Comprehensive Introduction to Economics and Economic Activity

Introduction and Etymology of Economics

  • Etymological Origins: The term "Economics" is derived from two distinct Greek words:
    • oikos: Meaning "household."
    • nomous: Meaning "management."
  • Original Meaning: In its original context, it referred to the management of a household using limited funds.
  • Social Context: This logic extends to society at large, which faces the problem of satisfying unlimited human wants with limited resources.
  • Core Study: Economics is the study of the ways and means by which people organize themselves to address the fundamental problems of scarcity.
  • General Definition: It is widely defined as the social science that studies economic activities. However, this definition is considered too broad because it does not specify the exact manner of study, and different economists emphasize different aspects.

Questions & Discussion

  • Interaction between Hari and Friend:
    • Hari: "Do you know what is Economics? Is it related to money like Rupees, Dollars etc.?"
    • Friend: "Not exactly, but I have studied Economics at secondary stage. No, It's more than that. I can only say economics is a study of how people manage income to meet their needs."

Wealth Definition (Classical View)

  • Proponent: Adam Smith (1723−17901723 - 1790), who is regarded as the Father of Economics.
  • Primary Work: He published a book titled "An Inquiry into the Nature and Causes of the Wealth of Nations" in 17761776.
  • Definition: "A science which inquires into the nature and cause of wealth of nations."
  • Focus: This definition emphasizes the production and growth of wealth as the primary subject matter.
  • Main Features:
    • Study of Wealth: The only proper subject is wealth, its nature, and the causes that increase it.
    • Production of Material Goods: To increase wealth, the production of material goods must be stepped up.
    • Material Goods Only: The term "wealth" is limited to scarce and useful material goods (e.g., tables, chairs, books, pens). Non-material goods such as services, water, and sunshine are excluded.
    • Causes of Wealth: Economics is viewed as the study of causes behind wealth accumulation and how richness brings economic development.
    • Economic Man: It focuses on the "economic man," an individual motivated solely by self-interest and the desire for wealth.
  • Structural Emphasis: In this view, wealth is kept at the center (the end), while human welfare is placed at the periphery.

Criticism of the Wealth Definition

  • Undue Importance to Wealth: Critics argue that wealth is not an end in itself; it is only a means to improve human welfare. Human life cannot be sacrificed for wealth.
  • Ignored Non-Material Goods: Adam Smith ignored the significant role of services and non-material goods.
  • Flawed "Economic Man" Concept: In real life, human activities are not strictly influenced by selfish motives but also by social, moral, and religious factors.

Welfare Definition (Neo-Classical View)

  • Proponent: Prof. Alfred Marshall (1842−19241842 - 1924).
  • Primary Work: "Principles of Economics," published in 18901890.
  • Definition: "A study of mankind in the ordinary business of life. It examines that part of individual and social actions which is most closely connected with the attainment and use of material requisites of well-being."
  • Focus: Marshall shifted the focus from wealth to economic welfare. Wealth is on one side, but the study of man is more important.
  • Additional Proponents: Pigou, Cannan, and William Beveridge provided similar definitions.
  • Main Features:
    • Study of Mankind: Economics studies how man creates wealth; man is at the center, and wealth is at the periphery.
    • Ordinary Business of Life: Refers to the activities an ordinary person performs to earn wealth and spend it to achieve maximum satisfaction.
    • Exclusion of Extraordinary Individuals: It does not study "extraordinary" men such as Sadhus or Saints.
    • Emphasis on Consumption: Focuses on the use (consumption) of wealth to generate well-being.
    • Material Welfare: Wealth is not the "be-all and end-all." The primary emphasis is on human welfare, with wealth being the means to that end.

Scarcity Definition

  • Proponent: Lionel Robbins.
  • Definition: "Economics is the science which studies human behaviours a relationship between ends and scarce means which have alternative uses."
  • Core Concepts:
    • Unlimited Wants (Ends): Human wants are endless; once one is satisfied, another emerges.
    • Scarce Means (Resources): Resources (like money and time) to satisfy wants are limited (Resources<WantsResources < Wants).
    • Alternative Uses: Scarce resources can be used for different purposes (e.g., rice can be used to make food or wine).
    • Choice: Because resources are scarce and have alternative uses, people must select the most urgent wants and leave others for later. Economics is thus described as a "science of choice."

Criticism and Merits of Scarcity Definition

  • Criticisms:
    • Abundance Problems: Robbins considers scarcity as the only cause of economic problems, but abundance (surpluses) can also cause crises, such as the Great Depression of the 1930s1930\text{s}.
    • Static Resource View: It ignores the potential growth of resources over time.
  • Merits:
    • Universal Applicability: It applies to all individuals, groups, and nations regardless of their economic system.
    • Superiority: It is considered more scientific than earlier definitions as it remains neutral between ends.

Growth Definition (Modern View)

  • Proponents: Modern economists like Paul Samuelson (1915−20091915 - 2009) and Paterson.
  • Definition: "Economics is the study of how man and society choose, with or without the use of money, to employ scarce productive resources, which could have alternative uses, to produce various commodities over time and distribute them for consumption now and in the future among various people and groups of society."
  • Focus: Focuses on sustainable development and the dynamic problem of production over time.
  • Main Features:
    • Efficient Allocation of Resources: Emphasizes allocation and proper utilization to satisfy more wants.
    • Growth of Resources: Suggests that efforts should be made to increase resources over time.
    • Solutions to Economic Problems: Economics should identify problems and suggest ways to solve them.
    • Dynamism: Addresses the problem of choice within a dynamic framework, considering the passage of time in relation to means and ends.

Keynes's Definition

  • Proponent: Lord Maynard Keynes (1883−19461883 - 1946).
  • Viewpoint: He shifted the focus from the individual to the society as a whole.
  • Definition: Economics is the study of the administration of scarce means and the determinants of employment and income.
  • Macro Focus: It studies the economy as a whole, including variables such as national income, aggregate demand, total consumption, total savings, total investment, and total employment.

Microeconomics and Macroeconomics

  • Origin of Terms: Coined by Prof. Ragnar Frisch in 19331933.
  • Microeconomics:
    • Derived from the Greek word "mikros" (small).
    • Studies small parts of the economy or individual economic units (consumers, firms).
    • The letter 'I' stands for "Individuals."
    • Focuses on price determination of individual commodities or services.
    • Examples: Price of a service, household income, demand for a specific good, output of a single firm.
  • Macroeconomics:
    • Studies the economy as a whole.
    • The letter 'A' stands for "Aggregates."
    • Also known as "aggregative economics."
    • Focuses on income and employment determination for the entire economy.
    • Examples: National income, aggregate demand, aggregate supply, general price level, national output.

Economic and Non-Economic Activities

  • Economic Activities:
    • Definition: Activities of providing, making, buying, or selling commodities or services to satisfy life's needs.
    • Features:
      • Wealth producing and carried out in exchange for money.
      • Measurable in monetary terms.
      • Performed for monetary gain (motive).
      • Basis for economic development.
    • Four Groups of Economic Activities:
      1. Production: The process of creating goods and services (e.g., food produced by a farmer, legal services by a lawyer).
      2. Consumption: The final or direct utilization of products to satisfy wants (e.g., a household eating food).
      3. Distribution: The process of distributing income (wages, rent, interest) among factors of production or spreading products across locations.
      4. Exchange: The buying and selling of goods/services for money.
  • Non-Economic Activities:
    • Definition: Activities carried out solely out of love, affection, sympathy, or patriotism.
    • Features:
      • Performed for self-satisfaction.
      • No financial gain involved.
      • Cannot be measured in money.
      • Nothing is produced for the market.
    • Types of Non-Economic Activities:
      • Social: (e.g., attending birthday parties, cultural programs).
      • Political: (e.g., activities by political parties).
      • Religious: (e.g., worship, temple donations).
      • Charitable: (e.g., helping the poor or disabled).
      • Parental: (e.g., parents' love and care for children).
      • Recreational: (e.g., watching TV, playing games for pleasure).
  • Key Distinction Principle: The same activity can be economic or non-economic based on the motive.
    • Example: A cricket player playing for pleasure is non-economic, but playing to earn money is economic.
    • Example: A teacher teaching their son at home is non-economic, but teaching in a school for a salary is economic.