CHAPTER 1

NATURE AND IMPORTANCE OF ECONOMICS

SYNOPSIS
1. An introduction to nature and importance of economics
2. An introduction to the well known definitions of Economics

I. AN INTRODUCTION TO THE NATURE AND IMPORTANCE

OF ECONOMICS.

Q1 Nature and Importance of Economics.

 Economics is concerned with economic activity which involves production and

consumption of goods and services for the ultimate sales of human wants.
 Therefore production, consumption exchange and distribution are various
activities of human beings.
 Man performs economic activities as well as non- economic activities.
 An economic activity is one for which he earns an income for whatever effort he
puts in production.
 However, an activity which a man performs for pleasure or out of love or pity is
a non- economic activity as it is not measured in terms of money but in terms of
social help. As humans we normally perform activities with have an economic
aspect.
 Economics is a growing or developing science of increasing importance.
 The subject matter of economics is economic problems arise because of the
multiplicity of wants and scarcity of resources.
 If people do not consume goods or down them, goods would not be…… there
would be no buying or selling or exchange.
 Entrepreneurs would not be required for alternate or distribute resources or fact
of popular to alternative uses.
 Thus economics has different aspects namely production, consumption,
exchange and distribution.
 Q2 Is economics a Science or an Art?

There are reasons as to why economics is both a science and art. The reasons are
mention below under the respective categories of science and art.

i) SCIENCE
 Economics is a developing or growing science of increasing importance.
 Economics is a science because it is a systematic or organized body of
knowledge where relevant facts are collected, observed and analyzed.
 It is a science just like history, politics, physics etc- a systematic or organized
study of the economics behavior of man.
 Economics studies man and his behavior in relation to wealth
 Hence it is also a social science and different from the natural sciences which
involves the study of nature.
 Economics is scientific in the sense that it lays down general principles or laws
to guide the economy.
 Besides economics is a also a science because economic laws are those which
state a casual relationship between two sets of facts.
 One set is the cause and the other set is the effect.
 A law is based on the fact that every cause has a tendency to produce some
definite result, if nothing happens to prevent it.
 Thus economic laws represent economics tendencies or principles expressing
what is likely to happen, other things remaining equal.

ii) ART
 Economics is also an art because it lays down certain rules and directions to
achieve specific goals or good results.
 If the rules of the game are followed closely and carefully good results would be
expected.
 Economics prescribes certain rules and principles.
 E.g.: If poverty is removed from eh society, form the country, the welfare and …..
Of the society will be raised.
 Economic novels do not give any readymade conclusions but helps us to solve
many practical problems. Hence it is considered an art.
 Economics thus help us to predict tendencies or what I likely to happen because
it help us to solve economic problem.
 Economic considerations play a signification role on the local, national and
international affairs.
 Economics deals with problems and questions that arise in society and it helps us
to understand those problem or questions and find suitable solutions and
suggestions for them.
 Thus economics is a useful and important subject.
 II WELL KNOW DEFINITONS OF ECONOMICS.
(An introduction to the well known definitions of Economics)

There are various definitions of economics given by Adam Smith, Alfred

Marshall, A.C Pigou and Lionel Robbins.

i) ADAM SMITH

 Adam Smith was a classical English economist. In his book “Wealth of

Nations” he has defined economics as:

“The study of the nature and causes of wealth of nations”

 In earlier times each political economy studied how man organizes productive
resources like land, labour, capital etc to produce wealth in society i.e. to
produce goods and services and also to study how goods are distributed.
Economics was hence concerned with the production and use of wealth.
However this definition has a serous limitation i.e. it was only concerned with
wealth and not man. – The human factor was completely ignored by this
definition.

 Therefore to overcome this limitation Alfred Marshall has another definition of

economics.

ii) ALFRED MARSHALL

 According to Alfred Marshall economics can be defined as:

“The study of mankind in the ordinary business of life……………. On one side the
study of wealth and on the other and more important side, a part of the study of
man”

 According to Marshall Economics deals with mans day to day life and work
i.e. economic activity he performs or the way he earns an income and spends it.
 The primary emphasis is on the study of mankind.
 Economics is concerned with wealth and well being of man.
 Wealth is the means and welfare is the end or ultimate aim and wealth, the
means to attain it.
 Wealth promotes welfare.
 Wealth produced in society is used for the welfare of it people.

 Marshall and some other economists conclude that the purpose of economics is
to promote human welfare through he study of wealth.

iii) A.C Pigou

 This idea was further expressed and improved upon by A.C Pigou who also
believed that economics is a study of economic welfare.

“It is that part of welfare which can be brought directly or indirectly in relation
with the measuring rod of money.”

iv) LIONEL ROBBINS

“Economics is a science which studies human behavior as a relationship between
ends and scarce means which have alternative use.”

 However the welfare definition of Marshall and Pigou were criticized by

Robins and others.
 Lionel Robbins criticized this definition in the grounds that all human activities
have an economics aspect
 Robins believe that economics has nothing to do with welfare.
 He did not like the concept of welfare as it was a very wide concept and very
difficult to define or express.
 Besides welfare is a state of mind or a feeling of satisfaction or happiness and
therefore these are subjective feelings i.e. the concept of welfare is introspective,
psychological, subjective etc and hence cannot be precisely measured.
 Welfare is not only difficult to express bur differs from person to
person(relatively) and even for the same person it is not the same at all times.
 Thus the concept of welfare is extremely confusing and difficult to define.
 Robin adds that human acts cannot be clearly classified into economic and
more economic activities.
 According to Robins all human acts have an economic aspect, that all of them
are related to wealth, directly or indirectly.
 e.g.: If a person goes to church, he is performing a religious act as the motive is
to pray to God but some amount of money is spent on transport i.e. going to
the church and hence it becomes an economic activity as well. The time spent
id praying in the church could have been spent in working and earning an
extra income. Thus going to Church or a Temple according to him is a religious
activity but there is also an economic aspect.
 Thus welfare has many aspects namely economic, social, psychological,
spiritual, moral etc. Thus it becomes highly confusing.
 Hence Robbins does not like the use of welfare in economics.
 He goes on another definition of economics in his famous book namely “The
Nature and Significance of Economics Science”
 This definition became one of the most correct and scientific definitions of
economics.
 It characterizes human life everywhere.

 The definition goes as follows.

“Economics is a science which studies human behavior as a relationship between

ends and scarce means which have alternative use.”

 This has become one of the most famous definitions of economics.

 This definition highlights the following points.
1. Man has unlimited wants
2. The means to satisfy human wants are limited
3. Resources are not only limited by have alternate uses.
4. Man has to make a choice.

1. Man has unlimited wants.

 Man has a variety of wants for food, clothing, shelter, entertainment etc.
 Some wants are basic to human existence like food, clothing and shelter.
 However other wants arise due to conditions of life in civilized society.
 Human wants are unlimited in number and are complex i.e. the satisfaction of
one want leads to another also known as multiplicity of wants which is an
essential characteristics of human existence.
 Human wants have a strong tendency to recur i.e. wants can be
satisfied/satiated at a given point of time but later they have a tendency to
recur/to arise again and again.
 Human wants have not only multiplied but have changed over time and age.
 E.g.: For an infant milk of toys satisfy their needs, for an adolescent, clothes,
music, fashion, gadgets etc are of interest and for an old person, a walking cane,
spectacles, spiritual books etc are satisfactory.
 Hence human wants keep changing from time to time.

2. The means to satisfy human wants are limited

 Multiplicity of wants alone does not create an economics problem.
 If man has unlimited means and also unlimited resources to satisfy them-there
would be no economic problem and all wants can be fully satisfied.
 Resources mean money, capital, land, natural resources, time, physical energy,
mental abilities etc
 No human being therefore has unlimited resources at his or her disposal.
 Most resources are not available in plentiful.
 Infact resources are limited which means that some wants will have to go
unsatisfied.

3. Resources are not only limited but have alternate uses

 Neither the existence of unlimited wants nor the existence of limited resource
constitute an economic problem.
 If resources were product-specific, there would be no problem.
 E.g.: If a plot of land is specific to cotton production “that is it has black cotton
soil, humidity, fertility, rainfall etc and is good enough to produce only cotton on
it, then there would be no problem”
 If factors of production is specific and has to be used for the production of only
one commodity, then there would have been no economics problem as there is
nothing to choose.
 In practice however resources are not specific but have alternate uses.
 E.g.: A plot of land can be put to cotton or rice or wheat or sugarcane cultivation.
Similarly a laborer can work on a farm, in a textile mill, in a coal mine or in a
government office.
 Thus resources available to man are not only limited by have alternate uses and
hence the problem is how best to use land, labour etc.

4. Man has to make a choice

 Man cannot satisfy all his wants as he has limited means and resources at his
disposal and they have alternate uses.
 Man has to decide between:
a) Which wants will he satisfy first and which he will satisfy later?
b) How will he satisfy these wants?
 Similarly what is true for an individual is also true for a nation or an economy.
 Every economy has to make choices:
a) What goods to produce?
b) How much to produce?
c) Where to produce?
d) How to produce?
e) How to distribute these goods?
 Hence every economy will seek to solve these problems in its own way and in
the most efficient manner.

DEFINITIONS

“The study of the nature and causes of wealth of nations”- Adam Smith
 “The study of mankind in the ordinary business of life……………. On one side the
study of wealth and on the other and more important side, a part of the study of
man”- Alfred Marshall

“It is that part of welfare which can be brought directly or indirectly in relation
with the measuring rod of money.”- A.C Pigou

“Economics is a science which studies human behavior as a relationship between

ends and scarce means which have alternative use.”- Lionel Robins