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THE NATURE AND SCOPE OF ECONOMICS
What is Economics?
Economics is a very interesting subject because it analyses how human beings make choices in an effort to maximize utility. It also analyses how a society seeks to allocate their limited resources in other to achieve growth. The term economics is derived from two words economy and science meaning the science of the economy or the science of proper utilization of resources. There is also the need to understand the basic economic problems of any society because other problems revolve around these problems.
Scarcity and Choice Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses. This means that economics is a human science. It involves maximizing satisfaction from scarce resource and the means available for satisfying these ends (wants) are scarce or limited in supply.
Also the scarce means are capable of alternative uses, that is, the use of scarce resource for one end prevents its use for any other purpose at that point in time. The ends are of varying importance which necessarily leads to the problem of choice in selecting the uses to which scarce resources can be put to. It is the various alternative uses of the resources that we have to decide on the best allocation of resources.
It should be noted that this definition stands on three major facts namely: Unlimited wants , scarcity of resources and alternative uses of the resources. It studies man’s activities in regards to all goods and services, without distinguishing them as material and non-material; provided they satisfy human wants. In other words, economic problem is one of allocating scarce means in relation to numerous ends.
A better understanding of the subject matter of economics needs a probe into the scope.
The Scope of Economics
Economics as a subject is experiencing continuous growth. A discussion on the scope of economics includes the definition of economics, whether economics is an art or a science and whether it is a positive or a normative science.
Economics as an Art and a Science
There have been numerous questions whether economics is an art or a science.
Economics is an art as well as a science. Economics is an art because different theories and laws are explained with the help of graphs, figures, tables, equations. Also economics make use of assumptions which helps to define the conditions for the application of theories, laws and relationship between economic variables.
Economics is a science because it is a systematized body of knowledge in which economic facts are studied and analyzed.
Economics just like science have laws and theories which trace out a causal relationship between two or more phenomena.
For instance the law of demand tells us that, all things being equal, a fall in price leads to an increase in demand and vice versa. A rise or fall in price is the cause while the decrease or increase in demand is its effect.
Economics is also a science because its laws possess universal validity such as the law of demand, law of diminishing marginal utility, etc. Some people do not regard economics as a science because there is no scope for experimentation.
Science involves collections of facts and testing them by experimentation. Economic phenomena are complex because they relate to man who acts irrationally as a result of tastes, habits, social and legal institutions in the society.
Although economics deal with statistical, mathematical and econometric methods for testing, but they are not so accurate to judge the true validity of economic laws and theories. As a result, exact quantitative prediction becomes impossible.
Basic Economic Concepts
Scarcity: - Scarcity means limited in supply. According to Thomas Sowell, the first lesson of economics is scarcity. There are three categories of economic resources: Land, labour and capital. Each of these resources exists in a finite, limited quantity. People have unlimited wants and since we have a limited amount of resources it means we can only produce a limited amount of goods and services, that is, the limited resources cannot produce enough to satisfy everyone’s unlimited wants. This gives rise to the study of economics for better allocation of scare resources among competing and insatiable needs so as to maximize welfare.
Choice: A choice is a comparison of alternatives. The problem of scarcity leaves us in a situation in which we must constantly choose which of our wants we will seek to satisfy. For instance, an individual consumer must choose among the types of goods and services to consume because of his limited income. He must also choose between spending on present consumption and saving for future consumption.
The firm with its limited capital must decide what to produce and what not to produce. A situation where the firm wants to produce two commodities, the choice to produce more of one would mean a resolve to produce less of the other.
The government is also forced to make a choice on the nature of public goods to provide for the citizens. The government has the task of utilizing the scare resources effectively in order to improve the welfare of the people. Scarcity gives rise to choice and making a choice creates a sacrifice because alternatives must be given up leading to the loss of the benefits which the alternative would have provided.
Scale of Preference: - In economics, it is assumed that man is rational in his choice making, that is, if a man has to choose between one thing and another, it is expected that he will always choose the alternative that will yield the greatest satisfaction. Similarly a firm faced with how to make a choice between production of one product and another, will choose the product that will yield the greatest profits. Scale of preference presents a list of wants arranged in order of importance with the most pressing want listed first, followed by the second most pressing need and so on.
Opportunity Cost: - Opportunity cost means forgone alternative. People must make choices because of limited resources. Every choice has an opportunity cost and so the satisfaction of one want involves forsaking the other. Therefore the real cost of satisfying any want is the alternative forgone or the opportunity cost. For instance, suppose a community uses a land and other resources to build a school instead of a factory, the opportunity cost of choosing the school is the loss of the factory and what could have been produced by building the factory. Also if a student misses his lecture on economics because he wants to go to the cinema, the cost to him is the lectures that he decides to miss. Opportunity cost of any choice is the value of the best alternative forgone in making it and not simply the amount spent on that choice.
Central Economic Problems of any Economy
All modern economies have certain fundamental or basic economic problems to deal with. The limited resources have led to the problem of how to assign the scare resources in order to achieve maximum satisfaction. There is the need to economize and utilize these resources in the most efficient manner in order to satisfy the welfare of the society. These problems are called central economic problems because other problems revolve around them. They are:
What to produce: - This has to do with the problem of allocation of resources among different goods and services. It involves selection of what should be produced and in what quantity in order to satisfy consumer wants as best as possible using the available resources. The society has to choose among different kinds of goods and decide on how to allocate resources among them, for instance whether to produce capital goods or consumer goods. The society also needs to determine the specific quantity of each type of good to be produced. In a market economy, the choice of what to produce is made by the buyers in other to fulfill their needs. Government can through its laws determine what to produce in a given economy. But the production of one good means a reduction in the production of another.
How to Produce: - This problem refers to selection of appropriate technique of production, that is, how to combine resources in other to produce goods and service in a more efficient way and at a minimum cost. A combination of resources (factors) implies a technique of production. The technique of using a combination which involves less capital and more labour is known as labour-intensive mode of production while a combination of more capital and less labour is capital-intensive mode of production. The decision on which resource combination to use depends on availability of factors and
The major drawback of microeconomics is the unrealistic assumption of full employment condition in an economy and it deals with the part of the economy instead of the whole economy.
Macroeconomics: - The word macro is derived from the Greek word makros meaning large. It is that branch of economics that focus on the impact of choices on the total or aggregate level of economic activities.
Macroeconomics is the study of aggregates of individuals, firms, prices and outputs. In other words, it studies the economy as a whole.
It analyses issues such as aggregate level of employment, the general price level, aggregate savings and investment in the economy.
The main objectives of macroeconomics are full employment, economic growth, favourable balance of payment and price stability.
The major limitation of macroeconomics is that it ignores the welfare of individuals in an economy and it takes into account only aggregate variables which may not clearly explain economic conditions.
Microeconomics differs from macroeconomics in that while microeconomics maps up close how individuals make decisions and how these decisions affect the price and output of various goods and services, macroeconomics analyses not individuals but aggregates of the economy. While microeconomics studies how an individual firm employs its labours, macroeconomics studies the total employment in a given economy. While microeconomics is particularly concerned with the relative prices of goods and service; macroeconomics studies total prices of all goods and services in the economy.
The division between microeconomics and macroeconomics is not rigid, they are interrelated. What affects the part affects the whole while the whole is made up of the parts. For instance, national income is the sum of the incomes of individuals, households, firms and industries. Also aggregates that are studied in macroeconomics are nothing but individual quantities which are studied in microeconomics. Moreover, modern macroeconomics is based upon the study of microeconomics. Therefore, microeconomics and macroeconomics cannot be isolated from each other.
