)There is observation of facts, systematic collection, classification and analysis of facts.
c)There is a making of generalization on the basis of relevant facts and formulating laws and theories.
d)These theories are subjected to real world observations.

Subjects like Chemistry and Physics are called science because it meets all the above characteristics. Economics can also be called a science since it meets these features of a science. Like in other sciences, economic theories are deduced by logical reasoning. For example, like in Newton’s Law of Gravitation in Physics, in economics, the Law of Demand states that, other things remaining the same, there will be an increase in demand if there is a reduction in the price.

Like in other sciences, in economics too there is observation of facts and an analysis of the same. Like other sciences in economics too theories are subjected to real world observations. The truth of economic theories can be challenged when these are subjected to real world observations. Since the methods of economics are scientific it is called a science. Economics is a Positive Science and a Normative Science. This is because it is concerned not only with the cause and effect relationship but also with the cause and desired effect relationship.

However, like in other sciences, laboratory experiments are not possible. Also the laws of economics are not universally applicable like other sciences. Therefore while economics is a science, it is not an exact science.

Economic as an Art : Economics is also an art. It is an art. It is an art because it is not only theoretical but also practical. Science is about knowledge. Art is the application of knowledge.
Applying this definition of art we can say economics is an art because the various branches of economics like consumption, distribution, money banking provide us with rules which can be used to solve the economic problems of society. Economics is an art because it uses the laws of economics (science) to solve everyday economic problems.

Thus, economics is both a science and an art.

8.Economics is both a positive and a normative science. Discuss.
A Positive Science is a science which is concerned with “what is” and not “what ought to be”. One school of thought is that economics is a science which is concerned with only the cause and effect relationship. That is economics must only be concerned with facts about the economy. This school of thought says that economics must frame theories to make predictions about the future course of economic events. It must answer questions like the causes of unemployment, reasons for inflation etc.

The other school of thought says that not only must economics answer questions of what is but also the question of “what ought to be”. A normative science answers the “what ought to be” questions. According to this school of thought, economics must prescribe a course of action to achieve certain goals. It says that economics must prescribe methods to correct undesirable economic happenings.

Now there is consensus that economics is not only a positive science but also a normative science. It uses theory to predict what will happen and then suggests action to get the desired outcome.

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