Unit – 1
Nature and scope of Economics
The study of Economics is divided into two parts viz Micro Economics and Macro Economics. The terms Micro Economics and Macro Economics were first coined and used by Ragnar Frisch of Oslo University in 1933 and since then they have been adopted by the economist all over the world.
The term Micro Economics is derived from the Greek word ‘mikros’ which means a small- a millionth part. Thus in Micro Economics we analyse the economic behaviour of small individual economic units such as individual consumer, individual producers etc.
The term Macro Economics is derived from the Greek word ‘makros’ which means large. Thus in Macro Economics we analyse the behaviour of the economy as a whole and we study the large aggregates of the economy, such as total national income, total national output, total consumption, aggregate investment etc. In other words, Micro Economic analysis is individualistic where as Macro Economic analysis is aggregative.
Knowledge of both the approaches is essential for complete understanding of the working of the economic system. But in the beginning, it is necessary to know the precise meaning, scope & subject matter of these two branches.
Prof. Alfred Marshall’s Welfare- Oriented Definition of Economics:
Neo-classical economist Prof. Alfred Marshall has given the welfare-oriented definition of Economics” which was published in 1890. His definition staes: “Economics is a study of mankind in the ordinary business of life. It examines that part of individual and social action, which is closely connected with the attainment and use of material requisites of well-being”.
Key-points of Marshall’s definition:
Study of an ordinary man.
Economics is a behavioral science.
Study of material waste
Economics is not simply a study of wealth.
Lionel Robbins’ Scarcity-Oriented Definition of Economics:
This is the most popular definition of Economics. Robbins, in his book entitled, “An Essay on the Nature and Significance of Economic Science” published in 1932 mentions about the scarcity- oriented definition of Economics.
“Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.”
Key- Points of Robbin’s definition:
Wants(ends) are unlimited.
Means are comparatively limited.
Wants are gradable on the basis of priority.
Means have alternative uses.
Positive and Normative economics
- Positive economics is the study of what and why an economy is the study of what and why an economic operates as it does. It is also known as Descriptive economics and is based on facts which can be subjected to scientific analysis in order for them to be accepted.
- It is based on factual information and uses statistical data, and scientific formula in determining how an economy should be. It deals with the relationship between cause and effect and can be tested.
- Positive economic statements are always based on what is actually going on in the economy and they can either be accepted or rejected depending on the facts presented.
- .Positive economic deals with what is while normative economic deals with what should be.
- . Positive economic deals with facts while normative economic deals with opinions on what a desirable economy should be.
- . Positive economics is also called descriptive economics while normative economics is called policy economics.
- . Positive economic statements can be tested using scientific methods while normative economics cannot be tested.
- Normative economics is the study of how the economy where in normative statements like opinions and judgements are used. It determines the ideal economy by discussion of ideas and judgements.
- In normative economics, people state their opinions and judgements without considering the facts. They make distinctions between good and bad policies and the right and wrong courses of action by using their judgements.
- Normative economic statements cannot be tested and proved right or wrong through direct experience or observation because they are based on an individual opinion.
Economics is the scientific study of the ownership, use, and exchange of scarce resources - often shortened to the science of scarcity. Economics is regarded as a social science because it uses scientific methods to build theories that can help explain the behaviour of individuals, groups and organizations. Economics attempts to explain economic behaviour, which arises when scarce resources are exchanged.
In terms of methodology, economists, like other social scientists, are not able to undertake controlled experiments in the way that chemists and biologists are. Hence, economists have to employ different methods, based primarily on observation and dedication and the construction of abstract models.
As the social sciences have evolved over the last 100 years, they have become increasingly specialized. This is true for economics, as witnessed by the development of many different strands of investigation including micro and macro economics, pure and applied economics, and industrial and financial economics. What links them all is the attempt to understand how and why exchange takes place, and how exchange creates benefits and costs for the participants.
Micro means small part. Micro economics is concerned with the behaviour of the individual economic unit, such as an individual consumer or producer or the price of particular commodity etc.
Adam Smith is considered as ‘THE FATHER OF ECONOMICS’ and the Founder of the Micro economics. In his book “ Wealth of Nations” published in 1776.
Definition: According to Maurice Dobb, “Micro economics is in fact a microscopic study of the economy.” Thus, it is a microscopic study of the various individual agents of economics i.e. individual commodity, firm, industry, household , consumer, etc.
According to K.E Boulding, “The micro economics is a study of a particular firm, particular household, individual prices, wages, incomes, individual industries and particular commodities.”
Features of Micro Economics:
Unit of study: According to K.E. Boulding micro economics is the study of individual unit. It focuses attention on the study of the behavior of Micro variable. Thus, it studies only part of the economy and not the whole.
Method: Micro economics is not concerned with the aggregate. What it really does is to slice (divide) the whole economy into smaller individual unit. So, economists point out that micro economics uses the Slicing method.
Price theory: Micro economics analysis how the price of individual commodities and services are determined. Micro economics tells us how the price of individual commodity is decided, how the equilibrium of an individual firm reached etc. This is known as Price theory.
Area of Study: The main area of its study is the theory of product and factor pricing and their reaction to changes in demand and supply condition.Micro economics analyses the markets for the factors of production, that is, labour, capital, land and entrepreneur.) Vision: Micro economics studies a small part of the economics through partial equilibrium. It studies in detail about behaviour of individual economics unit. Micro economics studies how efficiently the various resources are allocated to individual consumers and producers within the economy. i.e. it examines the tree not the forest.
Analysis allocation of resources: Micro economics analyses how resources are allocated to production of particular goods and services in the economy. Allocation of resources involves what to. Produce, how to produce and how much to produce. It also studies how efficiently the various resources are allocated to individual consumers and produces.
Undertakes general equilibrium analysis: It is generally understood that micro economics does not concern itself with the economy as whole. But this is not correct. Micro economics examines the economy as a whole, but microscopically.
Analysis of market structures: Micro Economics analyses different market structures i.e. perfect competition, monopoly, Oligopoly, monopolistic competition etc. and describes how prices and quantities are determined different markets.
Limited scope: Micro Economics studies individual economic units & not the whole economy. It does not deal with the nation-wide problems like unemployment, inflation, deflation, poverty, balance of payment situation, economic growth etc. So its scope is limited.
Macro Economics
The terms Macro is derived from the Greek terms ‘Makros’ meaning large. Macro economics studies the behaviour of the economy as whole. Thus macro economics study of aggregates covering the whole economy such as national income, employment, aggregates Demand and Supply, Total investment & General Price level.
Definition:-
According to Boulding, “Marco economics deals not with individual quantities but with aggregate if these quantities not with individual incomes bit with national income not with individual prices but with price levels, not with individual outputs but with the national output.”
Gardener Ackley, “It looks at the total size and shape and functioning of the elephant if economic experiences, rather the working or articulation or dimensions if the individual parts. It studies the character of the forest, independent of the trees which compose it”.
According Prof. Marshall, “Macro economics views the forest as a whole independent of the individual trees composing it.
Features of Macro economics:-
Study of aggregates: Macro economics is a study of the aggregates. It is also known as aggregates economics. It studies the economics system as a whole covering all condition of the economy such as total production, total consumption, total saving and total investment. In the words of Prof. Mc connel, “Macro economics examines the forest, not the tree.”
Lumping method: Macro economics deals with macro quantities and macro variable. Unlike macro economics, it does not split up the economy into small slice but studies in big lumps. Therefore it is called the method of lumping.
General Equilibrium: Macroeconomic is based on general equilibrium. Whole economy is called general equilibrium. The technique of general equilibrium is applied to study the determination of the general price level, total employment and output.
Vision: It gives the overall view of the whole economy i.e. it give a bird’s eye view of the whole economy.
Interdependence: Macro analysis stresses interrelationship between the different Market and sectors in the economy. According to general equilibrium analysis, a change in any one market or sector will have its impact on the other markets or sectors of the economy.
Income theory: Macro economics is known as income theory. It studies the factors determining national income and employment and the causes of fluctuations in income and employment. According to Edward Shapiro, the major task of macro economics is the explanation of what determines the economy’s income.
Policy-oriented: Macro economics, according to Keynes’ is a policy-oriented science. Macro-economic analysis helps in formulating suitable economic policies to promote economic growth, to generate employment, to control inflation, to pull the economy out of depression etc.
Books Recommended :
1. Dewett K. K.—Adhunik Arth Shastra Ke Sidhant (Modarn Econoinic Theory).
2. Marshall—Principles of Economics.
3.Roy, L. M.—Arthshastra.
4. Sundharam K. P. M. And Vaish M. C.—Principles of Economics.
5. Stonier and Hague -A Text Book of Economic Theory.
6. Jain K. P.—Arthshastra Ke Sidhanta.
7. Ahuja, H. L.—Advanced Economic Theory,
8. Ahuja, H. L.—Uchatar Arthic Sidhanta.
