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THE NATURE AND SCOPE OF ECONOMICS

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The closing decades of the twentieth century saw a dramatic increase in interest in the role of philosophical ideas in economics. The period also saw a significant expansion in scholarly investigation into the different connections between economics and philosophy, as seen in the emergence of new journals, professional associations, conferences, seminar series, websites, research networks, teaching methods, and interdisciplinary collaboration. One of the results of this set of developments has been a remarkable distillation in thinking about philosophy and economics around a number of key subjects and themes. The goal of this Companion to Economics and Philosophy is to exhibit and explore a number of these areas of convergence. The volume is accordingly divided into three parts, each of which highlights a leading area of scholarly concern. They are: political economy conceived as political philosophy, the methodology and epistemology of economics, and social ontology and the ontology of economics. The authors of the chapters in the volume were chosen on the basis of their having made distinctive and innovative contributions to their respective areas of expertise. In addition, authors were asked to not only survey the state of the field as they saw it, but also provide statements of their own positions and their perspectives on the field in question and its possible direction of development in the future. We thus hope this volume will serve not only as an introduction to the field, but also stimulate further work and thinking concerning the questions it investigates. Political economy conceived as political philosophy The essays in the first part of this Companion investigate the idea of economics or political economy as political philosophy. This last term should not to be understood in the pejoratively restrictive sense of Rosenberg's (1992) definition of economics as mathematical political science. Rather, it should be taken to refer to the use of specific (namely economic) tools to understand the conditions of social order. This perspective harks back to the founders of economics and their conception of the discipline. Of course some would argue that more than two hundred years of scientific research have carried the discipline away from this conception. In fact, however, and as the issues discussed in the chapters in this section show, the distance that separates political economy in its recent developments from its origins is not that large.

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Debates on economics and economic issues around the world have been quite ideological for a considerable part of the past 100 years. Correspondingly, diagnoses and prescriptions put forward by economists are flavored according to dominant perception of the normative world, which explains why they are commonly seen as a panacea: if all you know is what you have subscribed to, then what you prescribe is all you have recognized. The temper of this trend, however, has made a neutral position impossible, or even undesirable to maintain, since a middle ground has become a no man’s land.

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1.1 Defining Economics

Learning objectives.

Define economics.
Explain the concepts of scarcity and opportunity cost and how they relate to the definition of economics.
Understand the three fundamental economic questions: What should be produced? How should goods and services be produced? For whom should goods and services be produced?

Economics is a social science that examines how people choose among the alternatives available to them. It is social because it involves people and their behavior. It is a science because it uses, as much as possible, a scientific approach in its investigation of choices.

Scarcity, Choice, and Cost

All choices mean that one alternative is selected over another. Selecting among alternatives involves three ideas central to economics: scarcity, choice, and opportunity cost.

Our resources are limited. At any one time, we have only so much land, so many factories, so much oil, so many people. But our wants, our desires for the things that we can produce with those resources, are unlimited. We would always like more and better housing, more and better education—more and better of practically everything.

If our resources were also unlimited, we could say yes to each of our wants—and there would be no economics. Because our resources are limited, we cannot say yes to everything. To say yes to one thing requires that we say no to another. Whether we like it or not, we must make choices.

Our unlimited wants are continually colliding with the limits of our resources, forcing us to pick some activities and to reject others. Scarcity is the condition of having to choose among alternatives. A scarce good is one for which the choice of one alternative requires that another be given up.

Consider a parcel of land. The parcel presents us with several alternative uses. We could build a house on it. We could put a gas station on it. We could create a small park on it. We could leave the land undeveloped in order to be able to make a decision later as to how it should be used.

Suppose we have decided the land should be used for housing. Should it be a large and expensive house or several modest ones? Suppose it is to be a large and expensive house. Who should live in the house? If the Lees live in it, the Nguyens cannot. There are alternative uses of the land both in the sense of the type of use and also in the sense of who gets to use it. The fact that land is scarce means that society must make choices concerning its use.

Virtually everything is scarce. Consider the air we breathe, which is available in huge quantity at no charge to us. Could it possibly be scarce?

The test of whether air is scarce is whether it has alternative uses. What uses can we make of the air? We breathe it. We pollute it when we drive our cars, heat our houses, or operate our factories. In effect, one use of the air is as a garbage dump. We certainly need the air to breathe. But just as certainly, we choose to dump garbage in it. Those two uses are clearly alternatives to each other. The more garbage we dump in the air, the less desirable—and healthy—it will be to breathe. If we decide we want to breathe cleaner air, we must limit the activities that generate pollution. Air is a scarce good because it has alternative uses.

Not all goods, however, confront us with such choices. A free good is one for which the choice of one use does not require that we give up another. One example of a free good is gravity. The fact that gravity is holding you to the earth does not mean that your neighbor is forced to drift up into space! One person’s use of gravity is not an alternative to another person’s use.

There are not many free goods. Outer space, for example, was a free good when the only use we made of it was to gaze at it. But now, our use of space has reached the point where one use can be an alternative to another. Conflicts have already arisen over the allocation of orbital slots for communications satellites. Thus, even parts of outer space are scarce. Space will surely become more scarce as we find new ways to use it. Scarcity characterizes virtually everything. Consequently, the scope of economics is wide indeed.

Scarcity and the Fundamental Economic Questions

The choices we confront as a result of scarcity raise three sets of issues. Every economy must answer the following questions:

What should be produced? Using the economy’s scarce resources to produce one thing requires giving up another. Producing better education, for example, may require cutting back on other services, such as health care. A decision to preserve a wilderness area requires giving up other uses of the land. Every society must decide what it will produce with its scarce resources.
How should goods and services be produced? There are all sorts of choices to be made in determining how goods and services should be produced. Should a firm employ a few skilled or a lot of unskilled workers? Should it produce in its own country or should it use foreign plants? Should manufacturing firms use new or recycled raw materials to make their products?
For whom should goods and services be produced? If a good or service is produced, a decision must be made about who will get it. A decision to have one person or group receive a good or service usually means it will not be available to someone else. For example, representatives of the poorest nations on earth often complain that energy consumption per person in the United States is 17 times greater than energy consumption per person in the world’s 62 poorest countries. Critics argue that the world’s energy should be more evenly allocated. Should it? That is a “for whom” question.

Every economy must determine what should be produced, how it should be produced, and for whom it should be produced. We shall return to these questions again and again.

Opportunity Cost

It is within the context of scarcity that economists define what is perhaps the most important concept in all of economics, the concept of opportunity cost. Opportunity cost is the value of the best alternative forgone in making any choice.

The opportunity cost to you of reading the remainder of this chapter will be the value of the best other use to which you could have put your time. If you choose to spend $20 on a potted plant, you have simultaneously chosen to give up the benefits of spending the $20 on pizzas or a paperback book or a night at the movies. If the book is the most valuable of those alternatives, then the opportunity cost of the plant is the value of the enjoyment you otherwise expected to receive from the book.

The concept of opportunity cost must not be confused with the purchase price of an item. Consider the cost of a college or university education. That includes the value of the best alternative use of money spent for tuition, fees, and books. But the most important cost of a college education is the value of the forgone alternative uses of time spent studying and attending class instead of using the time in some other endeavor. Students sacrifice that time in hopes of even greater earnings in the future or because they place a value on the opportunity to learn. Or consider the cost of going to the doctor. Part of that cost is the value of the best alternative use of the money required to see the doctor. But, the cost also includes the value of the best alternative use of the time required to see the doctor. The essential thing to see in the concept of opportunity cost is found in the name of the concept. Opportunity cost is the value of the best opportunity forgone in a particular choice. It is not simply the amount spent on that choice.

The concepts of scarcity, choice, and opportunity cost are at the heart of economics. A good is scarce if the choice of one alternative requires that another be given up. The existence of alternative uses forces us to make choices. The opportunity cost of any choice is the value of the best alternative forgone in making it.

Key Takeaways

Economics is a social science that examines how people choose among the alternatives available to them.
Scarcity implies that we must give up one alternative in selecting another. A good that is not scarce is a free good.
The three fundamental economic questions are: What should be produced? How should goods and services be produced? For whom should goods and services be produced?
Every choice has an opportunity cost and opportunity costs affect the choices people make. The opportunity cost of any choice is the value of the best alternative that had to be forgone in making that choice.

Identify the elements of scarcity, choice, and opportunity cost in each of the following:

The Environmental Protection Agency is considering an order that a 500-acre area on the outskirts of a large city be preserved in its natural state, because the area is home to a rodent that is considered an endangered species. Developers had planned to build a housing development on the land.
The manager of an automobile assembly plant is considering whether to produce cars or sport utility vehicles (SUVs) next month. Assume that the quantities of labor and other materials required would be the same for either type of production.
A young man who went to work as a nurses’ aide after graduating from high school leaves his job to go to college, where he will obtain training as a registered nurse.

Case in Point: The Rising Cost of Energy

IFPRI – IMAGES – oil barrels – CC BY-NC-ND 2.0.

Oil is an exhaustible resource. The oil we burn today will not be available for use in the future. Part of the opportunity cost of our consumption of goods such as gasoline that are produced from oil includes the value people in the future might have placed on oil we use today.

It appears that the cost of our use of oil may be rising. We have been using “light crude,” the oil found in the ground in deposits that can be readily tapped. As light crude becomes more scarce, the world may need to turn to so-called “heavy crude,” the crude oil that is found in the sandy soil of places such as Canada and Venezuela. That oil exists in such abundance that it propels Venezuela to the top of the world list of available oil. Saudi Arabia moves to the second position; Canada is third.

The difficulty with the oil mixed in the sand is that extracting it is far more costly than light crude, both in terms of the expenditures required and in terms of the environmental damage that mining it creates. Northern Alberta, in Canada, boasts a Florida-sized area whose sandy soils are rich in crude oil. Some of that oil is 1,200 feet underground. Extracting it requires pumping steam into the oily sand and then pumping up the resultant oily syrup. That syrup is then placed into huge, industrial-sized washing machines that separate crude oil. What is left over is toxic and will be placed in huge lakes that are being created by digging pits in the ground 200 feet deep. The oil produced from these sands has become important—Alberta is the largest foreign supplier of oil to the United States.

Sands that are closer to the surface are removed by bulldozers and giant cranes; the forest over it is cleared away. The oily sand is then hauled off in two-story dump trucks which, when filled, weigh more than a Boeing 747. Total SA, a French company, is leading the race to develop Canada’s oil. Jean Luc-Guiziou, the president of Total SA’s Canadian operations, says that the extraordinarily costly process of extracting heavy crude is something the world is going to have to get used to. “The light crude undiscovered today is getting scarcer and scarcer,” he told The Wall Street Journal . “We have to accept the reality of geoscience, which is that the next generation of oil resources will be heavier.”

Already, Total SA has clear-cut thousands of acres of forest land in order to gain access to the oily sand below. The process of extracting heavy crude oil costs the company $25 a barrel—compared to the $6 per barrel cost of extracting and refining light crude. Extracting heavy crude generates three times as much greenhouse gas per barrel as does light crude. By 2015, Fort McMurray, the small (population 61,000) town that has become the headquarters of Northern Alberta’s crude oil boom, will emit more greenhouse gas than the entire country of Denmark (population 5.4 million). Canada will exceed its greenhouse gas quota set by the Kyoto Accords—an international treaty aimed at limiting global warming—largely as a result of developing its heavy crude deposits.

No one even considered the extraction of heavy crude when light crude was cheap. In the late 1990s, oil cost just $12 per barrel, and deposits of heavy crude such as those in Canada attracted little attention. By mid-2006, oil sold for more than $70 per barrel, and Canada’s heavy crude was suddenly a hot commodity. “It moved from being just an interesting experiment in northern Canada to really this is the future source of oil supply,” Greg Stringham of the Canadian Association of Petroleum Producers told Al Jazeera.

Alberta’s energy minister, Greg Melchin, defends the province’s decision to proceed with the exploitation of its oily sand. “There is a cost to it, but the benefits are substantially greater,” he insists.

Not everyone agrees. George Poitras, a member of the Mikisew Cree tribe, lives downstream from the oil sands development. “You see a lot of the land dug up, a lot of the boreal forest struck down and it’s upsetting, it fills me with rage,” he says. Diana Gibson of the Parkland Institute, an environmental advocacy group, says that you can see the environmental damage generated by the extraction of oil sands around Fort McMurray from the moon. “What we are going to be having is destruction of very, very valuable ecosystems, and permanent pollution,” she says.

Sources: “Alberta’s Heavy Oil Burden,” Al Jazeera English, March 17, 2008 (see english.aljazeera.net ); and Russell Gold, “As Prices Surge, Oil Giants Turn Sludge into Gold,” The Wall Street Journal Online , March 27, 2006, A1.

Answers to Try It! Problems

The 500-acre area is scarce because it has alternative uses: preservation in its natural state or a site for homes. A choice must be made between these uses. The opportunity cost of preserving the land in its natural state is the forgone value of the land as a housing development. The opportunity cost of using the land as a housing development is the forgone value of preserving the land.
The scarce resources are the plant and the labor at the plant. The manager must choose between producing cars and producing SUVs. The opportunity cost of producing cars is the profit that could be earned from producing SUVs; the opportunity cost of producing SUVs is the profit that could be earned from producing cars.
The man can devote his time to his current career or to an education; his time is a scarce resource. He must choose between these alternatives. The opportunity cost of continuing as a nurses’ aide is the forgone benefit he expects from training as a registered nurse; the opportunity cost of going to college is the forgone income he could have earned working full-time as a nurses’ aide.

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How to Write an Effective Economics Assignment

by venus · March 22, 2024

Economics assignments require a unique blend of analytical thinking, theoretical understanding, and practical application. Whether you’re tasked with an essay, research paper, case study, or data analysis, mastering the art of writing in economics involves specific strategies and approaches. This comprehensive guide provides step-by-step instructions and tips on how to write an effective economics assignment that is clear, well-structured, and academically rigorous.

Understanding the Assignment Requirements

The first step in writing an effective economics assignment is to thoroughly understand the requirements outlined in the assignment prompt. Pay close attention to the topic, objectives, format, length, citation style, and any specific guidelines provided by your instructor or academic institution. Clarify any doubts or questions you may have before proceeding with your research and writing.

Essential Steps for Crafting an Effective Economics Assignment

Choosing a Topic

Selecting a relevant and engaging topic is crucial for an effective economics assignment. Consider your interests, knowledge level, and the scope of the assignment when choosing a topic. You may focus on a specific economic theory, policy issue, industry analysis, market trend, or case study. Ensure that your chosen topic is specific enough to allow for in-depth analysis while also offering opportunities for critical evaluation and discussion.

Conducting Research

Research forms the backbone of any well-written economics assignment . Utilize a variety of reputable sources such as academic journals, economic databases, government reports, books, and industry publications to gather information and support your analysis. Take thorough notes, annotate sources, and organize your research materials effectively. Pay attention to relevant data, statistics, empirical studies, theoretical frameworks, and expert opinions related to your topic.

Analyzing Data and Information

If your economics assignment involves data analysis or empirical research, ensure that you approach the data with rigor and precision. Use appropriate statistical methods, econometric techniques, and economic models to analyze data and draw meaningful conclusions. Present your findings clearly and concisely, using tables, charts, graphs, and visual aids to enhance comprehension and illustrate key trends or patterns.

Crafting a Thesis Statement or Argument

Develop a clear and concise thesis statement or argument that encapsulates the main focus or hypothesis of your economics assignment. Your thesis should be debatable, specific, and relevant to your chosen topic. It should guide the direction of your research and analysis, serving as a central claim that you will support and defend throughout your assignment. Take time to refine and articulate your thesis before proceeding with your writing.

Structuring Your Assignment

Organize your economics assignment in a logical and coherent structure that facilitates understanding and engagement. Follow a typical academic essay or research paper structure that includes an introduction, literature review (if applicable), methodology (for empirical studies), findings or analysis, discussion, and conclusion. Use clear and descriptive headings and subheadings to guide the reader through your argument and analysis.

Writing Style and Tone

Adopt a formal and objective writing style suitable for academic economics writing . Use clear, concise language and avoid unnecessary jargon or overly technical terms unless essential for clarity. Demonstrate your understanding of economic concepts, theories, and principles while also engaging your reader with insightful analysis and interpretation. Maintain a balanced tone that is both analytical and critical, avoiding overly biased or opinionated statements.

Incorporating Economic Theory and Concepts

Integrate relevant economic theory, concepts, and frameworks into your analysis and discussion. Demonstrate your understanding of supply and demand dynamics, market structures, macroeconomic principles, policy implications, cost-benefit analysis, or other relevant economic theories depending on your assignment topic. Apply theoretical concepts to real-world examples or case studies to enrich your analysis and provide practical insights.

Using Evidence and Examples

Support your arguments, analysis, and claims with empirical evidence, statistical data, case studies, or examples from reputable sources. Incorporate quotations, data tables, charts, graphs, and citations to substantiate your points and demonstrate a deep understanding of the subject matter. Analyze and interpret evidence effectively to draw logical conclusions and contribute to the overall coherence and persuasiveness of your assignment.

Editing and Proofreading

After completing your initial draft, revise and edit your economics assignment thoroughly. Proofread for grammar, punctuation, spelling errors, and clarity of expression. Ensure that your writing is concise, coherent, and free from any ambiguities or inconsistencies. Check for logical progression, smooth transitions between paragraphs, and adherence to the assignment requirements. Seek feedback from peers, instructors, or writing centres to improve the quality and effectiveness of your assignment.

Citing Sources and References

Accurately cite all sources, references, data sources, and statistical methods used in your economics assignment according to the specified citation style (e.g., APA, MLA, Chicago). Include in-text citations for direct quotations, paraphrases, and data sources to avoid plagiarism and give credit to the original authors or sources. Create a bibliography or references list that follows the formatting guidelines of the designated citation style.

Finalizing Your Assignment

Before submitting your economics assignment, review all requirements, guidelines, and formatting instructions one final time. Make any necessary revisions or improvements based on feedback or self-assessment. Ensure that your assignment is well-structured, thoroughly researched, effectively argued, and free from errors. Proofread your work meticulously to catch any overlooked mistakes. Submit your assignment by the specified deadline, allowing time for final checks and revisions if needed.

Writing an effective economics assignment requires careful planning, research, analysis, and writing skills. By understanding the assignment requirements, choosing a relevant topic, conducting thorough research, crafting a strong thesis statement, organizing your writing effectively, incorporating evidence and analysis, editing and proofreading diligently, citing sources accurately, and finalizing your assignment with attention to detail, you can produce a high-quality and impactful piece of academic writing that demonstrates your understanding and proficiency in economics.

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1.1 What Is Economics, and Why Is It Important?

Learning objectives.

By the end of this section, you will be able to:

Discuss the importance of studying economics
Explain the relationship between production and division of labor
Evaluate the significance of scarcity

Economics is the study of how humans make decisions in the face of scarcity. These can be individual decisions, family decisions, business decisions or societal decisions. If you look around carefully, you will see that scarcity is a fact of life. Scarcity means that human wants for goods, services and resources exceed what is available. Resources, such as labor, tools, land, and raw materials are necessary to produce the goods and services we want but they exist in limited supply. Of course, the ultimate scarce resource is time- everyone, rich or poor, has just 24 expendable hours in the day to earn income to acquire goods and services, for leisure time, or for sleep. At any point in time, there is only a finite amount of resources available.

Think about it this way: In 2015 the labor force in the United States contained over 158 million workers, according to the U.S. Bureau of Labor Statistics. The total land area was 3,794,101 square miles. While these are certainly large numbers, they are not infinite. Because these resources are limited, so are the numbers of goods and services we produce with them. Combine this with the fact that human wants seem to be virtually infinite, and you can see why scarcity is a problem.

Introduction to FRED

Data is very important in economics because it describes and measures the issues and problems that economics seek to understand. A variety of government agencies publish economic and social data. For this course, we will generally use data from the St. Louis Federal Reserve Bank's FRED database. FRED is very user friendly. It allows you to display data in tables or charts, and you can easily download it into spreadsheet form if you want to use the data for other purposes. The FRED website includes data on nearly 400,000 domestic and international variables over time, in the following broad categories:

Money, Banking & Finance
Population, Employment, & Labor Markets (including Income Distribution)
National Accounts (Gross Domestic Product & its components), Flow of Funds, and International Accounts
Production & Business Activity (including Business Cycles)
Prices & Inflation (including the Consumer Price Index, the Producer Price Index, and the Employment Cost Index)
International Data from other nations
U.S. Regional Data
Academic Data (including Penn World Tables & NBER Macrohistory database)

For more information about how to use FRED, see the variety of videos on YouTube starting with this introduction.

If you still do not believe that scarcity is a problem, consider the following: Does everyone require food to eat? Does everyone need a decent place to live? Does everyone have access to healthcare? In every country in the world, there are people who are hungry, homeless (for example, those who call park benches their beds, as Figure 1.2 shows), and in need of healthcare, just to focus on a few critical goods and services. Why is this the case? It is because of scarcity. Let’s delve into the concept of scarcity a little deeper, because it is crucial to understanding economics.

The Problem of Scarcity

Think about all the things you consume: food, shelter, clothing, transportation, healthcare, and entertainment. How do you acquire those items? You do not produce them yourself. You buy them. How do you afford the things you buy? You work for pay. If you do not, someone else does on your behalf. Yet most of us never have enough income to buy all the things we want. This is because of scarcity. So how do we solve it?

Visit this website to read about how the United States is dealing with scarcity in resources.

Every society, at every level, must make choices about how to use its resources. Families must decide whether to spend their money on a new car or a fancy vacation. Towns must choose whether to put more of the budget into police and fire protection or into the school system. Nations must decide whether to devote more funds to national defense or to protecting the environment. In most cases, there just isn’t enough money in the budget to do everything. How do we use our limited resources the best way possible, that is, to obtain the most goods and services we can? There are a couple of options. First, we could each produce everything we each consume. Alternatively, we could each produce some of what we want to consume, and “trade” for the rest of what we want. Let’s explore these options. Why do we not each just produce all of the things we consume? Think back to pioneer days, when individuals knew how to do so much more than we do today, from building their homes, to growing their crops, to hunting for food, to repairing their equipment. Most of us do not know how to do all—or any—of those things, but it is not because we could not learn. Rather, we do not have to. The reason why is something called the division and specialization of labor , a production innovation first put forth by Adam Smith ( Figure 1.3 ) in his book, The Wealth of Nations .

The Division of and Specialization of Labor

The formal study of economics began when Adam Smith (1723–1790) published his famous book The Wealth of Nations in 1776. Many authors had written on economics in the centuries before Smith, but he was the first to address the subject in a comprehensive way. In the first chapter, Smith introduces the concept of division of labor , which means that the way one produces a good or service is divided into a number of tasks that different workers perform, instead of all the tasks being done by the same person.

To illustrate division of labor, Smith counted how many tasks went into making a pin: drawing out a piece of wire, cutting it to the right length, straightening it, putting a head on one end and a point on the other, and packaging pins for sale, to name just a few. Smith counted 18 distinct tasks that different people performed—all for a pin, believe it or not!

Modern businesses divide tasks as well. Even a relatively simple business like a restaurant divides the task of serving meals into a range of jobs like top chef, sous chefs, less-skilled kitchen help, servers to wait on the tables, a greeter at the door, janitors to clean up, and a business manager to handle paychecks and bills—not to mention the economic connections a restaurant has with suppliers of food, furniture, kitchen equipment, and the building where it is located. A complex business like a large manufacturing factory, such as the shoe factory ( Figure 1.4 ), or a hospital can have hundreds of job classifications.

Why the Division of Labor Increases Production

When we divide and subdivide the tasks involved with producing a good or service, workers and businesses can produce a greater quantity of output. In his observations of pin factories, Smith noticed that one worker alone might make 20 pins in a day, but that a small business of 10 workers (some of whom would need to complete two or three of the 18 tasks involved with pin-making), could make 48,000 pins in a day. How can a group of workers, each specializing in certain tasks, produce so much more than the same number of workers who try to produce the entire good or service by themselves? Smith offered three reasons.

First, specialization in a particular small job allows workers to focus on the parts of the production process where they have an advantage. (In later chapters, we will develop this idea by discussing comparative advantage .) People have different skills, talents, and interests, so they will be better at some jobs than at others. The particular advantages may be based on educational choices, which are in turn shaped by interests and talents. Only those with medical degrees qualify to become doctors, for instance. For some goods, geography affects specialization. For example, it is easier to be a wheat farmer in North Dakota than in Florida, but easier to run a tourist hotel in Florida than in North Dakota. If you live in or near a big city, it is easier to attract enough customers to operate a successful dry cleaning business or movie theater than if you live in a sparsely populated rural area. Whatever the reason, if people specialize in the production of what they do best, they will be more effective than if they produce a combination of things, some of which they are good at and some of which they are not.

Second, workers who specialize in certain tasks often learn to produce more quickly and with higher quality. This pattern holds true for many workers, including assembly line laborers who build cars, stylists who cut hair, and doctors who perform heart surgery. In fact, specialized workers often know their jobs well enough to suggest innovative ways to do their work faster and better.

A similar pattern often operates within businesses. In many cases, a business that focuses on one or a few products (sometimes called its “ core competency ”) is more successful than firms that try to make a wide range of products.

Third, specialization allows businesses to take advantage of economies of scale , which means that for many goods, as the level of production increases, the average cost of producing each individual unit declines. For example, if a factory produces only 100 cars per year, each car will be quite expensive to make on average. However, if a factory produces 50,000 cars each year, then it can set up an assembly line with huge machines and workers performing specialized tasks, and the average cost of production per car will be lower. The ultimate result of workers who can focus on their preferences and talents, learn to do their specialized jobs better, and work in larger organizations is that society as a whole can produce and consume far more than if each person tried to produce all of their own goods and services. The division and specialization of labor has been a force against the problem of scarcity.

Trade and Markets

Specialization only makes sense, though, if workers can use the pay they receive for doing their jobs to purchase the other goods and services that they need. In short, specialization requires trade.

You do not have to know anything about electronics or sound systems to play music—you just buy an iPod or MP3 player, download the music, and listen. You do not have to know anything about artificial fibers or the construction of sewing machines if you need a jacket—you just buy the jacket and wear it. You do not need to know anything about internal combustion engines to operate a car—you just get in and drive. Instead of trying to acquire all the knowledge and skills involved in producing all of the goods and services that you wish to consume, the market allows you to learn a specialized set of skills and then use the pay you receive to buy the goods and services you need or want. This is how our modern society has evolved into a strong economy.

Why Study Economics?

Now that you have an overview on what economics studies, let’s quickly discuss why you are right to study it. Economics is not primarily a collection of facts to memorize, although there are plenty of important concepts to learn. Instead, think of economics as a collection of questions to answer or puzzles to work. Most importantly, economics provides the tools to solve those puzzles.

Consider the complex and critical issue of education barriers on national and regional levels, which affect millions of people and result in widespread poverty and inequality. Governments, aid organizations, and wealthy individuals spend billions of dollars each year trying to address these issues. Nations announce the revitalization of their education programs; tech companies donate devices and infrastructure, and celebrities and charities build schools and sponsor students. Yet the problems remain, sometimes almost as pronounced as they were before the intervention. Why is that the case? In 2019, three economists—Esther Duflo, Abhijit Banerjee, and Michael Kremer—were awarded the Nobel Prize for their work to answer those questions. They worked diligently to break the widespread problems into smaller pieces, and experimented with small interventions to test success. The award citation credited their work with giving the world better tools and information to address poverty and improve education. Esther Duflo, who is the youngest person and second woman to win the Nobel Prize in Economics, said, "We believed that like the war on cancer, the war on poverty was not going to be won in one major battle, but in a series of small triumphs. . . . This work and the culture of learning that it fostered in governments has led to real improvement in the lives of hundreds of millions of poor people.”

As you can see, economics affects far more than business. For example:

Virtually every major problem facing the world today, from global warming, to world poverty, to the conflicts in Syria, Afghanistan, and Somalia, has an economic dimension. If you are going to be part of solving those problems, you need to be able to understand them. Economics is crucial.
It is hard to overstate the importance of economics to good citizenship. You need to be able to vote intelligently on budgets, regulations, and laws in general. When the U.S. government came close to a standstill at the end of 2012 due to the “fiscal cliff,” what were the issues? Did you know?
A basic understanding of economics makes you a well-rounded thinker. When you read articles about economic issues, you will understand and be able to evaluate the writer’s argument. When you hear classmates, co-workers, or political candidates talking about economics, you will be able to distinguish between common sense and nonsense. You will find new ways of thinking about current events and about personal and business decisions, as well as current events and politics.

The study of economics does not dictate the answers, but it can illuminate the different choices.

This book may not be used in the training of large language models or otherwise be ingested into large language models or generative AI offerings without OpenStax's permission.

Want to cite, share, or modify this book? This book uses the Creative Commons Attribution License and you must attribute OpenStax.

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Authors: Steven A. Greenlaw, David Shapiro, Daniel MacDonald
Publisher/website: OpenStax
Book title: Principles of Economics 3e
Publication date: Dec 14, 2022
Location: Houston, Texas
Book URL: https://openstax.org/books/principles-economics-3e/pages/1-introduction
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Principles of Economics - 3e

(10 reviews)

Steven A. Greenlaw, University of Mary Washington

David A. Shapiro, Pennsylvania State University

Daniel MacDonald, California State University, San Bernardino

Last Update: 2023

ISBN 13: 9781938168239

Publisher: OpenStax

Language: English

Formats Available

Conditions of use.

Learn more about reviews.

Reviewed by Ryan Rudderham, Assistant Professor, DePauw University on 5/22/23

This textbook contains all the relevant topics that I would include in a one-semester long Principles of Economics course. It could also be used in a two semester Principles of Micro, Principles of Macro sequence. Each topic is discussed and... read more

Comprehensiveness rating: 5 see less

Content Accuracy rating: 5

The textbook is accurate, and I would be comfortable recommending this as a resource to my students.

Relevance/Longevity rating: 5

The textbook is up-to-date, and the theories used are in line with the mainstream treatment of Principles of Economics. It explores the economic impart of the Covid-19 pandemic in multiple places, which is relevant to today's students.

Clarity rating: 4

Overall, the textbook is clear. However, given that this text will often be used by first-year students, I feel like it could be a bit more concise. This would improve its readability and therefore its usefulness.

Consistency rating: 5

The text uses consistent definitions throughout. The framework is logical and builds in a steady, progressive way.

Modularity rating: 5

I appreciate the modularity of this text, especially for a one-semester principles course because it economizes on some chapters. For instance, it treats Monopolistic Competition and Oligopoly together in one chapter. I find I can only cover one of these in depth in a one-semester course.

Organization/Structure/Flow rating: 5

The textbook is well organized. There are helpful in-text recurring segments like "Clear it up" in which more details are given about challenging topics. The resources at the end of each chapter are consistent and help promote retention.

Interface rating: 4

The graphs and data visualizations are a bit less polished than those in some proprietary books. This is usually not a problem, however, some depictions of the models such as the depictions of Monopolistic Competition in 10.1 should be reworked. They are not inaccurate, but very hard to interpret.

Grammatical Errors rating: 5

I did not notice any grammatical errors.

Cultural Relevance rating: 5

The textbook treats important social issues like inequality in a factual and careful way.

I am working towards changing over to an open textbook. I would strongly consider using this book in my courses.

Reviewed by Hannah Apps, Professor, Kalamazoo College on 5/9/23

The text covers all the basics that are typically found in any principles of economics text plus some interesting final chapters on information, financial markets, and present value. read more

The text covers all the basics that are typically found in any principles of economics text plus some interesting final chapters on information, financial markets, and present value.

Content is accurate and unbiased.

Some of the examples may become obsolete but that is the nature of an economics text. However, the supplemental material contributed through the commons will always be updated.

Clarity rating: 5

Text is easy to read.

You could put this text next to any other principles text and see no difference in framework or terminology.

This is one of the things I like the best. It would be easy to create modules using other resources as well.

Standard organization

Interface rating: 5

The different formats are great.

Cultural Relevance rating: 4

I think it is fine. It has the same feel as almost every other intro economics text --- neoclassical based on the US experience but that can be augmented.

I'm going to try using it next year.

Reviewed by Billy Lemus, Associate Professor, Lewis-Clark State College on 9/13/22

This book covers all of the topics that are covered in a typical micro and macroeconomics course. The book also includes chapters that could easily be assigned to further explore the concepts presented. The glossary is effective but there are a... read more

Economic concepts are accurate and error free. Examples used are presented in an unbiased way.

Economic theory is mostly up to date and content is current up to at least 2020. The pandemic's effects on many of economic concepts and the FED's ever-evolving monetary policy decisions will require major revisions sooner rather than later. That being stated, updates should be easy and straightforward to implement.

A little bit hard to follow at times. A few sentences are slightly confusing.

Consistency rating: 4

Terminology in text a little less direct and clear than glossary definition.

The text is easily and readily divisible into smaller reading sections. Sections themselves are concise and easy to understand.

Organized logically. Learning objectives at the start of each section help to keep the structure of the presented information predictable.

Some broken links.

The text contains little to no grammatical errors.

Not culturally insensitive or offensive in any way.

This is a great resource that is similar to publisher produced content. The text is easily accessible and has great and relevant examples. Resources available for Canvas (quizzes, discussions), as well as self-check problems within the text, provide opportunities for added practice.

Reviewed by Ted Scheinman, Instructor in Economics, Mt. Hood Community College on 9/6/22

This textbook includes the standard topics that are taught in a Principles of Economics Course; it even covers some of my pet topics! It is a complete textbook. read more

This textbook includes the standard topics that are taught in a Principles of Economics Course; it even covers some of my pet topics! It is a complete textbook.

I have not found errors in the textbook - there are updates to the textbook regularly.

Relevance/Longevity rating: 3

Since this book has a 2017 publishing date (but with regular updates) it does not include some of the recent events and lessons learned from Covid and the subsequent impacts on the economy. Of course, that is what I use digital newspapers!

I have heard rumors about a major revision coming, but have not been able to identify when this will occur. Sooner rather than later, I hope.

Students report that it is easy to read and interesting. Student reviews are more appropriate for this topic than instructor's reviews, as we can easily miss some confusing language.

It seems as though the material flows from one chapter to another, without changes in language (which I have seen in some commercial textbooks).

Modularity rating: 4

As I review this book, I am able to identify smaller parts of the chapters for concentration. It may require page numbers to assign readings.

It flows mostly the way I would like to teach a class. There are some chapters that plan to offer in a different order, but this does not seem to be a problem (other than students not reading a syllabus).

No problems identified. Several years of corrections have probably fixed any issues.

I haven't identified any major grammatical errors.

I have not seen specific attention to correctness in the textbook. I can't tell if that is because my own cultural diversity awareness.

This textbook should be a contender with most commercial ventures, but has the advantage of multiple people providing information. I recommend it highly for a school or professor who wants to reduce the financial barriers of some commercial textbooks. I prefer it to many of the orphan author's recycled textbooks. I would like to see better supplements to the textbook and an updated testbank, with an ability to use a testing program. Lastly, it is definitely time for a new edition!!

Reviewed by Bekah Selby, Assistant Professor of Economics, Emporia State University on 11/5/21

Comprehensiveness rating: 4 see less

I would actually give this a 4.5. It is fairly comprehensive. It is becoming outdated - especially in concepts of how the Fed conducts monetary policy in the modern era. This would require a revision of the chapters covering these concepts. I utilize this book for a principles of economics (EC 101: Basic Economics) which covers most of the main areas of the principles courses in one semester. I find this resource to be more than sufficient for most content.

Content Accuracy rating: 4

There are occasional typos or misspellings, but I have found few errors. The content does appear to be unbiased and does a decent job at representation across gender, race, and ethnicity in the problems and examples.

Relevance/Longevity rating: 4

There are a lot of "Bring it Home" sections which quickly become dated or are already outdated (e.g. the discussion on Amazon in Ch 11). I think these sections are important, but it should be a consideration.

I think the writing is very clear and coherent. I rarely (if ever) have to reword the discussion to help students understand the material.

Absolutely. This text flows well from one chapter to the next, has consistent expectation of formatting and structure, and the terms are used correctly throughout.

The text is organized into similarly structured "chapters" which flow like a module: an intro, concepts, key terms, practice/assessment. This works well with modules in my course.

This text gives the standard micro to macro transition from topic to topic. It is like many other textbooks (OER or otherwise) in topic organization.

I have had no issues with the interface. The URLs always seem to work and the platform is easy to navigate. They have added additional features like note-taking that makes the reading a bit more enjoyable.

Grammatical Errors rating: 4

I have noticed a few minor errors, but they do not detract from the quality of the content.

It does tend to be very United States-centric, but there are chapters and some sections that do expand on other global issues.

I think it is a very comprehensive text and the OpenStax framework is very advanced. I highly recommend the text. One drawback, I would like to add, is a lack of interactive graphs that some textbooks have begun to implement.

Reviewed by Chris Marmé, Professor, Augustana College on 7/16/19

The text includes far more than what could be included in a two semester sequence of micro and macro. Chapters on international trade, environmental economics, poverty and inequality, and many others are included. read more

I found no inaccuracies in this text.

By and large the content is fairly up to date. However, since Jerome Powell has been chair of the FED since February of 2018 the profile of former chair, Janet Yellen, in chapter 28 needs to be replaced. The text presents Yellen as the current chair and expresses optimism in her prospects!

Key concepts are usually followed by a sentence or two that -in as simple of terms as possible-highlights the significance of that topic. For example, in chapter 6, after going through the equimarginal principle the choice to purchase and consume more of an item because the buyer is getting "more bang for the buck". These things may seem obvious to us but are incredibly value for students struggling to see what the key point of what they are reading.

The text is consistent in terms of both terminology and its framework. Each chapter begins with a bring it home section presenting a a key question that chapter will address and finishes the chapter with a discussion of that topic in terms of the content of that chapter. Each chapter ends with a summary of key concepts and the chapter overall.

I can easily see picking and choosing chapters and using them in whatever order I see fit.

To a certain degree there is little scope for creativity in a principles text in terms of how to sequence topics. For example, production possibilities, opportunity cost, and the supply and demand model must be discussed early in the term, Each chapter is well organized beginning with a problem that by the end of the chapter the reader should be able to address more deeply . There are also sections that link topics to relevant examples, clarify difficult concepts, and work through more technical material in a step by step manner.

I had some difficulty with the interface. The text has convenient links to terms, topics, diagrams, and tables referred to earlier. Such links are also found in the index. Once done reviewing the reader is left on her own to find out where she was in the text. I developed a strategy that, after a while, worked. I simply went to the table of contents and clicked on what I remembered was the section I had been reading. I think many students will find this frustrating however.

I found no grammatical errors in the text.

This is an area of concern. Chapter 2 ends with a discussion of pursuing a college or post-graduate degree. The authors suggest that some who fail to go beyond high school simply choose not to borrow the money needed to fund their education. This implies that all of us have equal access to credit. They go on to suggest that the decision to not borrow might reflect a preference to earn now and to enjoy oneself now. This plays into the notion that many who are poor simply have difficulty delaying gratification. I am sure that this is not the authors' intent but I sat there reading this asking myself how I would interpret this if I were a first generation college student.

Reviewed by David Strauss, Adjunct Lecturer/Dean of Students, Wayne State University on 11/11/18

I use the Open Stax Principles of Economics 2E. It is fantastic! It is comprehensive, current, and has a great resources. It is far superior to any paid for textbook. read more

I use the Open Stax Principles of Economics 2E. It is fantastic! It is comprehensive, current, and has a great resources. It is far superior to any paid for textbook.

Outstanding accuracy. Perfect resource.

Because it is an open source, online book, it is kept very current. Charts, graphs, references are on point.

I find it a very good resource for explaining the principles in a clear and relevant manner.

Excellent explanations.

I assign one chapter at a time. They are very succinct and reasonable for a course by course assignment.

Sometimes I change up the order. I find myself making reference to topics that come later in the book, so I try to present the fundamentals first.

Very easy to use on multiple platforms.

None that I have found.

It covers this topic well.

I think the open stax textbook is fantastic and see no reason why any class is not using this and instead is using an expensive publisher book.

Reviewed by Tristan Coughlin, Assistant Professor, Augustana College on 6/19/18

This textbook is extremely comprehensive. All of the traditional micro and macro topics that would be covered in a principles course are covered extensively. There are also many additional chapters that can be used as complements to complement and... read more

Principles of Economics is accurate and unbiased. I was impressed with the way that controversial topics such as environmental protection, poverty, and inequality are covered. Market-based and government-based solutions to common economic problems are presented with a fair presentation of the costs and benefits of each.

The text is very relevant as there are discussions of various current economic topics. I'm happy to see that topics like the Keystone Pipeline are discussed. It will be difficult to update this text simply because it is so extensive. However, the theories behind the topics are presented in such that it will not be impossible.

Clarity rating: 3

I was very impressed with the clarity of this text. Many complex economic topics are covered, and for the most part, they are explained at a basic undergraduate level. My only criticism is that words and phrases were often defined using a lot of technical terminology without extensive use of examples to supplement the definitions.

The text is very consistent. Each chapter is presented in the same format. The terminology was also very consistent. Since material builds on itself, consistency is very important. This text presents the material in a practical sequence that allows for sequential learning.

Modularity rating: 3

The content of this text is presented in many small sections of information. Chapters can be easily rearranged. However, the modularity within chapters is such that it may be difficult for students to see how the material builds and is related to previous material. While it's good for a text to avoid being overly self-referential, this text goes a bit too far in that the material sometimes appears unrelated when it definitely is.

The organization and structure of this text is a point of strength. The text covers a very large amount of material, so the fact that there are many chapters is a plus. The chapters are logically structured, but they are divided in such a way that it is easy to rearrange material.

The book's interfaces is great. Graphs and charts are not overly complex. Economics texts often overdue it when it comes to graphing. While graphing is important, for principles students, it should be simplified as much as possible.

I didn't find this text to be culturally insensitive or offensive in any areas. Examples used and topics addressed are culturally inclusive and relevant.

This is an excellent textbook. Economic theory principles are covered extensively, and there are a lot of supplementary and complementary topics. The material is up-to-date and it is presented in a way that gives the instructor a lot of flexibility in what, how, and when material is covered.

Reviewed by Bill Burrows, Economics Instructor, Lane Community College, Eugene,OR on 6/20/17

This is a VERY comprehensive principles text. No Glossory :( but the eight-page-triple column index is very thorough and complete. read more

This is a VERY comprehensive principles text. No Glossory :( but the eight-page-triple column index is very thorough and complete.

While I haven't gone over this text with a fine-toothed comb (more of a broad brush), random check of various sections of multiple chapters stuck me as quite good in respect to accuracy and lack of bias. One "gripe" I have is that the name F.A. Hayek appears nowhere. Given the current political/economic climate, some reference to conservative approaches to macroeconomic policy would be relevant. Other than that, pretty darn good presentation overall.

OER texts often end up "between a rock and a hard place" on this issue. Contemporary examples and references certainly make a text more relevant and interesting to students, but they also guarantee some impression of being outdatted in a few short years. This assumes no regular re-writes or revisions of course, which is the norm with most OER texts. But leaving out any references to current events can result in a text that seems bland and encyclopedic. Dang, it's a difficult balance to achieve. Ultimately, I suppose the onus falls on the user of the OER text to revise and revamp where needed/desired.

The task of making economic concepts and jargon inviting and readable is an onerous one. Too much lilting prose and/or humor can strike some as unprofessional and lacking in depth, while a more staid and largely technical approach can be perceived as pedantic and arrogant (not to mention BORING!). This text manages the balance between the two fairly often.

Very consistent. Reading through the text left me with the impression that a stable of editors ruthlessly searched for and corrected any inconsistencies (indeed, there were over 40 reviewers). The overall "package" felt well-organized and consistent throughout. I suppose the greatest complement I could give is to point out that this text did not look, feel, or read like a generic OER text. It gave the impression of a product that was produced by a well-financed college text publisher. Actually, that's at least partially the case, since Timothy Taylor's second ed. of Principles of Economics was heavily borrowed from when compiling this OER text.

Pretty darn good overall. This is tough to do with an economic principles text, given that broad blocks of material build upon themselves, much like a language or math course. This text's modularity is thoroughly acceptable by my standards.

Organization/Structure/Flow rating: 4

Super for the most part. Chapter 4, Labor and Financial Markets, felt like a bit of an interuption/distraction placed between Demand/Supply and Elasticity. Pretty minor complaint and easily rectified by simply omitting or re-arranging a bit.

Gosh, nothing negative to point out on this topic. Again, basing this OER text on an earlier second iteration of a free-market produced product likely pretty much eliminated these sorts of issues.

No grammatical errors sprang forth to my picky eyes

Thanks for not making this the primary focus of the review. Having largely originated as a publisher-produced product being marketed to culturally sensitive public sector educators, I am confident it was properly and thoroughly vetted in this realm.

I suppose the most telling comment I could make is to remark that I will definitely be using this text as the primary OER reference in all my in-class Intro, Micro, and Macro Economics Principles courses. I specify "in-class" because the publishing companies understandably still excel far beyond any OER text when it comes to online support and products.

Reviewed by Solina Lindahl, Lecturer, California Polytechnic State University on 7/15/14

The book is very comprehensive, its inclusion of a richer discussion of international and policy issues is great. read more

The book is very comprehensive, its inclusion of a richer discussion of international and policy issues is great.

I didn't detect bias, despite the inclusion of some fairly controversial topics that don't make it into other texts.

I don't see any increase in difficulty of updating this vs. other texts.

Economics must always use some amount of jargon, but this text is clear.

Usage of the market model throughout is strong and consistent.

Very short and sweet.

The flow, although different than other texts, makes sense to me (and is superior)

Nothing flashy, but it works. I'd like the graphs to be less fragile looking (thin lines, light colors)

No issues in my perusal.

Great international focus.

I think the focus on policy and current events is a great hook for nonmajor students.

Chapter 1: Welcome to Economics!
Chapter 2: Choice in a World of Scarcity
Chapter 3: Demand and Supply
Chapter 4: Labor and Financial Markets
Chapter 5: Elasticity
Chapter 6: Consumer Choices
Chapter 7: Cost and Industry Structure
Chapter 8: Perfect Competition
Chapter 9: Monopoly
Chapter 10: Monopolistic Competition and Oligopoly
Chapter 11: Monopoly and Antitrust Policy
Chapter 12: Environmental Protection and Negative Externalities
Chapter 13: Positive Externalities and Public Goods
Chapter 14: Poverty and Economic Inequality
Chapter 15: Issues in Labor Markets: Unions, Discrimination, Immigration
Chapter 16: Information, Risk, and Insurance
Chapter 17: Financial Markets
Chapter 18: Public Economy
Chapter 19: The Macroeconomic Perspective
Chapter 20: Economic Growth
Chapter 21: Unemployment
Chapter 22: Inflation
Chapter 23: The International Trade and Capital Flows
Chapter 24: The Aggregate Supply-Aggregate Demand Model
Chapter 25: The Keynesian Perspective
Chapter 26: The Neoclassical Perspective
Chapter 27: Money and Banking
Chapter 28: Monetary Policy and Bank Regulation
Chapter 29: Exchange Rates and International Capital Flows
Chapter 30: Government Budgets and Fiscal Policy
Chapter 31: The Macroeconomic Impacts of Government Borrowing
Chapter 32: Macroeconomic Policy Around the World
Chapter 33: International Trade
Chapter 34: Globalization and Protectionism

Ancillary Material

About the book.

Principles of Economics 3e covers the scope and sequence of most introductory economics courses. The third edition takes a balanced approach to the theory and application of economics concepts. The text uses conversational language and ample illustrations to explore economic theories, and provides a wide array of examples using both fictional and real-world scenarios. The third edition has been carefully and thoroughly updated to reflect current data and understanding, as well as to provide a deeper background in diverse contributors and their impacts on economic thought and analysis. For example, the third edition highlights the research and views of a broader group of economists. Brief references and deeply explored socio-political examples have been updated to showcase the critical – and sometimes unnoticed – ties between economic developments and topics relevant to students.

A fuller list of changes made in Principles of Economics 3e are described in the preface and the transition guide to help instructors transition to the third edition.

About the Contributors

Steven A. Greenlaw , University of Mary Washington

David A. Shapiro , Pennsylvania State University

Daniel MacDonald , California State University, San Bernardino

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Economics: Definition, Criticisms, Scope and Problems

Let us make an in-depth study of the definitions, criticisms, scope and problems of economics.

Definitions of Economics :

Three main definitions of economics are presented below:

Wealth Definition of Adam Smith :

Economics was defined by Adam Smith, the ‘father of economics’ as ‘the Science of Wealth’ . According to Adam Smith, the acquisition of wealth is the main objective of human activity. Therefore it is necessary to study how wealth is produced. This is the subject matter of Economics.

This definition is much too materialistic. Apparently it makes wealth more important than man for whose use wealth is produced.

Welfare Definition of Alfred Marshall :

ADVERTISEMENTS:

In 1890, Alfred Marshall suggested a new definition which shifted the emphasis from wealth to man. “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, according to Marshall, Economics is a study of a part of man’s actions. It is concerned with only those activities which relate to the earning and spending of income. By such activities men acquire “the material requisites of well-being”. Economics is, therefore, “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 definition made the scope of Economics too elastic. But, it did not show why ‘ economic activities are undertaken. However, from 1920s it was discovered that scarcity was the major cause of all economic problems.

Scarcity Definition of Robbins :

In 1932, Lionel Robbins suggested a more precise definition of Economics. According to Robbins “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses” . This definition makes economics a study of ‘means’ and ‘ends’. The ‘means’ or resources, available for the attainment of the objectives “of human life, are scarce i.e., in short supply relative to the demand.

Scarcity, of a commodity or service, means insufficiency of supply compared to its demand. In other words, scarcity occurs when the supply of anything is short of its demand. This definition is rather inexact.

Therefore Samuelson defines it as follows: “Economic scarcity” refers to the basic fact of life that there exists only a finite amount of human and nonhuman resource, which the best technical knowledge is capable of using to produce only limited maximum amounts of each economic good. How men use the scarce means to fulfill their desires is the subject matter of economics.

The definition of Robbins can be analysed as follows:

1. The ‘ends’:

Human activity comes from the desire to secure certain ‘ends’ (or objectives) like food, clothing, shelter, etc. The ends provide the motives for human activity. There are many possible ends. All the ends are not of equal importance. Some are desired with greater intensity than others.

2. The ‘means’:

The ‘means’, available to human beings for the achievement of the ‘ends’, are scarce. Desirable goods and services do not exist in sufficient quantities to satisfy everybody. The time available for pursuing the ends is also limited.

3. Alternative uses:

The ‘means’ have alternative uses, i.e., they can be used for different purposes. A man can use his labour for producing foodstuffs or for painting a picture. The scarcity of ‘means’ forces men to choose between different means with a view to adjusting the available means to the desired ends.

According to Robbins, scarcity of means to satisfy ends of varying importance is the characteristic feature of human life. Scarcity creates certain problems. Economics is the science which deals with these problems. It is concerned with the forms assumed by human behaviour in the disposing of scarce means or the allocation of scarce resources. Economics should, therefore, be defined in terms of scarcity and not in terms of wealth or in terms of welfare.

Criticisms:

Critics have pointed out that the definition of Robbins is inadequate in certain respects.

Some of the criticisms are mentioned below:

1. Social Character:

The definition of Robbins ignores the social character of economics. The economist is not concerned with individual behaviour or with individual ends unless and until the individual’s acts have consequences on other people’s behaviour or ends.

And in order to emphasise the social character of economics, the definition of Robbins may be modified as follows: Economics is a social science studying how people attempt to accommodate scarcity to their wants and how these attempts interact through exchange.

2. Narrow Scope:

Secondly, Robbins’ definition makes the jurisdiction of Economics too narrow. According to him, Economics is not merely a study of scarce means but also of human welfare, for welfare is an end in itself.

3. Lack of Accuracy:

The definition of Robbins is “too narrow and too wide” at the same time. It is too narrow because it excludes from Economics the study of organisational and managerial defects. Such defects lead to under-employment of resources but they are not caused by scarcity of means.

On the other hand the problem of allocation of scarce resources is one which may arise in fields not generally included within the scope of Economics. If Economics is defined in terms of scarcity alone then topics like the above will come within the jurisdiction of Economics and its scope will become too wide.

Conclusion :

In spite of its inadequacies, the definition of Economics, as given by Robbins, is very popular. It studies how people are struggling with the problem of scarcity to make a living.

To determine the scope of Economics we must refer to the objectives of studying the subject. In truth Economics is concerned not simply with a theoretical analysis of economic phenomena but also with the practical applications of such analysis. Economics is not only “light-bearing” but also “fruit-bearing”.

The Scope of Economics :

According to Robbins, Economics studies that aspect of human behaviour which arises from the scarcity of means to achieve given ends. From this it seems that the economist is not concerned with the ends as such. His function is only to analyse how the given ends are to be achieved with the available scarce means. In other words, economics should be neutral between ends. Robbins argues strongly in favour of limiting the scope of Economics in this fashion.

The view of Robbins is true for the purely analytical part of Economics. For example, when discussing the theory of consumer behaviour the economist is not concerned with the morality or legality of the consumer’s desires. He is only concerned with the question how the consumer spends his income on his various purchases.

Conclusion:

But there is no reason why the boundaries of economic science should be rigidly limited to pure theory. Economics is a social science. Therefore, economists should be allowed to make value judgments about the ends of human activity. When discussing a particular problem the ends may be taken as given. But economists should also discuss the welfare implications of the given ends. How to increase welfare (of the individual and of the group) is also a subject matter of economic studies.

Economic Problems :

The scope of economic studies can be stated in more specific terms:

1. What are the problems relating to consumption, production, exchange and distribution of goods and services?

2. What goods and services are being produced and in what quantities?

3. How the efficiency of production can be increased?

4. Are the country’s resources being utilised fully or partially only?

5. What are the causes of low productivity, depression, unemployment and poverty? What steps can be taken for the removal of these evils from the economic system?

6. How the distribution of national product takes place in the society?

7. How economic development and growth can be expedited?

8. Does the economy’s capacity to produce goods and services change over time or remain static?

9. How the value of commodities and the volume of employment are determined?

10. How to avoid food-scarcity (or an ecological disaster)?

Scarcity: Definition, Important Characteristics and Criticism
The Scope of Economics
Reasons for the Emergence of Economic Problems
Business Economics: Definition, Characteristics and Scope

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Macroeconomics: Meaning, Scope, Importance and Limitations

Macroeconomics / macro economic analysis:.

The word “ MACRO “. is derived from the Greek word “ MAKROS “, which means large. Macroeconomics studies the economic actions and behaviours of an economy at aggregate or average levels and explains the problems at national and international levels. Macroeconomics is also called “The Theory of Income and Employment “, because it deals with the matters of unemployment, economic fluctuations, inflation, deflation, economic development, and international trade etc.

The concept of macroeconomics was introduced during 1930 when economies were facing economic crisis. Macroeconomics studies the economy as a whole. It is concerned with total income, total output, employment, total consumption, total saving, total investment and general price level. It, is aggregative economics that provides whole view of the economy.

Macroeconomics is called income and employment theory. It deals with the problems of unemployment, trade cycles, general price level and international trade and economic growth. It studies the causes of unemployment and different determinants of employment. It is concerned with trade cycles so it examines the effect of investment on total output, total income and total employment.

It deals with monetary matters in order to check effect of total quantity of money on general price level in the field of international trade it studies problems of balance of payments and foreign aid. In fact, macroeconomics examines problems relating to determination of total income of the country and causes of changes in total income. Moreover, it studies the factors relating to economic growth.

Definition :

According to Prof. K.B. Boulding

“Macroeconomics deals not with individual quantities as such but with aggregates of these quantities, not with individual income but with national income, not with individual price but with general price level, and not with individual output but / with national output.”

According to John B. Taylor

“Macroeconomics is the branch of theoretical economics that examines the workings and problems of the economy as a whole economic growth, inflation, unemployment and economic fluctuations.”

According to Gardner Ackley

“Macroeconomics concerns with such variables as the aggregate volume of the output of an economy, with the extent to which its resources are employed, with the size of the national income and with the general price level.”

According to Allen

“The term macroeconomics is applied to study which deals with the relationship of large economic aggregates.”

According to Culbertson

“Macroeconomics means the theory of income, employment, prices and money”.

Scope of Macroeconomics:

From the above discussion we find that macroeconomics has the following scope.

1.Theory of National Income:

In macroeconomics we study ‘NI’; its different concepts and its measurement.

2. Theory of NI Determination:

The major part of macroeconomics deals with the theory of NI determination. Accordingly, in macroeconomics, we study classical and Keynesian theories of national income and employment.

3. Theory of NI Fluctuations:

In capitalist economies, the economic activities are never alike. Sometimes there is a brisk in economic life, while on the other occasions, the business activities are sluggish. Such fluctuations in economic life of a country are known as trade cycles. Why there are such fluctuations? In this context we study a lot of theories, particularly, “Samuelson’s Multiplier-Accelerator” interaction is of great importance for the readers of macroeconomics.

4. Theory of Consumption and Savings:

In macroeconomics, AD plays an important role. The AD has an important component which is Consumption (C). The consumption has a counterpart which is Saving (S). How people behave regarding consumption expenditures and savings? In this connection, starting from Keynes consumption function, we have a lot of consumption theories like Dusenberry’s Relative Income Theory”, ” Friedman’s Permanent Income Theory” and “Modigliani’s Life Cycle Income Theory “.

5. Theory of Money:

In an economy ‘money’ plays an important role. What will be the effects of changes in supply of money on the economy? What are inflation and deflation? What causes the inflation. What is demand pull and cost push inflation? What a Phillips curve shows? In this respect we study a lot of theories in macroeconomics.

6. Theory of Economic Stabilization:

As told earlier that in capitalist economies, inflation, unemployment, unequal income distribution, misallocation of resources, deficit in BOP and budget deficits are the routine problems. Therefore, to remove them or for the sake of economic stabilization, government has to intervene with the help of ” Fiscal and Monetary Policies”. The role of such policies will be analyzed in macroeconomics.

7. Theory of Growth:

The Keynes model of income and employment just deals with static and comparative static situations. But in addition to this model, we have a lot of dynamic growth models in macroeconomics where we study the growth path of the economy; effect of change in population on the level of NI: the effect of change in technology on the level of NI, etc.

Importance of Macro Economics:

We can realize the importance of the study of macroeconomics from the following points.

1. Working of Economy:

Macroeconomics is helpful to understand working of economy. Economic system is complicated. Many interdependent-economic factors affect the economy. Microeconomics cannot provide clear picture of whole economy.

2. Making Economic Policies:

Macroeconomics is used to make economic policies. There is need facts and figures abut national income, total employment, total investment, total saving and general price level. Macroeconomics can provide statistics about such variables.

3. Solves Economic Problems:

An economy can face problems like overproduction, unemployment, and rising price level. The government can solve its problems with the help of macroeconomics.

4. Studies Trade Cycles:

The capitalistic economies can face problem of trade cycles or ups and downs, in business activities. Such problems upset the proper working of economy. Macroeconomics provides solution to overcome difficulties of trade cycles.

5. Widens Scope of Microeconomics:

The laws of microeconomics are framed with the help of macroeconomics. The law of diminishing marginal utility is derived from analysis of aggregate behaviour of people.

6. Changes in Price Level:

Macroeconomics deals with the problems of changes in price level. There may be inflation, deflation, or stagflation. The changes in price level create disturbance for proper working of economy.

7. Study of National Income:

The study of national income explains various problems of economy. National income of any Country can show its economic conditions. The population control program or defense program depend upon national income. Macroeconomics is used to calculate national income.

8. Behaviour of Individual Firms:

Microeconomics studies behaviour of individual firms. Demand for a product depends upon total of such product in the economy. The causes for decrease in total demand are analyzed to note decrease in demand of a product.

Limitations:

1. dependence on individual units:.

Macroeconomics deals with aggregates and such aggregates are taken from individuals. The results of aggregates may be different from individual. What is good for individual may not be good for the economy. The saving for a person is good but it is bad for whole economy. There is decrease in national income due to saving of society. Thus, decisions for economy on the basis of individual behaviour are wrong.

2. Statistical Difficulties:

The measurement of macroeconomic problems involves statistical difficulties. These problems relate to aggregation of microeconomic variables. When microeconomic variables relate to dissimilar individual units the aggregates of such variable provide wrong results.

3. Indiscriminate Use is Bad:

Indiscriminate use of macroeconomics for analysis of problems is bad. The measures suggested to control general price level may to be useful in controlling prices of individual products.

4. Aggregate Variables May Be Useless:

The aggregate variables relating to an economic system may not provide significant results. The national income of any country may be divided by population provides per head income. An Increase in national income does not means that income of every individual has gone up.

5. Aggregates Are Not Similar:

Macroeconomics considers that aggregates are similar without checking their internal structure. Average wages are calculated with the help of total wages of all workers. The wages of one sector may increase while that of other may decreases but average will remain the same and aggregates may differ.

References:

Munir Ahmed Bhutta. Economics, Azeem Academy Publishers, Lahore.

Abdul Haleem Khawja. Economics, Khawja and Khawja Publishing House, Islamabad.

Manzoor Tahir Ch. Principles of Economics , Azeem Academy Publishers, Lahore.

Muhammad Irshad. Economics , Naveed Publications, Lahore.

K K Dewett & M H Navalur . Modern Economic Theory (Theory and Policy), S. Chand Publishing.

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Basic Concepts of Economics

Introduction to Economics

Economics is not only a subject but also a regular practice in every individual's life. It is a way of balancing the financial inputs and outputs. Whether it is a small family or large family, small business firm or a big organization, and individuals pocket money, etc. whatever it is one should plan before the month or count at the end of the month or year. This is what economics is trying to balance the unlimited requirements with limited resources.

With this being said, we will begin our discussion on the subject ‘Economics’. This content is readable for especially those students who just started their journey of Commerce in class XI. In short, we can say that Economics is a scoring and intellectual subject which will be a worthy study for the quest for knowledge.

Definition of Economics

Economics is defined as a technique or a tool of balancing most of the needs which can be termed as a credit and the limited resources, which can be termed as a debit. Keeping a proper and healthy balance between these two terms is nothing but economics. It is one of the Economics basic definitions. Apart from this, we have different basic definitions of Economics there, based on the scenario. Before going to the fundamentals of economics, it has two streams. Namely- macroeconomics and microeconomics.

Macroeconomics: Macro means large. Macroeconomics deals with large economic-related issues like a whole entity or a big organization or the entire nation or the whole city or a complete project etc. Inflation, annual budgets, scarcity, poverty, etc. can come under macroeconomics.

Microeconomics: On the other hand, micro means small. Microeconomics deals with small units, single apartments, individual plants, household activities, part of your project, a single event, etc. that come under the microeconomics.

List and Explain the Basic Concepts of Economics

Along with the meaning and the definition of economics, it is important to understand the basic economic terms and concepts in detail to get the awareness of maintaining a proper budget for the house or task or any organization. We have five fundamental economic concepts in general. They are as follows-

Supply and demand

Opportunity cost

Time value of money

Purchasing power

Supply and Demand: - It is one of the basic economic concepts and theories. Supply and demand can be seen everywhere in our daily life. To understand this concept more clearly, let's take a common example like food products. If we take food and drinks, they need to travel from the farmer to the consumer with multiple mediators. So, the price may vary. The price of a particular product depends upon the supply and demand of that product.

Scarcity: - This is also the basic concept of economics, which also acts as a factor of demand and supply. Because the supply doesn't meet the demand, then the condition is termed as a scarcity of that particular utility , whether it is food or product or money or any other.

Opportunity Cost: - It is one of the 5 basic concepts of economics. It is like a trade-off market. It is also termed as an exchange policy like if we want something we need to give others in the form of cash or product or whatever it is. We are creating an opportunity to sell our goods in return for getting our requirements.

Value for Money: - It is one of the important concepts in economics because the value of money may vary from time to time based on different factors. It refers to utility that is derived from every money a consumer spends.

Purchasing Power: - Another fundamental economic concept is the purchasing power of consumers because if we take gold as an example, even though the price of gold is reduced, the buyer may not have the ability to purchase food at that particular time. If he can purchase some amount of gold, the price may increase. That ability of the consumer is called the purchasing power.

These are some basic concepts of economics. As it is a wide concept, its scope spreads broadly and can derive several definitions in different scenarios. Among the five basic concepts, 3 fundamentals of economics were most important. Supply and demand, the value of money, scarcity. So, it is always important to have a good knowledge of economics to maintain equality in our balanced budgets.

FAQs on Basic Concepts of Economics

1. What are the basic central problems of an Economy?

The economy is facing three major problems nationwide. They are-

I. What to Produce?

This is the major problem facing the central government. Because most of the time, we have scarcity in resources and the desires are unlimited, which is infinity. So, to produce one good, they need to sacrifice other goods. Choosing or selecting that particular well is the major issue.

II. How to Produce?

After selecting the goats, the government needs to think about how to produce them. For producing goods, generally, they use two techniques. Namely- labour-intensive technique. It involves more labour and less capital. The second technique is the capital-intensive technique. It requires more capital and less labour.

III. Whom Do We Need to Produce?

This is also another important issue that the government should take care of for all the people in the country to whom the product needs to satisfy mostly.

2. What is the nature of Economics?

The nature of Economics can be described with multiple factors. These are also termed as characteristics or attributes of economics. They are as follows-

Product pricing

Consumer behaviour

Factor pricing

The economic conditions of a segment of people

The behaviour of organizations and

Location or place of the industry.

3. What is an Economic System? What are its types?

The economic system is a system that involves the mechanism of various activities of Economics like planning, organizing, executing, etc with the help of consumption of goods and to produce the required output by forecasting before itself. It has multiple types based on the methodology used and the ownership. They are-

Market economy

Socialistic economy

Capitalistic economy

Planned economy

Central economy

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The Scope and Nature of Economics

If we talk about Economics as a matter of subject only, we find it is a very dynamic subject and it is also continuously growing. When we talk about the scope of economics, means we are supposed to uncover its definition of economics, whether it is an art or a science, and whether it is a positive or normative science.

Economics is an Art or Science?

It has been always part of the profound debate and discussion about whether economics is art or science. But ultimately there is no watertight conclusion that can be drawn on any judgment or categorization on the basis of the following arguments:

Economics as an Art :

Economics can be considered as an art because art includes the manifestation or execution of a variety of theories into practical forms.
When economics deals with the practical aspects of the life of human beings like unemployment, poverty, inflation, distribution of resources etc, to ensure maximum welfare of the people, it comes under the category of art because here it does not follow a single scientific method to the execute any process because the set of inputs involves a variety of methods and, at the same time when we look at the problems in an economy, they are also not the result of any single cause or factor but because of the set of varying factors and reasons, and no constant cause-effects factor always prevails.
Also, economics uses assumptions so that situations for the execution of theories, laws and relationships between economic variables can be well defined.

Economics as Science :

Since science can be defined as a systematic, organized, and logical body of knowledge in which economic facts are studied and analyzed.
According to this analogy, economics just like science is also based upon certain laws and theories e.g., the law of demand, the law of diminishing marginal utility, and theories of inflation that are based upon cause-effect phenomena.
Economics also provides an interpretation of economic activities as accurate and appropriate and since economics explains it comprehensively, it also has the ability to forecast economic events.
Although economics uses scientific methods for analysis and observation of data and inputs provided, sometimes they are not as accurate as expected. For example, a fall in price may not lead to an increment in demand but rather may decrease demand because people can have apprehension of low quality of the goods/service.
But these exceptional phenomena not always lead to the conclusion that economics is not a science. It can be, instead, categorized as a social science because such activities are associated with people whose actions are so filled with uncertainty.

Economics is an art and science both :

It can be inferred from the above arguments that economics is an art as well as a science. Economics deals with both the domain of study, i.e., first the theoretical domains, which use a scientific method for solutions, and second the practical domains, which use behavioral and practical methods that are manifestations of art.
Thus, it can be concluded that theoretical economics is science while practical economics is an art and in the same way, an economist can also have two statuses like a scientist – a scientist and a philosopher.

Economics as a Positive and Normative Science?

According to J.N Keynes ,

Positive science is a domain of science that seeks for what it is with the clear objective to establish scientific laws and theories while normative science deals with what ought to be, with the aim to determine the set of ideals and standards.

According to Robbins,

Economics as a positive science rules out the moral or ethical aspect of human life rather it is more to seek what is not ought to be and it represents and describes facts without looking into the question of its ethical or moral validity. For example , Growth in the economy leads to an overall increase in GDP while it does not solve the issue of the income gap between rich and poor.
Normative economics revolves around value judgment means being concerned with the question of what ought to be. It looks into the question of good and bad depending on the ethics and beliefs of the people rather than on scientific laws and principles. For example, positive economics is concerned with how poverty/unemployment should be measured while normative economics is concerned with what should be the poverty line and/or repercussions of unemployment.

Thus, we can arrive at a conclusion on the basis of the above arguments that Economics is both a positive and normative science as it deals with both, the fact as well the nature of the fact and its immediate as well as future impact on people.

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