WordPress.com



Introduction of EconomicsThe word economics was derived from the Greek word ‘Oeconomicus’ which means household management and agriculture management. Economics is social science which is dynamic in the sense that economics got changed with the change in time and human civilization. Economics was used in the early time of human civilization informally because people used to live outside the society. When the society has developed, increased numbers of family, production in large scale, exchange, development of market and invention of money to facilitate the transaction got the importance place in the area of economics. Now, in the modern times the scope of economics has become very broad and includes the each and every sectors of the society and hence economy. The overall development of economics can be divided into the following three periods. Classical period (1776-1890)The period between 1776 and 1890 is known as classical period in the history of economics. In this period, the classical economist, Adam Smith, the leader of classical school, defined economics as a science of Wealth in his book “Wealth of Nation”. Adam smith defined the economics as the science for the first time and gave definite shape to economics in the history of economics. Since he gave particular definition of economics for the first time, he is known as father of economics. Adam smith defines economics as science of wealth. According to him, it is only wealth to satisfy human needs in the society. So, people must effort for increasing the volume of wealth. In this period, other economists like J.B Say, Ricardo, and Malthus etc. were the followers of Smith and they also defined the economics as science of Wealth. According to J.B say “Economics is that body of Knowledge which relates to wealth”. It shows that in classical period economics was related with the study of wealth and wealth generating human activities. To Smith, only way to increase wealth in the society is the increase in the productivity of labor which depends on division of labor. Further, division of labor depends on the extent of market. It means labor division becomes more possible when market is free and large. Adam smith’s definition can be explained in the following points.Study of Wealth Wealth definition deals with production, exchange, distribution and consumption of wealth. Significance of wealth According to the wealth definition human beings make all his effort only to earn wealth and he satisfies all his wants only with wealth. So wealth is very important Primary Place to wealth Adam smith gave first priority to wealth and second priority to man in his definition. According to him, main goal of every human is to earn wealth and man is only means. So, man is for wealthStudy of Economic manSmith distinguished between economic and non-economic man. In his view, economics studies only those persons who are directly and indirectly involved in production and consumption of wealth. Economics does not study non economic man. Source of wealthAccording to Smith there is only one source of wealth that is employed labor. Criticism of Wealth Definition When the time was near of 1890 the classical ideas were bitterly criticized specially by Ruskin, Morris and Caryel. They abused his economics as bread and butter. It was criticized by Marshall and other economists in the following way. Narrow Definition According to critics Adam smith made the scope of economics narrow. He only considers wealth and left important aspect mankind and welfare. Similarly it neglected non material wealth and satisfaction from various services. In this sense, Smith narrowed down the scope of economics.Single source of wealth To Adam Smith, only employed labor is source of wealth but in reality there are other sources of wealth like capital, natural resources, socio economic institutions and entrepreneurs etc. when labor is combined with these sources the only wealth generation is possible. Too much emphasized on wealth Smith emphasized more on wealth. To him, wealth is goal of every people and to satisfy human wants only wealth is sufficient. But, he ignores the welfare from the wealth. Similarly, he neglects satisfaction from various services. Secondary Place to man According to Smith wealth is primary thing which is all in all in the society. He gave second place to mankind. But, in reality, man is primary subject and wealth is secondary in the society. Man is centre of every economics activities. So Adam smith is wrong to consider wealth as primary subject. Too much emphasis on economic man Adam smith gave the idea that economics studies only economic man. His assumption of economic man is wrong. In the sense, it is very difficult to distinguish between economic and non-economic man. Further, non economic aspect is also very important aspect of society. Overdependence on marketAccording to smith market economy (free market system) is only way to increase the wealth in the society. But concept of free market (laissez faire) does not deal with the problem of underdeveloped countries like Nepal. Because free market creates gap between rich and poor. Though classical definition was criticized on some above grounds, it has greater role in the development of economics. Because Adam Smith brought into existence s separate science. Neo-classical Definition The period between 1890 and 1932 is regarded as neoclassical definition. When classical definition was criticized bitterly, Alfred Marshall, a leader of neo-classical school gave new dimension to economics with the publication of his book “Principle of Economics” in 1890. He saved economics from disregard and disrepute and brought from wealth to welfare. Alfred Marshall defined the economics as a science which on the one hand studies wealth and on the other hand and more important side studies man and man’s welfare. Here Alfred Marshall assigned first priority to individual and social welfare where secondary place to wealth. According to Marshall “economics is the study of mankind in ordinary business life. It examines that parts of individuals and social action which is most closely connected with the attainment and use of material requites of well being”. Marshall highly emphasized on the study of only material welfare and ordinary man where to him economics does not studies not material welfare and extra ordinary man.Hence, welfare definition defines the economics as the science of material welfare. It establishes linkage between wealth and welfare (man).welfare definition can be explained in the following points. Welfare is Primary ConcernWelfare definition considers that wealth is for material welfare of any individuals. It rejects the idea that man is for wealth and it gives primary concern on material welfare and secondary place to wealth. But it does not consider non-material welfare. Study of ordinary man This definition stressed on ordinary man who earns wealth and uses it to get material welfare. But it does not study extra ordinary man like mad person, hermit, sadhu mahatma etc. Social scienceAlfred Marshall advocated economics as a social science which studies human behavior and activities in the society. But it does not study isolated person who lives outside the society. Normative Science Neo-classical definition of economics explains economics as normative science because it studies with what should be. It means economics studies the causes after material welfare and talks about what should be done to get material welfare from wealth. It can be concluded that welfare definition of economics describes how to get maximum material welfare with the use of wealth. So, economics is science of material welfare. Criticism of Welfare Definition At the time of early 20th century neo-classical ideas were criticized by modern economist like Leonel Robbins as follow: Welfare definition is classificatoryWelfare definition is criticized as classificatory definition but not analytical because it classified welfare into material and non-material and man into ordinary and extra ordinary. However, it does not give clear explanation of this concept. Narrow scope Alfred Marshall has limited the scope of economics to ordinary man and material welfare only. It ignores non- material aspect and extra ordinary man which have also clear economic meaning. Emphasized only on normative aspectAccording to Marshall, economics is normative science which deals with what should be. But he ignores positive aspect of economics that means what is. There is no meaning of normative science without positive aspect. Surfacial definitionWelfare definition is criticized as surfacial definition because it does not study centre economic problems scarcity and choice. It excludes human science To Marshall, economics studies people’s activities and behavior only inside the society and it does not study behavior and activities of the people outside the society. But people living outside the society like sadhu, mahatma etc. has also economic problems and they must be studied by economics. Contradictory Welfare definition is contradictory because on the one hand it talks about material welfare which is objective and at the same time it talks about utility which is subjective. Similarly there is contradiction in the meaning of welfare also because same physical goods like smoking gives satisfaction to someone and negative welfare to others. Welfare cannot be quantitative According neo-classical economist Pigou, welfare is quantitative and it is measured by money. But, the welfare from same amount of money differs from person to person, time to time and place to place. For example, same amount of money gives higher welfare to poor people and lower to rich people. Despite several demerits of this definition, it has redefined economic ideas of classical period and gave the different scope of the economics. Modern definition of EconomicsIt has been said that modern period was started in 1932. But, formally it was started in 1935 with the publication of Robbins’s book “An essay on the Nature and Significance of Economics”. Modern definition given by Robbins is scientific and logical in the sense that he explains the basic economic problem scarcity and choice. Robbins advocates that economics studies the central problem of all economic agents (producer, Seller, consumers) that is scarcity and choice. So, he explains economics as science of scarcity and choice. This definition is related with the problems arising from scarcity like how to make choice. Hence, Robbins definition can be defined as science of choice. According to Robbins “Economics is the science which studies human behavior as a relationship between unlimited ends and scarce means which have alternative uses”. Some other economists like Stigler also concerned with scarcity and choice.Robbins definition can be explained in the following main points. Human wants are unlimited According to Robbins there is multiplicity of wants where fulfillment of one want creates another want automatically. So we cannot fulfill all our wants at once or even during our life time.Limited Resources Resources are limited or scarce in comparison to human wants because human wants are always increasing but resources are not. Wants are of varying importanceAccording to Robbins unlimited human wants are not equally important. Some are more urgent and some are less. So, choice between them is possible and we can fulfill more urgent need now and postpone the less urgent wants. Alternative uses of resources. Robbins explains that scarce resources can be used in various uses on the basis of necessities. It helps to make choice and usefulness of available resources. That means scarce resources can be best utilized. Choice is the main problem Unlimited wants with different priority and limited resources with alternative uses create the problem of scarcity. So, main problem of economics is choice. That means how to make a choice among various alternatives is the major problem. Economics is pure or positive science Robbins explains economics as pure science like Physics and Chemistry which depends on fact not on value judgment. Similarly, to his economics is positive science which deals with what is. Efficient allocation. Robbins definition stresses on efficiency in the use of scarce resources to satisfy different human wants. Efficiency in allocation of resources is necessary to overcome the problem of scarcity and create efficiency in production and distribution. Hence Robbins definition is scientific and universally accepted definition because his definition is not classificatory and is more analytical. It deals with the problem of almost all economy that is scarcity and choice. Criticism of Robbins Definition Though Robbins’s definition is scientific, logical and universally accepted, some economists like Barbara Wotton and Frasar etc. have made criticism in the following ways. Still incomplete definition According to critics scarcity definition is incomplete because it only talks about scarcity and choice but is not able to address burning and current problem of any economy like poverty, unemployment, inequality, inflation economic growth and economic development. Scarcity is not only problemCritics say that as Robbins states economic problem does not arise only from scarcity but also due to the overproduction, inefficient use of resources, and misuse of resources and mismanagement of economic organizations. These all create disinvestment and unemployment.Wrong assumption of pure science Robbins says economics is a pure science which is tested on the basis of fact and statistical tools etc. however, some issues like utility, satisfaction, poverty, inequality cannot be measured in quantity with the help of scientific tools. Similarly unlike pure science economics studies human behavior which gets changed with time. So conclusion of economics cannot be applied as that of pure science everywhere. It neglects the normative aspect Robbins considers economics as positive science but ignores the normative aspects. In reality positive aspect is incomplete in the absence of normative aspect Similar to Marshall’s definitionRobbins’s definition is similar to Marshall’s definition in the sense of welfare. Robbins says that scarce resources are used to get maximum satisfaction. Here scarce resources are similar to the Marshall’s concept of wealth and satisfaction means welfare. Limited on allocation of resources. Scarcity definition explains only how scarce resources are allocated to get the maximum satisfaction but Robbins does not talk about the further process like production, exchange, distribution, consumption and re-utilization of resources.Critics claim that Robbins definition cannot be applied in rich and socialist country because problem of rich country is plenty of income and over production but not scarcity. Similarly, socialist economy focuses on providing basic needs to the people on the basis of collective choice and in such economy there is no proper choice between ends and means as Robbins says. In this way, if we leave some short comments, Robbins’s definition is more scientific, analytical and practical since it deals with main economic ideas scarcity and choice. Similarities between Marshall’s and Robbins’ definition. Both deal with Scarce resourcesAccording to Marshall, wealth is the thing that is scarce where as Robbins mentions scarce resources which is wealth. Both give importance to man Marshall was focused on human activities and Robbins is concerned with human behavior as a relationship between ends and scarce. The centre concern of both is maximization of human satisfaction. Both Concern with welfareMarshall is mainly interested in material welfare where as Robbins is interested in satisfaction which means welfareBoth Explains Rational man Both of them explain the rational man who aims to maximize welfare\ satisfaction with given resources. Superiority of Robbins definitionRobbins definition is superior in relation to Marshall because of following reasons. Robbins definition is ScientificRobbins definition is scientific because he does not classify man as ordinary and extra ordinary and welfare as material and non material. His definition is analytical in comparison to Marshal.Robbins definition is universally accepted Marshall has mainly focused on such problem which is applicable for only some people where as Robbins talks about scarcity and choice which is applicable to all type of individual, society and economies. Wide Scope of Economics Marshall confined economics into only material welfare, ordinary man and to him economics only studies man in society. But Robbins includes all of the things and he clearly mention about the human science. Economics as Positive Science Robbins definition explains economics as exact or objective. Whereas, Marshall studies normative science which is less exact and reliable. Scope of Economics Scope of economics means the area it covers. It means it deals with the range of things that the economics deals with. It includes, Subject matter of Economics Nature of EconomicsSubject Matter of Economic The issues or things or maters economics covers are known as subject matter of economics. Subject matter of economics is dynamic in the sense that it changes with the change in human civilization and thought and ideas. The subject matter of economics can be defined on the basis of following three bases. On the basis of representative definition Different economists have given their own definition of economics which specify the subject matter of economics. According to Adam Smith, the subject matter of economics is wealth. Whereas, Marshal has defined scope of economics as material welfare. To Robbins, economics is the science of scarcity and choice On the basis of economic activities Human being wants to maximize the satisfaction from everything. So, they make various economic activities in order to obtain it. These economic activities are subject matter of economics. Production Production is the creation of utility. It mainly deals with factors of productions and laws of productions. Consumption It deals with consumer behavior and utility. Under consumption it explains theory of demand and law of diminishing marginal utility.Distribution Mainly distribution is related with factor pricing which is share of every factor of production in national income.Exchange Exchange means transfer of goods and services from producer to consumers with the help of medium of exchange, money. Under exchange, economics studies the markets like perfect competition and monopoly. Public Finance It studies the income and expenditure of government. It means public finance is the study of financial activities of governmentInternational Trade Mainly it studies the import and export of goods. C) On the basis of division of economicsIn modern times, economics is defined as micro and macro economics. Microeconomics studies the small economic units such as individual income, demand, supply, price of particular price and factor, production of firm etc. Macroeconomic is studies the aggregate economic units such as general price, total production, aggregate demand, Aggregate supply national savings etc. Nature of Economics Is Economics Science or art? A science is a systematic body of knowledge which makes comprehensive study of any subject. Science derives the conclusion on the basis of facts and experiments which establishes cause and effect relationship. Scientific laws are universally applied. For example we can take law of gravitation law. Similarly Economics is also a systematic study of knowledge because it studies consumption, production, exchange and distribution systematically. Like other scientific laws, most of the economic laws, such as law of demand, establish cause and effect relationship among the various economic variables and the conclusion is derived from fact and experiment. As science it arises practical problem. So, economics is science, however, it is not exact science. It is social science which studies human behavior which changes from person to person and time and time. Art is related with the creation of new knowledge and ideas. It is a body of knowledge that guides an action and teaches how practical problems are solved. Economics provides solution to problems of economics such as problem of poverty, unemployment, inequality etc. by making plan, policy and programmes. So it is also an art. Hence, we can conclude that economics is both science and art. Economics as Positive and normative scienceEconomics as positive science Positive economics is a systematized body of knowledge that studies what is or what actually is. It talks about what exists. Positive economics was introduced at the time of classical period and it is also followed by modern economists. Positive economics always makes explanation and analyze the economic variables. It is based on facts and experiment but not on value judgment and public opinion. Positive economics establishes causes and effects relationship between economic variables (such as between income and expenditure: when income increases expenditure also increases).it means positive economics follows the scientific process. It makes the decisions following scientific processes. The conclusion is universally applicable, widely accepted and there is no chance of personal bias. Furthermore it is an objective science which reveals the economic problems in the economy. Basically, positive economics develops economic laws and theories assuming some proposition. Law of demand can be taken as the most important economic theory of positive economics. The conclusion of positive economics can be verified with empirical evidences. Hence, positive economics is a science which makes explanations and prediction on the basis of facts. Economics as a Normative ScienceNormative economics is the science that studies what should be or what ought to be. Normative economics studies what is best among the alternatives. It was introduced in the neoclassical period by Alfred Marshall. Normative economics is subjective which provides the solution of the existing problems raised by the positive economics. It derives the conclusion on the basis of personal opinion, value judgment and ethical consideration. So the conclusion of normative economics can’t be applied universally and it differs from person to person. Normative science does not follow scientific process and it does not establish causes and effect relationship between economic variables. It means normative economics does not make the explanation and prediction of any subject. There is the chance of personal bias in the derivation of conclusion. Normative economics is applied in policy sciences which make plans and policy such as tax policy, fiscal policy etc. in order to solve the practical problems of economy. So it is also known as policy science. Its conclusion can’t be verified tested and proved. Hence, normative economics is related with the maximization of returns related to production and consumption. Microeconomics and Macroeconomics Microeconomics The word micro is derived from the Greek word mikros which means a small or part. So, micro economics is the study of behavior of small or individual economic units like firm, a person’s income, individual demand and supply, price of particular product etc. sometimes it studies a small group of individual unit such as industry, market etc. Microeconomics is the microscopic study of economic units. Here, micro economics studies tree but not forest. According to K.E. Buildings ‘ Microeconomics is the study of particular firm, particular household, individual prices, wages, income, individual industries, particular commodities.’ The main objective of microeconomics is to study the equilibrium state of consumer and producer. It deals with the equilibrium of a consumer which means it is related with how consumer maximizes his satisfaction by given resources. It deals with the situation of producer’s equilibrium which means it studies how he allocates his limited resources to get maximum profit. Micro economics tries to study the market economy where price is very important factor. It means micro economics explains how price of particular product and factor is determined on the basis of demand and supply. So, micro economics is known as Price theory. Microeconomics makes the economic analysis with the help of assumptions like other things remaining the same (ceteris peribus). Assumptions of microeconomicsMicroeconomics makes the study of individual unit with following pointsFull employment in the economyResources are givenTotal output is fixGeneral price level is givenMicroeconomics makes economic analysis with assumptions like ceteris peribus. It studies the equilibrium of particular sector assuming other all sectors constant. So, it is known as partial equilibrium analysis. Microeconomics can be understood with the following ideas. Allocation of resources Microeconomics explains the use of scarce resources to maximize satisfaction or profit. It deals with the what, how, how much and to whom to produce. Theory of price Microeconomics is related with the determination of price of particular product and price of particular factor in the respective market on the basis of their demand and supply.Theory of economic welfare Microeconomics is related with efficient utilization of factors of production and other resources to attain maximum return. Hence, microeconomics aims to achieve economic efficiency in production, consumption, distribution and exchange to increase economic efficiencyMacroeconomics The word macro is derived from the Greek word micros which means big or aggregate. It means macro economics is the study of aggregate economic units such as national income, total product, general price level, aggregate demand and aggregate supply etc. Macro economics is the study of any subject as a whole. It means it studies forest not the tree. The main objective of the macroeconomics is to maintain economic stability through monetary stability and price stability. Basically, it studies aggregate demand and aggregate supply where aggregate demand is consumption and investment expenditure. According to K. E. Building,’ Macroeconomics is that part of economics which studies overall averages and aggregate of the system rather than particular unit’.It can be said that macroeconomics studies functioning of economy as a whole. It is related with the formulation of macroeconomic plans and policies like fiscal and monetary policies. So, it is known as policy science. Fiscal and monetary policies are economic tools that help to solve practical problems of economy. AssumptionsMacroeconomics assumes individual economic units given and studies aggregate of all individual variables. Individual price and wage are givenIndividual income is given Employment of individual factor is constant Since, macroeconomics studies equilibrium of all economic variables or sectors at a time together it is known as general equilibrium analysis. Macroeconomics can be understood with the following features. Theory of income and employment It deals with the determination of total income and total employment in the economy with the help of aggregate demand. Theory of general priceIt studies the average price of the whole economy assuming individual price constant. Similarly, under the theory of general price level it deals with the inflation, deflation, money and banking etc. Theory of economic growth Economic growth refers to the change in rate of growth of primary, secondary and tertiary sectors as a whole. It requires increase in the living standard of people. Macroeconomics formulates fiscal and monetary policies for economic growth. Modern theory of distribution It is related with the determination of aggregate price of factors of production in the form of rent, wages, interest and profit. It determines the relative share of factors in national income. So, it is known as distribution theory.Thus, macroeconomics is related with the economic system as a whole. Importance of Economics in economic analysis Importance of microeconomics Micro economics is the study of individual economic units and has following importance To understand working of economy It helps to know how an economy operates by the study of behavior of micro economic variables like individual income, production of single firm, price of particular firm etc. To solve current economic problem Micro economics helps to solve the current economic problems such as poverty, pollution, inequality etc. Efficient allocation of resources Microeconomics develops economic theories like theory of cost, production, exchange etc. Which helps to make productive use of resources that brings efficiency in the economy.Price determination Microeconomics helps in the determination of price of particular product and price of particular factor in the respective market on the basis of their demand and supply.Policy formulation and implementation Microeconomics helps to formulate and implement the policies like price policy, trade policy etc. with the study of individual units. To understand the macroeconomic variables To understand some macroeconomic variables like national income, general price level, aggregate demand, and aggregate supply etc. microeconomic variables are necessary. For example, to know about NI we must know the individual income. Importance of MacroeconomicsMacroeconomics which studies aggregate economic variables has the following importance. To know the functioning of economy Functioning of the economy is studied with the study of behavior of the aggregate economic variables like NI, AD, AS, etc. Formulation of Economic policiesMacroeconomics is known as policy science because it is mainly related with the policy formulation. In modern period, it helps to formulate policies like investment policy, trade policy, fiscal policy etc. Economic growth and economic development For economic growth and economic development it requires higher rate of increase in total production and income. Various macroeconomic plans and policies help to promote investment, production and hence economic welfare. It makes economic development ultimately. Economic stability and monetary stability Macroeconomics analyzes money supply and general price level and helps to control inflation deflation etc. it leads to economic and monetary stability. To solve various problems Macroeconomic helps to solve the various socio economic problems of the society with the formulation of accurate macroeconomic policies. To understand microeconomic variablesEvery individual unit is explained and measured with the help of aggregate of that unit. For example, price of a particular product explained or determined by general price level and wages of single labor depends on national wage policy. Similarly macroeconomics helps to determine the relative share of factors of production in national income. It means it helps to distribute NI Distinguish between micro and macro economics Though Micro economics and macroeconomics seem interdependence to each other, they have some distinct features. They are Microeconomics focuses on allocation of resources assuming full employment in the economy where macroeconomics focuses on achievement of full employment in the economy. Under microeconomics market equilibrium is determined by individual demand and supply where in macroeconomics such equilibrium is determined by AD and ASMicro economics is static analysis because it explains equilibrium at particular time. Where macro economics is dynamic analysis which deals with rate of change BEST OF LUCK ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download