Unit 1: Introduction to Economics

Economics
The word 'Economics' is derived from the Greek word 'Oikonomos' which can be divided into two
parts;

a) Oikos: meaning 'household'

b) Nemien: meaning 'to manage'
Thus, the literal meaning of economics is the management of the household.

Economics is a social science which studies the efficient allocation of scarce resources to attain
the maximum fulfilment of unlimited human needs. It is a science of choice and decision-making
that studies how people choose among limited resources to produce various commodities.
However, economics not only covers the decision-making behaviour of individuals but also macro
variables like national income, public finance, international trade, economic growth and so on.

Rationale of Economics
The foundation of economics is based on the two following facts:

1) The wants of humans (society) are unlimited

2) Economic resources are available in limited quantity (scarce)

The basic economic problem is the scarcity of resources and the choice among these scarce
resources to satisfy unlimited human needs and wants. Thus, economics is the study of how human
beings make decisions to use scarce resources to satisfy their unlimited wants.

Economy
It refers to the area or condition in which economic activities such as production, distribution, trade
and consumption of goods and services occur. E.g.: The economy of Nepal, the Economy of Dang
etc. Economy refers to the system of production and consumption of goods and services within a
closed boundary while economics is the study of how that system works.

Economic Problems/Questions
1. What to produce?
2. How much to produce?
3. How to produce?
4. When to produce?
5. For whom to produce? etc.

Assumptions of Economics
Some of the basic assumptions of economics are:
1. Scarcity: The human wants are unlimited. However, the resources required to fulfil these wants
are limited and scarce.

2. Trade-off: Due to scarcity of resources, all human wants cannot be fulfilled. So, every choice
has a cost and when we make a choice, we are trading it for something else.
3. Rationality: Individuals make rational decisions to maximize their satisfaction.

4. Self-interest: People are assumed to act in their self-interest. They make decisions that they
believe will benefit them the most.
5. Cost and benefits: Everyone acts rationally by comparing the cost and benefits of each choice.

6. Models and graphs: Simplified models and graphs are used to explain and analyze real-life
situations.

7. Ceteris Paribus: It is a Latin phrase meaning '' all other things being equal''. It is used to study
the relationship of a single variable while holding other factors constant.

Wealth definition of Economics (Adam Smith)

Adam Smith (father of economics) published a book entitled 'An Inquiry into the Nature and
Causes of the Wealth of Nations' in 1776 A.D. He defined economics as a science which inquires
into the nature and cause wealth of nations. He defined economics as a science of wealth.

Characteristics/Features:
1. It takes only material goods into account.
2. Smith exaggerated the emphasis on wealth.
3. He inquired about the cause of the creation of the wealth.

Criticisms:
1. This definition considers economics as a dismal or selfish science.
2. Smith defined wealth in a very narrow and restricted sense.
3. He only considered material and tangible goods.
4. Smith defined economics only in terms of wealth but not in terms of human welfare.

Welfare definition of economics (Alfred Marshall)

Alfred Marshall (1842 - 1924) wrote the book “Principles of Economics” (1890) in which he
defined Economics as 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 the material requisites of well-being.

Characteristics:
 1. According to Marshal, economics is on one side the study of wealth; and on the other side
the study of mankind.
2. Economics is a study of mankind in the ordinary business of life, i.e., the economic aspect
of human life. It is not concerned with social, religious and political aspects.
3. Economics studies both individual and social actions aimed at promoting the economic
welfare of people.
4. It focused on the production and consumption of goods.
5. Marshall made a distinction between two types of things, viz. material things and
immaterial things. Material things are those that can be seen, felt and touched, (E.g.) books,
rice etc. Immaterial things are those that cannot be seen, felt and touched. (E.g.) skill in the
operation of a thrasher, a tractor etc. In his definition, Marshall considered only the material
things that are capable of promoting the welfare of people.

Criticisms:
1. Marshall considered only material things. But immaterial things, such as the services of a
doctor, a teacher and so on, also promote the welfare of the people.
2. Marshall makes a distinction between (i) those things that are capable of promoting the
welfare of people and (ii) those things that are not capable of promoting the welfare of
people. But anything, (E.g.) liquor, that is not capable of promoting welfare but commands
a price, comes under the economics.
3. Marshall’s definition is based on the concept of welfare. But there is no clear-cut definition
of welfare. The meaning of welfare varies from person to person, country to country and
from one period to another.

Scarcity definition of economics (Lionel Robbins)

Lionel Robbins published a book “An Essay on the Nature and Significance of Economic Science”
in 1932. He defined economics as a science which studies human behaviour as a relationship
between ends and scarce means which have alternative uses.
Characteristics:
1. It defined new concepts like unlimited ends, scarce means and alternate use of means.
2. Ends refer to human wants. Human beings have an unlimited number of wants.
3. Resources or means are limited or scarce in supply. A commodity is scarce, if its demand
is greater than its supply.
4. The scarce means are capable of having alternative uses. Hence, anyone will choose the
resource that will satisfy his particular want. Thus, economics, according to Robbins, is a
science of choice.
5. It tried to bring the economic problem which forms the foundation of economics as a social
science.

Criticisms:
 1. Robbins does not make any distinction between goods conducive to human welfare and
goods that are not conducive to human welfare. In the production of rice and alcoholic
drinks, scarce resources are used. But the production of rice promotes human welfare while
the production of alcoholic drinks is not conducive to human welfare.
2. Robbins did not take into account the possibility of an increase in resources over time.
3. He treated economics as a science of scarcity only.
4. Economics not only deals with the microeconomic aspects like how resources are allocated
and how price is determined, but also the macroeconomic aspects like national income,
employment, economic growth and development etc. However, Robbins has reduced
economics merely to the theory of resource allocation.

In summary
Adam Smith emphasized wealth (production activities).
Alfred Marshal focused on human welfare (production and consumption activities).
Lionel Robbins highlighted the problem of scarcity (choices among the scarce means).