Economics is a social science that studies the behavior patterns of human beings. The basic function of economics is to study how individuals, households, organizations, and nations utilize their limited resources to achieve maximum profit. The study of economics is divided into two parts, namely microeconomics and macroeconomics. Microeconomics is a branch of economics that examines the market behavior of individual consumers and organizations.
It focuses on the demand and supply, pricing, and output of individual organizations. On the other hand, macroeconomics analyzes the economy as a whole. It deals with issues related to national income, employment pattern, inflation, recession, and economic growth. With the advent of globalization there is a rapid increase in complexities in business decision making. Therefore, it is important for organizations to have a clear understanding of different economic concepts, theories, and tools.
Managerial economics is a specialized discipline of economics that deals with the study of economic theories, logics, and tools used in the process of business decision making. In other words, managerial economics is a science that is concerned with those economic tools that are relevant to business decision making.
It applies various economic concepts, such as demand and supply, competition allocation of resources, and economic trade-offs, to help managers in making better decisions. In addition, managerial economics enables managers to determine the impact of different economic events on the performance of an organization.
Meaning of Economics:
Since time immemorial, defining economics
has always been a controversial issue. Different economists have explained the term economics differently and criticized each other’s definitions. Some economists believed economics as a study of money, while others had a notion that economics deals with problems, such as inflation and unemployment. In such a case, there was no proper definition of economics given.
Therefore, for simplifying the concept, economics is defined by taking four viewpoints, which are explained as follows:
i. Wealth Viewpoint:
Represents the classical perspective of economics. According to Adam Smith, economics is a science of wealth. He is regarded as the father of economics and wrote a book entitled “An enquiry into the Mature and the Causes of Wealth of Mahon 1776. In his book, he stated that the main purpose of all economic activities is to gain maximum wealth as possible therefore; he advocated that economics is mainly concerned with the production and expansion of wealth.
Further this definition was followed by various classical economists, such as J.B. Say, David Ricardo, Nassau Senior, and F.A Walker. Although wealth definition was an innovative work of Adam Smith, it was not free from criticism.
His definition was criticized mainly due to two reasons Firstly, Adam Smith, in his definition, focused only on maximizing wealth rather than means of earning wealth Secondly, he gave primary importance to wealth and secondary to man. However, wealth cannot be earned or maximized without human efforts. In this way, he disregarded the position of human beings.
ii. Welfare Viewpoint
Represents a neo-classical standpoint of economics. Alfred Marshall, a neo-classical economist associated the term economics with man and his welfare. He wrote a book “Principles of Economics” in 1980. In his book he stated that economics is a science of welfare.
According to him, “Political economy or economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which u most closely connected with the attainment and with the use of the material requisites of wellbeing.”
His definition was a great improvement in the definition of wealth as Marshall elevated the position of man. However, his definition was not free from criticism. This is because Marshall laid emphasis on welfare, but the meaning of welfare is different to different individuals. Moreover, the definition includes only materialistic welfare and ignores non- materialist welfare.
iii. Scarcity Viewpoint:
Refers to the pre-Keynesian thought of economics. Lionel Robbins defined economics as a science of scarcity or choice in his book “An Essay on the Nature and Significance of Economic Science”, which was published in 1932. According to him, “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.”
The definition provides three basic features of existence of human beings, namely unlimited wants, limited resources, and alternative uses of limited resources. According to Robbins, an economic problem arises because of unlimited human wants and limited resources. His definition was criticized because it ignored economic growth.
iv. Growth Viewpoint:
Indicates the modern perspective of economics. The main contributor of this definition was Paul Samuelson. He provided the growth-oriented definition of economics. According to him, “Economics is a study of how men and society choose with or without the use of money, to employ scarce productive uses resource which could have alternative uses, to produce various commodities over time and distribute them for consumption, now and in the future among the various people and groups of society.” In his definition, he outlined three main aspects, namely human behavior, allocation of resources, and alternative uses of resources. Therefore, his definition was similar to the definition provided by Robbins.
After getting familiar with different definitions of economics, let us now discuss the nature of economics.
Nature of Economics:
Similar to definitions of economics, there are a number of controversial issues related to its nature. Some economists believed economics as a science, while other believed economics as a social science.
Let us now discuss the nature of economics as follows:
i. Economics as a Science:
Refers to the scientific nature of economics. Some economists believed that in economics, a problem is solved by adopting a scientific approach, which involves collecting and analyzing data and making related laws and theories For example, various economists examined the concept of employment and framed relevant theories, such as Say’s law, Pigou’s modifications, and Keynes theory of employment.
Economics is considered as a science because there are similarities between the problem solving process of economics and science. Apart from this, there is another controversial issue related to whether economics is a positive or normative science.
Positive science refers to the science that deals with the question of what is, while the normative science deals with the question of what it should be. Positive science is the description of a concept whether it is right or wrong. On the other hand, normative science is the evaluation of a concept. After a very detailed analysis, it is decided that economics is a positive as well as normative science.
ii. Economics as a Social Science:
Implies that economics is a study of behavior patterns of human beings. The basic function of economics is to study how individuals, households, organizations, and nations utilize their limited resources to achieve maximum profit. This function of economics is termed as maximizing behavior or optimizing behavior. In economics, optimizing behavior refers to selecting the most profitable alternative from the available alternatives.
Therefore, it can be said that economics is a social science that aims at studying human behavior with respect to optimal allocation of available resources to achieve maximum profit. For example, economics covers how individuals allocate their resources (income) to purchase different goods and services, so that they can achieve maximum satisfaction.
In addition, economics also studies how organizations make their decisions regarding selection of a product to be produced, production technique, plant location, and price of the product. Apart from this, economics also covers how nations utilize their resources to fulfill the needs of the society so that economic welfare can be maximized.
Branches of Economics:
Economics is a wide subject that involves several concepts, which are difficult to be studied under a single discipline. Therefore, it is classified into two branches, namely, microeconomics and macroeconomics. Microeconomics deals with the economic problems of a single industry or organization, while macroeconomics deals with the problems of economy as a whole. Both of these branches contribute a major part in business analysis and decision-making directly or indirectly.
Let us discuss these two branches as follows:
i. Microeconomics:
Refers to a branch of economics that examines the performance and behavior of individual organizations and consumers in an economy. Microeconomics covers the study of decision-making process of individuals, organizations and consumers. Moreover, it focuses on the supply and demand patterns and price and output determination of individual markets.
In spite of a number of advantages, microeconomics suffers from certain drawbacks, which are as follows:
a. Assumes full employment condition in an economy, which is unrealistic
b. Deals with the part of economy instead of whole economy
ii. Macroeconomics:
Refers to a branch of economics that studies the performance and behavior of the whole economy. The word macro was given by Prof. Ragnar Frisch of Oslo University in 1993. Macroeconomics undertakes the study of economic aggregates, such as changes in employment, national income, rate of growth.
Gross Domestic Product (GDP), inflation, and price levels. Therefore, it helps in formulating policies in different economic conditions .and determining the causes of fluctuations in income, output, and employment. Apart from this, macroeconomics plays a major role in estimating national income. Thus, it helps in understanding and analyzing the overall performance of an economy.
However, macroeconomics has certain limitations, which are as follows:
a. Ignores the welfare of individuals in an economy
b. Takes into account only aggregate variables, which may not clearly define economic
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