Introduction to Economics
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The activity of seeking wealth is as old as Human Civilization. Human beings either as individuals or as groups or as large kingdoms and empires have always been engaged in acquiring and increasing the material wealth. However, a discipline study of the wealth producing activities was commenced about 230 years back when Adam Smith, the father of Economics, published “The Nature and Causes of Wealth of Nations”. Economics, as a discipline, constitute the most important subject to analyze activities related to wealth creation and distribution. The dimensions of the subject of Economics are truly vast and encompasses all aspects of our lives.
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Introduction to Economics
- 1. Introduction to Economics By Harshitha.S and Imran Pasha
- 2. CONTENTS 1. Introduction and Evolution of Economics in India. 2. Definitions of Economics. 3. Basic problems of an Economy. 4. Economic theories. 5. Organization of economic activities. 6. Centrally Planned Economy.
- 3. Part 2 Part 3 Part 4 • The Arthashastra is an ancient Indian treatise on statecraft, economic policy and military strategy written in Sanskrit. • The authors are "Kauṭilya" and "Vishnugupta” (350–283BCE) who was a scholar at Takshashila and the teacher and guardian of Emperor Chandragupta Maurya, founder of the Mauryan Empire. • The text which disappeared after 12th century was rediscovered in 1904 by R. Shamasastry, who published it in 1909. • The first English translation was published in 1915. Evolution of Economics in India Part 1 Part 5 Part 6
- 4. Derivation of the word Economics The term economics comes from the two Ancient Greek words “OIKOS” & “NOMOS”. 'Oikos' meaning "House" ＋ Part 2 Part 3 Part 4 Part 1 'Nomos' meaning "Law" ≈ 'Economics' In Greek οἰκονομία from οiκος (oikos, means “house") and νόμος (nomos, means "custom" or "law") Hence “THE ART OF HOUSEHOLD MANAGEMENT” or managing a house with the efficient use of limited resources. Part 5 Part 6
- 5. Derivation of the word Economics •Economics is an important social science which is described as Queen of social sciences. •It teaches the art of economizing, logical behaviour and rational decision making. •It is included in the list of Nobel prizes since 1969. •Till the publication of Alfred Marshall’s master piece, “The Principles of Economics” in 1890, economics was treated as a branch of politics, ethics, and logic and other social sciences. •The credit of separating economics from other social sciences must go to Alfred Marshall. •He was the first Economist who used the term ECONOMICS in the place of political economy. •The credit of developing economics on the solid foundations must go to Adam Smith. He is regarded as “The Father of Political Economics”. Part 2 Part 3 Part 4 Part 1 Part 5 Part 6
- 6. What is economics all about? Part 1 Part 3 Part 4 Part 2 Economics can be classified into two fundamentals facts: Human beings have unlimited wants, The means of satisfying these wants are relatively scarce. So to conclude the facts, economics is the study of how we work together to transform scarce resources into goods and services to satisfy the most of our infinite wants and how we distribute these goods and services among ourselves. Definitions: “You cannot be in any real sense a citizen unless you are also in degree an economist”- Mrs. Barbara Wooton "Economics is both light-giving and fruit-bearing"Prof. A.C. Pigou Part 5 Part 6
- 7. Part 3 Part 4 Definitions At present the definition of economics can be put under 4 heads: 1. Early definitions: Science of wealth. •Wealth definition is given by Adam smith and his followers. •It is also known as CLASSICAL DEFINITION. •He published his book "Wealth of Nations” in 1776. •He defines economics as “Science of Wealth”. •It is an inquiry into the nature and causes of wealth of nations.He aimed: The human activity and studied how much wealth is consumed. Since problems of the nation can be solved by creation of wealth and equal distribution, the production of wealth can be increased. Critics: 1) Over emphasizes wealth. 2) Ignores other activities of man. 3) Little attention is paid to man and his welfare. 4) It restricts the scope Part 5 Part 6 Part 1 Part 2
- 8. Part 3 Part 4 Definitions 2. Marshall’s definition: Science of Material Welfare. •The Welfare definition was given by well-known Economists as Alfred Marshall, A.C Pigou, Cannon and others. • It is also known as Neo-Classical definition. •They shifted emphasizes from Wealth to Welfare Economics. •Hence, it is called as “WELFARE DEFINITION OF ECONOMICS”. “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 material requisites of well-being.”- Alfred Marshall. Part 5 Part 6 Part 1 Part 2
- 9. Part 3 Part 4 Definitions 2. Marshall’s definition: Science of Material Welfare. Cntd., Aims: 1. Study of man and his welfare as a member of the organized society. 2. Study causes of material welfare. 3. Separates the science of economics from other social sciences. Critics: 1. Too narrow and unscientific 2. All material goods can’t promote welfare 3. Quantification of welfare is difficult 4. Concept of welfare misleading 5. Neglects basic problems classificatory rather than analytical. Part 5 Part 6 Part 1 Part 2
- 10. Part 3 Part 4 Definitions 3. Robbin’s definition: Science of Scarcity “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses”. - -Prof. Lionel Robbins. An essay on “The Nature and Significance of Economic Science” was published in1932. Definition was widely accepted as most scientific and concise. The main structural propositions for this definition are: Ends: Ends imply human unlimited and varied wants. Due to unlimited wants, problem of choice arises. As we cannot satisfy all the wants, we must choose between most urgent and less urgent wants. Scarce-Means: The means available to satisfy wants are limited or scarce. Scarcity depends on demand and creates many economic problems. Part 5 Part 6 Part 1 Part 2
- 11. Part 3 Part 4 Definitions Alternative uses: Though the resources are scarce, they are capable of being put to alternative uses. Particular resources can be employed in different uses. Problem of choice: As human wants are unlimited and means are limited, the problem of choice arises. Critics: Lacks human touch Narrows down the scope Ignores economic problem Ignores growth aspect 3. Robbin’s definition: Science of Scarcity Cntd., Part 5 Part 6 Part 1 Part 2
- 12. Part 3 Part 4 Definitions 4. Modern definition- Science of Dynamic Growth and Development. Economics is much more than merely a theory of value or of resource allocation. In J.M. Keynes’ terms, “Economics is defined as the study of the administration of scarce resources and the determinants of income and employment”. “Economics is the study of how men and society choose with or without the use of money, to employ scarce productive resources which could have alternative uses, to produce various commodities over time, and distribute them for consumption now and in the future among various people and groups of society”. – Paul. A. Samuelson Part 5 Part 6 Part 1 Part 2
- 13. Part 3 Part 4 Definitions 4. Modern definition- Science of Dynamic Growth and Development. Aims: Wider in scope Dynamic nature Deals with the problem of choice Stressed the problem of scarcity in relation to unlimited ends. Conclusion on definitions: Of all the definitions above, Samuelson definitions stands good for the universal appeal. It presents the choice problem in its dynamic setting and widens the scope of the subject. It is applicable to all sorts of economies- past, present and future. Part 5 Part 6 Part 1 Part 2
- 14. Part 4 •An economy or an economic system refers to the conditions under which goods and services are produced and distributed in a country. •It constitutes individuals, firms, companies, households, factories, banks, government, foreign sectors etc, who act and interact to producer and consumer of goods and services. •The central problems of an economy arises from two basic facts, namely, the multiplicity of ends and the scarcity of means. •In the modern economy, economic activities of different people are interrelated and interdependent. •It controls, regulates and guides the economic activities of people to achieve certain social and economic goals. Concept of Economy Part 5 Part 6 Part 2 Part 1 Part 2 Part 3
- 15. What to produce is problem of choice between commodities and this problem raised due to scarcity of resources? The main objective is to produce maximum output to satisfy needs of maximum people. Basic problems of an Economy Every economy has to solve 4 problems: Decided on: a) By assesing the requirment or Demand in the economy. b) By assesing the current number of producers in an Industry and potential growth or expected growth of the same. 1. What to produce? Part 5 Part 6 Part 3 Part 2 Part 1 Part 4
- 16. Basic problems of an Economy 2. How to produce How to Produce is problem of choice of technique. I.e. choice of technology to produce goods and services to meet the wants of the society which is economical. Decided on: a) With what resources and technology b) On what scale c) In what sector 2. How to produce How to Produce is problem of choice of technique. I.e. choice of technology to produce goods and services to meet the wants of the society which is economical. Decided on: a) With what resources and technology b) On what scale c) In what sector 2. How to produce? How to produce is problem of choice of technique. I.e. choice of technology to produce goods and services to meet the wants of the society which is economical. In simple words "which technology should be used in production." Decided on: a) What resources and technology b) What scale c) Which sector There are two types of production techniques: 1) Labor intensive 2) Capital/Machine intensive Part 5 Part 6 Part 3 Part 2 Part 1 Part 4
- 17. Basic problems of an Economy 2. How to produce How to Produce is problem of choice of technique. I.e. choice of technology to produce goods and services to meet the wants of the society which is economical. Decided on: a) With what resources and technology b) On what scale c) In what sector 3. For Whom to produce? For Whom to produce: is the problem of distribution of goods and services among the members of the society? Sharing the national product among factor of production. Solution can be determined on the basis of economic system Decided on: a) Which sector of the economy b) Which class of the society Part 5 Part 6 Part 3 Part 2 Part 1 Part 4
- 18. Basic problems of an Economy 4. How to choose between the present and the future How to choose between the present and the future: Regard to the use of economic resources. The country has to decide as to what proportion of these resources is to be reserved for the future. Decided on: a) Growth and development b) Availability of resources c) Population Part 5 Part 6 Part 3 Part 2 Part 1 Part 4
- 19. The process of formulation of economic models about the relationship between economic variables in order to generate testable hypotheses from these models and testing of these hypotheses against empirical data. Economic theory Steps of formulating an economic theory: Selecting the problem Collection of data Classification of data Formulation of hypothesis Testing of hypothesis Verification of theory Purpose of economic theory: To provide economic tools. To explain economic phenomena to predict economic events. To formulate economic policies. To judge the performance of the economy. Part 6 Part 4 Part 3 Part 2 Part 1 Part 5
- 20. Approaches to economic theory Part 6 Micro economics Macro economics Greek word ‘mikros’ means small Greek word ‘ makros’ means large Small components of the national economy of the country Large components of the national economy of the country Branch of economic analysis which studies the economic behaviour of the individual unit, may be a person, a particular household, or a particular firm. Branch of economic analysis which studies the behaviour of not one particular unit, but of all the units combined together. Detailed and specific consideration Aggregative economics Part 4 Part 3 Part 2 Part 1 Part 5
- 21. Approaches to economic theory Cntd., Part 6 Studies Micro-quantities or Micro- variables Studies inter-dependence and circular flow of the economy. Answers what good shall be produced, how they shall be produced, for whom they will be produced. Solves the equal distribution of income, trade cycles and fluctuations in the economy. Theory of product pricing, factor pricing theory, theory of economic welfare. Theory of income, output and employment, Theory of economic growth, Macro-theory of distribution Micro-statics, Comparative Micro- statics, Micro-dynamics are the types of Microeconomics Macro-statics, Comparative Macro- statics, Macro-dynamics are the types of Macroeconomics Part 4 Part 3 Part 2 Part 1 Part 5
- 22. Importance Part 6 Micro economics Macro economics Functioning of the economy Clear picture of the economy Formulation of economic policies and theories Formulation of economic policies Study of economic welfare Study of economic growth and aggregates Allocation of resources Study of trade cycles Development of international trade Consideration of economic problems Analysis of the problem of taxation Analysis of the problem of entire system of the economy Construction and use of models Indispensable study Part 4 Part 3 Part 2 Part 1 Part 5
- 23. Limitations Part 6 Micro economics Macro economics Unrealistic assumptions Neglects micro study Misleading because of specific study Studies aggregates and averages No clear picture of the entire economy Wrong conclusions Limited scope Excessive generalisations Certain economic problems cannot be analyzed Study of aggregates may lead to no change in policy Laissez-faire assumption Suffers from abstractness Part 4 Part 3 Part 2 Part 1 Part 5
- 24. Economics-As a Science Positive economics Normative economics Explains causes and consequences Discusses the rightness or wrongness of things Objective of establishment of uniformities Determination of ideals, economic goals of public policy. Studies facts as they are and not as they ought to be Studies things as they ought to be More light-giving Light-giving and fruit-bearing Makes critical analysis of the existing facts and draw conclusions Judge whether it is socially justified or not. How economic problem is solved How economic problem should be solvedPart 6 Part 4 Part 3 Part 2 Part 1 Part 5
- 25. Economics-As a Science Cntd., Positive economics Normative economics Based on facts i.e. development and testing of economic theories Based on ethical values Given by Robbins Given by Marshall and Pigou Independent analysis Dependent on positive analysis No value judgement Includes value judgement and values are purely scientific Also regarded as neutral and agenda free More elastic Economic statements can be treated and accepted or disregarded Economic statements are opinion based as they can be right or wrong. Part 6 Part 4 Part 3 Part 2 Part 1 Part 5
- 26. Deductive and Inductive Methods Deductive method Inductive method Also known as abstract, analytical and priori method Also known as historical, empirical, posterior method Ranges from general to particular analysis Ranges from particular to general Based on abstract reasoning and not on facts Actual Facts are collected, arranged and them general conclusions are drawn From indisputable facts about human nature and deduce to individual cases Technique of a practical approach to the problems of economic science No accuracy Accuracy because of calculation under statistical tools Static approach Dynamic approach Part 6 Part 4 Part 3 Part 2 Part 1 Part 5
- 27. Deductive and Inductive Methods Cntd., Deductive method Inductive method Only assumptions and experiments. Experimentation and statistical approaches are followed Ex: Law of diminishing marginal utility, larger the stock-lower the utility Ex: Experimentation with the effect of a public works programme on employment during a depression Approach to solve the problems of economic science, Remove gulf between theory and practice,Part 6 Part 4 Part 3 Part 2 Part 1 Part 5
- 28. Deductive and Inductive Methods Stages in the process of deduction: Perception of problem Making assumptions Formulating hypothesis Verifying hypothesis conclusions Stages in the process of induction: Collection of Statistical data Choosing right statistical methods for calculation Analysis Arriving to the conclusions Part 6 Part 4 Part 3 Part 2 Part 1 Part 5
- 29. Economic Statics and Dynamics Economic statics Economic dynamics Greek word ‘STATIKE’ means standstill Where there is movement or change Rates of output are constant Rate of output differs Economic phenomena that establish relations between elements of economic system, prices and quantities of commodities are at same point Uncertain, unexpected and irregular No change in population and its composition States of disequilibrium No change in quantity of a capital and technique of production Population grows and quantity of capital grows Part 6 Part 4 Part 3 Part 2 Part 1 Part 5
- 30. Economic Statics and Dynamics Cntd., Economic statics Economic dynamics No change in working and organisation of industrial units and no change in habits, tastes, fashions of the people Mode of production improve It is simple, has clarity and it is the basis of dynamic analysis Industrial organisation changes Applicable to theories such as Keynes general theory, Robbins’s definition. Habits, fashions and customs of people change Ignores time element Realistic, studies time element, more flexible and basis for economic theories.Part 6 Part 4 Part 3 Part 2 Part 1 Part 5
- 31. Organisation of Economic activities Economic activities: “It refers to those human activities which are undertaken with the object of satisfying material or economic needs”. India has classified and tracked its economy as three sectors — 1. Agriculture 2. Industry 3. Services. •Agriculture is a primary industry which is concerned with the production of goods mainly with the help of nature. •It includes crops, horticulture, milk and animal husbandry, aquaculture, fishing, sericulture, aviculture, forestry and related activities. Part 2 Part 3 Part 4 Part 6 Part 5 Part 1
- 32. Organisation of Economic activities •Industry includes various manufacturing sub-sectors. •It refers to manufacturing activity concerned with the conversion of raw materials or semi-finished goods into finished goods. •Service is a type of economic activity that is intangible, is not stored and does not result in ownership. •A service is consumed at the point of sale. •India's services sector includes construction, retail, software, IT, communications, hospitality, infrastructure operations, education, health care, banking, insurance, and other economic activities. Part 2 Part 3 Part 4 Part 6 Part 5 Part 1
- 33. Centrally Planned Economy •An economic system in which economic decisions are made by the state or government rather than by the interaction between consumers and businessmen. •An economy where decisions on what to produce, how to produce and for whom to produce are taken by the government. • The theory is that the government will overcome market failure and achieve equality of distribution. •The economies are broadly classified on the basis of production, exchange, distribution, role of government in economic activity. Classification of an economy: 1) Capitalist economy or Market economy 2) Socialist economy 3) Mixed economy Part 2 Part 3 Part 4 Part 6 Part 5 Part 1
- 34. Centrally Planned Economy 1. Market economy: A market economy is an economy in which decisions regarding investment, production, and distribution are based on supply and demand, and prices of goods and services are determined in a free price system. Characteristics: The right of private properly Freedom of enterprise Freedom to choice by the consumers Profit motive Competition Inequalities of incomes This economy uses impersonal forces of the market demand and supply to the price mechanism to solve its central problems. Part 2 Part 3 Part 4 Part 6 Part 5 Part 1
- 35. Centrally Planned Economy 2. Socialist economy: •A socialist economic system is based on some form of social ownership of the means of production. • It may be direct public ownership, factories, capital, and mines where production is carried out directly for use. •The material means of production are owned by the whole community represented by the state. Characteristics: Collective ownership of all means of production Central authority to set socio-economic goals. Relative equality of income Price mechanism is secondary role Part 2 Part 3 Part 4 Part 6 Part 5 Part 1
- 36. Centrally Planned Economy 3. Mixed economy: •It allows a level of private economic freedom in the use of capital, but also allows for governments to interfere in economic activities. •It include the best features of both the controlled economy and the market economy while excluding the demerits of both. •Mixed economy is three sector economy of industries. Private sector: •Production and distribution are managed and controlled by private individuals and groups. •They are based on self-interest and profit motive. •Private industries are regulated by the government by a number of policy instruments. Part 2 Part 3 Part 4 Part 6 Part 5 Part 1
- 37. Centrally Planned Economy Public sector: •The part of national economy providing basic goods or services that are either not, or cannot be, provided by the private sector. •It consists of national and local governments, their agencies, and their chartered bodies. •One of the largest sectors of any economy. •They are not primarily profit-oriented but are set up by the state for the welfare of the community. Combined sector: A sector in which both the government and the private enterprises have equal access and join hands to produce a commodity leading to the establishment of joint sectors. Part 2 Part 3 Part 4 Part 6 Part 5 Part 1
- 38. Part 2 Part 3 Part 4 Centrally Planned Economy Conclusion: Mixed economy is a planned economy where the government has clear and definite economic plan for the development of both the private and public enterprises. It also balances regional development and allocation of resources attempts to combine the productive efficiency of capitalism and distributive justice of socialism.. Part 5 Part 6 Part 1