Chapter-1: introduCtion of eConomiCs

We and Economics-The Introduction

Think of our day to day activities. We all go to a market to buy various products, where we interact with the
sellers who sell us the products. Have you ever thought of what goes in the mind of a purchaser when he/she is
purchasing something? Yes, some of the important points are price of the product, usefulness of the product,
worth for money, his/her preferences, etc.
Similarly, let us think about the behaviour of a seller. What a seller thinks while making his/her selling
decisions? What and how much should he/she sell? What should be the selling price? Where to sell? How many
sellers exist in the market? How useful is his product for the consumers? etc.
We can conclude that in both the above examples, we are concerned about the human behaviour. That is, how
human beings as individuals or as a group behave under different situations, having different motives and
resources. Thus, broadly, we can say that economics is a study of human behaviour.
Scarcity of Resources and Unlimited Wants
A unique feature of human behaviour is never-ending or unlimited wants. The fulfilment of these wants needs
resources (such as, money, natural resources, etc.). However; these resources are always scarce in relation to the
unlimited human wants. For example, with Rs 40,000, a consumer can either purchase a T.V or a Laptop. Thus,
he/she faces the constraint of limited availability of money. Similarly, a producer faces the limited availability
of resources for making his/her production decisions.
Hence, the basic concern of economics is to allocate the scarce resources to the best possible use in the face of
unlimited wants. Therefore, it can be said that economics is a study of mechanism that an economy or a society
uses to make choices and to allocate the scarce resources to the fields with maximum possible and optimum
returns.
Definition of Economics
Economics is a branch of social science which primarily focuses on various ways of maximising satisfaction,
enhancing welfare both at individual and society level. It also provides us the framework to take various
decisions rationally and logically in the face of unlimited wants and limited endowment of resources.
In the words of Robbins
"Economics is a science which studies human behaviour as a relationship between ends and scarce means
which have alternative uses."
In the words of Samuelson
" Economics is the study of how men and society choose, with or without use of money, to employ scarce
productive resources which could have alternative uses, to produce various commodities overtime and
distribute them for consumption now and in future among various people and groups of society."
Need For Economics
The need of economics stems from the basic problem of scarcity and choice. Every society is endowed with
limited resources that can be used to enhance the welfare and development of a society as a whole. Economics
is about how an individual or a particular society makes these decisions regarding choices. It provides us with a
basic framework which assists a particular society to make decisions by assessing costs and benefits of a
particular decision.
Positive Economics and Normative Economics
Till now, we know that the basic economic problem exists because of the problem of scarcity of resources and
parallelly unlimited wants. There may be different alternative solutions to solve a particular economic problem.
These different alternatives may lead to different allocation mix of available resources and also lead to different
distribution pattern of final output. Whenever, we try to understand and solve an economic problem such as
poverty, unemployment, etc, we often come across various statements or suggestions which may or may not be
subjected to verifications.
Depending on the nature of statements, i.e. whether these statements can be verified or not, the statements can
be classified into following two categories.
1. Positive Statements
2. Normative Statements
Positive Statements are the factual statements and describe what was, what is and what would be. These
statements can be tested, proven or disproven. These statements do not involve any personal value judgment.
For example, if one says that it is raining outside, then the truth of this statement can be checked out by going
outside.

Prepared By: Dr. Amit Juneja, Lecturer Economics, S.B.S.G.S.S.S.School, Sabuana

You Tube Channel: Amit Juneja Economics
 Chapter-1: introduCtion of eConomiCs

Normative Statements describe what should be or what ought to be. These statements cannot be tested and
verified. Unlike positive statements, normative statements involve personal value judgments. Usually, these
statements are debatable in nature. For example, if one say that he/she prefers tea over coffee, then such
statement reflects his/her personal ideas, preferences, thereby, cannot be proven or disproven.
Thus, it can be said that while the positive statements are objective statements, the normative statements are
subjective statements. For example, Indian Stock Market has boomed in recent years, is an example of positive
statements; whereas, Indian government should make the legal formalities for the foreign investors less-
stringent is an example of normative statements.
Difference between Positive and Normative Economics
Positive Economics Normative Economics

Positive Economics deals with factual situations i.e.

1. they describe the actual situation of what was what Normative Economics deals with the ideal situations
of what should be or what ought to be.
is and what would be.
2. It does not involve any personal value judgement It involves the personal value judgement.

3. Such situations/descriptions can be verified. Such situations/descriptions cannot be verified and are
debatable in nature.
4 Example- The rate of inflation at present is 4%. Example- What should an ideal rate of inflation be?

Subject Matter of Economics- Microeconomics and Macroeconomics

The subject matter of economics is sub-divided into two core branches, Micro Economics and Macro
Economics. This division came into existence only after 1930 as per the suggestion by Ragnar Frisch.
Microeconomics- In Microeconomics, we study about the issues pertaining to individual economic units,
basically consumers, and firms, that interact in the market of different good and services. We study how
consumers make their consumption choices and decisions given their money income and the prices of goods
and services. We analyse how the firms decide how much to produce and by different input combinations. We
also study how prices are determined in both commodity market as well as in the factor market based on the
demand and supply analysis. Thus, in other words, microeconomics is a study that basically focuses on
behaviour of individual consumer and producer. It is also called the Price theory as it primarily focuses on how
prices are determined both in commodity and factor markets. Microeconomics is a microscopic extension of
macroeconomics. The following are the important theories that fall under the domain of Microeconomics.
1. Theory of Consumer’s Behaviour and Demand- (Chapter- 2)
2. Theory of Producer’s Behaviour and Supply- (Chapter- 3)
3. Theory of Price Determination under different markets conditions (Chapter- 4, 5, 6)
4. Theory of Factor Pricing **
5. Theory of Welfare Economics**
Macroeconomics- In Macroeconomics, we study how an economy as a whole operates. It focuses on the
aggregate measures such as, Aggregate Demand, Aggregate Supply, Aggregate Price Level, etc. It studies how
these variables are determined and how they change over time. It helps us in understanding various economic
relationships and economic problems at the economy or aggregate level. It is also known as the Theory of
Income and Employment as its main focus is on how income and employment levels are determined. In
Macroeconomics, we confront major problems such as poverty, unemployment, inflation, BOP disequilibrium,
etc. The following are the important Macroeconomic theories.
1. Theory of National Income
2. Theory of Employment
3. Theory of Money
4. Theory of General Price Level
5. Theory of International Trade
6. Theory of Economic Growth **
7. ** to be covered to higher studies.

Prepared By: Dr. Amit Juneja, Lecturer Economics, S.B.S.G.S.S.S.School, Sabuana

You Tube Channel: Amit Juneja Economics
 Chapter-1: introduCtion of eConomiCs

Difference between Microeconomics and Macroeconomics

Points of
Microeconomics Macroeconomics
Difference
1 Study matters It studies about individual economic units It studies about an economy as a whole.
like households, firms, consumers, etc.
2 Deals with It deals with how consumers or producers It deals with how different economic
make their decisions depending on their sectors such as households, industries,
given budget and other variables. government and foreign sector make
their decisions.
3 Method It uses the method of partial equilibrium, i.e. It uses the method of general
equilibrium in one market. equilibrium, i.e. equilibrium in all
markets of an economy as a whole.
4 Variables The major microeconomic variables are The major macroeconomic variables
price, individual consumer’s demand, wages, are aggregate price, aggregate demand,
rent, profit, revenues, etc. aggregate supply, inflation,
unemployment, etc.
5 Theories Various theories studied are: Various theories studied are:
1.Theory of Consumer’s Behaviour and 1.Theory of National Income
Demand 2. Theory of Money
2. Theory of Producer’s Behaviour and 3. Theory of General Price Level
Supply 4. Theory of Employment
3. Theory of Price Determination under 5. Theory of International Trade
Different Market Conditions
4. Theory of Factor Pricing
5. Theory of Welfare Economics

Prepared By: Dr. Amit Juneja, Lecturer Economics, S.B.S.G.S.S.S.School, Sabuana

You Tube Channel: Amit Juneja Economics