Nature and Scope of Economics
Dr. R.GAYATHRI
Assistant Professor , School of Management
SASTRA Deemed University, Thanjavur – 613 401
[email protected]
Learning outcome
• To understand the nature and scope of
economics
• To identify the divisions of Economics
• To comprehend the circular flow of economic
activity in an economy.
Subject matter / Scope of Economics
It deals with what we
study in economics
Wants-efforts –satisfaction
Paul Samuelson calls
economics as the queen of
social sciences
Is Economics Science or Arts?
Economics as a Science
Science is a systematic study of knowledge and
fact which develops the correlation-ship
between cause and effect.
Science is not only the collection of facts,
according to Prof. Poincare, in reality, all the
facts must be systematically collected,
classified and analyzed.
Characteristics of any science
subject
(i) It is based on systematic study of knowledge
or facts;
(ii) It develops correlation-ship between cause
and effect;
iii) All the laws are universally accepted
(iv) All the laws are tested and based on
experiments;
(v) It can make future predictions;
(vi) It has a scale of measurement.
Economics as a Science
On the basis of all these characteristics,
Prof. Robbins, Prof Jordon, Prof. Robertson
etc. claimed economics as one of the subject
of science like physics, chemistry etc.
According to all these economists, ‘economics’
has also several characteristics similar to other
science subjects.
(i) Economics is also a systematic study of
knowledge and facts. All the theories and facts
related with both micro and macro economics
are systematically collected, classified and
analyzed.
(ii) Economics deals with the correlation-ship
between cause and effect. For example, supply
is a positive function of price, i.e., change in
price is cause but change in supply is effect.
(iii) All the laws in economics are also universally
accepted, like, law of demand, law of supply,
law of diminishing marginal utility etc.
(iv) Theories and laws of economics are based on
experiments, like, mixed economy to is an
experimental outcome between capitalist and
socialist economies.
(v) Economics has a scale of measurement.
According to Prof. Marshall, ‘money’ is used as
the measuring rod in economics.
However, according to Prof. A.K. Sen, Human
Development Index (HDI) is used to measure
economic development of a country.
Economics as an Art
According to Т.К. Mehta, ‘Knowledge is
science, action is art.’
According to Pigou, Marshall etc., economics
is also considered as an art.
In other way, art is the practical application of
knowledge for achieving particular goals.
Science gives us principles of any discipline
however, art turns all these principles into
reality.
Therefore, considering the activities in
economics, it can claimed as an art also,
because it gives guidance to the solutions of
all the economic problems.
• According to Cossa, science and art are
complementary to each other.
Hence, economics is considered as both a
science as well as an art.
Economic Models
An economic model is a theoretical construct
representing economic processes by a set of
variables and a set of logical and/or
quantitative relationships between them.
The economic model is a simplified, often
mathematical, framework designed to illustrate
complex processes.
The Economic Way of Thinking
Assumptions
Economic
Margins Way of Variable
Thinking
Ceteris
Paribus
Divisions of Economics
• Consumption
• Production
• Exchange
• Distribution
• Public Finance
Economic Analysis
Economic analysis is the assessment or
examination of any particular topic or
issue to understand how it affects the
organization or system. There are two
methods
I. Deductive method
II. Inductive method
Goals of an Economy
• Satisfaction of human needs
• Security
• Happiness
• Achievements
• Fairness
• Freedom
• Participation
• Ecological balance
• Good social relations
The Circular flow of Economic activity
The circular flow of income in an economy
Production possibility curve
Production Possibility Frontier refers to a
curve that presents the possible amounts at
which two distinct products can be
manufactured when the resources and
technology that both goods require for their
production are made available.
PPF curve
An Expanded Production
Possibilities Frontier
BASIS FOR MICROECONOMICS MACROECONOMICS
COMPARISON
Meaning The branch of The branch of
economics that economics that
studies the behavior studies the behavior
of an individual of the whole
consumer, firm, economy, (both
family is known as national and
Microeconomics. international) is
known as
Macroeconomics.
Deals with Individual economic Aggregate economic
variables variables
Business Applied to Environment and
Application operational or external issues
Scope Covers various issues like demand, Covers various issues like,
supply, product pricing, factor national income, general
pricing, production, consumption, price level, distribution,
economic welfare, etc. employment, money etc.
Importance Helpful in determining the prices of Maintains stability in the
a product along with the prices of general price level and
factors of production (land, labor, resolves the major
capital, entrepreneur etc.) within problems of the economy
the economy. like inflation, deflation,
unemployment and
poverty as a whole.
Limitations It is based on unrealistic It has been analyzed that
assumptions, i.e. In 'Fallacy of Composition'
microeconomics it is assumed that involves, which sometimes
there is a full employment in the doesn't proves true
society which is not at all possible. because it is possible that
what is true for aggregate
may not be true for
individuals too.
The Circular flow of Economic activity
Source :Transtutors
