Definitions of Economics

• Adam Smith’s definition:

• Economics is an academic discipline which is

more than two centuries old.

• In 1776, Adam Smith regarded as the father of

economics and published his famous book
“ An Inquiry into the nature and causes of Wealth
of Nations”
 Definitions Economics
• According Smith: “Economics is the science of
Wealth”.

• This implies that the task of Economics is to give

specialized knowledge about how the wealth of a
nation can be increased.

• In other words, Economics gives special

knowledge about the factors on which the wealth
of a country depends.
 Definitions Economics

• Before Adam Smith, there was a group of thinkers

who thought that like an individual any country
can also become rich by accumulating gold and
precious metals from foreign countries.

• This means that the country having more precious

metal or gold would be more prosperous.
 Definitions Economics
• That group of thinkers was known as mercantilists.

• Adam Smith Strongly opposed this view.

• The country can not be prosperous only by

accumulating precious metals or gold.

• The wealth of a nation depends on the volume of

productions.
 Definitions Economics
• A country become more wealth through more
production as wealth is generated through
production.

• According Smith, the main theme of Economics

is to discuss the determinants or factors of
production and the way to increase these factors
of production.
 Definitions Economics
• Criticism:

• The definition gives more importance on the

creation of wealth. Nothing is said about the use of
wealth.

• The welfare of the people is increased through the

use of wealth. Therefore, wealth is not main
objectives. The main objectives is to increase the
welfare of human beings.
 Definitions Economics
• The welfare increases through removal of
wants. This aspect has been neglected in this
definition.

• Secondly: in this definition, wealth is regarded

as the main theme of Economics. But those men
for whom wealth is created and also their
behaviour are not considered in this definition.
 Definitions Economics
• How men create wealth and how this wealth
removes the wants of people and increases their
welfare should actually be the main theme of
Economics.

• But Smith’s definition there is no mention about

the role of human beings.
 Definitions Economics
• Thirdly: More emphasis is given on wealth

• Some people think that the main purpose of

Economics is to accumulate wealth honestly or
dishonestly.

• That’s way Economics has been described as the

Gospel Mammon by earlier philosophers.

• Due to the belief in this definition, Economics was

neglected as a branch of knowledge by earlier
thinkers.
 Definitions Economics
• In fact, Adam Smith’s definition is the origin of
this wrong notion about the subject-matter of
Economics.
 Definition of Economics

• Marshall’s definition of Economics

• To remove the wrong notion about of

Economics Prof. Alfred Marshall gave
another definition of Economics in his
famous book “Principles of
Economics’.
 Definition of Economics
• This book was published in the year
1890.
• According to Marshall, “Economics is a
study of mankind in the ordinary
business of life and examines that part
of individual and social action which
is connected with material requisites
of well being”.
 Definition of Economics

• In this definition instead of giving

emphasis on wealth, importance is
given on the activities of mankind.
 Definition of Economics
• There are innumerable (countless)
activities connected with our daily life
and the task of Economics is to discuss
those activities which are connected
with the personal welfare of human
beings.
 Definition of Economics
• As a result, “ Economics is, on the one
side, a study of wealth and on the other
and more important side, a part of
study of man”.

• There are two important defects in

Marshall’s definition.
 Definition of Economics
• First: in one sense this definition is very
broad and another sense it is also
narrow.
• The Subject matters of Economics
becomes very broad if it deals with all
the activities connected with daily life.
This is so because men perform various
types of activities in daily life.
 Definition of Economics
• If Economics deals with the
activities connected with material
welfare, then also the subject-matter
of Economics becomes very
narrow because the non-material
welfare or welfare obtained from
services is excluded from the scope
of Economics.
 Definition of Economics
• Secondly: why people perform different
activities in daily life is not mentioned in
this definition.
• Every man performs many activities to earn
income. This income is used to purchase
commodities to be consumed.
 Definition of Economics
• Men are engaged in various economic
activities due to the existence of unlimited
wants and limited resources.
• This problem of scarcity of resources is
absent in Marshall’s definition.

• According to Robbins, the main subject-

matter of Economics is how to meet
unlimited wants with the limited resources of
the economy.
 Definition of Economics
• Robbins' definition of Economics:
• Another improved and sophisticated
definition as compared to Marshall’s
definition is given by Prof. Robbins in his
famous book ‘ Nature and Significance of
Economic Science’.

• The book was published in the year 1931.

 Definition of Economics
• According to Robbins “Economics
is the science which studies human
behaviour as a relationship between
ends and scarce means which have
alternative uses”.
 Definition of Economics
• This definition rests on three facts.

• First: man has unlimited wants. When one

want is satisfied a new want arises. It is not
possible to satisfy all the wants at a time.
But the intensities of different wants are
different. Some are more urgent and are to
be satisfied initially.
 Definition of Economics
• Secondly: man has limited amount of
resources. By resources here it is meant
natural resources, man-made capital goods
and consumption goods, etc. It is not
possible to satisfy all wants with limited
resources. Hence a man has to decide which
want is to be satisfied first or which wants is
more important than other.
 Definition of Economics
• Thirdly: limited resources have alternative
uses. If resources are utilized to satisfy
some wants, some other wants remains
unsatisfied. Hence it has to be decided how
to make the efficient use of resources.
According to Robbins, Economics studies
the ways in which man can strike a balance
between unlimited wants on the one hand
and limited resources on the other.
 Definition of Economics
• Economics is a science because this subject
provides specialized knowledge about this.

• When resources are scarce, a choice

problem arises.

• Economics provides specialized knowledge

about how optimum choice can be made.
 Definition of Economics
• Limitations: According Robbins, Economics is a
human science and not a social science. The
subject matter of Economics is how man utilizes
limited resources to satisfy wants. This man may
live within the society or outside the society.
Therefore, in Robbins’ definition, this social
aspect is neglected.
• Social beings are dependent on one another. The
goods and services are exchanged among different
to remove wants. The exchange is an important
economic activity. But the problem of exchange
has been totally neglected in Robbins’ definition.
 Definition of Economics

• Secondly: if the task of Economics is only

to decide how the limited resources can be
utilized efficiently in different ways, then
only the value theory should be included in
the subject-matter of Economics.
 Definition of Economics
• How prices of goods and services are
determined, how factors prices are
determined, what will be the amount
of an input needed for the production
of a particular commodity, etc.,
become the subject of discussion in
Economics.
 Definition of Economics
• The national income of a country, different
components of national income, the upward
and downward movement of national income,
economic growth and development, etc.,
cannot become the subject-matters of
Economics. According to Robbins’ definition,
Macroeconomics is not included in Economics.
But at present this Macroeconomics has
become very important in Economics.
• One of the major drawback of Robbins
defination is that it cannot able to explain one
of the major problem the real world is facing
i.e. Unemployment Problem.
 Subject Matter of Economics
• Microeconomic theory
• Macroeconomic Theory

• Microeconomic theory is also known as

Microeconomics

• Macroeconomic theory is also known as

Macroeconomics
 Economic theory
• These terms were first used by Ragnar
Frisch
• The term ‘Micro’ comes from the Greek
word ‘Mikros’ means small.
• The term ‘Macro’ comes from the Greek
word ‘Makros’ means large.
 Microeconomics
• Microeconomics deals with the analysis of
individual economic units such as consumers,
firms and small aggregates or group of
individual unit such as industries and markets.
 Microeconomics
• In the words of Lerner, “Microeconomics
consist of looking at the economy through a
microscope, as it were, to see how the millions
of cells in the body economic- the individuals
or households as consumer and individual or
firms as producers play their part in the
working of the whole economic organism”.
 Microeconomics
• Thus the Microeconomic theory tries to
determine the mechanism by which the different
economic units attain equilibrium, proceeding
from the individual units to a narrowly defined
group.

• It does not consider the totality of behaviour of

all units in the economy. Microeconomics does
not consider the economic system or the
economy as whole.
 Microeconomics

• It takes the total quantity of resources as

given and seeks to explain how they are
allocated to the production of different
commodities. It also explain whether the
allocation of resources is efficient or not.
 Microeconomics
• Microeconomics examines the economy as a
whole microscopically.

• It analyses the behaviour of individual

economic units and their inter-relationship.

• This is known as general equilibrium analysis.

Subject Matter of Microeconomics
• Product Pricing:
Demand , Cost and Supply.
Factor Pricing:
Land, labour, Capital, Enterpreneur
Welfare Economics
 Importance of Microeconomics
• It has both theoretical and practical Importance.

• It is highly useful for the formulation of

economic policies which will promote the
welfare of the common people.

• The theoretical approach to microeconomics

utilise abstract models in an attempt to see how
prices are determine and how resources are
allocated to various uses.
 Importance of Microeconomics
• It can also be used as the basis for prediction.

• These predictions are of the form: if this occurs

then this will follow.

• A shot-put and a feather: A vacuum

 Importance of Microeconomics
• It can also be applied to economic policy.
• This means we can use microeconomics to
analyse the action of govt. when it functions to
influence the economy.
• We should able to study govt. policies afecting
prices of commodities and wages.
• We can also see how these policies affect the
allocation resources.
•
 Importance of Microeconomics

• Microeconomics theory can also be used by

business enterprises.

• The analytical methods developed from the

study of microeconomics can be used in
managerial decision making.
 Macroeconomics

Macroeconomics deals with the analysis of the

economy as a whole and its large aggregates
such as total national output, national income,
total consumption, aggregate investments etc.
Subject Matter of Macroeconomics
• Income and Employment:
Consumption & Investment
General Price Level
Inflation, Deflation
Economic Development and Growth

Macro theories of distributions

 Importance of Macroeconomics
• Problems of country/ economy.
• Strategies to overcome the Problems
• Policies to be framed.
 Interdependence
• Microeconomic theory and Macroeconomic
theory complements of each other.
• For economic analysis the discussion of both
is needed.
• For Macroeconomic discussion,
microeconomic discussion is necessary
because the behaviour of totals is determined
from the behaviour individuals.
 Interdependence
• Hence we can know macro behaviour from the
analysis of the behaviours of small and tiny
units.

• Again, sometimes it is seen that something

which is true for individuals seperately can’t be
true for totals.
• Hence, we should not only discuss
microeconomics; we should discuss
macroeconomics separately.