AN INTRODUCTION

TO
ECONOMICS

Kulsoom Raza
Visiting Faculty
Faculty of Law
University of Lucknow
Lucknow

Disclaimer: The e-content is exclusively meant for academic purposes and for enhancing
teaching and learning. Any other use for economic/commercial purpose is strictly prohibited.
The users of the content shall not distribute, disseminate or share it with anyone else and its
use is restricted to advancement of individual knowledge. The information provided in this e-
content is authentic and best as per my knowledge

1
 I. Meaning:

Economics is popularly known as the “Queen of Social Sciences”. It studies economic

activities of a man living in a society. Economic activities are those activities, which are
concerned with the efficient use of scarce means that can satisfy the wants of man. After the
basic needs viz., food, shelter and clothing have been satisfied, the priorities shift towards
other wants. Human wants are unlimited, in the sense, that as soon as one want is satisfied
another crops up. Most of the means of satisfying these wants are limited, because their
supply is less than demand. These means have alternative uses; there emerge a problem of
choice. Resources being scarce in nature ought to be utilized productively within the
available means to derive maximum satisfaction. The knowledge of economics guides us in
making effective decisions. Economics is a social science that examines how people choose
among the alternatives available to them. It is social because it involves people and their
behaviour. It is a science because it uses, as much as possible, a scientific approach in its
investigation of choices.

BOX-1 Economic Resources

Economic resources are the inputs, the factors, or the means of producing the goods and
services we want. They can be classified broadly into land (or natural resources), labor (or
human resources), and capital. These are the resources that firms must pay to hire. Land
refers to the fertility of the soil, the climate, the forests, and the mineral deposits present in
the soil. Labor refers to all human effort, both physical and mental, that can be directed
toward producing desired goods and services. It includes entrepreneurial talent that combines
other labor, capital, and natural resources to produce new, better, or cheaper products.
Finally, capital refers to the machinery, factories, equipment, tools, inventories, irrigation,
and transportation and communications networks. All of these “produced” resources facilitate
the production of other goods and services. In the economist’s sense, money is not capital
because it does not produce anything. Money simply facilitates the exchange of goods and
services.

2
 II. DEFINITIONS OF ECONOMICS

The word economics has been derived from the Greek Word “OIKONOMICAS” with
“OIKOS” meaning a household and “ NOMOS” meaning management.

A. Smith’s Wealth Definition:

The formal definition of economics can be traced back to the days of Adam Smith (1723-90)
— the great Scottish economist. Following the mercantilist tradition, Adam Smith and his
followers regarded economics as a science of wealth which studies the process of production,
consumption and accumulation of wealth. His emphasis on wealth as a subject-matter of
economics is implicit in his great book— ‘An Inquiry into the Nature and Causes of the
Wealth of Nations or, more popularly known as ‘Wealth of Nations’—published in 1776.

According to Smith:

“The great object of the Political Economy of every country is to increase the riches and
power of that country.” Like the mercantilists, he did not believe that the wealth of a nation
lies in the accumulation of precious metals like gold and silver.

To him, wealth may be defined as those goods which command value-in- exchange.
Economics is concerned with the generation of the wealth of nations. Economics is not to be
concerned only with the production of wealth but also the distribution of wealth.

Other contemporary writers also define economics as that part of knowledge which relates to
wealth. John Stuart Mill (1806-73) argued that economics is a science of production and
distribution of wealth. Another classical economist Nassau William Senior (1790-1864)
argued “The subject-matter of the Political Economics is not Happiness but Wealth.” Thus,
economics is the science of wealth. However, the last decade of the nineteenth century saw a
scathing attack on the Smithian definition and in its place another school of thought emerged
under the leadership of an English economist, Alfred Marshall (1842-1924).

3
Criticisms:

• This definition is too narrow as it does not consider the major problems faced by a
society or an individual. Smith’s definition is based primarily on the assumption of an
‘economic man’ who is concerned with wealth-hunting. That is why critics
condemned economics as ‘the bread-and-butter science’.
• They also alleged that classical economists have ignored the higher values of life
such as happiness, love and affection.
• Literary figures and social reformers branded economics as a ‘dismal science’, ‘the
Gospel of Mammon’ since Smithian definition led us to emphasise on the material
aspect of human life, i.e., generation of wealth. On the other hand, it ignored the
non-material aspect of human life. Above all, as a science of wealth, it taught
selfishness and love for money. Smithian definition is bereft of changing reality.
• The central focus of economics should be on scarcity and choice. Since scarcity is the
fundamental economic problem of any society, choice is unavoidable. Adam Smith
ignored this simple but essential aspect of any economic system.
B. Marshall’s Welfare Definition:

Alfred Marshall in his book ‘Principles of Economics’ published in 1890 laid emphasis on
human activities or human welfare rather than on wealth. Marshall defines economics as “a
study of men as they live and move and think in the ordinary business of life.” He argued that
economics, on one side, is a study of wealth and, on the other, is a study of man.

Emphasis on human welfare is evident in Marshall’s own words: “Political Economy or

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, “Economics is on the one side a study of wealth; and on the other and more important
side, a part of the study of man.” According to Marshall, wealth is not an end in itself as
was thought by classical authors; it is a means to an end—the end of human welfare.

4
Feautures:

• Economics is a social science since it studies the actions of human beings.

• Economics studies the ‘ordinary business of life’ since it takes into account the
money-earning and money-spending activities of man.
• Economics studies only the ‘material’ part of human welfare which is measurable in
terms of the measuring rod of money. It neglects other activities of human welfare not
quantifiable in terms of money. In this connection A. C. Pigou’s (1877- 1959)—
another great neo-classical economist—definition is worth remembering. Economics
is “that part of social welfare that can be brought directly or indirectly into relation
with the measuring rod of money.”
• Economics is not concerned with “the nature and causes of the Wealth of Nations.”
Welfare of mankind, rather than the acquisition of wealth, is the object of primary
importance.

Criticisms:

Though Marshall’s definition of economics was hailed as a revolutionary one, it was

criticised on several grounds.

They are:

• Marshall’s notion of ‘material welfare’ came in for sharp criticism at the hands of
Lionel Robbins (later Lord) (1898- 1984) in 1932. Robbins argued that economics
should encompass ‘non- material welfare’ also. In real life, it is difficult to segregate
material welfare from non-material welfare. If only the ‘materialist’ definition is
accepted, the scope and subject-matter of economics would be narrower, or a great
part of economic life of man would remain outside the domain of economics.
• Robbins argued that Marshall could not establish a link between economic activities of
human beings and human welfare. There are various economic activities that are
detrimental to human welfare. The production of war materials, wine, etc., is
economic activities but do not promote welfare of any society. These economic
activities are included in the subject-matter of economics.

5
 • Marshall’s definition aimed at measuring human welfare in terms of money. But
‘welfare’ is not amenable to measurement, since ‘welfare’ is an abstract, subjective
concept. Truly speaking, money can never be a measure of welfare.
• Marshall’s ‘welfare definition’ gives economics a normative character. A normative
science must pass on value judgments. It must pronounce whether a particular
economic activity is good or bad. But economics, according to Robbins, must be free
from making value judgment. Ethics should make value judgments. Economics is a
positive science and not a normative science.
• Finally, Marshall’s definition ignores the fundamental problem of scarcity of any
economy. It was Robbins who gave a scarcity definition of economics. Robbins
defined economics in terms of allocation of scarce resources to satisfy unlimited
human wants.

C. Robbins’ Scarcity Definition:

Lionel Robbins in 1932 in his book ‘An Essay on the Nature and Significance of Economic
Science’ gave the scarcity definition. According to Robbins, neither wealth nor human
welfare should be considered as the subject-matter of economics. The welfare conception of
Economics lacked universality and scientific precision. Robbins defined Economics thus:
“Economics is the science which studies human behavior as a relationship between ends and
scarce means which have alternative uses.”

Robbins claimed that his definition did not suffer from any of these defects. His definition
was analytical rather than classificatory. Instead of discussing a certain type of human
behavior, it focused its attention on a particular aspect of human behaviors; i.e., behavior
concerned with the utilization of scarce resources to achieve unlimited ends.

Features:

Human wants are unlimited; wants multiply—luxuries become necessities. There is no end
of wants. If food were plentiful, if there were enough capital in business, if there were
abundant money and time—there would not have been any scope for studying economics.
Had there been no wants there would not have been any human activity. Prehistoric people
had wants. Modern people also have wants. Only wants change—and they are limitless.

6
 • The means or the resources to satisfy wants are scarce in relation to their demands.
Had resources been plentiful, there would not have been any economic problems.
Thus, scarcity of resources is the fundamental economic problem to any society. Even
an affluent society experiences resource scarcity. Scarcity of resources gives rise to
many ‘choice’ problems.
• Since the prehistoric days one notices constant effort of satisfying human wants
through the scarcest resources which have alternative uses. Land is scarce in relation
to demand. However, this land may be put to different alternative uses.

A particular plot of land can be either used for jute cultivation or steel production. If it is used
for steel production, the country will have to sacrifice the production of jute. So, resources
are to be allocated in such a manner that the immediate wants are fulfilled. Thus, the problem
of scarcity of resources gives rise to the problem of choice.

Society will have to decide which wants are to be satisfied immediately and which wants are
to be postponed for the time being. This is the choice problem of an economy. Scarcity and
choice go hand in hand in each and every economy:

In view of this, it is said that economics is fundamentally a study of scarcity and of the
problems to which scarcity gives rise. Thus, the central focus of economics is on opportunity
cost and optimisation. This scarcity definition of economics has widened the scope of the
subject. Putting aside the question of value judgement, Robbins made economics a positive
science. By locating the basic problems of economics — the problems of scarcity and choice
— Robbins brought economics nearer to science. No wonder, this definition has attracted a
large number of people into Robbins’ camp.

Criticisms:

• In his bid to raise economics to the status of a positive science, Robbins deliberately
downplayed the importance of economics as a social science. Being a social science,
economics must study social relations. His definition places too much emphasis on
‘individual’ choice. Scarcity problem, in the ultimate analysis, is the social problem—
rather an individual problem. Social problems give rise to social choice. Robbins
could not explain social problems as well as social choice.

7
 • According to Robbins, the root of all economic problems is the scarcity of resources,
without having any human touch. Setting aside the question of human welfare,
Robbins committed a grave error.
• Robbins made economics neutral between ends. But economists cannot remain
neutral between ends. They must prescribe policies and make value judgments as to
what is good for the society and what is bad. So, economics should pronounce both
positive and normative statements.
• Economics, at the hands of Robbins, turned to be a mere price theory or
microeconomic theory. But other important aspects of economics like national income
and employment, banking system, taxation system, etc., had been ignored by Robbins.

BOX-2 Scarcity: The Pervasive Economic Problem

Resources have alternative uses. For example, a particular piece of land could be used for a
factory, housing, roads, or a park. A laborer could provide cleaning services, be a porter,
construct bridges, or provide other manual services. A student could be trained to become an
accountant, a lawyer, or an economist. A tractor could be used to construct a road or a dam.
Steel could be used to build a car or a bridge. Because economic resources are limited, they
command a price. While air may be unlimited and free for the purpose of operating an
internal-combustion engine, clean air to breathe is not free if it requires the installation and
operation of antipollution equipment.

Because resources are generally limited, the amount of goods and services that any society
can produce is also limited. Thus, the society must choose which commodities to produce and
which to sacrifice. In short, society can only satisfy some of its wants. If human wants were
limited or resources unlimited, there would be no scarcity and there would be no need to
study economics.

Over time, the size and skills of the labor force rise, new resources are discovered and new
uses are found for available land and natural resources, the nation’s stock of cap-ital is
increased, and technology improves. Through these advances, the nation’s ability to produce
goods and services increase. But human wants always seem to move well ahead of society’s
ability to satisfy them. Thus, scarcity remains. Scarcity is the fundamental economic fact of
every society.

8
 D. Growth Definition

Paul A Samuelson in his book, ‘Economics: An Introductory Analysis’ (1948) defined

economics as “the study of how men and society choose with or without the use of money, to
employ the scarce productive resources which have alternative uses, to produce various
commodities over time and distribute them for consumption now and in future among various
people and groups of society. It analyses the costs and benefits of improving pattern of
resource allocation”. This definition introduced the dimension of growth under scarce
situation.

Features

• It is not merely concerned with the allocation of resources but also with the expansion
of resources.
• It analysed how the expansion and growth of resources to be used to cope with
increasing human wants.
• It is a more dynamic approach.
• It considers the problem of resource allocation as a universal problem. It focused on
both production and consumption activities.
• It is comprehensive in nature as it is both growth-oriented as well as future-oriented.
• It incorporated the features of all the earlier definitions

III. MAJOR ECONOMIC PROBLEMS

Faced with the pervasiveness of scarcity, all societies, from the most primitive to the most
advanced, must somehow determine

(1) What to produce,

(2) How to produce,

(3) For whom to produce,

(4) How to provide for the growth of the system, and

(5) How to ration a given quantity of a commodity over time.

9
BOX- 3. Some of the renowned Indian Economists are:

1) Chanakya (Kautilya): He was an Indian teacher, philosopher, and royal advisor.

Originally, he was a professor of Economics and Political science at the ancient
Takshashila University. Chanakya is traditionally identified as “Kautilya” or “Vishnu
Gupta”, who authored the ancient political treatise called Arthashastra (Economics).
2) Mahavira: Economics in Jainism is influenced by the Mahavira and his principles
and philosophies. His philosophies have been used to explain the economics behind it.
He was the last of the 24 Tirthankars, who spread Jainism.
3) Shri DadaBhai Naroji: He is fondly called the Grand Old Man of India. He was a
pioneer in the field of Economics. He prepared the first estimates of National Income
in 1876.
4) Prof. V.K.R.V. Rao: He was a prominent Indian Economist, Politician, Professor &
Educator. He was the first person to adopt scientific procedure in estimating National
Income in 1931.
5) Prasant Chandra Mahalanobis: He was a renowned Indian Statistician and was
instrumental in formulating India’s strategy for Industrialization in Second Five Year
Plan (1956-61).
6) Jagdish Natwarlal Bhagwati: He is an India-born, naturalized American, economist.
He is a professor of Economics and Law at Columbia University. Bhagwati is notable
for his researches in International Trade and advocacy of Free Trade
7) Prof. Amartya Sen: He is a renowned Economist and social worker. He was awarded
Nobel Prize for the welfare Economics in Market oriented Economics in 1998.

What to produce refers to which goods and services a society chooses to produce and in
what quantities to produce them. No society can produce all the goods and services it wants,
so it must choose which to produce and which to forgo. Over time, only those goods and
services for which consumers are willing and able to pay a price sufficiently high to cover at
least the costs of production will generally be produced. Automobile manufacturers will not
produce cars costing $1 million if no one is there to purchase them. Consumers can generally
induce firms to produce more of a commodity by paying a higher price for it. On the other
hand, a reduction in the price that consumer is willing to pay for a commodity will usually
result in a decline in the output of the commodity. For example, an increase in the price of

10
milk and a reduction in the price of eggs are signals to farmers to raise more cows and fewer
chickens.

How to produce refers to the way in which resources or inputs are organized to produce the
goods and services that consumers want. Should textiles be produced with a great deal of
labor and little capital or with little labor and a great deal of capital? Since the prices of
resources reflect their relative scarcity, firms will combine them in such a way as to minimize
costs of production. By doing so, they will use resources in the most efficient and productive
way to produce those commodities that society wants and values the most. When the price of
a resource rises, firms will attempt to economize on the use of that resource and substitute
cheaper resources so as to minimize their production costs. For example, a rise in the
minimum wage leads firms to substitute machinery for some unskilled labor.

For whom to produce deals with the way that the output is distributed among the members
of society. Those individuals who possess the most valued skills or own a greater amount of
other resources will receive higher incomes and will be able to pay and coax firms to produce
more of the commodities they want. Their greater monetary “votes” enable them to satisfy
more of their wants. For example, society produces more goods and services for the average
physician than for the average clerk because the former has a much greater income than the
latter.

In all but the most primitive societies there is still another function that the economic system
must perform: It must provide for the growth of the nation. Although governments can
affect the rate of economic growth with tax incentives and with incentives for research,
education, and training, the price system is also important. For example, inter-est payments
provide the savers an incentive to postpone present consumption, thereby releasing resources
to increase society’s stock of capital goods. Capital accumulation and technological
improvements are stimulated by the expectations of profits. Similarly, the incentive of higher
wages (the price of labor services) induces people to acquire more training and education,
which increase their productivity. Through capital accumulation, technological

11
improvements, and increases in the quantity and quality (productivity) of labor, a nation
grows over time.

Finally, an economic system must allocate a given quantity of commodity overtime.

Rationing over time is also accomplished by the price system. For example, the price of
wheat is not so low immediately after harvest that all the wheat is consumed very quickly,
thus leaving no wheat for the rest of the year. Instead, some people (speculators) will buy
some wheat soon after harvest (when the price is low) and sell it later (before the next
harvest) when the price is higher; the available wheat is thus rationed throughout the year.

References:

Several resources have been referred to develop this content including:

Dewett, K.K. Modern Economic Theory

Pindyck, Robert S. & Rubinfeld Daniel L. Microeconomics

Salvatore, Domnick. Principles of Microeconomics

12