SCOPE OF ECONOMICS
The term scope refers to the area or domain of study. When exploring the scope of economics, it is essential to determine whether it qualifies as a science or an art and whether it is classified as a positive or a normative science. Additionally, it encompasses the subject matter of economics and is recognized as Major issues and challenges in Economics or Core inquiries in economics. The core inquiries in economics include:
Core inquiries in economics.
1) What should be produced?
This pertains to the distribution of resources. Which goods and services ought to be generated within society? In what amounts? For instance, should society focus on manufacturing consumer goods or capital goods utilizing its limited resources that have other possible uses? In essence, should current consumption (satisfactions) be sacrificed for future benefits (by investing in capital goods), or should additional funds be directed toward space exploration, nuclear research, or agricultural production?
2) How should production occur?
This revolves around how society organizes its limited resources to achieve maximum productivity. It addresses the technological methods employed in production. For example: In agriculture, should production be achieved through extensive farming or intensive farming? Should it utilize capital-intensive or labor-intensive methods?
3) Who is the production intended for?
This inquiry concerns the allocation of the produced goods and services within the economy. The focus here is not only on the growth of the national income but also on individual living standards.
Economics - A Science and an Art
a) Economics as a Science:
A science can be defined as an organized body of knowledge that establishes connections between causes and effects. Another feature of science is that its phenomena can be measured. Considering these traits, it is evident that economics forms a field of knowledge where various pertinent facts have been methodically gathered, categorized, and examined. Economics explores the ability to derive generalizations regarding economic behaviors of individuals. The motivations of people and businesses can be readily quantified in monetary terms. Therefore, economics qualifies as a science.
Economics - A Social Science:
To grasp the social dimension of economics, it’s important to recognize that workers are engaged with materials sourced globally, creating goods intended for worldwide distribution to exchange for fulfilling their needs. This illustrates a profound interdependence among millions of individuals residing in far-flung regions unfamiliar to each other. Consequently, the fulfillment of wants encompasses not only individual actions but also a collective process. In the study of economics, it is essential to examine social interactions, specifically the behavior of individuals within groups.
Economics as an Art
An art comprises a set of guidelines aimed at achieving specific objectives. While science equips us with knowledge, art informs us on how to act. In light of this definition, economics provides us with practical insights to address economic issues. Science and art complement each other, making economics both a science and an art.
Positive and Normative Economics
Economics encompasses both positive and normative aspects.
a) Positive science:
It merely describes existing conditions, whereas normative science recommends what should occur. Positive science does not judge what is beneficial or detrimental to society. It simply presents the outcomes derived from the economic evaluation of an issue.
b) Normative science:
It differentiates between what is considered good and what is deemed bad. It suggests necessary actions to enhance human welfare. A positive statement relies on factual evidence, while a normative statement incorporates moral values. For example, the statement “12 percent of the workforce in India was unemployed last year” represents a positive assertion that can be validated through scientific methods. Conversely, the expression “Twelve percent unemployment is too high” is a normative assertion that contrasts the factual 12 percent unemployment rate against a standard of what is deemed excessive and implies potential solutions. Thus, economics serves as both a positive and normative science.
iii) Methodology of Economics
As a discipline, economics employs two approaches for identifying its laws and principles: (a) the deductive approach and (b) the inductive approach.
a) Deductive or Analytical or Abstract or A priori method:
This approach moves from the general to the specific, beginning with principles that are either self-evident or grounded in rigorous observation. It progresses through logical reasoning to derive the implications these principles suggest. For example, the assertion that traders profit from their businesses is a broad claim accepted without the need for verifying it with the traders themselves. The deductive method is advantageous in dissecting complex economic situations where causes and effects are intricately linked. However, its efficacy hinges on the validity of specific assumptions. (Traders realize profits when the demand for a good exceeds supply). Economists such as Ricardo and Mill endorsed this methodology.
b) Inductive or Historical or Realistic method:
This approach works from specific instances to general conclusions, beginning with the observation of individual facts and advancing through reasoning based on experience to develop laws and theories derived from observed data. For example, information regarding the consumption patterns of low, middle, and high-income groups is gathered, categorized, analyzed, and significant conclusions are made based on this data. Classical economists like Engel and Malthus employed this reasoning technique.
In the deductive approach, we draw conclusions from established principles that are either beyond dispute or based on thorough observation, making inferences regarding specific situations. In the inductive approach, an individual case is scrutinized to derive a broader or universal principle. Both deductive and inductive methods are valuable tools in economic analysis.
iv) Subject Matter of Economics
Economics can be examined through a) conventional approach and (b) contemporary approach.
a) Conventional Approach:
Economics is divided into five primary categories, which are consumption, production, exchange, distribution, and public finance.
1. Consumption:
When goods and services are utilized to fulfill human desires, this process is known as consumption. It signifies the reduction of utility.
2. Production:
Items that fulfill human needs can be seen as "collections of utility." Thus, production signifies the generation of utility or the fabrication of items to meet human requirements. To achieve production, resources such as land, labor, capital, and organization are essential.
3. Exchange:
Goods are crafted not solely for personal consumption but also for the purpose of sale. These goods are offered to buyers within marketplaces. The act of buying and selling represents exchange.
4. Distribution:
The creation of any agricultural product necessitates four components: land, labor, capital, and organization. Compensation for these four production factors must be provided for their contributions to the production process. The landowner receives rent, the laborer receives wages, the capitalist earns interest, and the entrepreneur is compensated with profit. The mechanism of establishing rent, wages, interest, and profit is referred to as distribution.
5. Public Finance:
This area examines how the government acquires funds and its methods of expenditure. Therefore, public finance involves the analysis of public income and public spending.
b) Contemporary Approach
The field of economics is classified into: i) Microeconomics and ii) Macroeconomics. "Micro" refers to a tiny portion, while "macro" indicates a broader or higher level (Global / National / State).
Microeconomics
Microeconomics investigates the economic actions of specific decision-making entities, such as households or businesses. It explores how economic resources or production factors transition from households or resource holders to businesses and how goods and services flow from businesses to households. Additionally, it examines how individual decision-making entities respond to price and output determinations and their reactions to variations in demand and supply. As a result, microeconomics is often referred to as price theory.
Macroeconomics
Macroeconomics looks at the economic system in its entirety or collectively analyzes all decision-making entities. It addresses the behavior of aggregates, including total employment, gross national product (GNP), national income, and the overall price level. Thus, macroeconomics is frequently called income theory.
Microeconomics fails to provide insight into the overall economy's operation. Similarly, macroeconomics overlooks the preferences and well-being of individuals. What holds true for an individual or a part might not necessarily be applicable to the entire system, and vice versa. Conclusions about one small farmer cannot be generalized to encompass all small farmers in Tamil Nadu. Likewise, the typical characteristics of small farmers in the state might not accurately represent those of a specific small farmer. Consequently, studying both micro and macroeconomics is vital for comprehending the complete system of economic activities.
Three Divisions of Economics
1. Descriptive economics – outlines the pertinent details of the economic sector.
2. Economic theory – clarifies how the economic system operates.
3. Applied Economics – utilizes economic evaluation to elucidate the reasons and importance of economic occurrences.
(1).jpg){kind=small}