MODULE 2
Unit 1: Basic Economics
Intended Learning Outcomes:
1. Understand the different definitions of economics and how it is related to other sciences;
2. Differentiate the divisions of economics; and
3. Explain the basic economic problems.
Time element: 10 hours
Name: ___________________________________ Course & Yr.: _______________ Section: _____
Lesson Preparation/ Review/Preview
TASK NO. 1:
UNSCRAMBLE THE LETTERS TO FORM A WORD
PYUSPL
TREKMA
CIONSUMPONT
DMNEAD
ITOFPR
DIUTESTIRB
XEGANECH
LATICAP
XAT
CMTOIOPETIN
1. What comes into your mind when you hear the word “economics”?
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Presentation
THE DIFFERENT DEFINITIONS OF ECONOMICS
By Amaka Metu
1.1
What is Economics?
Economics is a very interesting subject because it analyses how human beings make choices in an effort to maximize
utility. It also analyses how a society seeks to allocate their limited resources in order to achieve growth. The term economics
is derived from two words economy and science meaning the science of the economy or the science of proper utilization of
resources. This chapter focuses on the nature and scope of economics. To understand the subject matter of economics, we
tried to look at its different definitions by different scholars. The basic concepts of economics are discussed in order to give a
better understanding of the definitions. There is also the need to understand the basic economic problems of any society
because other problems revolve around these problems. The various definitions of economics is grouped under different
headings as discussed below:
1.1.1
The Classical View of Economics
The Classical economists viewed economics as a science of wealth. Adam Smith, the father of economics, in his
book titled: ‘An Enquiry into the Nature and Causes of Wealth of Nations’, defined economics as the science of wealth.
According to Adam Smith, economics makes inquiries into the factors that determine the wealth and growth of a nation. So to
Adam Smith what forms the subject matter of economics is the production and expansion of wealth. However, Ricardo shifted
emphasis from wealth production to wealth distribution. According to a French classical economist, J. B Say, economics is
the science of production, distribution and consumption of wealth. Other classical economists such J.S. Mill, defines
economics as the law that governs mankind in the production of wealth. The wealth definition means that wealth was
considered to be an end in itself.
Critical Evaluation of the Classical Economists View
The classical economists narrowed the scope of economics by defining it as the science that deals with only material
wealth. They do not regard the services of those who produce non-material goods because their services do not relate to
production of tangible goods. This view or conception by the classical economists attracted a lot of criticisms. Critics pointed
out that economics studies not only material goods and wealth, but also includes non-material goods such as services of
teachers, doctors, lawyers. These services provided by human resources fulfill human wants and should be regarded as part
of wealth.
Secondly, the classical economists emphasized the importance of wealth rather than human beings in economic life.
The critics observed that wealth was given primary role while human life was given secondary role, but on the contrary, human
life should play a primary role and so cannot be sacrificed for wealth. According to the classical economists, wage to labour
is the only source of wealth to a nation, but the critics are of the view that there are other sources of wealth such as natural
resources, human resources and capital resources.
1.1.2
The Neo- Classical View of Economics
The neo-classical economists led by Alfred Marshal gave economics a respectable place among social sciences.
Marshall defined economics as the study of mankind in the ordinary business of life; it examines that part of individual and
the social action which is most closely connected with the attainment and use of material wellbeing. Wealth was regarded not
as an end in itself but a means to an end because it was seen as the source of human welfare.
Major propositions of Marshall’s welfare definition are economics is the science of material welfare. Secondly,
economics is a social science because it is a study of men as they live and move and think in the ordinary business of life and
thirdly that economics is the study of rational behavior of people as they maximize their material welfare. This means that
economics is concerned with economic activities that promote material welfare but excludes all non-economic activities that
are socially undesirable like stealing, prostitutions, etc.
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Critical Evaluation of the Neo-Classical Economists View
The neo-classical definition of economics was criticized by Lionel Robbins because of the distinction between material
and non-material activities. According to Robbins, the use of the word ‘material’ narrows down the scope of economics
because there are many things in the world which are immaterial, but are useful for promoting human welfare. Robbins regards
all goods and services which command a price as economic activity whether they are material or non-material. To say services
are non–material is misleading because services have value. Their definition of Economics from the material point of view is
a misrepresentation of the science of Economics.
To the neo-classical economists, economics is concerned with material welfare. According to Robbins, the word
welfare should not be used along with material activities because there are many activities which are regarded as economic
activities but they do not promote human welfare. For example, the production and sale of tobacco, drugs and alcohol are
economic activities but harmful to human health.
Robbins has also objected to the word ‘welfare’ in the neo-classical definition. Welfare is a subjective thing and varies
from person to person, from age to age. According to Robbins, it cannot be said in objective term which things will promote
welfare and the ones that will not. Robbins believes that economics is not concerned with welfare rather he explains
economics as the problem that have arisen because of scarcity of resources.
1.1.3
Scarcity and Choice Definition by Lionel Robbins
Robbins criticized Marshall’s definition and provided his own definition in his book, “An Essay on the Nature and
Significance of Economic Science” in 1932. According to Robbins, economics is the science which studies human behaviour
as a relationship between ends and scarce means which have alternative uses. This means that economics is a human
science. It involves maximizing satisfaction from scarce resource and the means available for satisfying these ends (wants)
are scarce or limited in supply. Also the scarce means are capable of alternative uses, that is, the use of scarce resource for
one end prevents its use for any other purpose at that point in time. The ends are of varying importance which necessarily
leads to the problem of choice in selecting the uses to which scarce resources can be put to. It is the various alternative uses
of the resources that we have to decide on the best allocation of resources.
It should be noted that Robbins definition stands on three major facts namely: Unlimited wants, scarcity of resources
and alternative uses of the resources. Robbins economics studies man’s activities in regards to all goods and services, without
distinguishing them as material and non-material; provided they satisfy human wants. In other words, economic problem is
one of allocating scarce means in relation to numerous ends.
Critical Evaluation of Robbins Definition
Robbins definition is no doubt popular among economists because it points out the basic economic problems
confronting the society. But Robbins definition has also been criticized on several grounds. According to the critics, Robbins
definition also talks about welfare which he formally criticized. In fact, in Robbins definition the idea of welfare is present
because it involves the allocation of resources to maximize satisfaction. But this maximum satisfaction is nothing but welfare.
Also Robbins assumption fails to explain fully the nature of ‘end’ and the difficulties associated with it. The idea of definite
ends is also not acceptable because immediate ends many act as intermediaries to further ends. It is difficult to separate ends
from means because immediate ends may be the means to the achievement of further ends.
Robbins definition is also criticized for not analyzing the theory of economic growth and development rather it talks
about the theory of product and factor pricing. The theory of economic growth and development studies how national income
and per capita income increase and what causes the increase. Robbins takes the resources as given while the theory of
economic growth is concerned with reducing the scarcity of resources through accumulation of capital and wealth. Therefore,
Robbins definition though applicable to fully employed economy is not realistic for analyzing the economic problems of the
real world. Economic problems arise not only due to scarcity but due to under, miss or over utilization of resources.
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1.1.4
Samuelson’s Growth Oriented Definition
The present trend in the world is the establishment of welfare states and improvement in the standard of living through
reduction in poverty, unemployment and income inequality. In line with this trend Samuelson has given a definition of
economics based on growth aspects. According to Samuelson, “Economics is the study of how people and society end up
choosing with or without the use of money, to employ scarce productive resources that could have alternative uses to produce
various commodities over time and distribute them for consumption, now or in the future, among various person or groups in
the society”. Samuelson’s definition is an improvement over Robbins scarcity definition based on the following facts:
1. Samuelson regards economics as a social science which emphasized the problem of scarce resources and the idea of
alternative uses of resources.
2. He emphasized on the consumption and distribution of various commodities for the present and future economic growth
thereby highlighting the study of macroeconomics.
3. Samuelson lays emphasis on the use of modern technique of cost-benefit analysis to evaluate the development programme
for the use of limited resources.
4. Samuelson’s definition of economics has superiority over that of Robbins because of the inclusion of time element thereby
making the scope of economics dynamic.
From the above discussion, it is clear that economics cannot adequately be defined in one sentence. No definition of
economics has been generally accepted as being satisfactory because every single definition has been followed up with
criticism. Even though there are different definitions as there are different scholars, we will summarize economics as a social
science concerned with how human beings allocate their limited resources in order to achieve a given end over time. That is,
it analyses how households, firms, and society as a whole try to maximize their gains from their limited resources and
opportunities now and in the future. A better understanding of the subject matter of economics needs a probe into the scope.
ECONOMICS AND OTHER SUBJECTS
By Nipun S
Economics and Psychology:
Economics is particularly concerned with consumption, production and resource use by individuals and groups.
Economics is also concerned with the procures by which households and firms make decisions about the use of scarce
resources. Inevitably, this definition of the ‘territory’ of economics leads to some overlapping with the other disciplines.
Psychologists and economists share an interest in what motivates people to take certain action.
However, the primary interest of economists lies in those actions that are reflected in market activity or in economic
decisions made through government.
Economics and Sociology:
While sociologists are interested in all fact of organized human activity, economists are interested mainly in organized
activities that related to the production and consumption of goods and services. As a general rule economists assume that
individuals pursue their self-interest and respond to various signals or incentives in the light of that self-interest. Although this
may seem obvious, it is somewhat different viewpoint on human behavior from that of psychologists and sociologists. This
perspective often leads economists to draw different conclusions.
Economics and Political Science:
Economics interacts with almost all other academic disciplines. It is inti-mately intertwined with current events, and it
has a significant effect on political events, both domestic and international. Economics has various things common with
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political science. For example, in both subjects we teach public finance, financial relations between the center of the study as
also the economics of planning.
Economics and Decision Sciences:
Economics is also part of a group of disciplines called decision sciences which includes some branches of statistics,
applied mathematics, opera-tional research, and some areas of management and engineering. All of these disciplines deal
with how individuals and groups make decisions. Econo-mists are specifically interested in those decisions relating to
production consumption and resource use. As a decision science, economics is closely related to business and management
courses.
Economics and Statistics:
One major function of an economist is to conduct research. The job of the company economist is to investigate
economic aspects of various decisions Government agencies and private business firms generate a vast array of economic
statistics on such matters as income, employment, prices and expenditure patterns. A two-way street exists between statistical
data and economic theory.
Statistics can be used to test the consistency of economic theory and measure the responsiveness of economic
variables to changes in policy. At the same time, economic theory helps to explain which economic variables are likely to be
related and why they are linked. Statistics do not tell their own story.
We must utilize economic theory to properly interpret and better understand the actual statistical relationships
among economic variables.
5 MAJOR DIVISIONS OF ECONOMICS
Based on the subject-matter, Economics can be divided into Consumption, Production, Exchange, Distribution and
Public Finance. They are briefly explained below.
1. Consumption. Since the existence of human wants is the starting point of economic activity, we study consumption first. In
this, we study about the consumption of wealth for the satisfaction of human wants. In this division, we study about the
characteristics of human wants, the behavior of the consumer, diminishing utility and consumer’s surplus, etc.
2. Production. This division covers the factors of production viz., Land, Labor, Capital and Organization. The laws governing
production, mobility of factors and the role of factors are studied in this division.
3. Exchange. In this division, we study about trade and commerce, money and banking. Consumption will be possible only if
the produced commodity is placed in the hands of the consumer. For this, trade and commerce are essential for the movement
of goods and services from one place to another.
4. Distribution. Production is the result of the cooperation of factors of production. Since a commodity is produced with the
efforts of land, labor, capital and organization, the produced wealth has to be distributed among the cooperating factors. The
reward for factors of production is studied in this division under rent, wages, interest and profit. Distribution studies about the
pricing of factors of production.
5. Public Finance. This division studies about the income, expenditure and financial administration of the State. This tells
about taxation and expenditure, budgeting and financial administration. Public Finance has been separated from Economics
and is treated as an independent branch.
These divisions of economics should not be considered as water-tight compartments. Only for purposes of study, we
make these divisions. But in practice, these divisions overlap. For example, when we study about production, we are studying
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about consumption as well. When we study the production of motor cars, we have to study the consumption of raw materials
like iron, steel, aluminum, rubber etc. Similarly, production of tables and chairs involves consumption of wood.
Wheat grown in Haryana is used by the people of Tamilnadu. Production takes place in Haryana and consumption is
done in Tamilnadu. In between, trade and commerce (Exchange) as well as banking come into the study to effect the
transaction. So, all the divisions of economics are interrelated and inter-dependent.
THREE BASIC ECONOMIC PROBLEMS OF SOCIETY
All modern economies have certain fundamental or basic economic problems to deal with. In every single economy,
including the so-called “affluent society”, resources are limited. As a result, decisions regarding the resource use have to be
made together by individuals, by business corporations, and by society.
It is the social choice and community preferences which give substance to the question of macro-economic decisions.
Following figure shows the 3 fundamental economic problems faced by all societies worldwide.
1. What to produce?
Each and every economy must
determine what products and services,
and what volume of each, to produce. In
some way, these kinds of decisions should
be coordinated in every society. In a few,
the gov’t decides. In others, consumers
and producers’ decisions act together to
find out what the society’s scarce
resources will be utilized for. In a market
economy, this ‘what to produce?’ choice is
made mainly by buyers, acting in their own
interests to fulfill their needs. Their
demands are fulfilled by organizations
looking for profits.
For instance, if cellphones are in
demand In case a manufacturer produces
an item which buyers don’t buy in much
quantity, there will likely be inadequate
income. The manufacturer will have to enhance the quality and modify the product to match buyer tastes. If the item is still
not preferred, the producer will most likely halt the production. In this manner, buyers get the goods they need.
Customers rule the ‘what?’ decision. They ‘vote’ for certain products and services by spending money on those they like. Each
and every manufacturer has to offer what buyers want so that they can compete effectively against other manufacturers.
Government authorities also perform some part in making ‘what?’ decisions. For example, a law demanding all ladies to wear
a helmet generates demand for helmets, and profit-seeking businesses will produce them.
2. How to produce?
This basic economic problem is with regards to the mix of resources to use to create each good and service. These
types of decisions are generally made by companies which attempt to create their products at lowest cost. By way of example,
banking institutions have substituted the majority of their counter service individuals with automatic teller machines, phone
banking and Net banking. These electronic ways of moving money, utilizing capital as opposed to labor resources, have
decreased the banks’ production costs. states by using huge earth moving devices.
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The initial approach to production, using a resource combination which includes a small capital and much labor, is
labor-intensive while the second, utilizing a little labor and a lot of capital, is capital-intensive. Each one of these ‘how’ decisions
was made based on lowest cost and accessible modern technology.
3. For whom to produce?
This basic economic question is focused on who receives what share of the products and services which the economy
produces. The portion of production which each person and family can consume is determined by their income. Income is
distributed in line with the value of resources we have to sell.
As an example, a top cricket player will earn far more income than a professor. A top cricket player has a resource to
sell for which many people will pay a high price. Professors are not so rare, and few people pay for their services.
The for whom decision can even be dependent upon skills shortages, in which case organizations will provide higher
incomes to attract workers with rare skills. In the same way, high wages may be required to attract employees to rural
locations.
Practice
TASK NO.2:
1. Do you think economics has an impact on education and vice versa? Elaborate your answer.
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Performance
TASK NO.3:
1. Visit the link: https://www.edsys.in/best-education-system-in-the-world/
2. Look at the top 3 countries with best education system in the world.
3. Research on each country’s economy and answer the following:
a. What is the country’s source of income?
b. How much is their GDP? Are they lower or higher compared with the Philippines’ GDP?
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REFERENCES:
Author unknown (n.d.) Five Major divisions of economics. Available: https://accountlearning.com/5-major-divisionseconomics/
Author unknown (n.d.) Three basic economic problems of society. Available: https://universalteacher.com/1/three-basiceconomic-problems/
Metu, A. (2016). The nature and scope of economics. Available:
https://www.researchgate.net/publication/325677755_THE_NATURE_AND_SCOPE_OF_ECONOMICS
Nipun S (n.d.) Relationship of Economics with Other Subjects. Available:
https://www.economicsdiscussion.net/relationship/relationship-of-economics-with-other-subjects/25099
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