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In general terms, economics is a social science that studies the behaviour 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 others 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
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 Says law, Pigous 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
conditions.