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The scope of economics

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  • The scope of economics

    The scope of economics

    A social science deals with some aspect or aspects of human society. Economics is a social science
    which is concerned with the allocation of scarce resources to provide goods and services which meet
    the needs and wants of consumers.

    One of the important assumptions in economics, and one on which much economic theory is based, is
    the rationality of human behaviour. In order to make predictions about their economic behaviour,
    economists assume that human behaviour is 'rational' and that consumers and producers act rationally.
    For example, producers and consumers will make reasoned decisions about how much to produce or
    buy at any given price.

    The optimum
    The assumption of the rationality of human behaviour, and that people will take decisions and actions
    which are directed towards a rational objective, leads us to the concept in economics of the optimum.
    The optimum means the best possible, and the following are underlying assumptions in much economic

    (a) Producers will seek to maximise their profits and returns.
    (b) Consumers will seek to maximise the benefits they obtain (their 'utility') from using the
    income at their disposal.
    (c) Governments will seek to maximise the well being of their population (for example, by
    maximising the national income per head of the population).

    Positive and normative economics
    You might already have strong personal views about what sort of economic society we should have,
    e.g. whether a free market 'capitalist' economy is desirable, or whether a centrally planned 'command'
    economy is preferable. In the study of economics, it is easy for us to be influenced in our views by our
    ideas of 'what ought to be'.
    Economists also have views on these subjects, and some economic writing is aimed at influencing
    decision makers by prescribing actions, which, in the opinion of the author, will lead to ends, which he
    or she considers desirable. Other economic research, however, is directed purely to finding out what the
    consequences will be if certain actions are taken, without expressing any view on the desirability of
    those consequences. These two different approaches are referred to as normative economics and
    positive economics.

    (a) Normative economics is concerned with the expression of value judgements by economists, of
    what they would like to happen -e.g. what sort of economic society they would like to see in
    (b) Positive economics is concerned with objective statements about what does happen or what
    will happen. A positive approach is more objective, and more scientific, and it is the approach
    we shall try to take in our study of economics here.
    Microeconomics and macroeconomics

    The study of economics is divided into two halves, microeconomics and macroeconomics.
    (a) 'Micro' comes from the Greek word meaning small, and microeconomics is the study of
    individual economic units or particular parts of the economy -e.g. how does an individual
    household decide to spend its income? How does an individual firm decide what volume of
    output to produce or what products to make? How is the price of an individual product
    determined? How are wage levels determined in a particular industry?
    (b) 'Macro' comes from the Greek word meaning large, and macroeconomics is the study of
    'global' or collective decisions by individual households or producers. It looks at a national or
    international economy as a whole -e.g. total output, income and expenditure, unemployment,
    inflation, interest rates and the balance of international trade etc, and what economic policies a
    government can pursue to influence the condition of the national economy.
    In this text, we shall study microeconomics first before going on to look at the macroeconomic
    environment in later chapters.

    The fundamental problem of economics
    A fundamental concept in economics is the scarcity of resources. There are not enough resources to
    meet the needs of consumers and producers.
    (a) In the case of consumers, the scarcity of goods and services might seem obvious enough.
    Everyone would like to have more -another car, a bigger home, more domestic goods, better
    food and drink, more holidays, more trips to the cinema or theatre, a boat, a private plane,
    membership of more clubs and societies, more clothes and so on. There simply isn't enough to
    go round to satisfy the potential demand.
    (b) In the case of producers, there are four scarce resources:
    (i) natural resources, referred to collectively as 'land';
    (ii) labour;
    (iii) capital -e.g. equipment and tools;
    (iv) enterprise or entrepreneurship.
    Scarce resources mean that producers cannot make unlimited Quantities of goods and services.
    Since resources for production are scarce and there are not enough goods and services to satisfy the
    total potential demand, choices must be made. Choice is only necessary because resources are scarce.
    (a) Consumers must choose what goods and services they will have.
    (b) Producers must choose how to use their available resources, what goods and services to
    produce, and in what quantities.
    The fundamental problem of economics is the allocation of these scarce resources. What will be
    produced? What will be consumed? And who will benefit from the consumption?

  • #2
    Re: The scope of economics

    It is vast field.