Nature and Methodology of Economics

Module 1
Nature and Methodology

of Economics
What is Economics?
 Economics is the study of how individuals &

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

Meaning of Economics
 The term economics comes from the ancient

Greek word oikos (household) & nemein
(manage), which in effect meant managing a
household, using limited funds available in the
most economical manner possible.
Definition of Economics
Definition of Economics are
divided under four heads:-
1. Science is wealth (Adam smith)

2. Science is Material welfare (Alfred
Marshall’s)
3. Science of Scarcity (Robbin’s )
4. Modern Definition
Science is wealth
 “ An enquiry into nature & cause of

wealth of nations.”
By: Adam Smith
Adam Smith define Economics as the

“Science of wealth”. Economics was
regarded as the science which studied the
production & Consumption of wealth.
Science is Material welfare
“Economics is a study of mankind in the

ordinary business of life; it examines
that part of individual and social action
which is most closely connected with the
attainment and the use of the material
requisites of well being.”
Science of Scarcity
‘Economics is the science which studies
human behavior as a relationship
between scarce means which have
alternative uses."
Nature of Economics
 Economics is a Science.
 Economics is a Art.
 Economics is a Positive
 Economics is a Normative.
Nature Of Economics
Economics is a Science.
The Term science has been defined as

a systematized body of knowledge
which trace the relationship between
cause & effect.
The fact should systematically
collected ,classified and analyses.
Nature of Economics
Economics is a Art
the art is lays down a specific solution
for specific problems.
J.N.Keynes “ An Art is a system of rules for
the attainment of a given end.”
Science teaches us to know , or an art

teaches us to do .
Nature of Economics
Economics is Positive science.
 It is defined as a body of systematized

knowledge concerning what is.
 The objective of a positive science is
the establishment of uniformities.
 It deals with things as they are.
 It explains their causes & effects.
Nature of Economics
Economics is a Normative Science
 It is defined as a body of systematized
knowledge relating to the criteria of

what ought to be.
 The objective of a normative science is
the determination of ideals.
 It deals with things as they ought to be.
Micro & Macro Economics
Micro Economics
The term Micro Economics is derived
from Greek word Mikos (small). Micro
economics thus deal with a small part or
a component of the national economy of
the country.
Example:- How does the change of a price

of good influence a family purchasing
decision.
Types of Micro Economics
 Micro Static
 Comparative Microstatic
 Micro dynamics
Importance of Micro
Economics
 Helpful in efficient employment of
resource.
 Understanding free enterprise economy.
 Helpful in development of international
trade.
 Helpful in understanding the implication
of taxation.
 Basis for welfare economics.
Limitation of Micro Economics
 What is true in the case of individual unit may
not be true in the case of aggregates.
 Micro economics instead of studying the total
economy concentrates only on small parts of
it.
 There are certain economic
 problem which cannot be analysed with the
aid of micro economics. Example:- important
problem relating to public finance , monetary
& fiscal polices are beyond the purview of
Micro economics
Macro Economics
The word ‘Micro’ is derived from the
Greek word Makos meaning large &
therefore, Macro Economics is
concerned with the economics activity
in the large.
Macro Economics is a study in
aggregate.
Example:- How does change in interest
rate influence national savings.
Types of Macro Economics
 Macrostatic
 Comparative Macrostatics
 Macrodynamics
Economic Problem
Economic is mainly concerned with the
achievement & use of martial
requirement to satisfy human wants.
Human wants are unlimited &
productive resources are scared or
limited.
This gives rise to the problem of
how to use scare resource for maximum
satisfaction of the people. This is called
Economic Problem
Economic Problem
 Unlimited wants:- The economic
problem arises not merely due to the
limited resource & capacity to produce
alone but also due to unlimited human
wants.
Economic Problem
 Scarcity of resource:- Wants of the
people are unlimited means to satisfy
those wants are limited or scare. It is
due to the scarcity of the resource
Basic Economic Problem
The scarcity of resources relative to
human wants gives rise to various
basic problem.
Basic problem are:-
1. What to Produce.
2. How to Produce
3. For whom to Produce.
4. What Provision be made for economic
growth.
What to Produce
 This means that what goods & in what
quantities are produced by a society.
 The society has to choose among
thousands of consumer goods
themselves & decide about all allocation
of resource between them.
 Special mention in this regard is the
choice between necessities & luxuries.
How to Produce
 This means with what method or
techniques a society will decide to
produce goods.
 A combination of resource implies a
technique of production.
 There are various alternative technique
of producing a commodity & the society
has to choose among them with a proper
combination of resource.
Whom to Produce
 It means who will get how much for
consumption.
It means how much distributed
among the members of the society.
 The distribution of national income
should be on the basis of “ from each
according to his ability,to each
according to his needs.”
What Provision should be made
for Economic growth
 Both an Individual & a society would

not like to use all its scarce resource for
current consumption only.
Methodology
Static & Dynamics

STATIC
Economic static's refers to that type of
analysis where we establish the
functional relation between two variable
whose value related to the same point of
time or same period of time.
Example:- The product pricing is a good
example of economic statics.
Merits of Economic statics
 Simplifier:- We can study the complex
economic system with the help of this
simplifier device by assuming several thing as
constant.
 Crate understanding:- To understanding
the working of the dynamic economy , a study
of economic statics is essential.
 Highly Developed:- Method of statics is
more highly developed than the method of
dynamics
Demerits of economic Statics
 Unrealistic assumption.
 Constant variable.
 No use
 It is not appropriate.
Economic Dynamics
 Economic dynamics refers to that analysis
which considers the relationship between
those relevant variables whose value belong to
different point of time, or different period of
time.
 It is also a very comprehensive method.
 It is a very realistic method of study or
investigation.
 It is method which picturise the entire series
of adjustment which take place between the
break up of old equilibrium & the
establishment of new.
Merits of Economic
Dynamics
 Realistic assumption:- The study of
economic become indispensable to
correct the unrealistic nature of
economic statics.
 Considerable amount of elasticity:-
There is a considerable amount of
elasticity in the method of economic
dynamics. Because of its elasticity. It
can be used to investigate all
possibilities concerning a particular
problem
Demerits of Economic
Dynamic
 Difficult method of investigation.

 It is very complex & complicated.
 It is not yet fully developed.
Economic Laws
&
Government Laws
Economic Laws
 The purpose of the economic law is to
regulate the relations arising from the
economic activities.
In the legal system of the soviet
union “economies laws” was the legal
theory & system under which economic
relation were a legal discipline
independent of criminal law & civil law.
Government Law
 It deals with the governments power to

regulate, that the Amerian constitution is
respected & enforced through the
department of justice &various law
enforcement agencies.
Economics and Law
 The economic analysis of law (also
known as law & economic) is an
analysis of law applying method of
economics.
Economic concept are used to
explain the effects of laws, to assess
which legal rules are economically
efficient & to predict which legal rules
will be promulgated.
Types of Law and Economics
 Positive Law & Economics.:- Positive

law and economics uses economic analysis to
predict the effects of various legal rules.
Positive law & economics has also at
times purported to explain the development of
legal rules.
Example:- The common law of torts , in
terms of their economic efficiency.
Normative law & Economics
 It goes one step further & makes policy
recommendations based on economic
consequences of various policies.
 The key concept for normative
economic analysis is efficiency , in
particular , allocative efficiency.
 A common concept of efficiency used
by law & economics scholars is Pareto
Efficiency or kaldor hicks efficiency
Inductive
 The Inductive Method is also known as
historical , empirical method.
Induction is the process of
reasoning from a part to the whole ,from
particular to general, or from individual
to the universal.
It is an ascending process in which
facts are collected , arranged & the
general conclusion are drawn.
Form of Inductive Method
 Experimentation approach.
 Statistical approach.
Merits of Induction
 Economic investigation & Research

 Improvement of Economic Problem.
 Dynamic
Demerits of Induction
 Misinterpreted & Misuse.

 Time Consuming & costly.
 Risk
Deductive Method
 The Deductive method is also known as the
analytical , abstract method.
deduction means reasoning or inference
from the general to the Particular or from the
universal to the individual.
In other word its works the general to the
specific this is also called a top-down
approach.
Process of Deduction
 Perception of the problem.

 Making Assumption.
 Formulating hypothesis.
 Testing or Verifying the hypothesis.
Merits of Deduction
 Simple
 Less time consuming & Less Expensive.
 It is a powerful method.

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Module 1

Nature and Methodology

 Economics is the study of how individuals &

 Economics is the study of making choice.

 The term economics comes from the ancient

1. Science is wealth (Adam smith)

 “ An enquiry into nature & cause of

Adam Smith define Economics as the

“Economics is a study of mankind in the

The Term science has been defined as

Science teaches us to know , or an art

 It is defined as a body of systematized

knowledge relating to the criteria of

Example:- How does the change of a price

 Both an Individual & a society would

Static & Dynamics

 Difficult method of investigation.

 It deals with the governments power to

 Positive Law & Economics.:- Positive

 Economic investigation & Research

 Misinterpreted & Misuse.

 Perception of the problem.

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