What is Micro Economics Notes - Economics Online Class

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Introduction to Economics

Meaning and definitions of Economics

Economics is that branch of knowledge, in which those activities of men are studied which they undertake to acquire scarce means (i.e. wealth) to satisfy their unlimited wants. Dictionary meaning of the term Economics refers to that science which studies human activities relating to wealth. Economics is called ‘Arthashastra’ (अर्थशास्त्र) in Hindi that is made up of two words- Artha = wealth and Shastra = scientific study. That is, economics is that science, in which the money related activities of man are studied.

The word ECONOMICS of English language is derived from 2 words of Greek language i.e. OIKOS (Household) and NEMEIN (management). thus, It means ‘management of household’. The needs and wants of every householde are unlimited, but most of the means to satisfy them like clothes, food, income etc. are limited. These limited resources are called wealth. Every householder makes proper use of his wealth in such a way that he can satisfy his maximum needs. To achieve this objective, he would need the study of Economics.

Definition of Economics

Economics is a developing branch of knowledge. In different periods, different economists have given different definitions from time to time. We can divide the definitions of Economics into the following parts –

1- Wealth Definition

Adam Smith, the father of modern economics, gave the following definition of economics in his book ‘An enquiry into the nature and causes of wealth of nation‘ published in 1776 defined it as-

“Economics is an enquiry into the nature and causes of the wealth of nations.”

Criticism : Wealth definition of economics is faulty. According to this definition, only money (all kinds of material things) is studied in economics instead of human welfare. Hence Carlyle, Ruskin, Maurice etc. Economists have condemned and criticized it by calling it a DISMAL SCIENCE. or a “Science of Bread and Butter”.

2- Material Welfare Definition

Dr. Marshall has given the following definition of economics in his book ‘Principle of Economics‘ published in 1890-

“Economics is a study of mankind in the ordinary business of life. It examines that part of individual and social action which is most closely connected with the attainment and use of material goods requisites of well being.”

Criticism : Lord Robbins has criticized this definition for many reasons. For example

1) Economics is the study of the economic activities of all human beings. Whether he lives in society or in solitude
2) Economics studies all economics activities which are concerned with scarce mean, whether material or non-material.
3) Economics is the study of all types of economic activities whether they increase welfare or not.

3- Scarcity/Rarity definition

Lord Robbins in his book “AN ESSAY ON THE NATURE AND SIGNIGICANCE OF ECONOMICS SCIENCE” published in 1932 has given rarity definition of the economics.

According to Robbins –“Economics is a science that studies human behavior as a relationship between ends and scarce means which have alternative uses.”

Criticism: Many Economists like Durbin, Fraser, Ely have criticized this definition, saying that Robbins has reduced economics to simply a theory of value determination or a science of choice-making. It has nothing to do with the welfare of man and solving his economic problems. It is an impractical, complex and static definition of economics.

4- Growth Oriented definition

According to modern economists such as Nobel Prize winning economist Professor Samuelson, Peterson, Ferguson etc. – “Economics is a science that study those activities of man which he undertakes to maximise his satisfaction by making proper use of his scares means”

Components of Economics

Ragnar Frisch, the famous Norwegian economist and the first Nobel Prize winner (1969) in economics, in 1933 divided economics into two parts – microeconomics and macroeconomics.

a) Microeconomics

In English language individual is called MICRO. This word of the English language is derived from the Greek word (MIKROS), which means-small.

In microeconomics, the economic activities of only one economic unit are studied. Such as the study of the income of a household or the study of the production of a firm. According to Professor Boulding “Microeconomics is the study of particular firm, particular household, individual price, wage, income, industry and particular commodity.”

b) Macroeconomics

In the English language, the population is called MACRO. This word of the English language is derived from the Greek language word (MAKROS). which means big.

In macroeconomics, economic activities and economic problems are studied at the level of the economy as a whole. Subjects related to National income and employment and price level are principal components of macroeconomics.

Scope of Micro Economics/Subject matter of Micro Economics

The field or subject matter of microeconomics is divided into four parts-

1-Theory of Demand
2-Theory of Production
3-Theory of Pricing
4-Theory of factor pricing

1. Theory of Demand–

Theory relating consumer’s demand and his maximum satisfaction is called theory of Demand. It studies how a consumer distributes his given income on different goods at the prevailing market price.

2- Theory of production-

Microeconomics also studies theory of production. A firm produces goods and services by aggregating various factors like land, labour, capital etc.. Theory of production studies production function an dlaws of production.

3. Theory of Pricing/The principle of Price determination-

Microeconomics also studies theory of price determination. Produced goods are bought and sold under different market conditions. The demand and supply conditions are also analyzed in this theory.

4- Theory of factor price

Four factors are needed to produce any commodity-Land, Labour, Capital and Entrepreneurs. The study of dividing the income received by a firm from selling its output into these four factors(respectively, rent, wages, interest and profit) is also studied under this factor price theory. It is also called the principle of factor or factor income.

Importance of the study of microeconomics

The study of microeconomics has the following advantages.

1- Operation of an Economy Microeconomics throws light on the functioning of an economy. It lets us know whether different parts of the economy like consumers, firms etc. are working efficiently or not. According to Prof. Watson “Microeconomics has many uses. the greatest of these is the understanding of the opearation of the economy.”

2 Prediction- Theories of microeconomics may be formed on the basis of predictions. But these predictions are based on certain conditions. For example, if the demand for a commodity increases, its prices are likely to rise.

3. Economic Policies– Microeconomics helps in the formulation of economic policies. Price policy is a tool that helps in this task. By its uses we can analyse government policies which affect the economy.

4- Economic welfare- Knowledge regarding the state of economic welfare can be obtained through the study of microeconomics. Economic welfare is the main subject of normative economics. Microeconomics offers suggestion as how economic welfare can be achieved.

5- Managerial decision- Business firms while taking a managerial decision make use of microeconomics. In this matter policies formed by analysing cost of production of a commodity and its demand are of great significance.

6- helpful in international trade- study of microeconomics help in understanding international trade problem like dis-equilibrium in balance of payment foreign exchange rate etc.

Nature of Economics

The nature of economics can be divided into two parts. One science as two arts.

A-Economics as a science

According to Professor Seligman, science can be of two types – 1- social science , 2- natural science. Economics is a social science, as it relates to humans. Whereas physics , chemistry etc. are natural sciences.

The following are the reasons for considering economics as a social science :

1- Systemic study- As a social science, in economics, the chronological study of human behavior is done.

2- Scientific laws- The laws of economics such as the law of demand, the law of supply, etc. are scientific laws. This rules correlate causes and results between various variables.

3. Accuracy of rules each science checks accuracy of its terms. In economics also, the truth of various rules can be checked.

Economics is a real ( POSITIVE) Science and NORMATIVE science.

Economics as a real science-Real science is the science in which the true and real condition of a subject is studied. As a real science, statements of economics are real statements. Actual statements are those statements from which it is known that “ What is? What was it and what will happen under special circumstances? “Example- India’s population is 125 crores. India’s growth rate is 7%. This is an example of a real science statement .

Economics as normative science – Famous economists such as Marshall , Pigu considered economics as normative science. Normative science is related to ‘What ought to be?’ Examples- to be control over India’s population. India’s growth rate should be more than 10%. Prices should be able to stabilize. There should be equitable distribution of income . Briefly in economics is a real science and normative science too.

B-Economics as an Art

The practical application of knowledge for the attainment of a certain purpose is called art. In economics to achieve different objectives, means are used to practice the principles of Scripture. Pro. J M Keynes has used the term applied economics in place of art . Modern economists use the term economic policy for art .

In the end we can say that economics is both science and art. Professor Chepmen is right when he said that ” Economics is a positive science dealing with Economic facts and an art finding out the ways and means by which the desired and can be reached.”

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