BHARAT POUDEL

Definition and Methodology in Economics

Scheme of Presentation

Definition of EconomicsBy Adam Smith, Marshall and Robbins

Definition of Economics

Economics is a social science, a body of models and theories that explains the real world phenomena. Based on real world phenomena, economics makes assumptions, builds hypothesis from those assumptions and tests the hypothesis before developing it up into a theory.

Adam Smith

Adam Smith (1723 - 1790) - Scottish philosopher and economist, author of: Inquiry into the Nature and Causes of the Wealth of Nations (1776). Before Smith there was no economic discussion and after Smith people started discussing about Economics. In this sense he is known as the father of Economics

Defining Economics

Economics as a Science of Wealth – Adam Smith The last quarter of the eighteenth century heralded a

new era in the field of economics. In the year 1776 a book was published by Adam Smith, a Scottish philosopher turned economist. The title of the book was – An Inquiry into the Nature and Causes of the Wealth of Nations, popularly known as 'The Wealth and Nations‘

Main Idea of Adam Smith DefinitionStudy of wealthSource of wealthStudy of economic manPrimary place to wealth

Alfred Marshall

Alfred Marshall (1842 - L924) - British economist, who envisaged price determination as the outcome of the interaction of market demand and market supply, author of 'The Principle of Economics' (1890).

Economics as a Science of Material Welfare -Alfred Marshall

In the year 1890, Alfred Marshall, a British economist, published a book entitled the 'Principles of Economics'. Marshall defined Economics in the following words - Economics is a study of mankind in the ordinary business of life. It examines that parts of individual and social actions which are closely related the well being of individuals.

Main Idea of Marshallian Definition of EconomicsWelfare is the Primary ConcernStudy of ordinary manStudy of material welfare

Lionel Robbins

Lionel Robbins (1898 - 1984) - British economist, writer of 'An Essay on the Nature and Significance of Economic Science' (1935) who stressed the aspect of scarcity in all economic behaviour

Economics as a Science of Scarcity and Choices - Robbins

Lionel Robbins, a British economist, criticized Marshall's definition of Economics and proposed his own definition in the book 'An Essay on the Nature and Significance of Economic Science'. The book was published in 1935 wherein Robbins laid emphasis on the scarcity aspect of resources in all economic activities. Robbins defined Economics as- The science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.

Mani Idea of Robbins DefinitionUnlimited endsScarce means or resourcesAlternative use of resources

Micro and Macro Economics

Micro EconomicsIt is that part of the economic analysis which is

concerned with the behaviour of individual units: consumers and firms. It examines how consumers choose between goods, how workers choose between jobs, and how a business firm decides what to produce and what production methods to use.

Use/Importance of Microeconomics

Determination of PriceAllocation of the Resources and Economic

EfficiencyWelfare EconomicsTool for Policy Design and EvaluationTool for other branches of the Economics

Determination of Price

Microeconomics helps us to understand the price determination process under different market structures Demand, Supply and Market

This is very important as Price acts as Information for Economic Decision making units which facilitates decisions

Allocation of Resources and Economic Efficiency

Tells the process of Resource Allocations-role of economic agents and resource allocation process Eg Circular Flow of Income and Expenditure Eg. How consumer is spending his/her money income, or

supply labor etc.It also establishes conditions for ensuring economic

efficiency(?) Efficient condition for consumption (exchange), production

and mix of both. (pareto efficient) A perfectly competitive market ensures economic efficiency

Allocation…………………….

These Conditions serves as benchmark for comparison if there are imperfections in the market

If there are imperfections, this invites the regulatory role of the public institutions (market failure arguments)Monopoly, Monopsony MarketsExternalities

Welfare Economics

Pareto EfficiencyPareto Optimum and Social Optimum

Classical-Adam SmithUtilitatirian (interpersonal comparison and

costs benefits analysis)Social welfare function and Social Optimum

Two Fundamental Theorems of Welfare (?)

Tool for Policy Design and Evaluation

Microeconomics is used as tool for public policy design and Evaluation Public Policy (like change in tax and subsidy,

government expenditure etc.) Examples: impact of tax using demand and supply

framework (think is increase in VAT rate will necessarily increase revenue collection?)

Welfare Impact Analysis: Compensating and Equivalent Variations

Tool for Other Branches of Economics

Managerial EconomicsEnvironmental EconomicsInternational EconomicsPublic financeHealth Economics

Macro Economics

Macroeconomics is the study of the behaviour of the economy as a whole, such as national income, total consumption, saving, investment, total employment, general price level etc. In macroeconomics, we worry about aggregate economic goals such as full employment, control of inflation, economic stability and growth without considering the behaviour of individual consumers or firms.

Use/Importance of Macro Economics