Introduction To Economics
Definitions of economics
Different economists have given different definitions of economics.
The term for 'economics' is derived from Greek word oikos + nmein, meaning household management.
The modern definitions are,
• Wealth definition by Adam Smith in his book Wealth of Nations (1776)
“Economics is the science of the nature and causes of the wealth of nations”
Ordinary meaning of wealth is money. In economic terms wealth has special meaning. It refers to goods which satisfy human wants.
As per Adam Smith the economics is concerned with problems arising out of getting and using the wealth. He was interested in the ways by which the wealth of nations could be increased.
• Welfare definition by Alfred Marshall in his textbook Principles of Economics (1890)
“Economics is a study of man in ordinary business of life.” It enquires how gets his income and how he uses it.
In the words of Marshall, "man earns money to get material welfare."
○ On one side it is the study of wealth, on the other it is the study of man.
○ The primary object and end of economics is promotion of material welfare, which is part of human welfare.
○ The emphasis is on welfare rather than on wealth.
• Scarcity definition by Lionel Robbins in his book An Essay on the Nature and significance of Economic Science (1932)
“Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.”
Important Characteristics of Robbins’ Definition:
(i) Unlimited Wants: Human wants are unlimited in number. No sooner one want is satisfied, a new want grows up. Hence, wants are ‘ever growing and never ending’.
(ii) Limited Means/Scarcity of Resources: Human wants are unlimited but Resources or means are scarce with respect to the demands or wants. Here the term scarcity is used not in the absolute sense but in the relative sense i.e., in relation to demand. The scarce means are the basis of all economic problems
(iii) Alternative Use of Resources: All the scarce means can be used in more than one purpose. For instance, land is very scarce, but land can be used for construction of buildings, cultivation, playground etc. Likewise, all these economic resources are used for various purposes. Thus, in reality goods can be put to alternative uses of varying importance.
• Growth oriented definition by Prof Samuelson in Economics: An Introductory Analysis (1948)
“Economics is the study of how men and society choose with or without the use of money, to employ the scarce productive resources which have alternative uses, to produce various commodities over time and distribute them for consumption now and in future among various people and groups of society. It analyses the costs and benefits of improving pattern of resource allocation”.
Characteristics of Samuelson’s Definition
This definition introduced the dimension of growth under scarce situation. It is not merely concerned with the allocation of resources but also with the expansion of resources. It analysed how the expansion and growth of resources to be used to cope with increasing human wants. It is a more dynamic approach. It considers the problem of resource allocation as a universal problem. It focused on both production and consumption activities. It is comprehensive in nature as it is both growth-oriented as well as future-oriented. It incorporated the features of all the earlier definitions.
• Final Definition of Economics
“Economics is the study of how people and society choose to employ scarce resources that could have alternative uses in order to produce various commodities that satisfy their wants and to distribute them for consumption among various persons and groups in society.”
Why Study Economics?
Study of economics is important to understand different aspects of economy and for analyzing problems and policies of the government. Economics is concerned about selection of resources under conditions of scarcity.
The main problem of economics is how to satisfy the unlimited wants with limited means which have alternative uses. Robbins describes this problem as the problem of economizing scarce means.
The problem of economizing resources leads to the problem of choice. Since wants are numerous and means are scarce, we have to choose the most urgent wants from these unlimited wants. Hence, the consumer will select few wants from the numerous wants according to his preference pattern. Thus, scarcity of resources makes the choice necessary. Hence, Economics is termed as a science of choice.
Activities undertaken for earning a living, that is, for monetary gain or to earn income, are called economic activities. For example a worker, working in a factory, shopkeeper selling goods, a doctor attending to patients etc.
Types of Economic Activities:
Economic activities can be divided into three categories
Consumption is an economic activity which deals with use of goods and services for satisfaction of human wants. For example, eating bread, drinking milk, wearing clothes, using mobile phone etc.
It refers to all activities which are undertaken to produce goods and services for generation of income and satisfaction of wants. Land, Labour, capital and Entrepreneur are the four factors of production. For example – farming, manufacturing, trading, teaching etc.
Economic activity which studies how income generated from the production process is distributed among the factors of production, that is, rent, wages, interest and profit.
People involved in economic activities
Consumer: A person who buys (or consumes) goods and services for the satisfaction of human wants.
Producer: A person who produces goods and services for generation of income.
Seller: A person who sells goods to make a profit for himself or herself, is called a seller.
Service holder: A person who works for some other person or organization and gets paid for it in the form of wages or salaries.
Service Provider: A person who provides services to others for a payment, eg., lawyer, doctor telephone company etc.
Non economic activities are those activities which are done not for earning money or any consideration rather they are undertaken voluntarily. For example –
● Housewives doing day to day to work like cooking, laundry etc.
● A person doing a work for hobby like gardening, fishing, painting etc.
● Work done for charity like taking tuition classes of poor children, providing free services to earthquake victims, helping a blind man in crossing road etc.
● Work done for personal satisfaction like sleeping in afternoon in free time instead of working and earning money or playing video games on Sundays etc.
Subject Matter of Economics
Economics is concerned with the study of economic problems at the level of an economy as a whole on one side and on the other it is concerned with the study of economy of an individual.
The subject matter of economics is studied under two broad branches viz. microeconomics and macroeconomics.
It deals with following aspects of economy,
Consumption: Wants, their origin, nature and characteristics and laws governing them (Theory of consumer behavior).
Production: Means of production, their basic features and laws governing them (Theory of producer behavior).
Exchange: Price determination, through forces of demand and supply.
Distribution: Production is combined effect of all the factors involved, i.e., land, labour, capital and entrepreneur. Hence income should be distributed appropriately among all the factors.
Public Finance: Due to role of government, public finance is treated as a separate branch of economics and deals with economics of government.
Meaning, Scope And Importance Of Statistics
Types of variables
Quantitative Variables: Variables which can be expressed in numerical terms are known as quantitative variables, e.g., number of students, heights of people, incomes of people. These are also called cardinal numbers. They can be measured and can be analysed.
Qualitative variables: Variables which cannot be expressed in numerical terms are called qualitative variables, e.g., honesty, beauty, intelligence. They are not measurable and cannot be analysed.
Qualitative expressions cannot be analysed and are not statistics unless assigned numerical equivalents, like assigning ranks to intelligent people. This type of data is called ordinal numbers.
Meaning of statistics
The term “statistics” is used in two senses:
(i) In plural sense meaning numerical facts or data - the figure themselves, e.g., figures relating to population, profits of different units in an industry etc.
(ii) In singular form, the term ‘statistics’ denotes the various methods adopted for the collection, analysis and interpretation of the quantitative information. Statistics involves collection and organisation of data.
Based on the facts and data, policies are formed. Policy is a course or principle of action adopted or proposed by an organization or individual.
Statistics in Plural Sense
1. Statistics are aggregate of facts
Statics are a number of facts. A single and isolated figure does not form statistics. For example, a single age of 20 years is not statistics, a series of ages are. A single figure can be called statistics if it represents an aggregate like average or sum of many observations.
2. Statistics are affected by a multiplicity of causes
A number of causes affect statistics in a particular field of enquiry, e.g., in data regarding production of crop, statistics are affected by climate, fertility of soil, availability of raw materials and methods of quick transport.
3. Statistics are numerically expressed, enumrated or estimated
The subject of statistics is concerned essentially with facts expressed in numerical form—with their quantitative details but not qualitative descriptions. For example, collection of heights of people, are statistics. But facts indicated by terms such as ‘good’, ‘poor’ are not statistics unless a numerical equivalent is assigned to each expression. Also this may either be enumerated or estimated, where actual enumeration is either not possible or is very difficult.
4. Statistics are collected or estimated according to reasonable standard of accuracy
The figures should be counted or estimated according to reasonable standards of accuracy. Absolute accuracy is neither necessary nor sometimes possible in social sciences. But whatever standard of accuracy is once adopted, should be used throughout the process of collection or estimation. Personal bias and prejudices of the enumeration should not enter into the counting or estimation of figures, otherwise conclusions from the figures would not be accurate.
5. Statistics should be collected for a predetermined purpose
Purpose of collecting the statistical data must be decided in advance, otherwise usefulness of the data collected would be negligible. Data collected without complete awareness of purpose will be confusing and cannot be made basis of valid conclusions.
6. Statistics should be collected in a systematic manner
For accuracy and reliability, figures must be collected in a systematic manner. If figures are collected in an unsystematic and haphazard manner, the reliability of such data will be less.
7. Statistics should be placed in relation to each other
The collected figure should be comparable and well-connected in the same department of inquiry. For purpose of comparison, it is necessary that the data be homogeneous. Heights of people are to be compared only with the corresponding heights of people, and not with, say, heights of trees.
Statistics in Singular Sense:
“Statistics in singular sense may be defined as the technique or methodology, which has been developed for the collection, presentation, analysis and interpretation of numerical data.”
Stages of Investigations
(i) Collection of Data:
It is the main and first stage of investigation and collection of data. The technique of collection of data depends on the objective of the study.
(ii) Organisation of Data:
It is second stage. The data are simplified and made comparative and are classified according to time and place.
(iii) Presentation of Data:
In this third stage, organised data are made simple and attractive. These are presented in the form of tables diagrams and graphs.
(iv) Analysis of Data:
Forth stage of investigation is analysis. To get correct results, analysis is necessary. It is often undertaken using Measures of central tendencies, Measures of dispersion, correlation, regression and interpolation etc.
(v) Interpretation of Data:
In this last stage, conclusions are enacted. Use of comparisons is made. On this basis, forecasting is made.
Functions of Statistics
The functions of statistics may be enumerated as follows:
(i) To Present Facts in Definite Form: We can represent the things in their true form with the help of figures. Without a statistical study, our ideas would be vague and indefinite. If the results are given in numbers, then they are more convincing than if the results are expressed on the basis of quality.The statements like, there is lot of unemployment in India or population is increasing at a faster rate are not in the definite form. The statements should be in definite form like the population in 2004 would be 15% more as compared to 1990.
(ii) To simplify unwieldy and complex data: It is very difficult for an individual to understand and conclude from the huge numerical data. Statistical methods help present and make meaningful sense out of the collected data. It is not easy to treat large numbers and hence they are simplified either by taking a few figures to serve as a representative sample or by taking average to give a bird’s eye view of the large masses. For example, complex data may be simplified by presenting them in the form of a table, graph or diagram, or representing it through an average etc.
(iii) To make comparison of facts: The significance of certain figures can be better appreciated when they are compared with others of the same type. The comparison between two different groups is best represented by certain statistical methods, such as average, coefficients, rates, ratios, etc. For per capita income of India makes sense only when compared with per capita income of some other countries.
(iv) To provide guidance in planning and formulation of policies: The purpose of statistics is to enable correct decisions, whether they are taken by a businessman or Government. Based on statistics about number of schools, number of students, pass percentages etc., helps the government to plan and make policies for education.
(v) Formulation and Testing of Hypothesis: The statistical methods help us in formulating and testing the hypothesis or a new theory. For example we can test whether credit squeeze is effective in checking inflation or not. Similarly we can test a hypothesis, whether a rise in the Railway fares would affect the passenger traffic.
(vi) Forecasting: Business is full of risks and uncertainty. Statistics helps predict the future course of action for business and governance. We can make future policies on the basis of estimates made with the help of Statistics. For example, we can predict the demand for goods in 2005 if we know the population in 2004 on the basis of growth rate of population in past. Similarly a businessman can exploit the market situation in a successful manner if he knows about the trends in the market.
(vii) It enlarges individual knowledge and experience: “Statistics enables one to enlarge his horizon”. So when a person goes through various procedures of statistics, it widens his knowledge pattern. It also widens his thinking and reasoning power. It also helps him to reach to a rational conclusion.
(viii) To Measure Uncertainty: Future is uncertain, but statistics help the various authorities in all the phenomenon of the world to make correct estimation by taking and analyzing the various data of the part. So the uncertainty could be decreased. As we have to make a forecast we have also to create trend behaviors of the past, for which we use techniques like regression, interpolation and time series analysis
Importance of Statistics:
According to A L. Bowley, “Knowledge of statistics is like a knowledge of foreign languages or of Algebra, it may prove of use at any time under any circumstances”
The importance of the statistical science is increasing in almost all spheres of knowledge, e g., astronomy, biology, meteorology, demography, economics and mathematics. Economic planning without statistics is bound to be baseless.
We increasingly use Statistics to analyse serious economic problems such as rising prices, growing population, unemployment, poverty etc., to find measures that can solve such problems. Further it also helps evaluate the impact of such policies in solving the economic problems.
Statistics serve in administration, and facilitate the work of formulation of new policies. Financial institutions and investors utilise statistical data to summaries the past experience.
There is no field of work in which statistical methods are not applied.
We can study the importance of statistics under following heads,
(a) Importance to the Government
(b) Importance in Economics
(c) Importance in Economic Planning
(d) Importance in Business
Importance to the Government
Statistics plays a very vital role in formulation of government policy and functioning of government. The role of government in welfare and as a facilitator of business has increased. The government requires information for formulation of policies to fulfill its welfare objectives and for efficient running of the nation. It is used by the government in various ways, for example, for schools, for hospitals, for economic policies.
Importance in Economics
Statistics is an indispensible tool for proper understanding of various economic problems. Statistics provides important guidelines for formulation of various economic policies. Most of the economic problems can be expressed in numerical figures. Statistics is used in economics in following different ways,
(i) Statistics helps in formulation of economic laws: By using inductive method of generalization several laws of economics; like ‘Law of Demand’, ‘Law of Elasticity of Demand’ etc.; have been formed.
(ii) Statistics helps in understanding and solving problems, like poverty, unemployment, disparities in distribution of income and wealth, etc.
(iii) Statistics helps in study of market structures. For example, it helps in study of perfect competition, oligopoly, monopoly etc. by comparing market prices, costs and profits of firms.
(iv) It helps in establishing mathematical relations between various economic variables. For example, price-demand relationship can be estimated through statistics.
(v) It is useful in study of behavior of different economic concepts. For example trends in prices, production and consumption behavior, money circulation etc.
(vi Price Analysis: Statistical surveys of prices help in studying the theories of prices, pricing policy and price trend as well as their relationship to problem of inflation.
Importance of Statistics in Economic Planning
Statistics are used in economic planning for the following purposes
(i) The importance of consumption, production, distribution etc can be known from the available statistical data.
(ii) The success that a plan achieves is measured best by the use of statistical methods.
(iii) Statistical data are used for knowing about the progress in the techniques of production, volume of productions imports, exports, etc.
(iv) Statistics is used for knowing available resources in the economy and thereby determine whether a particular rate of growth etc. is achievable.
(v) Planning involves fixation of targets and priorities. Targets which are fixed; have to be achieved within a specific period of time.
Importance of Statistics in Business
Statistics is important in business in following ways,
For establishing a business unit: It is necessary to know the feasibility of a business before starting it. It involves detailed information about location, size of output, availability of inputs, taxes, size of market etc. are useful tools, for this purpose.
For estimating the demand of product: It is very important to know the present and future demands for the product. Statistical methods are very useful in preparing trends and esrimating the demands reliably.
For production planning: Statistics helps businessman to plan production for maintaining the balance between demand and supply. It helps maximize the profits and minimize losses.
For quality control: The quality of the products can also be checked more efficiently by using statistical methods, like control charts etc.
For making marketing strategy: Statistics play an important role in business. A successful businessman must be very quick and accurate in decision making. He knows that what his customers wants, he should therefore, know what to produce and sell and in what quantities. aste of the costumers, So all the activities of the businessman based on statistical information. He can make correct decision about the location of business, marketing of the products, financial resources etc.
Limitations of Statistics
The scope of statistic is restricted by certain limitations
(i) The use of statistics is limited to numerical studies: Statistical methods cannot be applied to study the nature of all type of phenomena. Statistics deal with only such phenomena as are capable of being quantitatively measured and numerically expressed. For, example, the health, poverty and intelligence of a group of individuals, cannot be quantitatively measured, and thus are not suitable subjects for statistical study.
(ii) Statistical methods deal with population or aggregate of individuals rather than with individuals. When we say that the average height of an Indian is 1 metre 80 centimetres, it shows the height not of an individual but as found by the study of all individuals.
(iii) Statistics relies on estimates and approximations: Statistical laws are not exact laws like mathematical or chemical laws. They are derived by taking a majority of cases and are not true for every individual. Thus the statistical inferences are uncertain.
(iv) Statistical results might lead to fallacious conclusions by deliberate manipulation of figures and unscientific handling. This is so because statistical results are represented by figures, which are liable to be manipulated. Also the data placed in the hands of an expert may lead to fallacious results. The figures may be stated without their context or may be applied to a fact other than the one to which they really relate. An interesting example is a survey made some years ago which reported that 33% of all the girl students at John Hopkins University had married University teachers. The fact was that the University had only three girls student at that time and one of them married to a teacher.
Distrust of Statistics:
Although statistics serves great purpose, people distrust the statistical methods and statements.
Causes of Distrust:
The distrust of statistics occurs due to the following reasons:
(i) Incomplete knowledge of statistical methods.
(ii) Unrealistic assumptions.
(iii) Deliberate misuse of statistics.
(iv) Ignoring limitations of statistics.
(v) Misuse of statistics
(vi) Wrong application of statistical methods like inappropriate comparisons, statistical errors, false percentages etc.
Removal of Distrust
Statistics are only techniques These techniques are innocent techniques which may be used for the betterment of the society. To remove the distrust, we need to take care of following points.
(i) Limitations of statistics should be kept in mind,
(ii) Only experts should make use of the statistics,
(iii) Data should be used after a careful enquiry,
(iv) Great care and caution should be exercised while using statistics,
(v) Experts of statistics must exercise self-restrain or statistics must exercise self-restrain,
(vi) Free and frank discussion can go a long way to overcome the problem of distrust.