CHAPTER 1 : INTRODUCTION TO ECONOMICS (BASIC CONCEPTS)

1.1 Definition and Nature

Economics is a relatively new science: it came into being a little over two centuries ago. So far it has developed into three main stages: the Classical (Adam Smith 1776), the Neo classical (Marshallian 1885), and Modern Keynesian (Macro 1936) schools. Corresponding to these there are three distinct definitions of the subject. Initially it was considered as a science of wealth, through its fourfold activity of consumption, production, distribution and exchange. Marshall related the subject to economic welfare, ’most closely connected with the attainment and the use of material requisites of well being.’ However Lionel Robbins (1932) gave the subject a positive scientific basis. His definition is widely acknowledged:

Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.

In this way, Robbins has at once relieved economics of both wealth and welfare considerations. It is now considered a science purely of human behavior in specific situations. Such an economic situation is one which is marked, on the one hand, by multiple ends (wants and their satisfaction) and, on the other, by scarce or limited resources (money, land, water, energy, capital etc.). This necessarily compels individuals to economize and optimize; for instance, one attempts to maximize one’s satisfaction, profits, wages, salaries, etc. and minimize on one’s resources (expenditure, cost of production and effort). This is likely to ensure the best results for all economic activities.

Yet economics is neither the science of ’ends as such’ nor of ’scarcity’. Resources though scarce, are capable of alternative uses. Land can be used for cultivation (of wheat, rice, cotton, etc.) or construction, or even for commercial purposes. Labor can be employed in various ways - in factories, for road construction, in agriculture etc. Capital can be used for the purchase of factory equipment, for raw materials, or for investing in shares and bonds, etc. Again from among multiple ends like purchasing a car, a house, or traveling abroad, etc. the one which is urgent and the most satisfying can be chosen. Hence under economics one studies the interesting way in which an individual or the society as a whole allocates its scarce resources.