Comprehensive Introduction to Economics and Economic Principles and Concepts
Etymology and Fundamental Concepts of Economics
Origin of the Term: The word 'Economics' is derived from two Greek words:
'Oikos': Meaning a house.
'nemein': Meaning to manage.
Household Management: Consequently, the literal meaning of economics is 'Household Management.'
Historical Nomenclature: In earlier periods, the subject was referred to as 'Political Economy.'
Core Definition: Economics is the comprehensive study of how individuals and societies utilize limited resources to satisfy unlimited human wants. It explains the processes through which goods and services are produced, distributed, and used in daily life.
Human Activity: All human beings engage in various activities to satisfy their desires. Examples include farmers working in fields, laborers in factories, and professionals like Chartered Accountants (CAs) or Doctors practicing their professions.
Classification of Human Activities
Human activities are broadly categorized into two types based on their underlying objectives:
Economic Activities: These are activities undertaken to earn a living or generate money. Examples include:
A shopkeeper selling goods in a retail shop.
A doctor attending to patients in a private clinic.
Workers performing tasks in a factory.
Non-Economic Activities: These are activities undertaken for personal satisfaction or emotional reasons rather than monetary gain. Examples include:
A housewife cooking food for her family.
A teacher educating his/her own child.
Inspirations: These activities are driven by love, sympathy, patriotism, and sentiment.
Sub-categories of Non-Economic Activities:
Charitable Activities: Blood donation camps or providing free education to students in need.
Social Activities: Attending parties or social get-togethers.
Political Activities: Work performed by various political parties.
Religious Activities: Praying to God.
Principal Economic Activities
Every economy revolves around three primary activities concerning goods and services that are not available for free:
Consumption: An activity involving the use of goods and services to satisfy human wants.
Examples: Eating bread, drinking milk, wearing a watch, or listening to music.
Study Focus: Involved in analyzing the origin, nature, and characteristics of wants and the laws governing them.
Role of Statistics: Helps identify spending patterns among different groups (necessities vs. luxuries) to determine standard of living and taxable capacity.
Production: The process of converting raw materials into finished products to generate income and satisfy wants. It enhances utility by changing the form of products.
Factors of Production: This involves four essential elements: Land, Labour, Capital, and Entrepreneur.
Core Decisions: Determining what to produce (which goods/services) and how to produce (choice of technique).
Role of Statistics: Measures and compares the productivity of the four factors of production and helps adjust supply to meet demand.
Distribution: This activity studies how the income generated from the combined efforts of the factors of production is shared among them.
Allocation of Income:
Rent: Paid for the use of Land.
Wages: Paid to Labour.
Interest: Paid to the owners of Capital.
Profit: Earned by the Entrepreneur.
Focus: Determining how the Gross Domestic Product () is distributed among these factors.
Role of Statistics: Analyzes national income distribution and assists in solving problems arising from unequal wealth distribution.
Essential Economic Roles and Terms
Consumer: An individual who consumes goods and services to satisfy personal wants.
Producer: An individual (e.g., a farmer or manufacturer) who produces goods and services to generate income.
Service Holder: A person who works for another and receives payment in the form of wages or salary (e.g., a doctor in a government hospital).
Service Provider: An individual providing specialized services to others for a payment (e.g., Lawyers, Doctors, Bankers).
Exchange: The study of price determination through the market forces of demand and supply.
Saving: The act of setting aside a portion of income instead of spending it on current consumption; it serves as a source of funds.
Investment: The use of saved funds to purchase assets or generate returns, such as buying shares, depositing money in banks, or starting a business.
Historical Definitions of Economics
Economists have defined the subject in four distinct ways throughout history:
Wealth Definition (Adam Smith, 1723–1790):
Asserts that "Economics is the science of wealth."
Wealth refers to any good capable of satisfying human wants.
Welfare Definition (Alfred Marshall, 1842–1924):
Defines it as "A study of man in the ordinary business of life," examining how man earns and uses income.
Focuses on the promotion of material welfare as a component of human welfare.
Scarcity Definition (Lionel Robbins, 1898–1984):
Defines it as the science studying human behavior as a relationship between ends (unlimited wants) and scarce means (limited resources) which have alternative uses.
Emphasizes that scarcity is universal across all countries and times.
Growth Oriented Definition (Paul Samuelson, 1915–2009):
Studies how society chooses to employ scarce resources for producing commodities over time and distributing them for current and future consumption.
Considered the most comprehensive definition as it incorporates previous views, social welfare, and economic growth.
The Economic Problem and Scarcity
Scarcity: A situation where the supply of a commodity is limited in relation to the demand. It is the root of all economic problems.
The Economic Problem: Primarily a problem of choice. It arises from three main factors:
Scarcity of Resources: Resources like land, labour, and capital are limited; an economy cannot produce everything desired.
Unlimited Human Wants: Human desires are never-ending and vary in priority.
Alternative Uses: Resources can be applied to different purposes, necessitating a choice.
Manifestations of Scarcity: Evident in daily life through long railway queues, crowded transport, shortages of essential goods, and rising prices of petrol or vegetables.
Nature and Branches of Economics
Economics is considered a combination of both Science and Art.
Economics as a Science: It is a systematic body of knowledge studying cause-and-effect relationships. Because economic laws are not as exact as natural sciences, it is categorized as a Social Science.
Positive Economics: Deals with "what is" and how economic problems are actually solved (e.g., stating "Prices in India are rising").
Normative Economics: Deals with "what ought to be" and how problems should be solved (e.g., stating "Prices should not rise").
Economics as an Art: It involves the skillful application of knowledge and principles (learned through study and experience) to achieve desired objectives using human imagination.
Study Branches:
Microeconomics: Studies the behavior of individual units (e.g., individual income, output). Primary tools are Demand and Supply.
Macroeconomics: Studies the behavior of the economy as a whole (e.g., National Income, aggregate consumption). Primary tools are Aggregate Demand and Aggregate Supply.