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An economy exists because of two facts, i.e. human wants are unlimited and the resources are scarce.
The basic problem of scarcity gives rise to many of the economic problems
The subject-matter and scope of Economics are defined in terms of Wealth by Adam Smith, Welfare by
Alfred Marshall, Scarcity by Lionel Robinson and Growth by Paul Samuelson. But, each definition is
incomplete and inadequate and created confusion about the nature and scope of economics.
The subject matter of economics is divided into two parts Micro and Macro Economics where micro
means small and macro means aggregate.
Economics is a science as well an art. While laying down the laws or theories, Economics may be treated as
a positive science but as a tool of application it must have normative goals in view.
In Economics, there are two methods of deriving generalizations or laws. These are deductive method and
inductive method. In deductive method, the logic proceeds from general to particular. In inductive method, the
logic proceeds from particular to general.
Unlimited human wants and scarcity of resources lead to the central economic problems like what to
produce, how to produce and for whom to produce.
The problem of scarcity and choice-making can be depicted using the tool of production possibilities curve.
The basic economic problems of what, how and for whom to produce are solved by different economies in
different ways. A capitalist economy uses the tool of price mechanism, a socialist economy uses the tool of
central planning and a mixed economy uses a mix of both price mechanism and central planning to solve its
basic economic problems.
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