Short Note

UNIT 1: INTRODUCING ECONOMICS

Economics is an extremely useful subject that has acquired greater importance recently as countries worldwide face growing economic problems. The study of this discipline advances logical thinking, enhances analytical skills, and improves our ability for observation and judgment. It is useful to individuals and society as a whole.

1.1 MEANING OF ECONOMICS

• Origin: The term is derived from the ancient Greek word oikonomia, meaning the management of a family or a household.
• Definition: Economics is a branch of social science that studies the efficient allocation of scarce resources to attain the maximum fulfillment of human needs.
• The Science of Choice: It studies how people choose to use limited productive resources (land, labour, equipment, technical knowledge, etc.) to produce various commodities.
• Key Premises:
  • Resources are scarce.
  • Human needs are unlimited.
  • Allocation of resources must be efficient.

The Nature of Economics

• Economics as a Science: It produces a systematic and organised body of knowledge that links causes and effects. It collects, classifies, and analyses facts to make predictions about the future.
• Economics as an Art: It provides techniques or ways of achieving something. It examines the causes of economic problems and sets procedures for finding solutions.

1.2 BRANCHES OF ECONOMICS

The foundation of modern economics rests on two major branches:

1. Microeconomics:
   • Concerned with the economic behavior of individual decision-making units such as households, firms, and governments.
   • Deals with how these units make decisions and interact in specific markets.
   • Fundamental Problem: Resource allocation or price determination.
2. Macroeconomics:
   • Deals with the effects and consequences of the aggregate behavior of all decision-making units in an economy.
   • Examines interrelations among aggregate variables like total employment, national income, and total investment.
   • Fundamental Problem: Full employment of economic resources.

1.3 METHODS AND APPROACHES OF STUDYING ECONOMICS

Methods of Studying Economics

• Deductive Method:
  • Proceeds from general to particular.
  • Involves reasoning from certain principles to the analysis of specific facts.
• Inductive Method:
  • Proceeds from particular to general.
  • Develops theories based on observations, experiments, and comprehensive data collection.

Approaches of Studying Economics

• Positive Economics:
  • Concerned with facts and attempts to describe the world as it is.
  • Answers questions of “what is,” “what was,” or “what will be”.
• Normative Economics:
  • Involves value judgments and asks “what the economy ought to be” or “should be”.
  • Evaluates the desirability of outcomes based on opinions of what is good or bad.

1.4 DECISION MAKING UNITS

The basic decision-making units, also known as economic agents, include:

1. Households:
   • Chief owners of the factors of production (land, labour, capital, and entrepreneurship).
   • They sell factor services to producers and receive income in the form of rent, wages, interest, and profit.
2. Business Firms:
   • Hire factor services from households to produce commodities.
   • They are the leading producers of commodities and principal buyers of factors of production.
3. Government:
   • Purchases goods from producers and factor services from households to provide free services (e.g., education, medical facilities, police).
   • Gets income mainly from direct and indirect taxes levied on households and firms.

KEY TERMINOLOGY

• Business firms: Leading producers of commodities and principal buyers of factors of production.
• Deductive method: Logical reasoning that proceeds from the general to the particular.
• Economics: Branch of social science that studies efficient allocation of scarce resources to fulfill unlimited human needs.
• Economic theory: Generalisations about human behaviour that provide the basis for economic analysis.
• Efficient allocation: The best possible use of scarce resources to achieve maximum fulfillment of needs.
• Government: Economic agent that provides public services and raises revenue through taxes.
• Households: Chief owners of factors of production who receive income by selling factor services.
• Inductive method: Process of reasoning from the particular to the general based on observations.
• Macroeconomics: Study of an economy as a whole and its aggregate variables.
• Microeconomics: Study of individual decision-making units and their interactions in markets.
• Nature of economics: Perspective considering economics as both a science and an art.
• Normative economics: Approach involving value judgments on what the economy should be.
• Positive economics: Analysis of facts to describe the world as it is.
• Scarcity: Imbalance between unlimited human wants and limited productive resources.