Module 1Module 1

Nature and Methodology Nature and Methodology of Economicsof Economics

What is Economics?What is Economics?

Economics is the study of how individuals & Economics is the study of how individuals & group make decision with limited resources as group make decision with limited resources as the best satisfy their wants, needs, & desires.the best satisfy their wants, needs, & desires.

Economics is the study of making choice.Economics is the study of making choice.

Meaning of EconomicsMeaning of Economics

The term economics comes from the ancient The term economics comes from the ancient Greek word Greek word oikosoikos (household) & (household) & nemein nemein (manage),(manage), which in effect meant managing a which in effect meant managing a household, using limited funds available in the household, using limited funds available in the most economical manner possible.most economical manner possible.

Definition of EconomicsDefinition of Economics

Definition of Economics are Definition of Economics are divided under four heads:-divided under four heads:-

1.1. Science is wealth (Adam smith)Science is wealth (Adam smith)2.2. Science is Material welfare (Alfred Science is Material welfare (Alfred

Marshall’s)Marshall’s)3.3. Science of Scarcity (Robbin’s )Science of Scarcity (Robbin’s )4.4. Modern DefinitionModern Definition

Science is wealthScience is wealth

“ “ An enquiry into nature & cause of An enquiry into nature & cause of wealth of nations.”wealth of nations.”

By: Adam Smith By: Adam Smith

Adam Smith define Economics as the Adam Smith define Economics as the “Science of wealth”. Economics was “Science of wealth”. Economics was regarded as the science which studied the regarded as the science which studied the production & Consumption of wealth. production & Consumption of wealth.

Science is Material welfareScience is Material welfare

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

Science of ScarcityScience of Scarcity

‘‘Economics is the science which studies Economics is the science which studies human behaviorhuman behavior as a relationship as a relationship between between scarce meansscarce means which have which have alternative uses."alternative uses."

Nature of EconomicsNature of Economics

Economics is aEconomics is a Science.Science. Economics is aEconomics is a Art.Art. Economics is aEconomics is a Positive Positive Economics is aEconomics is a Normative. Normative.

Nature Of EconomicsNature Of Economics

Economics is a Science.Economics is a Science.

The Term science has been defined as The Term science has been defined as a systematized body of knowledge a systematized body of knowledge which trace the relationship between which trace the relationship between cause & effect.cause & effect.

The fact should systematically The fact should systematically collected ,classified and analyses.collected ,classified and analyses.

Nature of EconomicsNature of Economics

Economics is a ArtEconomics is a Art

the art is lays down a specific solution the art is lays down a specific solution for specific problems.for specific problems.

J.N.Keynes “ An Art is a system of rules J.N.Keynes “ An Art is a system of rules for the attainment of a given end.”for the attainment of a given end.”

Science teaches us to knowScience teaches us to know , , or an artor an art teaches us to doteaches us to do . .

Nature of EconomicsNature of Economics

Economics is Positive science.Economics is Positive science.

It is defined as a body of systematized It is defined as a body of systematized knowledge concerningknowledge concerning what is.what is.

The objective of a positive science is The objective of a positive science is the establishment of uniformities.the establishment of uniformities.

It deals with things as they are.It deals with things as they are. It explains their causes & effects.It explains their causes & effects.

Nature of EconomicsNature of Economics

Economics is a Normative ScienceEconomics is a Normative Science It is defined as a body of systematized It is defined as a body of systematized

knowledge relating to the criteria of knowledge relating to the criteria of what ought to be.what ought to be.

The objective of a normative science is The objective of a normative science is the determination of ideals.the determination of ideals.

It deals with things as they ought to be.It deals with things as they ought to be.

Micro & Macro EconomicsMicro & Macro Economics

Micro EconomicsMicro Economics

The term Micro Economics is derived The term Micro Economics is derived from Greek wordfrom Greek word Mikos Mikos (small). Micro (small). Micro economics thus deal with a small part or economics thus deal with a small part or a component of the national economy of a component of the national economy of the country.the country.

Example:- How does the change of a price Example:- How does the change of a price of good influence a family purchasing of good influence a family purchasing decisiondecision..

Types of Micro EconomicsTypes of Micro Economics

Micro StaticMicro Static Comparative MicrostaticComparative Microstatic Micro dynamicsMicro dynamics

Importance of Micro Importance of Micro EconomicsEconomics

Helpful in efficient employment of Helpful in efficient employment of resource.resource.

Understanding free enterprise economy.Understanding free enterprise economy. Helpful in development of international Helpful in development of international

trade.trade. Helpful in understanding the implication Helpful in understanding the implication

of taxation.of taxation. Basis for welfare economics.Basis for welfare economics.

Limitation of Micro EconomicsLimitation of Micro Economics What is true in the case of individual unit may What is true in the case of individual unit may

not be true in the case of aggregates.not be true in the case of aggregates. Micro economics instead of studying the total Micro economics instead of studying the total

economy concentrates only on small parts of economy concentrates only on small parts of it.it.

There are certain economicThere are certain economic problem which cannot be analysed with the problem which cannot be analysed with the

aid of micro economics. aid of micro economics. Example:-Example:- important important problem relating to public finance , monetary problem relating to public finance , monetary & fiscal polices are beyond the purview of & fiscal polices are beyond the purview of Micro economicsMicro economics

Macro EconomicsMacro Economics

The word ‘Micro’ is derived from the The word ‘Micro’ is derived from the Greek wordGreek word Makos Makos meaning large &meaning large & therefore, Macro Economics is therefore, Macro Economics is concerned with the economics activity concerned with the economics activity in the large.in the large.

Macro Economics is a study in Macro Economics is a study in aggregate.aggregate.

Example:- How does change in interest Example:- How does change in interest rate influence national savingsrate influence national savings..

Types of Macro EconomicsTypes of Macro Economics

MacrostaticMacrostatic Comparative MacrostaticsComparative Macrostatics MacrodynamicsMacrodynamics

Economic ProblemEconomic Problem

Economic is mainly concerned with the Economic is mainly concerned with the achievement & use of martial achievement & use of martial requirement to satisfy human wants.requirement to satisfy human wants.

Human wants are unlimited & Human wants are unlimited & productive resources are scared or productive resources are scared or limited.limited.

This gives rise to the problem of This gives rise to the problem of how to usehow to use scare resourcescare resource for maximum for maximum satisfaction of the people. This is called satisfaction of the people. This is called Economic ProblemEconomic Problem

Economic ProblemEconomic Problem Unlimited wants:-Unlimited wants:- The economic The economic

problem arises not merely due to the problem arises not merely due to the limited resource & capacity to produce limited resource & capacity to produce alone but also due to unlimited human alone but also due to unlimited human wants.wants.

Economic ProblemEconomic Problem

Scarcity of resource:-Scarcity of resource:- Wants of the Wants of the people are unlimited means to satisfy people are unlimited means to satisfy those wants are limited or scare. It is those wants are limited or scare. It is due to the scarcity of the resourcedue to the scarcity of the resource

Basic Economic ProblemBasic Economic Problem The scarcity of resources relative to The scarcity of resources relative to

human wants gives rise to various human wants gives rise to various basic problem.basic problem.

Basic problem are:- Basic problem are:- 1.1. What to Produce.What to Produce.2.2. How to ProduceHow to Produce3.3. For whom to Produce.For whom to Produce.4.4. What Provision be made for economic What Provision be made for economic

growth.growth.

What to ProduceWhat to Produce

This means that This means that what goodswhat goods & in & in what what quantities quantities are produced by a society.are produced by a society.

The society has to choose among The society has to choose among thousands of consumer goods thousands of consumer goods themselves & decide about all allocation themselves & decide about all allocation of resource between them.of resource between them.

Special mention in this regard is the Special mention in this regard is the choice between necessities & luxuries.choice between necessities & luxuries.

How to ProduceHow to Produce This means with This means with what method orwhat method or

techniquestechniques a society will decide to a society will decide to produce goods.produce goods.

A combination of resource implies a A combination of resource implies a technique of production.technique of production.

There are various alternative technique There are various alternative technique of producing a commodity & the society of producing a commodity & the society has to choose among them with a proper has to choose among them with a proper combination of resource.combination of resource.

Whom to ProduceWhom to Produce

It means It means who will getwho will get how much forhow much for consumption.consumption.

It means how much distributed It means how much distributed among the members of the society.among the members of the society.

The distribution of national income The distribution of national income should be on the basis of “ from each should be on the basis of “ from each according to his ability,to each according to his ability,to each according to his needs.”according to his needs.”

What Provision should be made What Provision should be made for Economic growthfor Economic growth

Both an Individual & a society would Both an Individual & a society would not like to use all its scarce resource for not like to use all its scarce resource for current consumption only.current consumption only.

MethodologyMethodology

Static & DynamicsStatic & Dynamics

STATICSTATIC Economic static's refers to that type of Economic static's refers to that type of

analysis where we establish the analysis where we establish the functional relation between two variable functional relation between two variable whose value related to the whose value related to the same point ofsame point of time or same period of time.time or same period of time.

Example:-Example:- The product pricing is a good The product pricing is a good example of economic statics.example of economic statics.

Merits of Economic staticsMerits of Economic statics Simplifier:-Simplifier:- We can study the complex We can study the complex

economic system with the help of this economic system with the help of this simplifier device by assuming several thing as simplifier device by assuming several thing as

constantconstant.. Crate understandingCrate understanding:- :- To understanding To understanding

the working of the dynamic economy , a study the working of the dynamic economy , a study of economic statics is essential.of economic statics is essential.

Highly Developed:-Highly Developed:- Method of statics is Method of statics is more highly developed than the method of more highly developed than the method of dynamics dynamics

Demerits of economic StaticsDemerits of economic Statics

Unrealistic assumption.Unrealistic assumption. Constant variable.Constant variable. No useNo use It is not appropriate.It is not appropriate.

Economic DynamicsEconomic Dynamics Economic dynamics refers to that analysis Economic dynamics refers to that analysis

which considers the relationship between which considers the relationship between those relevant variables whose value belong to those relevant variables whose value belong to different point of time, or different period of different point of time, or different period of time.time.

It is also a very comprehensive method.It is also a very comprehensive method. It is a very realistic method of study or It is a very realistic method of study or

investigation.investigation. It is method which picturise the entire series It is method which picturise the entire series

of adjustment which take place between the of adjustment which take place between the break up of old equilibrium & the break up of old equilibrium & the establishment of new.establishment of new.

Merits of Economic Merits of Economic DynamicsDynamics

Realistic assumption:-Realistic assumption:- The study of The study of economic become indispensable to economic become indispensable to correct the unrealistic nature of correct the unrealistic nature of economic statics.economic statics.

Considerable amount of elasticity:-Considerable amount of elasticity:-There is a considerable amount of There is a considerable amount of elasticity in the method of economic elasticity in the method of economic dynamics. Because of its elasticity. It dynamics. Because of its elasticity. It can be used to investigate all can be used to investigate all possibilities concerning a particular possibilities concerning a particular problemproblem

Demerits of Economic Demerits of Economic DynamicDynamic

Difficult method of investigation.Difficult method of investigation. It is very complex & complicated.It is very complex & complicated. It is not yet fully developed.It is not yet fully developed.

Economic LawsEconomic Laws&&

Government Laws Government Laws

Economic LawsEconomic Laws The purpose of the economic law is to The purpose of the economic law is to

regulate the relations arising from the regulate the relations arising from the economic activities.economic activities.

In the legal system of the soviet In the legal system of the soviet union “economies laws” was the legal union “economies laws” was the legal theory & system under which economic theory & system under which economic relation were a legal discipline relation were a legal discipline independent of independent of criminal lawcriminal law & & civil law.civil law.

Government LawGovernment Law

It deals with the governments power to It deals with the governments power to regulate, that the Amerian constitution regulate, that the Amerian constitution is respected & enforced through the is respected & enforced through the department of justice &various law department of justice &various law enforcement agencies.enforcement agencies.

Economics and LawEconomics and Law The economic analysis of law (also The economic analysis of law (also

known as law & economic) is an known as law & economic) is an analysis of law applying method of analysis of law applying method of economics.economics.

Economic concept are used to Economic concept are used to explain the effects of laws, to assess explain the effects of laws, to assess which legal rules are economically which legal rules are economically efficient & to predict which legal rules efficient & to predict which legal rules will be promulgated.will be promulgated.

Types of Law and Types of Law and EconomicsEconomics

Positive Law & Economics.:-Positive Law & Economics.:- Positive Positive law and economics uses economic analysis to law and economics uses economic analysis to predict the effects of various legal rules.predict the effects of various legal rules.

Positive law & economics has also at Positive law & economics has also at times purported to explain the development of times purported to explain the development of legal rules.legal rules.

Example:-Example:- The common law of torts , in The common law of torts , in terms of their economic efficiency.terms of their economic efficiency.

Normative law & EconomicsNormative law & Economics It goes one step further & makes policy It goes one step further & makes policy

recommendations based on economic recommendations based on economic consequences of various policies. consequences of various policies.

The key concept for normative The key concept for normative economic analysis is efficiency , in economic analysis is efficiency , in particular , allocative efficiency.particular , allocative efficiency.

A common concept of efficiency used A common concept of efficiency used by law & economics scholars is by law & economics scholars is Pareto Pareto Efficiency or kaldor hicks efficiencyEfficiency or kaldor hicks efficiency

Inductive Inductive

The Inductive Method is also known as The Inductive Method is also known as historical , empirical method.historical , empirical method.

Induction is the process of Induction is the process of reasoning from a part to the whole ,from reasoning from a part to the whole ,from particular to general, or from individual particular to general, or from individual to the universal.to the universal.

It is an ascending process in which It is an ascending process in which facts are collected , arranged & the facts are collected , arranged & the general conclusion are drawn.general conclusion are drawn.

Form of Inductive MethodForm of Inductive Method

Experimentation approach.Experimentation approach. Statistical approach.Statistical approach.

Merits of InductionMerits of Induction

Economic investigation & ResearchEconomic investigation & Research Improvement of Economic Problem.Improvement of Economic Problem. DynamicDynamic

Demerits of InductionDemerits of Induction

Misinterpreted & Misuse.Misinterpreted & Misuse. Time Consuming & costly.Time Consuming & costly. RiskRisk

Deductive MethodDeductive Method

The Deductive method is also known as the The Deductive method is also known as the analytical , abstract method.analytical , abstract method.

deduction means reasoning or inference deduction means reasoning or inference from the general to the Particular or from the from the general to the Particular or from the universal to the individual.universal to the individual.

In other word its works the general to the In other word its works the general to the specific this is also called a top-down specific this is also called a top-down approach.approach.

Process of DeductionProcess of Deduction

Perception of the problem.Perception of the problem. Making Assumption.Making Assumption. Formulating hypothesis.Formulating hypothesis. Testing or Verifying the hypothesis.Testing or Verifying the hypothesis.

Merits of DeductionMerits of Deduction

SimpleSimple Less time consuming & Less Expensive.Less time consuming & Less Expensive. It is a powerful method.It is a powerful method.