Unit 1

ECONOMICS
The term economics comes from the Ancient Greek word
(oikonomia, "management of a household,
administration") hence "rules of the house(hold)".

There are many definitions given by many experts the
important four definitions are the basic for the
economics are
Science of wealth
Science of Material welfare
Science that Deals with Scarcity
Science of Economic Growth



Economics as a Science of wealth

J.B. Say has defined economics as the science which deals with
wealth.
Adam Smith defined economics as "a science which studies the
nature and causes of the wealth of nations. For Adam Smith
wealth was to be-all and end-all of economic activity. This
definition came in for sharp criticism for its narrow vision, and
hence, since has largely been abandoned.

But this definition has been criticized on the following grounds :
Adam Smith laid all emphasis on wealth but ignored man and
his welfare.
He gave restricted meaning of wealth as he included in wealth
only material goods like tea, biscuits, butter and excluded non-
material goods, i.e. services like those of doctor, soldier.
He pre-supposed the existence of an economic man who is to
satisfy his own interest having no social interest.
This definition makes the earning of wealth an end in itself and
ignores the propriety of means to achieve it





Economics as a Science of Material Welfare

According to Alfred Marshall, "Economics is a study of man's actions in the
ordinary business of life. It enquires how he gets his income and how he
spends it". Thus, it is on the one side, a study of wealth and on the other and
more important side, "a part of the study of man.
Marshall's view regarding the definition of economics can be expressed as follows
(1) Economics is a study of man,
(2) Economics is concerned only with those activities of man which are related
to the acquisition and enjoyment of wealth.

Bobbins criticized Marshall's definition on the following grounds:
Marshall's view of economics is narrow and unscientific.
Material welfare, which cannot be measured by any scale, cannot be
accepted as end of economics.
Marshall offered normative view of economics. But economics is neutral
between ends and does not give value judgement.

Economics as a Science of Allocation of Scarce Resources
According to Robbins, "Economics is the science which studies human
behaviour as a relationship between ends and scarce means which have
alternative uses."
Critisism
It ignores social aspects of economic activities.
Very wide scope of economic.
Scarcity is not the cause of economic problem.
Complex & abstract.

Economics as a Science of economic growth
Satisfactory Definition of Economics
According to Prof. Paul. A. Samuelson:"Economics is the study of how man
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 future
among various people and groups of society."
The definition focus on both scarcity and growth.
It is also known as the growth definition of economics.

Economic analysis is of two types (a) Micro economic analysis and (b)
Macro economic analysis

Micro economics:

According to E. Boulding, "Micro economics is the study of particular
firm, particular household, individual price, wage, income, industry,
and particular commodity."
In the words of Leftwitch, "Micro economics is concerned with the
economic activities of such economic units as consumers, resource
owners and business firms."
'Micro' is a Greek word means 'small.
Micro economic theory studies the behaviour of individual decision-
making units such as consumers resource owners, business firms,
individual households, wages of workers, etc
It studies the composition of flows and how the prices of goods and
services in the flow are determined.
In this analysis economists pick up a small unit and observe the details
of its operation.
It provides analytical tools for the study of the behaviour of market
mechanism.
It is also called as Price theory.
Importance of Micro economics:
Micro economics occupies a very important place in the study of
economic theory. It has both theoretical and practical importance. It
explains the functioning of a free enterprise economy.
It tells how millions of consumers and producers in an economy take
decisions about the allocation of productive resources among millions
of goods and services.
It explains the determination of the relative prices of the various
products and productive services.
It helps in the formulation of economic policies calculated to promote
efficiency in production and the welfare of the masses.

Limitations:
It cannot give an idea of the functioning of the economy as a whole. An
individual industry may be flourishing, where as the economy as a
whole may be languishing
It assumes full employment which is a rare phenomenon, at any rate in
the capitalist world. Therefore it is an unrealistic assumption


Macro economics:
According to E. Boulding "Macro economics deals not with
individual quantities as such but with aggregates of these
quantities, not with individual income but with national
income not with individual prices but with price levels, not
with individual outputs but with national output."
Macro economics is the obverse of microeconomics.
It is the study of economic system as a whole.
It studies not one economic unit like a firm or an industry
but the whole economic system
Therefore it deals with totals or aggregates national income
output and employment, total consumption, saving and
investment and the genera level of prices.
It is also called as Income theory and
It is also called as aggregative economics.

Importance:
It helps in understanding the functioning of a complicated
economic system
It gives a bird's eye view of the economic world
For the formulation of useful economic policies for the nation
macro economics is of the utmost significance.
It is far more fruitful to regulate aggregate employment and
national income and to work out a national wage policy
It occupies most important place in economic theory in its
pursuit of the solution of urgent economic problems.

Limitations:
Individual is ignored altogether. It is individual welfare which is
the main aim of economics.
It overlooks individual differences. Say the general price level
may be stable, but the price of food grains may have gone
spelling ruin to the poor.

Sr.no Micro economics Macro economics
1. Difference in the
degree of
aggregation
It studies the individual units of
the economy like a firm, a
particular commodity.

It deals with aggregates like
national income and aggregate
savings. It studies the problem
of the economy as a whole
2. Difference in
objectives

It is to study of principles,
problems and policies
concerning the optimum
allocation of resources
It studies the problems, policies
and principles relating full
employment of resources and
growth of resources
3. Method of study


Micro economics laws establish
relationship between the causes
and effects of economics
phenomena and it is formulated
by taking some assumptions
Macro economics elements are
categorized into aggregate
units like aggregate demand,
aggregate supply, total
consumption, total
investment, etc
4. Difference of
subject matter
It deals with the
determination of price,
consumer's equilibrium,
distribution and welfare, etc.
It is full employment,
national income, general price-
level, trade cycles, economic
growth, etc
5. Difference of the
forces of
equilibrium

It studies the equilibrium
between the forces of
individual demand and supply
or market demand and supply.

It deals with equilibrium
between the forces demand
and supply of whole economy.

Economics as a science
A science is a systematized body of knowledge about a particular branch of the
universe and which contains concepts, theories and principles which are
based on cause and effect relationship and are universal in nature.
Judged by this standard, economics is undoubtedly a science because it is a
systematized body of knowledge about economic activities.
Economics as a science has also got the scientific methods of deduction for its
study. Economics like other sciences deduces conclusions or generalizations
after observing, collecting and examining facts.
It is based on the facts .
But some economists feel that economics cannot be treated as a science
because different economists may suggest different solutions to the same
problem
It has been called a social science as it deals with the economic decisions
taken by human beings.

Nature of economics

Economics as an art
"An art is system of rules for the attainment of a given end". This implies that
art is practical.
Applying this definition of art to economics we can say it is an art. Its several
branches like consumption, production and public finance provide practical
guidance to solve economic problems.
Art is also defined as "a collection or body of rules for the execution of external
works." The application of certain rules will result in the attainment of specific
results. Thus, since solution to economic problems requires lot of application
of economic skills, economics is treated as an art.
Economics is both a science and an art.
The question whether economics is a positive or
normative science has been discussed for a very long
time.
Positive science is which ask why , when & normative
science is which ask what ought to be.
"A positive science is a body of systematised
knowledge concerning what is and a normative science
or regulative science is a body of systematised
knowledge relating to the criteria of what it ought to
be". In other words, a positive science describes things
they are. For this reason, it is also called descriptive
science. But normative science, on the other hand,
explains things not as they are but as they ought to be.

Economics as a Positive Science
The classical economists proposed' that economics should boconcerned only
with "what is" and not "what ought to be". In other words, they maintained
thut oconomics is only a positive science. They said that economics should not
explain rightness and wrongness of things and economists should not pass
moral judgement. Cairns said that economics should stand neutral as
mechanics stand between rival schemes of railway construction. Strigler
observed, "Strictly speaking words like 'ought* and "bad' cannot occur in
economic discussions". Lionel Robbins reaffirmed the view that economics is
nothing but a positive science. The above statod views are based on the
following reasons :
If economics is to inquire about the norms or ends of economics, there will
arise much confusion regarding the desirability or otherwise of economic ends.
If economics is treated as a normative science, ethical considerations will enter
into the realm of economics. This will lead first to difference of opinions and
then to perpetual disagreement among economists regarding economic norms.
This, in turn, will obstruct the growth of economics.
If economics becomes a normative study, economists will be forced to pass
moral judgements. Such judgements based on their moral judgements may
prove to be wrong in practical situations.
If economics is concerned with ends, it will become related to ethics.

Economics as a Normative Science
According to Marshall, economics is a normative science because it has a
norm,viz. welfare. Macifie remarks that "economics is fundamentally a science,
not merely a positive science like chemistry".
Howtrey feels that economics is a normative science because there is an
'economics oughf as it is in ethics. Subscribing to this view, other economists
have also put up a strong case for normative scicnce.
If economics is considered to be a positive science, it will become a mere value
theory. Prof. Eraser is of the opinion that economics is something more than a
mere value theory or equilibrium analysis".
Further if economics does not deal with any norm, economists will be reduced
to the position of theorists. As such they may explain and expound but not
advocate and condemn. But economists must tell what should be done and
what should be avoided.
When economics is neutral between ends, it becomes abstract complex and
unreal. But as a normative science, it is very human and realistic.
Economics is a social science which suggests the modes of promotion of
economic welfare with limited means. It can be of great service of mankind as a
normative science. It can help a person to get maximum welfare from the
limited resources. Normative economics can also be of great help in achieving
the national goals of removing poverty, increasing employment and raising the
quality of life of the people.
Definition of Managerial Economics:

Managerial economics in general defined as the study of
economic theories, logic and methodology which are
generally applied to seek solutions to the practical
problems of business.
Business Economics consists of the use of economic
modes of thought to analyse business situations.- McNair
and Meriam
Business Economics (Managerial Economics) is the
integration of economic theory with business practice for
the purpose of facilitating decision making and forward
planning by management." - Spencer and Seegelman.
Managerial economics is concerned with application of
economic concepts and economic analysis to the problems
of formulating rational managerial decision." - Mansfield

Economics-
Theory and Methodology
Business Management-
Decision Problem
Managerial Economics-
Application of
Economics to solving
business problem
Optimal Solution to
business problem
Scope of Managerial Economics:
The scope of managerial economics is not yet clearly laid out because it
is a developing science. Even then the following fields may be said to
generally fall under Managerial Economics:
Demand Analysis and Forecasting
Cost and Production Analysis
Pricing Decisions, Policies and Practices
Profit Management
Capital Management
These divisions of business economics constitute its subject matter.
Recently, managerial economists have started making increased use of
Operation Research methods like Linear programming, inventory
models, Games theory, queuing up theory etc., have also come to be
regarded as part of Managerial Economics

Demand Analysis and Forecasting: A major part of managerial decision making
depends on accurate estimates of demand. A forecast of future sales serves as a
guide to management for preparing production schedules and employing resources.
Demand analysis also identifies a number of other factors influencing the demand
for a product. Demand analysis and forecasting occupies a strategic place in
Managerial Economics.
Cost and production analysis: A firm's profitability depends much on its cost of
production. A wise manager would prepare cost estimates of a range of output, identify the
factors causing variations in cost estimates and choose the cost-minimising output level,
taking also into consideration the degree of uncertainty in production and cost calculations.
Production processes are under the charge of engineers but the business manager is supposed
to carry out the production function analysis in order to avoid wastages of materials and time.
Sound pricing practices depend much on cost control. The main topics discussed under cost
and production analysis are: Cost concepts, cost-output relationships, Economics and
Diseconomies of scale and cost control.

Pricing decisions, policies and practices: Price is the genesis of the revenue of a firm
and as such the success of a business firm largely depends on the correctness of the price
decisions taken by it. The important aspects dealt with this area are: Price determination in
various market forms, pricing methods, differential pricing, product-line pricing and price
forecasting.

Profit management: Business firms are generally organized for earning profit and in the
long period, it is profit which provides the chief measure of success of a firm. Economics tells
us that profits are the reward for uncertainty bearing and risk taking. A successful business
manager is one who can form more or less correct estimates of costs and revenues likely to
accrue to the firm at different levels of output. The more successful a manager is in reducing
uncertainty, the higher are the profits earned by him. In fact, profit-planning and profit
measurement constitute the most challenging area of Managerial Economics.

Capital management: Capital management implies planning and control of capital
expenditure because it involves a large sum and moreover the problems in disposing the capital
assets off are so complex that they require considerable time and labour. The main topics dealt
with under capital management are cost of capital, rate of return and selection of projects.

Characteristics of Managerial Economics
Managerial Economics is micro- economics.
Managerial Economics largely uses that body of
economics concepts and principles which is known
as Theory of Firm.
Managerial Economics is pragmatic.
Managerial Economics belongs to normative
economics.
It is having a multidisciplinary approach.
It is the integration of economics & business
management.

Managerial economics & other disciplines
Managerial economics & mathematics-
Estmatesvarious economic relationships.
Use of various mathematical tools like algebra, calculus, logarithm, exponential
are helpful.

Managerial economics & accounting
Accounting is recording the financial operation of a business firm.
Accounting information is source of data for economist.
Accountancy does provide the data support but in traditional economics,
managerial economics stresses upn the logic or reasoning behind such data.

Managerial economics & operation research-
Linear programming as well as goal programming models which are very useful
for managerial decisions.
Helpful in solving problems related to allocation of resources, transportation,
inventory, etc.

Managerial economics & statistics-
Statistics help managerial economists in the following ways:
Managerial economics calls for marshalling of quantitative data and reaching
useful measure of appropriate functional relationships involved in decision
making. Statistics provides the detailed data about a firm, which is useful in the
managerial economics for decision making.
Managerial Economics employs statistical methods for empirical testing of
economic generalizations. These generalizations can be accepted in practice
only when they are validated against the data from the world of reality and are
found valid.
Managers do not usually have exact information about the variables affecting
the decisions and have got to deal with the uncertainty of future events, theory
of probability, upon which
Role & functions of a managerial economics
A managerial economist is an expert who advises business
management in economic matters & problems faced by the business
organisation.
Analysis of business environment- help in making corporate plan by
forecasting the economic environment.
Analysis of in ternal factors- price determination, use of installed
capacity, investment decisions, expansion
Economic intelligence- supply management with economic
information of general interest so that it can be used in confrences &
seminars.
Collected from government publication,RBI, trade & industry journals,
newspaper.
Decision making
Pricing strategy- helps in setting the price ,analysis of price in different
market.
Specific function & responsibilities-
Sales forecasting
Market research
Economic analysis of competing firms
Pricing problem of industry
Evaluation of capital projects
Security/ investment analysis
Production & inventory control
Environmental forecasting
Advice on international trade & foreign exchaange management.

Social responsibility
Firm should not indulge in illegal activity.
Should be one which is dealing in good & service which do not harm people at
large.
Reasonable remuneration to the workers.
Child labour should be avoided.
Meaning and Nature of Science
Science is the systematised body of knowledge pertaining to a particular field of
enquiry. Such systematised body of knowledge pertaining to a particular field
contains concepts, theories and principles which are universal and true.
Science has the following features :
Systematised body of knowledge.
Scientific methods of observation.
Tests of validity and predictability.
Universal application of principles.
Whatever field of enquiry fulfills the above criteria is called a science. The
important examples of science are physics, chemistry, biology, zoology, etc.
Science is a social institution.
There is a method of science which is used to solve problems arising either out of
social and economic needs for individual curiosity.
Science has a cumulative tradition of knowledge. The stock of previous
knowledge forms the basis for new knowledge, with the previous knowledge
merging into the new knowledge.
Science has several functions in a given society. It plays a major role in the
maintenance and development of production processes.
Science is influenced by the prevailing social thought. And, in turn, radical
changes in scientific ideas influence the general attitudes and beliefs in society.
In science, theory and practice are intimately related. Hence, science
progresses rapidly in societies and in conditions, where practitioners and
thinkers mix and interact. Theory without practice is as barren as practice
without theory.

Science and Economic Development
Science passes through three stages of growth before coming to the level of
production which results in economic development. These stages are :
Stage I: formulation of scientific principles
Stage II: Application of the scientific principles (known as innovations)
Stage III : Development of the innovations to the point of commercial
exploitation e. g., (development of a solar cooker).



Science as the Prime Driver for Inventions
An invention is a scientific discovery e. g., (invention of a wheel). It is the
creation of a new idea. Invention is triggered because of a desire to do
something and this desire can be to:
(i) Solve some practical problem (viz., how to travel distance in lesser time).
(ii) Take advantage of a cheaper input. For example, if labour supply becomes
costly, then it is better to switch over to robotics/ computerisation (i.e., capital
input).
(iii) Satisfy widening markets. When the demand of a particular item (product)
increases steps are taken to resort to mass production of that product.
Innovation
It is the practical application of an invention. It is the use of an idea into
production process. Innovation may happen in three ways :
By chance discovery .
By deliberate search (i.e., through research and development
called (R & D).
During the process of production.
Innovations cause changes in the following areas which result in economic
development:
(i) Increasing productivity.
(ii) Changing the combination of factors (Input) ( viz. Land, Labour, Capital).

Meaning and Nature of Engineering
Engineering involves application of scientific knowledge. It is composed of the
skills and ingenuity in adapting knowledge to the uses of human race.
According to the Engineers Council for Professional Development,
"Engineering is the profession in which knowledge of the mathematical and
natural sciences gained by study, experience and practice is applied with
judgement to develop ways to utilize economically, the materials and forces of
nature for the benefit of mankind".
The purpose of an engineer is to apply his knowledge to particular situations to
produce products and services. To the engineer, knowledge is not an end in
itself but is the tool from which he fashions structures, machines and
processes. Thus, engineering involves the determination of the combination of
materials, forces and human factors that will yield a desired result with a
reasonable degree of accuracy.
Modern civilization rests to a large extent upon engineering. Most products
Used to facilitate work, communication and transportation, and to furnish
sustenance, shelter and even health care are directly or indirectly a result of
engineering activities.


Engineering has also been instrumental in providing instruments of
entertainment and leisure. Through the development of the printing
process, television and rapid transportation.
Engineering has provided the means for both cultural and economic
improvement of the human race.
In addition, engineering has become an essential input for national
defense. This is evident from the fact that a large number of engineers
of different branches are in the employment of armed forces of almost
all countries.


Engineering and Economic Development

Engineering is a profession in which the knowledge of mathematics and natural
sciences is applied. This knowledge is applied to develop ways to utilise the
materials and the forces of nature (viz., building a Hydroelectric Plant or Nuclear
Thermal Power Station) economically for the benefit of mankind. Engineering
facilitates economic development in two ways :
(i) By mechanisation of Production Process. The introduction of machines result
in large scale production, saves time and efforts. For example, usage of machines
(e.g. Tractors) in agriculture sector has helped in increasing agricultural
production
(ii) Development of Infrastructure. Engineering is extensively used in the
development of infrastructure which is almost a precondition for economic
development of a country. Better infrastructure consists of better means of
transport (roads etc.), better means of energy (electricity, power etc.), and better
means of communication (better connectivity). Thus, engineering is used in the
ships, aeroplanes etc.
It has been mentioned in World Development Report that, "The adequacy of
infrastructure helps determine one country's success to another country's failure in
diversifying production, expanding trade, coping with population growth, reducing
poverty and improving environmental conditions."
Meaning and Nature of Technology
Broadly speaking, technology refers to the body of knowledge, skills and
procedures for preparing, using and doing useful things. It is often identified with
the knowledge and skills in utilizing machines and processes with some specific
objectives in view. Technological development is a continuous process. Improved
technology replaces the existing technology to increase productivity and quality
of production.

Types of Technology
Labour intensive technology:- It involves more of labour and less of capital for
producing a unit of output. It is more appropriate for underdeveloped countries,
where labour is in abundance and capital is scarce.
Capital intensive technology:- It involves more of capital and less of labour for
producing a unit of output. It is more suitable for an advanced country where
capital is in abundance and labour is scarce.
Neutral technology:- It is neither labour saving nor capital saving.
Intermediate technology:- It is that technology which is midway between
capital intensive technology and labour intensive technology. For example,
manufacturing a washing machine which works on electricity (when electricity
is available) as also can be operated by hand (when electricity is not available).




The significant of aspects of technology that affect human life and economic
development include the following:
The nature of technology adopted determines the various jobs being
performed by individuals in an organization. With change in technology the
jobs are changed because it is the technology that determines the level of skill
needed.
Technology is a major factor of productivity improvement in the organization
and economy as a whole. Though people are primarily responsible for handling
technology their efficiency is determined by the nature and type of technology
adopted.
The firms/countries using latest technology in various fields enjoy a
competitive edge over others.

Role of Science and Technology in Economic Development
Utilisation of Natural Resources
One aspect of the development of science and technology is fuller utilisation of the
wealth or resources with which a country has been endowed.
Increased Efficiency
The essence of technological change lies in the introduction of new techniques of
production leading to product improvement, cost reduction and increased
productivity. These are achieved in either of the two ways. Firstly, it raises output
with given input of resources. Secondly, it produces the same output with lesser
inputs. In either case , the result would be increase in efficiency. Knowledge of
economics would help the engineer to achieve increased output with little addition
of inputs.
Factor Substitution
Technology often allows the engineers to substitute one factor for another
depending upon the availability of the factors. Cost of factors, requirements of
customers, etc.
Overcoming Scarcity
Application of latest technology loosens the constraints of scarcity of resources in
the country. It does so in the following ways:
(i) Use of existing resources in an efficient manner to get greater outputs.
(ii) Discovery of new resources and substitutes to feed the production processes.