What is Economics

General Definition

the study of the choices that people make in overcoming the problems that arise because resources are limited, while needs and wants are unlimited.

Classical Approach by Adam Smith

Economics is the science of wealth.

Definition by Adam Smith

Economics is the science which studies the production, distribution, consumption and exchange of wealth

Four aspects of wealth:

Production of Wealth

Distribution of Wealth

Consumption of Wealth

Exchange of Wealth

Production

Production of wealth means how to produce wealth. Wealth can be produced with the the help of four factors of production i.e. land, labour, capital and organization.

Distribution

Wealth produced by these four factors is distributed among them as follows Land obtains rent, labour gets wages, interest to capital and organization gains profit.

Consumption

When we use goods and services to satisfy our wants, it is called consumption of wealth. All the goods and services, which we obtain are the result of consumption of wealth.

Exchange

When wealth passes from one person to another person or it transfers from one country to another country, it is called exchange of wealth.

Alfred Marshall Approach

Economics is the science of welfare.

Alfred Marshall Definition

Economics is a study of mankind in the ordinary easiness of life. It examines that part of individual and social action which is most closely connected with the entertainment and use of material requisites of well-being.

Main Points

Welfare
To Promote Material Welfare
Social Science
Subject matter

Science of welfare

Human welfare means to satisfy human wants, which is possible by use of wealth Human beings are most important. so wealth stands to a secondary position.

To Promote Material Welfare

Marshall discussed only those activities in economics, which promoting human welfare.

Non-material activities are excluded from the study of economics like the services of teachers, lawyers, judges ete, because they do not provide material welfare.

Social Science

Economics is a social science It studies the activities of the person who lives in this society (his choices).

It excludes the activities of the person who are not living in this society. For example. Isolated people like beggers, people living in jungles.

Subject matter

According to Marshall the subject matter of economics is to attain material welfare.

Robbin’s Definition

Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.

Main Idea

Economics is the science of scarcity and choice

1. Unlimited wants

.

2. Wants varies in importance

For some, rent is more important than food. For others, food may satisfy them greatly as compared to paying rent on time.

3. Scarce means

Resources are quite limited.

4. Alternative uses of resources

Resources can be applied on different uses. e.g. Money.

5. When a person has enough money, he might ask:

• Should I buy or lease a car?

• Should I invest in stocks?

• What’s the best way to use my money?

Opportunity costs

whenever a choice is made by an economic agent concerning the use of its resources, something is given up or sacrificed.

Trade off

The next best alternative when an economic decision is made

Every trade-off comes with

an opportunity cost.

The Trade-off is the Action.

The Opportunity Cost is the Price Tag.

In other words for trade-off vs opportunity cost:

act of choosing vs value of the loss.

Example 1.

My parents want to have lunch but I have to go to class, and that is like a trade-off.

You either pay with your class, or you pay with time with your family.

Example 2.

An hour spent studying is an hour that can't be spent sleeping

(thus, the opportunity cost of one hour of studying would be one hour of sleeping).

• The Action: "I am choosing a Police Officer over a Teacher."

• The Concept: You are trading "Education" for "Safety."

• The Price Tag: "The cost of this safety is one less classroom of educated children."

• The Concept: It is the specific benefit you could have had but walked away from.

Free goods

If there is no scarcity if a good, and everyone can have as much as they want, it is called a free good

Nothing is free

In economics, nothing is free. Even if you are getting free lunch, there is the cost of time associated with it.

Common trade offs

Income, Time.

Macroeconomics

Definition: It is the branch of economics that deals with the performance, structure, and behavior of the economy as a whole.

Microeconomics

Definition: It is the branch of economics that studies the behavior of individual components of the economy.