BASIC CONCEPTS OF ECONOMICS
The subject Economics has no specific definition. It has been defined in many ways by various economists as a social science which studies human beings and their behaviour. Some of the definitions given by some of the experts in the subject are:
Alfred Marshal defined economics as “A study of mankind in the ordinary business of life.” This definition simply emphasises that economics have something to do with the study of human beings in relations to their daily economic activities.
Adam Smith saw it as “An inquiry into the nature and causes of wealth of nations.” To him economics is all about the making of wealth. Adam Smith was the first person to put a work together on Economics by writing a treatise, “Wealth of Nation” He is popularly regarded as the Father of Economics.
John Stuart Mill viewed it as “The practical science of production and distribution of wealth.”To this man, economics is concerned with how people produce and distribute various goods and services that are required for the maintenance of human existence.
H.J. Davenport looked at economics as the science that treats phenomena from the stand point of price. This definition stressed the importance of exchange and seeks to explain that economics deals with things that have a price value, which implies that for any goods or service to be of any economic importance, it must have a price attached to it.
A.C. Pigou defined economics as the science of material welfare. To him, economics is all about acquiring material wealth which improves or eases the welfare of human beings.
From the above explanations, it is very clear that there are many definitions of economics. In fact, it is often said that there are as many definitions of economics as there are economists.
However, the most generally accepted definition of economics is the one put forward by Professor (Lord) Lionel C. Robbins. He defined economics as “The Science which studies human behaviour as a relationship between ends and scarce means which have alternative uses”. This definition is all embracing because it covers some major aspects of economics such as scarcity, wants, human behaviour and choice. The ends in the definition refers to human wants, desires or needs. Human wants are numerous or many relative to available resources required to satisfy them. The scarce means refers to the limited available resources used in satisfying the numerous human wants. In other words, the resources required to satisfy human wants which are referred to as the ‘means’ are scarce or not many, relative to their demand. The alternative uses in the definition means that these scarce resources can be used for different purposes. In other words, the more pressing needs have to be satisfied first, leaving others that are less important.
In summary, human wants or ends are usually many, relative to available resources or means of satisfying them. Therefore, choice has to be made in order to maximise or get the best out of the available scarce resources to meet the various economic ends. As a result of scarce resources, human wants can be arranged in order of preference. These scarce means or resources can be used in different or alternative ways to satisfy human wants.
NATURE AND SCOPE OF ECONOMICS
Economics belongs to a group of subjects called social sciences. Other social science subjects are sociology, geography, psychology, government, political science, religious studies, anthropology and philosophy. Economics is regarded as a social science because it studies human behaviour. For example, is the price of a commodity rises, people will buy less, while if the price of such commodity decreases, people will buy more, all things being equal.
Economics is also concerned with human behaviour, such as how people achieve their wants. Man interacts with people in the process of buying and selling. Economics as a social science subject is also concerned with the study of firms or companies and the government which is responsible for the provision of goods and services for its people in order to satisfy their wants.
Economics is also regarded as a science because it adopts the scientific method. The scientific methods involves the following:
- Formulating a hypothesis.
- Collection of data.
- Organising or analysing the data.
- Formulating laws.
- Testing the laws
- Prediction on the basis of the laws.
Even though economics is often regarded as a science subject, it does not assume the same level of precision and accuracy as any of the natural pure or physical sciences like chemistry, physics and biology. This is because economics deals with human behaviour, which is very complex and changes from time to time depending on the circumstances.
BASIC CONCEPTS OF ECONOMICS
The basic concepts or elements of economics are: wants, scarcity, scale of preference, choice and opportunity cost.
Definition: Want may be defined as insatiable desire or need by human beings to own goods or services that give satisfaction. The basic needs of man include: food, housing and clothing. Human needs are many. They include tangible goods like houses, cars, chairs, television set and radio, while the others are in form of services, e.g. tailoring, carpentry and medical. Human wants or needs are many, and are usually described as insatiable because the means of satisfying them are limited or scarce.
Definition: Scarcity is defined as the limited supply of resources which are used for the satisfaction of unlimited wants. In other words, scarcity is the inability of human beings to provide themselves with all the things they desire or want. These resources are scarce relative to their demand. The available resources within the environment can never at any time be in abundance to satisfy all human wants. Since wants are numerous and insatiable relative to the available resources, human beings have to choose the most important ones and leave others that are less important. There would be no economic problem if resources were not scarce, hence economics is sometimes defined as the study of scarcity.
Why is Scarcity a Fundamental Problem in Economics?
Economics seeks to study the relationship between ends and means. Ends are unlimited while the means are limited. Scarcity simply means resources are limited in relation to the ends. Economics is therefore concerned with allocating limited resources among the competing and unlimited wants.
How do governments solve the problems of scarcity?
Governments are faced with the problem of allocating scarce resources among competing unlimited wants. In doing this, government draws a scale of preference which helps them to choose or select the most important want to be satisfied. In making choices, you forgo some other wants. The forgone wants are the opportunity cost or real cost of the selected alternative.
SCALE OF PREFERENCE
Definition: Scale of preference is defined as a list of unsatisfied wants arranged in the order of their relative importance. In other words, it is a list showing the order in which we want to satisfy our wants arranged in order of priority. In the scale of preference, the most pressing wants come first and the least pressing ones come last. It is after the first in the list has been satisfied that there will be room for the satisfaction of the next. Choice therefore arises because human wants are unlimited or numerous, while the resources for satisfying them are limited or scarce.
Importance of Scale of Preference
- Ranking Of needs: Scale of preference helps us to rank our needs or wants in order of their relative importance.
- Financial prudence: Scale of preference does assist in managing our finances properly.
- Identification of highest priority: Scale of preference assists individuals to identify quickly the most important needs among others.
- Rational choice: Scale of preference assists individuals, firms and governments to make rational choices in the list of wants.
- Efficient utilisation of limited resources: Scale of preference also helps individuals to make efficient utilisation of available resources.
- Optimum allocation of resources: Scale of preference facilitates optimum allocation of resources.
- Maximisation of satisfaction: Scale of preference enables economic agents to maximise their satisfaction.
Definition: Choice can be defined as a system of selecting or choosing one out of a number of alternatives.
Human wants are many and we cannot satisfy all of them because of our limited resources. We, therefore, decide which of the wants we can satisfy first. Choice arises as a result of numerous human wants and the scarcity of the resources used in satisfying these wants. Choice therefore arises as a result of scarcity of resources. Since it is extremely difficult to produce everything one wants, choice has to be made by accepting or taking up the most pressing wants for satisfaction based on the available resources.
Definition: Opportunity cost is defined as an expression of cost in terms of forgone alternatives. It is the satisfaction of one’s want at the expense of another want. It refers to the wants that are left unsatisfied in order to satisfy another more pressing need. Human wants are many, while the means of satisfying them are scarce or limited. We are, therefore, faced with a problem where we have to choose one from a whole set of human wants; to choose one means to forgo the other.
Importance of Opportunity Cost
Opportunity cost is very important to individuals, firms and governments.
a) To individuals
- Wise choice: Opportunity cost enables individuals to make wise choice between competing wants.
- Efficient use of scarce resources: It also assists individuals to make maximum use of scarce resources relative to their unlimited wants.
b) To the firms
- Rational decision: It assists the firm to make rational decisions about production process.
- Techniques of production: It also helps manufacturing industries in deciding the techniques of production, i.e. whether to adopt capital or labour intensive method of production.
c) To the government
- Preparation of budget: Opportunity cost helps the government in the preparation of budget, since it assists in efficient allocation of scarce resources to certain sectors of the economy.
- Decision making process: It helps the government in making certain decisions, e.g. the priority areas that may require immediate attention, such as medical and education.
WHY WE STUDY ECONOMICS
We study the subject Economics for the following reasons:
- Allocation of resources: The study of economics enables the government to allocate scarce resources to various sectors of the economy.
- Development of programmes: It also enables the government to develop certain programmes that are beneficial to the people.
- Rational decision: Economics enables the individuals to choose certain wants among the numerous needs using their scarce resources.
- Preparation of budget: Economics assists the government to determine the expected income and expenditure of a country.
- Solutions to economic problems: Economics also enables individuals, firms and governments to solve their problems using various principles of the subject.
- Production: The study of economics assists us to determine what to produce, when to produce, factors of production and how to produce goods and services required to satisfy human wants.
- Provision of basic tools: The study of economics provides basic tools for analysing economic problems among individuals, firms and governments.
- Maximisation of profits: Economics enables traders and businessmen to maximise their profits using economic principles in their business.
- Consumption of commodities: Economics also assists us to determine the pattern of consumption of goods and services in our local environment.
- Satisfaction of wants: The study of economics helps us to utilise the principles of choice, opportunity cost, scale of preference, etc. in order to satisfy human wants.
- Participation in government: The understanding of the subject economics does help individuals to participate actively in the art of governance.
BRANCHES OF ECONOMICS
Economics can be grouped into two major divisions. These are micro-economics and macro-economics.
Definition: Micro-economics refers to the branch of economics which deals with smaller units or components of the economy. It is concerned with the analysis of the basic decision making components of households, individuals, firms and governments. It relates to cost, output, production, pricing and marketing activities of households, firms and governments.
Advantages of Micro-economics
- Better understanding: Microeconomics helps in the better understanding of the functioning of the various units or components of the economy.
- Making of policies: It also enables us to make and develop better policies that will improve the welfare of the people.
- Knowledge of vibrant sector: The knowledge of micro-economics enables us to determine the vibrant sector of the economy.
- Development of economic tool: The study of micro-economics helps us to develop sound economic tools used for interpreting or solving economic problems.
Disadvantage of Micro-economics
Unreliability of data: Data derived from the use of micro-economic principles are not always reliable for the same components or units.
Definition: Macro-economics refers to the branch of economics which deals with larger units or aggregate of the economy. Macro – economics relates to large aggregates such as national income, inflation, unemployment and balance of payment. In summary, macro-economics deals with the broad aggregates in the economy.
Advantages of Macro-economics
- Even distribution of income: The study of macro-economics helps to make sure that the wealth of the nation is not concentrated in the hands of few individuals or to certain sectors of the economy.
- Full employment: Ina macroeconomy, full employment is provided to a larger proportion of the population.
- Provision of goods and services: Goods and services are generally provided for the people in a macro economic system.
- Balance of payment: Macroeconomics also ensures adequate balance of payment in the total economy.
- Monetary policies: Monetary policies are being completely analysed and comprehended easily through the study of macro-economics.
- Increase in gross domestic product (GDP): The study of macroeconomics has resulted in the increase in gross domestic product (GDP) leading to economic development.
- Stability of price: Price stability is obtained in macro-economics by minimising price disturbances in the economy.
- Deficiency in aggregate demand: The causes of deficiency in aggregate demand are made known through the study of macro-economics.
Disadvantages of Macro-economics
- Statistical difficulties: The study of macro-economics makes statistical data difficult to analyse as a result of the grouping of macroeconomic variables.
- Negative grouping of data: In the analysis of macro-economics, data are being negatively grouped to be the same without considering the particular nature of each component of the economy.
Other Branches of Economics
- Pure economics: This is concerned with the study of the laws and theories derived from the study of economic behaviour.
- Applied economics: This is concerned with the application of the laws and theories in analysing and solving economic problems.
- Mathematical economics: This is concerned with the collection and analysis of data as well as statistics.
- Monetary economics: This involves the study of money and banking.
- Business economics: Business economics is concerned with the study of trade, business organisation and accounting.
- Development economics: This is concerned with the study of economic planning and national economics.