Nature of Economics

**Economics Resources:**Refers to the inputs which are needed to produce goods and services. They are also known as the factors of production or means of production. The factors of production are things which are necessary for production. The factors of production may include.

1. Natural resources such as land and man-made resources such as capital.
2. Human resources are such as labor and entrepreneurship.

Refers to the total expenditure by households or final users on goods and services which yield utility in the current period. OR Is the process of using goods and services to satisfy wants. Are things that are produced by the factors of production like land, labor, capital etc. and are consumed by man to satisfy his wants. It involves goods and services. Production: Is a creation of goods and services for personal consumption or use. OR Is a process of making goods and provision of services to satisfy people’s needs or wants e.g. giving crops for food, building houses. Wealth Refers to the country’s stock of resources and goods that can be used to satisfy wants. NOT: A country’s wealth consists of stock of resources and goods that can be used to satisfy wants. It includes; machines, buildings, and human skills. In economics, wealth refers to all goods which possess the following qualities;

1. They must have satisfaction (utility).
2. They must be scarce.
3. They must have value.
4. They are capable of being transferred or exchanged.

Refers to the tangible things which satisfy human wants. Goods are categorized in the following ways;

1. Free goods and Economic goods. Those free goods are provided free by the nature E.g. Air, rain, ocean water.
2. Private goods and public goods.
3. Intermediate goods and final goods.

Welfare Refers to the level of satisfaction that a person or group of people derives from the consumption of goods and services. WELFARE ECONOMICS: The study of the impact of the pattern of resources allocation on society’s well-being(or welfare) Economists are able to judge whether the existing arrangement about

1. the methods of production
2. the type and quantity of goods and services produced and consumed
3. the relative share of goods and service going to each household, are satisfactory.

EFFICIENCY: Pareto efficiency–a situation in which it is not possible to make someone better off without making someone else worse off. EQUITY: Equity is concerned with the treatment of different individuals or groups in society. MARKET EQUILIBRIUM: Exist when the price and quantity of a commodity match both consumers and producers. In this case the quantity demanded and supplied are equal and the market clear. MARKET DISEQUILIBRIUM: Exist when the price and quantity of commodity fail to match consumers and producers expectation. Goods: These are things which can satisfy human wants like clothes, cars, houses etc. Goods are classified as follows. a. Free goods: These are goods which are provided freely by nature. E.g. Air, sunshine, rainfall, ocean water and forest. Features of free goods

1. They are not scarce i.e. they are abundant.
2. They are not produced by human effort, hence are provided freely by nature.
3. They are not transferable in terms of its ownership.
4. They lack exchange value.
5. They possess utility

b. ECONOMIC GOODSThese are the goods produced by human efforts and possess the following qualities; Quality of Economic Goods

• They have utility, i.e. ability to satisfy wants/needs.
• They have exchange value, i.e. they can be bought or sold.
• They are transferable in terms of ownership from one person to another person.

Thus Economics is concerned with economic goods and not free goods because production in Economics is for exchange for which the economic goods possess value.

• Consumer Goods– These are goods produced for final consumption or use such as food, radio, clothes, furniture etc.
• **Producer Goods-**These are goods which are produced to assist in the production of other goods. They are also known as capital goods. Producer goods include; machinery, raw material, workshop, building etc.

**c. Perishable Goods:**These are goods which can easily be destroyed or spoil like food stuffs e.g., milk, meal, fruits, vegetable etc. **d. Durable Goods:**These are goods which can last or stay for a long period of time without being destroyed or damaged such as buildings, machines, furniture etc. e. Private goods: Are goods owned by individuals for example private car, clothes, houses etc. f. Public goods: Are goods owned and enjoyed by all individuals in the country. For example; roads, defence etc. Feature of Public Goods:-

1. Non divisibility i.e., provided in totality to the public.
2. Non rivalry i.e., there is no competition of consumption. One person can consume extra units without reducing consumption of others.

g. Intermediate goods: Are goods in progress e.g. raw material. **h. Final goods:**Are goods ready for consumption. i. Normal Goods: Are the goods for which their demand increases when the real income of the consumers increases while their demand decreases when income of consumers decreases. j. Inferior Goods: - Are goods which the demand of the goods by the consumers decreases when real income increases. PRODUCTION Is a creation of goods and services for personal consumption or use. OR Economists define production as a process of creating goods and services for exchange i.e for sale in order to satisfy people’s needs. OR Is a creation of utility. Utility means the level of satisfaction a consumer derives from consuming a certain unit of goods and services. Economics Activities: Prof. Marshall defined all activities concerning with the earning and spending income (wealth) such as-; the activities of farmers, labor, shopkeeper, teachers, doctors and advocates. Thus all activities which are done with view to earn income are called Economic activities.   NON ECONOMIC ACTIVITIES: Refers to all activities which do not have the earning of wealth as their nature. E.g. .playing football for health reasons, singing by mothers, teachings by a teacher to his own children, etc. SCARCITY Means limited in supply or less than that what is required or needed. CAUSES OF SCARCITY.

1. Limited stock of resources. Resources are limited in number therefore it is not possible to produce enough goods and services to satisfy all wants.
2. Unlimited wants. Wants are unlimited in number therefore resources available cannot produce enough goods and services to satisfy all wants.
3. Alternative uses of the available resources. E.g., same land can be used to grow beans, rice or other uses such as land for construction of buildings. Resources are normally scarce and therefore you have to choose from the few alternatives to satisfy the needs. Producers – chooses what goods to produce. Consumers – Decides which wants/needs they require.

SCALE OF PREFERENCE: Is a list of all wants in an order to their importance such that that the most important wants are kept first on the list followed by the less important wants. OPPORTUNITY COST.

• The true cost of producing an additional of goods or services in their value of goods or services that must be given up to obtain. E.g. A student may have two alternatives of her/his evening time to do homework and the alternative is to play football.
• If he/she chooses to play football, the opportunity cost of playing football is the homework.

EXCHANGE Refers to the process of selling or buying of goods and services to government to guarantee wealth (income). MORE IMPORTANCE TO WEALTH DEFINITION The definition gave too much importance of wealth and ignored human welfare and moral values. Because of these weaknesses, Adam smith’s definition of economics could not be accepted.   Marshall’s Definition: According to Marshall in his book titled “principle of Economics”. Defined economics is the study of man in ordinary business of life. It examines that part of individual and social actions which is closely connected with the attainment and the use of material requisites for wellbeing. The main features of Marshall’s definitions are:

• Economics is a social science and it studies the economic activities of social normal and real man.
• Wealth is a means while the ends are human welfare i.e. wealth is for man and man not for wealth.
• The central point in the study of Economics is man’s material welfare.

CRITICISM Strongest attack on Marshall’s Definition comes from Prof. Robbins. The main criticisms of Marshall’s definition are;

1. Wrong concept of material goods. Economics is not all about the study of material goods. In reality it is not easy to distinguish material things and immaterial things. Economics also studies immaterial goods such as the services of teachers, doctor, advocates, singer etc.
2. Economics has no relationship with the material welfare according to Prof. Robbins. Economics can’t be linked with material welfare it is because;
   • The concept of welfare cannot be defined exactly.
   • In economics we study a number of such activities which cannot be regarded goods from welfare point of view E.g. war, production of home etc.
   • Economics do not have appropriate scale of measurement by which welfare can be measured.
3. Not a social science. According to Robbins, Economic is not a social science rather it is a human science.
4. Wrong division of human activities in Economics. Marshall Division of human activities was also wrong. According to Robbins every activity has main aspects and one of them is economic aspect.
5. Classification Marshall Definition is classified. There are many categories but the destination between there is not clear e.g. ordinary business, social and unsocial, material and immaterial, economic and non-Economic etc.

Marshall’s definition was better than Adam smith’s definition yet was rejected after sometimes because of these weaknesses.   Welfare Definition Lionel Robbins published a book “An Essay on the Nature and Significance of Economic Science” in 1932. According to him, “economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses”. The major features of Robbins’ definition are as follows:

1. Ends refer to human wants. Human beings have unlimited number of Resources or means, on the other hand, are limited or scarce in supply. There is scarcity of a commodity, if its demand is greater than its supply. In other words, the scarcity of a commodity is to be considered only in relation to its demand.
2. The scarce means are capable of having alternative uses. Hence, anyone will choose the resource that will satisfy his particular want. Thus, economics, according to Robbins, is a science of choice.

Criticism:

1. Robbins does not make any distinction between goods conducive to human welfare and goods that are not conducive to human welfare. In the production of rice and alcoholic drink, scarce resources are used. But the production of rice promotes human welfare while production of alcoholic drinks is not conducive to human welfare. However, Robbins concludes that economics is neutral between ends.
2. In economics, we not only study the micro economic aspects like how resources are allocated and how price is determined, but we also study the macroeconomic aspect like how national income is generated. But, Robbins has reduced economics merely to theory of resource allocation.
3. Robbins definition does not cover the theory of economic growth.

SCARCITY DEFINITION. According to Lionel Robbins and his followers like Stingley, Samuelson, Carnations and many other. Modern Economists defined economics as;

• A science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.

FACTS OF ROBBIN’S DEFINITION. According to Robbin’s and his follower Samuelson.

1. Human Wants Are Unlimited
   People always want more goods and services. When one need is satisfied, another arises. This makes it impossible to satisfy all wants completely.
2. Human Wants Have Alternatives
   There are different ways to satisfy a single want. For example, hunger can be satisfied with rice, bread, or fruit. People choose based on preference, cost, or availability.
3. Resources Are Scarce
   The means to satisfy wants—like land, labor, money, and time—are limited in supply. This scarcity forces individuals and societies to make choices.
4. Resources Have Different Importance
   Not all resources or uses are equally important. People must prioritize and allocate resources to the most pressing or valuable needs.

The unlimited wants and the scarcity of the resources give rise to the problem of choice. Choice: refers to the process of making selections among multiple or several alternatives. CRITICISM OF ROBBIN’S DEFINITION

1. The difference between means and ends is not clear. This definition uses two terms, means and ends which have not been clearly distinguished.
2. Neutral towards ends. The definition regards economics is neutral towards ends if it is occupied then used. The study or economics would be of no use of which it would not remain a fruitfully science. Thus, economist is a tool maker as well as toll users.
3. Reduced merely to valuation theory. Robbins definition has reduced Economics merely to evaluation theory. This does not taken into account. The problem of macroeconomics and growth.
4. Problem of abundance. All economic problems do not arise from scarcity. Some of them may also arise from abundance, such as the problem of over production etc.

Hence in simple words we can say Economics is a science that studies human behaviour as a relationship between ends and scarce means which have alternative uses.

i. Wealth Definition Adam smith (1723 -1790), in his book “An Inquiry into Nature and Causes of Wealth of Nations” (1776) defined economics as the science of wealth. He explained how a nation’s wealth is created. He considered that the individual in the society wants to promote only his own gain and in this, he is led by an “invisible hand” to promote the interests of the society though he has no real intention to promote the society’s interests. Criticism: Smith defined economics only in terms of wealth and not in terms of human welfare. Ruskin and Carlyle condemned economics as a ‘dismal science’, as it taught selfishness which was against ethics. However, now, wealth is considered only to be a mean to end, the end being the human welfare. Hence, wealth definition was rejected and the emphasis was shifted from ‘wealth’ to ‘welfare’. ii. Growth Definition Paul Samuelson defined economics as “the study of how men and society choose, with or without the use of money, to employ scarce productive resources which could have alternative uses, to produce various commodities over time, and distribute them for consumption, now and in the future among various people and groups of society”.   The major implications of this definition are as follows:

1. Samuelson has made his definition dynamic by including the element of time in it. Therefore, it covers the theory of economic growth.
2. Samuelson stressed the problem of scarcity of means in relation to unlimited ends. Not only the means are scarce, but they could also be put to alternative uses.
3. The definition covers various aspects like production, distribution and consumption. Of all the definitions discussed above, the ‘growth’ definition stated by Samuelson appears to be the most satisfactory. However, in modern economics, the subject matter of economics is divided into main parts, viz., Micro Economics and  Macro Economics.

NOT: Economics is, therefore, rightly considered as the study of allocation of scarce resources (in relation to unlimited ends) and of determinants of income, output, employment and economic growth.