TOPIC 1 OF ECONOMIC DEVELOPMENT PDF

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TOPIC 1NATURE AND SCOPE OF ECONOMICSEconomics is defined as the social science that deals with the production, distribution, and consumption of goods and services. Evolved in the 19th century, the economic studies have become one of the most significant studies of modern days. From a small shop to a...

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TOPIC 1 NATURE AND SCOPE OF ECONOMICS Economics is defined as the social science that deals with the production, distribution, and consumption of goods and services. Evolved in the 19th century, the economic studies have become one of the most significant studies of modern days. From a small shop to a country, Economics plays a crucial role in the efficient running of both. No business can flourish without applying the principles of economics. The study of economics is extensive and varied. The nature and scope of economics depend upon the interaction of economic agents and how economies work. Let’s analyze the nature and scope of economics deeply. Different Viewpoints on Economics What are the various viewpoints that further justify the nature and scope of economics? • Classical Viewpoints The classical Economists focused on the concept of wealth. Adam Smith- founder of economics himself said that the study of nature and the causes of generating the wealth of nature. All this is considered as the scope of Economics. In his famous book “An Inquiry into the Nature and Causes of the Wealth of Nations”, he believed the production & expansion of wealth as the subject matter of economics. However, Recado, a noted economist emphasized on the distribution of wealth is the study of economics. JB Shaw- a French economist further explained that it is a science which treats with wealth. JS Mill defined the scope of economics as a practical science of production and distribution of wealth. All these definitions of classical economics solely focused on the concept of wealth.

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• Neo-Classical Economics Basically, among all neoclassical idea propagators, Alfred Marshall falls on the top list. It is believed that he has given a reputed place to Economics within the domain of Social Science. He said that “Wealth was observed as the basis of human welfare. Political economy or economics is a study of mankind in the ordinary business of life”. Overall, we can say that neo-classical Economists laid emphasis on the overall Human development. • Scarcity Robins- one of the noted economist said has given a scarcity definition under the scope of Economics. He said economics is the science which studies human behavior as a relationship between the ends and scarce resources which have an alternative use. Nature of Economics The nature of economics deals with the question that whether economics falls into the category of science or arts. Various economists have given their arguments in favor of science while others have their reservations for arts. In the simplest terms, the nature and scope of Economics is prevalent as an art and science. Economics as a Science To consider anything as a science, first, we should know what science is all about? Science deals with systematic studies that signify the cause and effect relationship. In science, facts and figures are collected and are analyzed systematically to arrive at any certain conclusion. For these attributes, economics can be considered as a science. However, economics is treated as a social science because of the following features: • It involves a systematic collection of facts and figures. • Like in science, it is based on the formulation of theories and laws. • It deals with the cause and effect relationship. • These points validate that the nature of economics is correlated with science. Just

as in science, various economic theories are also based on logical reasoning.

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Economics as an Art It is said that “knowledge is science, action is art.” Economic theories are used to solve various economic problems in society. Thus, it can be inferred that besides being a social science, economics is also an art. Economics as an art is the implementation of theories, concepts and findings to achieve goals. Thus, the practical application of the scientific economic findings comes under Economics as an Art. It includes graphs, figures, tables as well as equations. All the theories in it are well explained with the help of graphical representations. Moreover, all those theories are perfectly explained defining the relationship between economic variables and, application of theories etc. Many economists evolved over the year who presented their divergent views about economics. Some believe that economics can be seen through the prism of science and some believed its falls in a category of Arts. Scope of Economics The word scope can be understood as “the extent of the area that something deals with”. Major things come under the preview of Economics are considered as its nature and scope. Economists use different economic theories to solve various economic problems in society. Its applicability is very vast. From a small organization to a multinational firm, economic laws come into play. The scope of economics can be understood under two subheads: Microeconomics and Macroeconomics. Let’s discuss these in detail: Microeconomics Microeconomics it deals with the applications of economics on an individual economic activity, industries, and their interaction. It has the following characteristics: • Elasticity: It determines the ratio of change in the proportion of one variable to another variable. For example- the income elasticity of demand, the price elasticity of demand, the price elasticity of supply, etc.

• Theory of Production: It involves an efficient conversion of input into output. For example- packaging, shipping, storing, and manufacturing.

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• Cost of Production: With the help of this theory, the object price is evaluated by the price of resources. • Monopoly: Under this theory, the dominance of a single entity is studied in a particular field. • Oligopoly: It corresponds to the dominance of small entities in a market. Macroeconomics It is the study of an economy as a whole. It explains broad aggregates and their interactions “top down.” Macroeconomics has the following characteristics: • Growth: It studies the factors which explain economic growth such as the increase in output per capita of a country over a long period of time. • Business Cycle: This theory emerged after the Great Depression of the 1930s. It advocates the involvement of the central bank and the government to formulate monetary and fiscal policies to monitor the output over the business cycle. • Unemployment: It is measured by the unemployment rate. It is caused by various factors like rising in wages, a shortfall in vacancies, and more. • Inflation and Deflation: Inflation corresponds to an increase in the price of a commodity, while deflation corresponds to a decrease in the price of a commodity. These indicators are valuable to evaluate the status of the economy of a country. Examples of Micro and Macroeconomics There are numerous examples of Micro and Macroeconomics across factors, aspects and economic activities. Here is the difference between Micro and Macroeconomics with example: Examples of Microeconomics • Inflation • GDP

• Unemployment rates • Economic outputs • Price Stability Page 4 of 7

• Goods • Productivity • Stability Examples of Macroeconomics • Supply • Demand • Prices • Elasticity • Competition • Opportunity Cost • Competitive Advantage • Consumer Choice • Welfare Economics

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Basis of Difference Between Micro & Macro Economics

Macroeconomics

Microeconomics

Definition

It aims to study the economy as a whole and covers different market segments.

Focusing on an individual level, Microeconomics studies a specific market segment in an economy.

Central Approach

Takes an expansive approach by studying the whole economy.

More of an individual-centric approach as it is concerned with businesses and households and analyses consumer behavior, resource

allocation and human choices. Concerned with

Also called as the income theory because it describes the changing levels of national income of an economy during a certain period of time.

Referred to as the price theory, it deals with factor pricing such as rent, interest, wage, profits, etc for land, labor, capital and enterprise and explains how different prices are decided.

Factors

National income, GDP, distribution, employment, general price level, money, etc

Demand, supply, factor pricing, product pricing, economic welfare, production, consumption, etc.

Importance

Preserves stability in the broad price level and solves the major issues of the economy like deflation, inflation, rising prices (reflation), unemployment and poverty, etc.

Plays a significant role in regulating the prices of a product alongside the prices of various factors of production (labor, land, entrepreneur, capital, etc) within the economy.

Applications

It helps in strengthening policies and uniform resource distribution at the economy level such as unemployment, inflation level etc.

It helps in developing policies to facilitate appropriate resource distribution at the firm level.

Examples

National Income & Savings; Aggregate Demand; Inflation Rates, GDP; Rate of Employment, Poverty, etc.

Individual Income & Savings; Determining the price of a specific good or commodity; Consumer Equilibrium; Output generated and produced by a specific firm.

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Relationship Between Micro and Macroeconomics The similarities between Micro and Macroeconomics are based on the factor that they

both study the different economic problems. Microeconomics studies the economic problem of scarcity and choice at an individual level and how an individual makes these economic decisions and Macroeconomics expands it further to the economy as a whole thus studying how a country is able to take large-scale decisions of making economic budgets, tackling inflation, competition across markets and much more. The relationship between Micro and Macroeconomics is that they are dependent on each other because microeconomic variables largely rely on macroeconomic variables and similarly macroeconomics depend on the microeconomic variables in an economy. For example, every individual’s income (microeconomic variable) in an economy would largely the national income (macroeconomic variable) and on the other hand, the overall inflation rate (macroeconomic variable) would also affect the purchasing power of an individual (microeconomic variable) in an economy.

“The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.” ― John Maynard Keynes

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