CHAPTER 01

Nature and Scope of Economics

DEFINITIONS OF ECONOMICS:
Several economists have defined economics taking different aspects into account. The word
‘Economics’ was derived from two Greek words, oikos (a house) and nemein (to manage) which
would mean ‘managing an household’ using the limited funds available, in the most satisfactory
manner possible.
The definition of economics can be divided into four major categories, such as;
1. Wealth Definition or Adam Smith Definition
2. Welfare Definition or Alfred Marshal Definition
3. Scarcity and choice Definition or Lionel Robbins Definition
4. Growth and Efficiency Definition

1) Wealth Definition:
Adam smith (1723 - 1790), in his book “An Inquiry into Nature and Causes of Wealth of
Nations” (1776) defined economics as the science of wealth. He explained how a nation’s wealth
is created. He considered that the individual in the society wants to promote only his own gain
and in this, he is led by an “invisible hand” to promote the interests of the society though he has
no real intention to promote the society’s interests.
To analyze this definition we will discuss the word 'wealth and its four aspect. Wealth means
goods and services transacted with the help of money. It is a matter of common observation that
the transaction of goods and service (wealth) takes place in our daily life. But the question is:
Why and how is the transaction of goods and service taking place. To know the answer of this
question we are required to look into the four aspects of wealth.
1. Production of Wealth:
This means the production of goods and services by combining four factors of production, ie
land, labour, capital and organization or entrepreneurship Land includes all the natural resource
such as soil, sea, minerals, livestock, forests etc. Labour is the mental or physical work which is
done for the sake of reward. Capital means man made resources which help to produce goods
and services, whereas organization is the act of combining the other three factors of production
for producing and marketing the goods and services for the sake of profit. Hence, production of
wealth means production of goods and services.
 2. Exchange of Wealth :
Entrepreneurs usually produce more goods and services than their own requirements. Why do
they do so. Simply to get their surplus output exchanged in the market with the surplus good and
services produced by others. The process of exchanging of wealth continues throughout the year
and, as a result, people get the required goods and services. This enables everyone in the society
to satisfy his multiple wants.
3. Distribution of Wealth:
As a result of exchange of wealth in a country whatever falls to the lot of each individual or a
section of society is called its share in the national wealth. If the share of a certain section of a
society in the national wealth is bigger than that of others this will be the unequal distribution of
wealth in a country. If all sections of the society have almost equal command over goods and
services being produced in the country, this situation will signify a fair and equal distribution of
wealth.
4. Consumption of Wealth:
The ultimate objective of production, exchange and distribution is the consumption of wealth
When people get their share from the national output they use it to satisfy their wants. Hence,
the using up of the utility of goods and services for the satisfaction of wants is known as the
consumption of wealth.

Thus, from the above explanation of wealth and its four aspects, it becomes clear that Adam
Smith held the view that economics studies the wealth of a nation which is the same thing as the
goods and services available to a society. Besides this, he also explains as to why and how
wealth is produced, exchanged, distributed and consumed.
Criticism on Wealth Definition:
During the late 18th century religious sentiments and spiritual values of the people were very
strong Therefore, it was difficult for them to accept a science which taught materialism. They
raised hue and cry against it.
Especially the two men of letters, Carlyle and Ruskin, condemned it. They said that economics
as a science of materialism is just a science of bread and butter. They also termed economics "a
dismal science" as, according to them, it promoted selfishness and greed. They thought that if
economics was taught, the science of materialism will take mankind away from spiritualism.
Hence, Carlyle even went to the extent of saying that economics is "a pig philosophy". The two
literary figures therefore claimed that spiritual values such as love, sincerity, sacrifice, friendship,
brother hood etc. be promoted through religion and materialism being taught in economics be
condemned. Regardless of what critics had been saying about economics, the criticism was not
justifiable at all. The reason was that they saw only the negative side of the picture. However,
gradually people discovered through observation and experiments that economics helped them to
eliminate poverty, raises their standard of living and turns them into better human beings. Soon,
they realized that material wealth plays a vital role in their lives.

2) Welfare Definition:
Alfred Marshall (1842 - 1924) wrote a book “Principles of Economics” (1890) in which he
defined “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 the material requisites of wellbeing”.
The important features of Marshall’s definition are as follows:
a) According to Marshall, economics is a study of mankind in the ordinary business of
life, i.e., economic aspect of human life.
b) Economics studies both individual and social actions aimed at promoting economic
welfare of people.
c) Marshall makes 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.)
book, 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., cultivation of hybrid cotton variety and
so on. In his definition, Marshall considered only the material things that are capable of
promoting welfare of people.
1. ECONOMICS AS A SOCIAL SCIENCE: According to Marshall, Economics studies
the economic behaviour of the people living in a society. Economic activities of the
people outside the society are, therefore, not considered in economics Hence, economics
does nox study the isolated individuals or any Robinson Crusoe". By this be shows that
economics in a social science.

2. WELLBIENG OR ATTAINMENT AND USE OF MATERIAL REQUISITES: OR

PRODUCTION AND CONSUMPTION OF WEALTH: In the ordinary business of
life, human beings perform different types of activities such as political activities, sports
activities, economic activities, moral and religious activities etc. Of all these activities of
ordinary life, Economics studies only those activities which are related with the
attainment and use of material requisites or, in other words, the production and
consumption of wealth. In this respect he is of the same view as Adam Smith that
Economics is a science of wealth.

3. WELL-BEING WELFARE OF THE SOCIETY: According to Marshall, the objective

of the study of Economics is to promote the material welfare of the people. According to
Marshall, Economics focuses only on material aspects of life and therefore studies
material requisites of well-being. Economics does not regard wealth to be the goal of all
 human activities. Instead, it is only a means to achieve an end is the economic welfare of
the masses
Criticism on Marshall's Definition:
In 1931, another economist, Leonel Robbins, wrote a book entitled Nature and significance of
Economic Science. In this book, he criticized Marshall on the following grounds:
1. Marshall's Definition Narrows the Scope of Economics:
The use of word 'material' by Marshall narrows the scope of Economics as we all need both
material and non-material requisites of life, i.e., goods and service. The need for non-material
requisites is certainly overwhelming. Examples of non-material requisites are the services of
lawyers, teachers and doctors etc. These non-material requisites (or service) satisfy our wants
in the same way as material requisites (or goods) do and if we exclude them from the study
of economics, the scope of economics would certainly be restricted.
2. Well-being is a Non-Measurable Concept:
We cannot measure "well-being". It is something that cannot be put to figures. Thus, according to
Robbins, wellbeing cannot be measured as stated by Marshall.
3. Economics should not pass value judgment:
According to Marshall, economics should emphasize only on human wants and their satisfaction
and, where as it do not concerned with whether these wants are being satisfied by good things or
bad. For example, although human beings basically need food, clothing and shelter, their want
for alcoholic drinks, cigarettes and gambling are also required to be satisfied as people are ready
to pay for them regardless of the welfare aspect of these things. Thus, what Robbins a trying to
say is "Ant surafy wants and don't bother whether they are for the better or the

4. It creates problems for policy making: According to Marshall, the study of economics
should be directed to pursue the concept of welfare. But, Robbins objects to this point of
view on the ground that the concept of welfare would place the government in a
vulnerable position while making economic policies. For example, some people may
object to the producing of alcohol and cigarettes on the ground that these things retard
welfare. But, others might say that they want these things for the satisfaction of their
wants and are ready to pay for them. Thus, the question of liking and disliking of some
product on the basis of welfare will create problems for the government in the framing of
economic policies.

3) Scarcity and Choice Definition of Economics or Lionel Robbins

Definition
Lionel Robbins published a book “An Essay on the Nature and Significance of Economic
Science” in 1932. According to him, “economics is a science which studies human behavior as a
relationship between ends and scarce means which have alternative uses”.

The major features of Robbins’ definition are as follows:

a) Ends refer to human wants. Human beings have unlimited number of wants.
b) Resources or means, on the other hand, are limited or scarce in supply. There is scarcity of a
commodity, if its demand is greater than its supply. In other words, the scarcity of a commodity
is to be considered only in relation to its demand.
c) 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.
Criticism on Robbins Definition:
a) 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 drink, scarce
resources are used. But the production of rice promotes human welfare while production of
alcoholic drinks is not conducive to human welfare. However, Robbins concludes that economics
is neutral between ends.
b) In economics, we not only study the micro economic aspects like how resources are allocated
and how price is determined, but we also study the macroeconomic aspect like how national
income is generated. But, Robbins has reduced economics merely to theory of resource
allocation. c) Robbins definition does not cover the theory of economic growth and development.
4. Growth and Efficiency Definition:
The modern economists define economics as a science of growth and efficiency. According to
Samuelson, "Economics is the study of how people and society end up closing, with or without
the use of money, to employ scarce productive, resources that could have alternative uses, to
produce various commodities and distribute them for consumption now or in the future among
various persons and groups in society." It analyses the cost and benefits of improving patterns of
resource allocation. In the words of CR Meconnell "Economics can be defined as a science of
efficiency in the use of resources so as to attain the greatest or maximum fulfilment of society's
unlimited wants. Efficiency here implies technical efficiency and economic efficiency in the use
of scarce resources for producing a given level of output. The term efficiency also relates to the
efficiency of whole economics system. If one section of the society is made better off without
making the other section worse off, we can say the economic system is operating efficiently
After considering the various definitions, Economics can be defined "as a social science which is
concerned with the proper use and allocation of resources for the achievement and maintenance
of growth with stability and efficiency".
The major implications of this definition are as follows:
a) Samuelson has made his definition dynamic by including the element of time in it. Therefore,
it covers the theory of economic growth.
b) Samuelson stressed the problem of scarcity of means in relation to unlimited ends. Not only
the means are scarce, but they could also be put to alternative uses.
c) The definition covers various aspects like production, distribution and consumption. Of all the
definitions discussed above, the ‘growth’ definition stated by Samuelson appears to be the most
satisfactory.
However, in modern economics, the subject matter of economics is divided into main parts, viz.,
i) Micro Economics and ii) Macro Economics. Economics is, therefore, rightly considered as the
study of allocation of scarce resources (in relation to unlimited ends) and of determinants of
income, output, employment and economic growth.
SCOPE OF ECONOMICS
Scope means province or field of study. In discussing the scope of economics, we have to
indicate whether it is a science or an art and a positive science or a normative science. It also
covers the subject matter of economics and it is also referred to as Major issues and problems in
Economics or Fundamental questions in economics.
The fundamental questions in economics are;
1) What to produce? It is related to allocation of resources, what goods and services should be
produced in the society? In what quantity? Eg: Whether to produce consumer goods or capital
goods by using the scarce resources which have alternate uses. i.e. sacrificing the present
consumption (pleasures) for future (by investing in capital goods) or should we spent more
money on space research or atomic research or food production?
2) How to produce? It refers to how society will organize its scarce resources for maximum
efficiency. It refers to the technology to be used in production. Eg: Agricultural production –
whether by extensive cultivation or intensive cultivation? – or by capital intensive technologies
or labour intensive technologies.
3) Whom to produce? This question relates to the distribution of goods and services produced in
an economy. Here the concern is not only growth of national income but also individual standard
of living.
Economics - A Science and an Art
Economics is a science: Science is a systematized body of knowledge that traces the
relationship between cause and effect. Another attribute of science is that its phenomena should
be amenable to measurement. Applying these characteristics, we find that economics is a branch
of knowledge where the various facts relevant to it have been systematically collected, classified
and analyzed. Economics investigates the possibility of deducing generalizations as regards the
economic motives of human beings. The motives of individuals and business firms can be very
easily measured in terms of money. Thus, economics is a science.
Economics - A Social Science: In order to understand the social aspect of economics, we should
bear in mind that laboures are working on materials drawn from all over the world and producing
commodities to be sold all over the world in order to exchange goods from all parts of the world
to satisfy their wants. There is, thus, a close inter-dependence of millions of people living in
distant lands unknown to one another. In this way, the process of satisfying wants is not only an
individual process, but also a social process. In economics, one has, thus, to study social
behaviour i.e., behaviour of men in-groups.
Economics is also an art: An art is a system of rules for the attainment of a given end. A
science teaches us to know; an art teaches us to do. Applying this definition, we find that
economics offers us practical guidance in the solution of economic problems. Science and art are
complementary to each other and economics is both a science and an art.
Positive and Normative Economics: Economics is both positive and normative science.
a) Positive science: It only describes what it is and normative science prescribes what it ought to
be. Positive science does not indicate what is good or what is bad to the society. It will simply
provide results of economic analysis of a problem.
b) Normative science: It makes distinction between good and bad. It prescribes what should be
done to promote human welfare. A positive statement is based on facts. A normative statement
involves ethical values. For example, “12 per cent of the labor force in India was unemployed
last year” is a positive statement, which could is verified by scientific measurement. “Twelve per
cent unemployment is too high” is normative statement comparing the fact of 12 per cent
unemployment with a standard of what is unreasonable. It also suggests how it can be rectified.
Therefore, economics is a positive as well as normative science.
Subject Matter of Economics
The subject matter of economics can be studied through a) traditional approach and (b) modern
approach.
a) Traditional Approach: Economics is studied under five major divisions namely
consumption, production, exchange, distribution and public finance.
1.Consumption: The satisfaction of human wants through the use of goods and services is called
consumption. It means destruction of utility.
2.Production: Goods that satisfy human wants are viewed as “bundles of utility”. Hence
production would mean creation of utility or producing (or creating) things for satisfying human
wants. For production, the resources like land, labour, capital and organization are needed.
3. Exchange: Goods are produced not only for self-consumption, but also for sales. They are
sold to buyers in markets. The process of buying and selling constitutes exchange.
4. Distribution: The production of any agricultural commodity requires four factors, viz., land,
labour, capital and organization. These four factors of production are to be rewarded for their
services rendered in the process of production. The land owner gets rent, the labourer earns
wage, the capitalist is given with interest and the entrepreneur is rewarded with profit. The
process of determining rent, wage, interest and profit is called distribution.
5. Public finance: It studies how the government gets money and how it spends it. Thus, in
public finance, we study about public revenue and public expenditure.
b) Modern Approach: According to this approach the study of economics is divided into:
Microeconomics i) and ii) Macroeconomics.
i) Microeconomics: Micro means a millionth part. Microeconomics analyses the
economic behaviour of any particular decision making unit such as a household or a
firm. Microeconomics studies the flow of economic resources or factors of production
from the households or resource owners to business firms and flow of goods and
services from business firms to households. It studies the behaviour of individual
decision making unit with regard to fixation of price and output and its reactions to
the changes in demand and supply conditions. Hence, microeconomics is also called
price theory.
ii) Macroeconomics: Macro means larger or higher level (Global / National / State).
studies the behaviour of the economic system as a whole or all the decision-making
units put together. Macroeconomics deals with the behaviour of aggregates like total
employment, gross national product (GNP), national income, general price level, etc.
So, macroeconomics is also known as income theory. Microeconomics cannot give an
idea of the functioning of the economy as a whole. Similarly, macroeconomics
ignores the individual’s preference and welfare. What is true of a part or individual
may not be true of the whole and what is true of the whole may not apply to the parts
or individual decision making units. By studying about a single small-farmer,
generalization cannot be made about all small farmers, say in Peshawar district.
Similarly, the general nature of all small farmers in the state need not be true in case
of a particular small farmer. Hence, the study of both micro and macroeconomics is
essential to understand the whole system of economic activities.
Branches of Economics
There are three major branches of economics, which are as follows;
1. Descriptive economics – describes the relevant facts of economic field.
2. Economic theory – explains functioning of economic system.
3. Applied Economics – we use economic analysis to explain the causes and significance of
economic events.