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What is Economics?

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2018-03-14

What is ECONOMICS and why I should study it at all? This must be the question you would be having on many occasions. So, in this blog, I would like to attempt to answer that very question. This is just a start and please do not consider it as a complete answer to the aforementioned question. Next few blogs will be focused on basic understanding of economics rather than its technicalities. Without further delay, let’s get into the topic…

What is Economics?

Suppose you have the annual earning of INR 100,000. How will you spend this income? Will you spend the entire money on basic needs or will you spend some part of it on basic necessities and remaining on the things which you need to own and experience? You may wish to purchase good food, good clothes, own home, better home, a vehicle and so on. You may wish to go on a holiday, spend on your unfulfilled desires or more. However, you cannot do everything you want with limited income of INR 100,000. That’s where you decide on what you want to spend first and what can wait. You allocate your income to everything or few things. And that is what economics is all about.

According to the former professor of London School of Economics Lionel Robbins, “Economics is the science which studies human behavior as a relationship between given ends and scarce means which have alternative uses.”

This definition of economics gives a well-detailed idea of what economics is. In the above definition, “ends” refer to human wants and “scare means” refer to the limited resources available to satisfy those wants. In the above example, money is the resource while cloths, food, home, vehicle, etc. are the wants. Money, which is a fixed resource, does have alternative uses but it cannot satisfy all wants of a person.

Economics does not restrict itself only to money or monetary aspect. It considers all kind of resources like money, labor force, technology, land, other natural resources and so on. These resources are scare or limited but human wants are never-ending. Therefore, governments and society have to decide where these resources need to be allocated. Efficient use of resources helps the economy achieve greater high while wastage of them not only restricts development of a country but also harms potential of the economy.

Economics is broadly divided into two categories: Positive Economics and Normative Economics.

Positive Economics is a representation of facts, evidence, and reality. Positive economics tells us “what is”. Statements of positive economics can be tested with historical records, statistics and other empirical evidence. For e.g. “Government of India spending more on defense than on education.” This statement is a claim which can be proved right or wrong with the help of records of government and its departments. Positive economics’ statement establishes a relationship between two more variables.

Normative Economics gives a value judgment or opinions. Normative economics is more concerned about ‘what has to be’ rather than ‘what is.’ These can be suggestions, opinions or values. For e.g. “Government of India should increase expenditure on education sector rather than on subsidies.” Such statements cannot be challenged immediately and cannot be wrong or right either. There is no way of testing statements of normative economics because they are based on personal judgment and opinions. Normative economics do not establish any kind of relationship between variables. It is more concerned with providing suggestions for the problems persisting in the economy.

So, this is it for this blog. In the next blog of this series, we will see four definitions of economics given by four different renowned economists and we will discuss them to understand the detailed meaning of economics. If you have any query, suggestions or just leave a message on my social media account or email to me on the email address mentioned in About Me. Thank you!

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