BASIC CONCEPTS OF ECONOMICS

                     BASIC CONCEPTS OF ECONOMICS

               (IX)

 

What is Economics?

 

 

 Economics is the study of the economic activities of an individual as a part of society.

           The word 'Economics' is derived from the  Greek word 'Oikonomia' . Here, 'Oikos' means 'family' and 'nomos' means 'rules'. Therefore, economics is regarded as the rules which direct the running of a family or society.

 

Why the study of economics is necessary or important?

There are several reasons for the necessity in the study of economics. They are as follows: 

1) A healthy democracy requires civic consciousness of the people. A tax - paying people want to know that how the government collects revenue, how it spends  the collected revenue, what rules governs the process of expenditure, is the revenue being spent judiciously, and so on.

2) A social reformer want to find out the reasons for widespread and abject poverty. Through this, he will be able to understand that many of the reasons for this problem are economic in nature.

3)As conscious customers , we would like to know the reasons for the rise in prices of essential commodities.

4) We also want to know what is globalisation? What are its merits and demerits? What is economic development ? What is environmental economics? 

            All these questions are related to the economics. So, to know the answers of these questions the study of economics is essential.

 

Some definitions of economics

Adam Smith's definition:

Adam Smith is considered as the father of economics. He gave his definition of economics in his famous book 'An Enquiry  into the Nature and Causes of the Wealth of Nations' published in 1776. He defined economics as "the science of Wealth".

This definition is considered as a wealth based definition.

               But , his definition was criticised by Carlyle and Ruskin as being the "Gospel of the Mammon".  According to them, wealth can never be the main aim of human life. It is only a means of achieving this. Too much emphasis on wealth would turn economics into a 'dismal science'.

Alfred Marshall's definition:

Alfred Marshall , in his book 'Principles of Economics' published in 1890 put forward a definition of economics based on the principle of welfare. According to him, "Economics is the study of mankind in the ordinary business of life." It examines that the part of individual and social action is mostly connected with the attainment and with the use of the material requisites of well-being. Thus it implies two aspects - 

            a) a study of wealth

            b) a part of the study of human being.

            However, his definition is also faced criticism that Marshall only mentioned about the welfare derived from material goods. Welfare derived from non material services such as those of a teacher or doctor were not mentioned by him. Moreover, all goods may not bring about welfare of the people. For example, use of alcohol, drugs, cigarettes do not lead to the increase in the welfare of man. But economics deals with the study of the production, consumption and distribution of such products.

Lionel Robbin's definition:

Economist Lionel Robbins, in his book ,'An Essay on the Nature and significance of Economic Science' published in 1932, put forward the most acceptable definition of economics. According to him, "Economics  is the science which studies human behaviour as a relationship between the ends and scarce means which have alternative uses".

                 This definition highlights three main points: 

1) Human wants are unlimited.

2) Resources to satisfy human wants are limited.

3) Scarce resources have alternative uses.

             Robbins' definition is also not above criticism. According to the critics, the problem of attaining present economic development is more important than the problem of choices. But Robbins is silent on this point.

Samuelson and Nordhaus' definition: Samuelson and Nordhaus have combined the concept of scarcity with efficiency and put forward a definition of economics. According to them, "Accepting the reality of the existence of scarcity ,the efficient use of resources by the society to produce valuable commodities, form the subject matter of economics".

 

Scope of economics: The scope of economics includes all the monetary activities of the society. Basically, it covers the following topics:

1) Consumption: The activities which lead to the satisfaction  of our wants are known as consumption. The laws governing consumption activities, consumers' equilibrium, etc. fall within the scope of economics.

2)Production:The creation of useful commodities or services is known as production. In economics we discuss about the four factors of production- land, labour, capital and organisation, the laws of production, producers' equilibrium, monetary system etc.

 3) Distribution: The laws and theories which are to be followed for the efficient distribution of goods and service are discussed in the study of distribution.

4) Exchange: No individual , region or country can produce all commodities that are required by them. Therefore, in such a situation, exchange becomes necessary between individuals, regions and countries.This exchange takes place through internal and international trade. Both internal and international trade are discussed in economics.

5) Money: The discussions on the role of money, its functions, types, etc. form an important part of the study of economics.

6) Income: The study of per capita income ,National income, its production and distribution, its relation with economic welfare ,fall within the scope of economics.

7) Public Finance: Public finance is an integral part of economics. It is the study of public revenue, public expenditure and public debt.

8) Welfare Economics: Economics is also study about the welfare of the people.Economists like A.C.Pigou. Vilfredo Pareto, Hicks, Amartya Sen etc. have popularised the concept of welfare econimics.

9) Economics of Environment: The study of the environment has been included in the subject matter of economics in order to find out ways to restore environmental equilibrium.This inclusion has led to the opening up of a new aspect in the scope of economics.

10) Efficiency: The efficient use of scarce resources to build society is the basic subject of economics.The efficient use of scarce resources to accelerate the process of production will lead to the increase of economic welfare. 

                           All these topics are fall within the scope of economics. 

 

*Jonbeel Mela: The Jonbeel Mela (fair) is in the Morigaon District of Assam.This fair is a very good example of the barter system.Since the fifteenth century,people of the Karbi, Khasi, Tiwa, Jaintia and other tribes come to this fair to exchange goods produced by them. This fair is a symbol of brotherhood between the people of hills and plains of the north eastern region of India.

 

                      Jonbeel Mela

 

 

 Some Fundamental Concepts of Economics:

1)Goods:All commodities and services which can satisfy human wants are known as goods in economics. Goods can be categorised  into two forms:

 

                  a) Tangible goods,such as tables and chairs, houses, tools and implements, food, clothing etc.

                    b) Intangible goods: the services of teachers, doctors, politicians,soldiers, lawyers, etc.

                            Goods can also be categorised into two forms:

                  a) Free goods: They are the free gifts of nature,such as the heat from the sun, wind , rain, etc. For example, electricity, food, cloths, etc. are economic goods.

                   b) Economic goods: There is a price for economic goods.

                                                         

Goods can be further divided into two goods:

                 a) Consumption goods: Consumption goods satisfy our wants directly. They are known as finished goods.

                                                              

                 b) Capital goods or producers' goods: They are used for the purpose of production . Capital goods are known as intermediate goods.

2) Utility: The power of any good or service to satisfy human wants is known as Utility. For example, a meal of rice or bread can satisfy the hunger of a famished person. in the same way the services of a doctor which cures a patient can satisfy him.  Therefore,the power of a good or service which can satisfy such human wants is known as utility.

3) Wealth: In order to be regarded as wealth , a good must possess the four characteristics - utility,scarcity,transferability and externality. Sunlight is abundant, the talent of Sachin Tendulkar or the patriotism of Mahatma Gandhi is not transferable.That is why these are not regarded as wealth in economics. Food, clothes,furniture, coal, crude oil, etc, are regarded as wealth, as they possess all the four characteristics of wealth.

             According to economics, for a good to be regarded as wealth, it must be usable, valuable ( scarce) , and transferable from one person to another  person.

4) Wants: The desire for satisfaction from a commodity is known as want. It is the necessity for the sue of a commodity. For example, in the hectic schedule of everyday life, the desire to listen to music to relieve  oneself from stress can be termed as want.

5) Welfare: Welfare is divided into forms:

                    a) Economic welfare: Economic welfare can be achieved through the medium of money.     

                    b) Non - economic welfare: Non economic welfare is moral and social welfare, which cannot be measured with money. For example, the welfare activities of parents for their children are non economic welfare. 

 

6) Price: The money value or the exchange value of any commodity is called its price. For example, the price of a book is Rs. 75/-, the maximum retail price of a laptop computer is Rs.32750/- etc.

7) Demand: The desire of a consumer for a particular commodity can be termed as demand only if that desire be backed by the power to purchase it. If a beggar has the desire to purchase a car , then it cannot be termed as demand.

8) Supply: The part of the produced goods which are brought to the market for selling is known as supply. There is a supply department for supplying goods in the market.There is also a departmental minister. The Food Corporation in India is an organisation which looks after matters relating to stock and supply of food in the country.

9) Market: Market is a place where goods are bought and sold. But in economics, market does not mean only a particular place. In economics, market means an arrangement where buyers and sellers buy and sells goods directly or indirectly. Stock markets, online markets  are some examples of market.

10) Capital: The means or appliances which help production are known as capital. For example, a piece of land is capital for the production of food grains: a loom, sewing machine and implements are capital for the production of cloth.

11)  Savings:The portion of income which is not used for consumption is known as savings.

12) Investment: When capital is used for the purpose of production , it is called investment.

13) National Income: The money value of all goods and services produced in a country in a financial year is known as national  income.

14) Per Capita Income: The per capita income of a country can be found out by dividing the total national income by the total production. 

           Per capita income = National income/ Population of the country.

Micro Economics: The word Micro Economics comes from the Greek word 'Mikros' , meaning 'small'. It discusses on the economic behaviour of persons of organisations in an individual manner. The behaviour of  an consumer, a producer or a productive enterprise, a market, a creditor, a saver is included in Microeconomics.

Macro Economics:The word Macro Economics comes from the Greek word 'Macros' , which means large. The aggregate behaviour of a country or the behaviour of all consumers, producers etc. are included in the subject matter of Macroeconomics.The study of the population , employment, industrialisation, agriculture etc. of a country is included in Macroeconomics.