NATURE OF ECONOMICS
Short answer questions
Who is the father of economics and why?
Adam Smith is known as the father of economics because he made the first attempt to present a systematic analysis of economics as a separate discipline in his book "An Enquiry into the Nature and Causes of Wealth of Nations", published in 1776. Until then, economics was considered to be a part of other disciplines like Logic, Politics and Ethics.
What are the characteristics of wealth definition?
The main characteristics of the wealth definition are as follows:
Study of wealth: This definition regards economics as the study of wealth, its production, consumption, exchange and distribution.
Study of economic man: This definition considers the study of economics activities like production, distribution, consumption etc. all other activities of a person are outside the orbit of this definition. This man is always guided by self interest.
Inclusion of material goods: The definition of wealth given by Adam Smith includes only material goods and ignores the non-material goods. Material goods are those goods which can be seen, touched and transferred like pen, pencil, book, car etc. whereas non- material goods cannot be seen, touched or transferred but felt only like the ability to cure, sing etc.
Investigation of the source of wealth: This definition considers increment in production of material goods through specialization and division of labor as the source of wealth.
What are the characteristics of welfare definition?
The main characteristics of welfare definition given by Alfred Marshall are as follows:
Primary concern on mankind: Unlike the classical definition, this definition gives more emphasis on human welfare rather than wealth. It states that wealth is not for its own sake but for the sake of human welfare.
Study of material welfare: Welfare definition gives emphasis on material welfare. As such, it studies only material requisites of well being or causes of material welfare and ignores non-material aspects.
study of economic activities: People engage in various kinds of activities like political, social and religious activities. However, the welfare definition encompasses only economic activities related with the earning of income and expense and excludes other activities.
Social science: Economics is a social science and it is concerned with the study of economic activities of those people only who live in an organized society. People living in isolation like saints are excluded in the study of economics.
Explain the subject matter of economics. (HSEB 2057)
The subject matter of economics refers to the area of study of economics. It tells us the topics, sub-topics, things that economics as a separate discipline studies. The subject matter or economics is classified on two basis which are presented as under:
On the basis of economic activities
Human wants are unlimited. In order to satisfy those want people have to put efforts. The fulfillment of wants gives satisfaction. This process consists of various economic activities namely production, consumption, exchange and distribution. Hence, all of these activities come under the scope of economics.
On the basis of Modern Analysis
The Modern analysis of economics divides the area of study of economics into two parts namely Micro and Macro economics. Microeconomics deals with the economic behavior of individual units like households, firms and industries. Macroeconomics deals with aggregates of the economy or the economy as a whole. As such it deals with total output, national income, general price level, inflation, economic growth, consumption, investment etc.
Distinguish between positive and normative economics. (HSEB 2056)
The distinction between positive and normative economics are as follows.
Basis of Distinction | Positive economics | Normative economics |
Nature of study | Positive Economics deals with factual statements of a phenomena. | Normative economics deals with value judgments. |
Inclusion/exclusion of suggestions | It answers the question of what ought to be rather than what is. Hence, it is also called prescriptive economics. | It does not pass any suggestions or value judgments. |
Examples | When income of a consumer increases his/her consumption of a commodity at the same price level also increases for normal goods. | Progressive taxation system should be adopted for social welfare and redistribution of wealth. |
Write short notes on microeconomics and macroeconomics. (HSEB 2058)
Microeconomics
Micro is derived from the word 'Mikros' meaning small. Thus, Microeconomics deals with the behavior of individual units of the economy like individual consumer, individual producer, individual market , individual industry etc. Microeconomics is the microscopic study of the economy. According to K.E. Boulding, 'Microeconomics is the study of particular firms, particular households, individual prices, wages, incomes, individual industries, particular commodities'.
Macroeconomics
The word Macro is derived from the term 'Makros' meaning large. Hence, macroeconomics is concerned with the study of the economy as a whole. In the words of K.E. Boulding, 'Macroeconomics deals not with individual quantities but with aggregate of these quantities, not with individual incomes but with national income, not with individual prices but with price level, not with individual output but with national output'.
Explain about the subject matter of economics. (HSEB 2070)
The subject matter of economics refers to the area of study of economics. It tells us the topics, sub-topics, things that economics as a separate discipline studies. The subject matter or economics is classified on two basis which are presented as under:
On the basis of economic activities
Human wants are unlimited. In order to satisfy those want people have to put efforts. The fulfillment of wants gives satisfaction. This process consists of various economic activities namely production, consumption, exchange and distribution. Hence, all of these activities come under the scope of economics.
On the basis of Modern Analysis
The Modern analysis of economics divides the area of study of economics into two parts namely Micro and Macro economics. Microeconomics deals with the economic behavior of individual units like households, firms and industries. Macroeconomics deals with aggregates of the economy or the economy as a whole. As such it deals with total output, national income, general price level, inflation, economic growth, consumption, investment etc.
Long Answer Questions
Economics is a science of wealth. Discuss.
Adam Smith also known as the 'Father of Economics' made the first attempt to present a systematic analysis of economics in his book 'An Enquiry into the Nature and causes of Wealth of Nations' published in 1776. Adam Smith defined economics as an enquiry into the nature and causes of wealth of nations or science of wealth. He asserted that economics is concerned with the production, consumption, exchange and distribution of wealth. Other classical economists like J.S. Mill, F.A. Walker, J.B. Say, David Ricardo fully supported the classical approach to Economics put forward by Adam Smith.
However, economics as a science of wealth has been criticized on various grounds. Some of them are as follows.
Excess emphasis of wealth: This definition regards man as means and wealth as ends. However, wealth is for the sake of man, man is not for the sake of wealth. Hence, this definition has been criticized on the ground for giving excess importance to wealth.
Narrow meaning of wealth: The classical definition includes only material goods under wealth and excludes all non-material goods.
Unrealistic concept of economic man: This definition considers economics as the study of economic man whose all activities are guided by self interest only. However, this is not always the case in real life scenarios where love, friendship also carry a lot of value.
Neglects economic welfare: This definition considers economics as the study of wealth only and totally neglects the economic welfare of the society.
Explain Adam Smith's definition of economics.
Adam Smith also known as the 'Father of Economics' made the first attempt to present a systematic analysis of economics in his book 'An Enquiry into the Nature and causes of Wealth of Nations' published in 1776. Adam Smith defined economics as an enquiry into the nature and causes of wealth of nations or science of wealth. He asserted that economics is concerned with the production, consumption, exchange and distribution of wealth. Other classical economists like J.S. Mill, F.A. Walker, J.B. Say, David Ricardo fully supported the classical approach to Economics put forward by Adam Smith.
Thus Adam Smith's definition of economics can be explained as follows:
a. Study of wealth: This definition regards economics as the study of wealth, its production, consumption, exchange and distribution.
b. Study of economic man: This definition considers the study of economics activities like production, distribution, consumption etc. all other activities of a person are outside the orbit of this definition. This man is always guided by self interest.
c. Inclusion of material goods: The definition of wealth given by Adam Smith includes only material goods and ignores the non-material goods. Material goods are those goods which can be seen, touched and transferred like pen, pencil, book, car etc. whereas non- material goods cannot be seen, touched or transferred but felt only like the ability to cure, sing etc.
d. Investigation of the source of wealth: This definition considers increment in production of material goods through specialization and division of labor as the source of wealth.
Explain Marshall's definition of economics. (HSEB 2059)
The welfare definition of economics was given by Alfred Marshall, an eminent English economist. The wealth definition given by Adam Smith received many bitter criticisms on various grounds. Marshall enlarged the scope of economics by shifting the focus of economics from material wealth to material welfare. In his book, 'Principles of Economics' (1890), he defined economics as 'Economics is the study mankind in ordinary business of life. It examines that part of individual and social action, which is closely connected with the attainment, and the use of material requisites of well being. It is on the one side a study of wealth, and on the other and more important side , a part of the study of man'. A.C. Pigou, Cannan and Beveridge have strongly supported the view of Marshall.
Marshall's definition of economics can be explained by the following points.
a. Primary concern on mankind: Unlike the classical definition, this definition gives more emphasis on human welfare rather than wealth. It states that wealth is not for its own sake but for the sake of human welfare.
b. Study of material welfare: Welfare definition gives emphasis on material welfare. As such, it studies only material requisites of well being or causes of material welfare and ignores non-material aspects.
c. study of economic activities: People engage in various kinds of activities like political, social and religious activities. However, the welfare definition encompasses only economic activities related with the earning of income and expense and excludes other activities.
d. Social science: Economics is a social science and it is concerned with the study of economic activities of those people only who live in an organized society. People living in isolation like saints are excluded in the study of economics.
Explain Robbins definition of economics. Also mention its criticisms. (HSEB 2058)
Professor Lionel Robbins, London School of Economics took a new approach to present a new dimension in the definition of economics in his book 'An Essay on the Nature and Significance of Economic Science' published in 1932. In his words 'Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses'. This definition of economics has gained a worldwide popularity and consensus among the economists. Economists like Karl Manger, Peter, Stigler, Scitovosky, etc. supported Robbins notion of Economics.
The major criticisms of Robbins definition of economics are as follows.
Implicit concept of welfare: Marshall's definition of welfare has been criticized by Robbins. However, the idea of welfare is implicit in the scarcity definition. Whenever one makes choices to use scarce means into a use for maximum satisfaction, it gives the same notion of choices to maximize welfare.
Abundance can create Problems: Robbins attributed scarcity of means in relation to its demand as the source of the economic problem. However, abundance may also result in problems too. The excessive number of working population might result in unemployment, excessive money supply in the economy results in inflation etc.
Inseparability between means and ends: Something can be both means and ends in life which creates a lot of confusion. A person studying M.B.B.S. wants to get a medical officer degree. It is an end for him. But the same degree also acts as a means to get an M.D. degree.
Self-contradictory: This definition states that economics is a positive science which is neutral between ends. But, the idea of choice between alternative uses to maximize satisfaction makes it a normative science. Hence, the definition is self contradictory.
Compare Marshall's definition with that of Robbins definition of economics. (HSEB 2064)
Basis of comparison | Neo-Classical Definition | Modern Definition |
Nature of study | Economics is a science of material welfare. | Economics is a science of human behavior. |
Aim of human beings | To maximize material welfare | To maximize pleasure or satisfaction |
Role of wealth | Wealth is a means for material welfare. | Wealth is a scarce resource to maximize satisfaction. |
Scope of the study | It considers the concept of people living in organized society only. | It is pervasive and is applicable to all people, living in a society or in isolation. |
What do you mean by scope of economics. Describe the subject matter or economics. (HSEB 2061)
The subject matter of economics or its scope refers to the areas of study that falls under the purview of economics. The scope of economics can be divided on the basis of two criterions.
On the basis of economic activities
Human wants are unlimited. In order to satisfy those want people have to put efforts. The fulfillment of wants gives satisfaction. This process consists of various economic activities namely production, consumption, exchange and distribution. Hence, all of these activities come under the scope of economics.
On the basis of Modern Analysis
The Modern analysis of economics divides the area of study of economics into two parts namely Micro and Macro economics. Microeconomics deals with the economic behavior of
individual units like households, firms and industries. Macroeconomics deals with aggregates of the economy or the economy as a whole. As such it deals with total output, national income, general price level, inflation, economic growth, consumption, investment etc.
Define micro and macroeconomics. Discuss the importance of economic analysis in policy formulation. (HSEB 2062)
Micro is derived from the word 'Mikros' meaning small. Thus, Microeconomics deals with the behavior of individual units of the economy like individual consumer, individual producer, individual market , individual industry etc. Microeconomics is the microscopic study of the economy. According to K.E. Boulding, 'Microeconomics is the study of particular firms, particular households, individual prices, wages, incomes, individual industries, particular commodities'.
The word Macro is derived from the term 'Makros' meaning large. Hence, macroeconomics is concerned with the study of the economy as a whole. It gives the big picture of the large macroeconomic variables like production, consumption, investment, savings, interest rate etc. In the words of K.E. Boulding, 'Macroeconomics deals not with individual quantities but with aggregate of these quantities, not with individual incomes but with national income, not with individual prices but with price level, not with individual output but with national output'.
Economic analysis is very important in policy formulation. Both kinds of economic analysis micro and macro are essential in policy formulation. It is on the tenets of microeconomics that we ascertain the effects of government policies on the allocation of resources and pricing of certain public utilities like postal service, railways, water supply, electricity, etc. Microeconomic analysis is also very useful in policy formulation. Problems like inflation, unemployment, low economic growth rate etc. are big issues of today's global economy. Huge amount of efforts are being put to solve these macroeconomic problems. Hence, appropriate policy has to be formulated to fight with these problems which require thorough macroeconomic knowledge of how macroeconomic variables behave. Macroeconomic analysis not only helps us in policy formulation but also in checking the effectiveness of the policies adopted to reach those macroeconomic objectives. For example, if policymakers find out that the high rate of inflation in an economy is due to the high aggregate demand relative to a given supply, they can take measures to reduce aggregate demand like increasing the tax rates, reducing the government expenditure etc.
Define economics. What are its subject-matters?
Different economists have defined economics differently according to their own perspectives. Here are some of the popular definitions of economics.
Adam Smith defined economics as an enquiry into the nature and causes of wealth of nations or science of wealth.
Alfred Marshall, in his book, 'Principles of Economics', defined economics as 'Economics is the study mankind in ordinary business of life. It examines that part of individual and social action, which is closely connected with the attainment, and the use of material requisites of well being. It is on the one side a study of wealth, and on the other and more important side , a part of the study of man'.
Lionel Robbins states that 'Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses'.
The subject matter of economics or its scope refers to the areas of study that falls under the purview of economics. The scope of economics can be divided on the basis of two criterions.
On the basis of economic activities
Human wants are unlimited. In order to satisfy those want people have to put efforts. The fulfillment of wants gives satisfaction. This process consists of various economic activities namely production, consumption, exchange and distribution. Hence, all of these activities come under the scope of economics.
On the basis of Modern Analysis
The Modern analysis of economics divides the area of study of economics into two parts namely Micro and Macro economics. Microeconomics deals with the economic behavior of
individual units like households, firms and industries. Macroeconomics deals with aggregates of the economy or the economy as a whole. As such it deals with total output, national income, general price level, inflation, economic growth, consumption, investment etc.
Define economics. Explain its nature.
Different economists have defined economics differently according to their own perspectives. Here are some of the popular definitions of economics.
a. Adam Smith defined economics as an enquiry into the nature and causes of wealth of nations or science of wealth.
b. Alfred Marshall, in his book, 'Principles of Economics', defined economics as 'Economics is the study mankind in ordinary business of life. It examines that part of individual and social action, which is closely connected with the attainment, and the use of material requisites of well being. It is on the one side a study of wealth, and on the other and more important side , a part of the study of man'.
c. Lionel Robbins states that 'Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses'.
The subject matter of economics or its scope refers to the areas of study that falls under the purview of economics. The scope of economics can be divided on the basis of two criterions.
The nature of economics refers to the question of whether economics is an art or science. However, economics is both an art as well as science.
Economics as a science
Science is a systemized body of knowledge, which explains the cause and effect relationship. Moreover, scientific laws are universal and based on experiments.
Economics is also a systemized body of knowledge because it studies consumption, production, exchange and distribution systematically. Like other systematic laws, most of the economic laws establish cause and effect relationship between various economic variables. For example, law of demand establishes cause and effect relationship between price and quantity demanded.
Most of the economic laws are universally accepted and derived from experiments. Capitalism, socialism and mixed economy are the experiments of economics. The laboratory of these experiments is the global society, not a particular room.
Economics as an art
A body of knowledge that guides an action is called an art. Art teaches how practical problems are solved. Economics prescribes various measures to improve economic phenomena. It provides solutions to problems of poverty, unemployment, inequality, soaring prices etc. So, economics is an art.
Define economics. Explain its scope.
Different economists have defined economics differently according to their own perspectives. Here are some of the popular definitions of economics.
a. Adam Smith defined economics as an enquiry into the nature and causes of wealth of nations or science of wealth.
b. Alfred Marshall, in his book, 'Principles of Economics', defined economics as 'Economics is the study mankind in ordinary business of life. It examines that part of individual and social action, which is closely connected with the attainment, and the use of material requisites of well being. It is on the one side a study of wealth, and on the other and more important side , a part of the study of man'.
c. Lionel Robbins states that 'Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses'.
The subject matter of economics or its scope refers to the areas of study that falls under the purview of economics. The scope of economics can be divided on the basis of two criterions.
The subject matter of economics or its scope refers to the areas of study that falls under the purview of economics. The scope of economics can be divided on the basis of two criterions.
On the basis of economic activities
Human wants are unlimited. In order to satisfy those want people have to put efforts. The fulfillment of wants gives satisfaction. This process consists of various economic activities namely production, consumption, exchange and distribution. Hence, all of these activities come under the scope of economics.
On the basis of Modern Analysis
The Modern analysis of economics divides the area of study of economics into two parts namely Micro and Macro economics. Microeconomics deals with the economic behavior of individual units like households, firms and industries. Macroeconomics deals with aggregates of the economy or the economy as a whole. As such it deals with total output, national income, general price level, inflation, economic growth, consumption, investment etc.
Distinguish between microeconomics and macroeconomics. (HSEB 2060)
Microeconomics and Macroeconomics are the part of economics. However, they are different on various grounds. Some of the major differences between them are as follows.
Basis of Difference | Microeconomics | Macroeconomics |
Economic unit | Microeconomics is concerned with the study of individual units of an economy. | Macroeconomics is concerned with the study of aggregate units of an economy. |
Objective | Microeconomics is concerned with the use of scarce means to achieve maximum satisfaction. | Macroeconomics is concerned with the objectives of full employment, price stability, economic growth and favorable BOP. |
Methodology | Microeconomic theories are based on the 'ceteris paribus' or all other things being equal assumption. Hence, it is known as partial analysis. | Macroeconomic theories are not based on such assumptions. Hence it is known as general equilibrium analysis. |
Components of equilibrium | The demand and supply forces interact to create an equilibrium price. | The Aggregate demand and Aggregate supply interact to reach the general equilibrium. |
Theories | Price theory, Theory of value | Theory of output, income and employment |
Examples of variables | Price, demand, supply etc. | National income, National output, General Price Level, Full Employment etc. |
Explain the interdependence of micro and macroeconomics.
Though microeconomics and macroeconomics are different on many grounds, they are interdependent, interlinked and exert influence on each other.
Dependence of microeconomics on macroeconomics
Although microeconomics is a small part of the economy, the changes in macroeconomic variables shape and exert an influence on the microeconomic variables. The change in the general wage level also helps shaping the wage of labor in an individual firm. Here, general wage level is a macroeconomic variable whereas wage of labor in an individual firm is micro variable.
Dependence of macroeconomics on microeconomics
Microeconomics studies the behavior of individual units of an economy. But, macroeconomic units are the sum of individual microeconomic units and hence the changes in microeconomic units eventually give shape to the macroeconomic units. For example, changes in the individual outputs of firms results in changes in national output, saving of individual units determine the national saving. This is because, macroeconomic variables are the collective result of microeconomic variable. Hence, they are dependent on small microeconomic units.
What are the importances of microeconomics and macroeconomics policy analysis?
Importance of microeconomic policy analysis
Helps to know the functioning of the economy: Microeconomics studies the behavior of the individual units of the economy. It tells us how the individual units of the economy take decisions regarding allocation of scarce resources to various productive uses. It aids in knowing the working of the economy.
Aids in devising appropriate policies: The knowledge and understanding of working and interactions, relationships between individual units of the economy helps in the formulation of various policies and enhances their effectiveness.
Helps in business decision making: Microeconomics includes the process of price determination, factors affecting demand, elasticity of demand, demand forecasting tools and techniques which are extremely useful in the decision making process of firms.
Importance of macroeconomic policy analysis
To understand the working of the economy: Macroeconomics studies the economy in its aggregate form. It studies on how macroeconomic variables are determined, how they are interrelated and how the change in one macroeconomic variable influences other variables and aspects of the whole economy. Hence, it helps in knowing the functioning of the economy.
Helps in devising suitable policies: The problem of inflation, unemployment and economic growth are the major reasons of headaches of both developed and underdeveloped countries. These problems carry so much weight that keeping them under a certain level can keep a government stable and failure to address such problems can collapse the whole government. The knowledge of working of the economy and the interrelationship between economic variables helps the government to devise appropriate policies to solve these serious problems.
Helps in comparison: The macroeconomic indicators like GDP, Inflation, and Unemployment percentage act as the standard against which relative developments of countries over time can be compared. A country's relative development in the present can be known compared to the past.
To know the effectiveness of policies: Macroeconomics gives various tools and techniques to know the effectiveness of using various policies under given situations. Basically, the IS-LM model helps to know the policy effectiveness of using various policies. It also sheds light on the fact that sometimes a single policy cannot help to achieve the stated objectives and hence the judicious mix of both the policies is necessary. Moreover, it helps to throw light on the fact that microeconomic laws do not apply under macro situations.
Critically explain the Marshall's definition of economics. (HSEB 2070)
The welfare definition of economics was given by Alfred Marshall, an eminent English economist. The wealth definition given by Adam Smith received many bitter criticisms on various grounds. Marshall enlarged the scope of economics by shifting the focus of economics from material wealth to material welfare. In his book, 'Principles of Economics' (1890), he defined economics as 'Economics is the study mankind in ordinary business of life. It examines that part of individual and social action, which is closely connected with the attainment, and the use of material requisites of well being. It is on the one side a study of wealth, and on the other and more important side , a part of the study of man'. A.C. Pigou, Cannan and Beveridge have strongly supported the view of Marshall.
However, this definition given by Marshall was not free from criticisms. Some of the major criticisms of this definition are as follows.
Connection between economics and welfare: Marshall identifies economics as the science which deals with human welfare. However, certain economic activities which are disastrous for human health like production and consumption of wine and cigarettes also fall within the purview of economics.
Material and non material welfare: Marshall defined economics as a science concerned with material welfare. However, sometimes the same activity could be material and non-material at other times. For example, A doctor's services in exchange for fees would be a material activity whereas a doctor's service for philanthropic reasons would be non-material because nothing is received in exchange of such services.
Use of money as a measurement of welfare: Marshall used money as a measuring rod of welfare. However, money itself is not an accurate measurement of satisfaction. Different people like rich and poor may derive different level of satisfaction even from the same amount of money.
Social science: Marshall stated economics as a social science. He considered economics as a study of people living in organized societies only. But, the laws of economics are universally applicable, be it a person living in an organized society or be it a person living in isolation.