BCom 1st Year Meaning of Economics Notes Study Material
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BCom 1st Year Meaning of Economics Notes Study Material
What is Economics? It is a simple question to which no simple answer can be given. Modern economics originated in 1776 when Adam Smith published his classic, An Enquiry into The Nature and Causes of the Wealth of Nations. So he is rightly called the founder—the father-of modern economics. From this point of view economics is only about two-and-a-quarter centuries old. During this period our notion about economics has undergone many stages of development.
1. Economics: A Science of Wealth
Adam Smith defined economics as a science of wealth’. Some other economists followed Smith and defined economics in a similar way. Famous French economist, J. B. Say, stated, “Economics is the science which treats of wealth.” To American economist, F. A. Walker, “Economics is that body of knowledge which relates to wealth.”
By wealth was meant not only gold and silver but also all kinds of other goods-houses and public buildings, furniture, ships, workshops, tools and machines in use at the time of the production of goods.
Economics, which is described as the “queen of social sciences”, cannot be so narrowly defined. Economics, as a social science, cannot be confined to wealth-earning and wealth-consuming activities only. Wealth has its importance, but it cannot be the end of all human activities.
The purpose of a definition is not to limit the scope of a subject, but to delimit, that is, to determine its boundaries or limits. In this sense, all definitions of economics relating it to wealth are narrow, they put a limit or limits to the scope of economics. For this reason, later economists criticised them. They accused Economics of selfishness and meanness. It was described as the gospel of Mammon, the god of wealth (Kuber, according to Hindu mythology). It was called a bread and butter science. Such a subject can have no lofty ideal, must be a “dismal” science and so cannot be acceptable. Social reformers, like Carlyle, Ruskin, Maurice, etc. condemned it.
2. Science of Material Welfare
Later economists tried to rescue economics from this condemnation. They brought man to the forefront and wealth was made subsidiary to him, only a means to an end. The end became the welfare of human being. Thus there was a basic shift in emphasis-from the study of wealth to that of human welfare.
The best representative of this line of thinking was Alfred Marshall, the renowned British neo-classical economist. He defined economics thus:
“Political Economy or Economics is a study of mankind in the ordinary business of life”, it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing.
“Thus it is on the one side a study of wealth; and on the other, and more important side, a part of the study of man.”
In this definition the terms on which emphasis is laid are “ordinary business”, “social action” and “material requisites of wellbeing”. They are important because man’s character, according to Marshall, is moulded by his every-day work and the material resources at his command. He says further that a science which deals with issues vital for the wellbeing of mankind will attract the noblest thinkers of every age. But this did not happen because the influence of economics on the higher wellbeing of man had been overlooked. Instead, wealth became its subject-matter and so it was repugnant to many.
Marshall says that it is true that money or command over material wealth is the centre around which economic science clusters; but it is not so because money or material wealth is the chief objective of human activities. It is not even the main subject-matter of economics. The importance of money lies in that it is a convenient means of measuring human motive. The older economists could not make this point clear. Had this been done so, there would have been no bitter attack on economics by the social reformers; economics would not have been taken as a science having no concern except the selfish desire for wealth.
Another important aspect of Marshall’s definition is that economists study the actions of individuals as they behave in society. They do not study isolated individuals like Robinson Crusoe living alone in a lonely island. Economists’ individuals live in society, influencing the other persons and being influenced by them,
Further, economists deal with man as he is, not with an abstract or “economic” man, but a man of flesh and blood.
Thus Marshall, like Pigou later, regarded the accumulation of wealth only as a means towards raising a people’s standard of living. A. C. Pigou, in his famous book “The Economics of Welfare’, defined economics in terms of welfare in which he stressed the human as well as the material aspect of the subject. He regarded economics as a means of studying how total production could be increased so that the standard of living of the people might be improved.
Definition of economics as a science of material welfare remained acceptable for about four decades before being successfully challenged in the 1930s. Main points of criticism of this definition are as given under:
(1) It is classificatory. It divides welfare into material and non-material. It is a false division. Take, for example, the theory of wages. If wages are spent on things, such as bread, butter, etc., it comes under the study of economics because it increases material welfare. If the same wages are spent on spiritual attainment, it cannot come under the scope of economics as it does not add to any material welfare. Robbins says that such a dichotomy in the theory of wages is untenable.
(2) Neoclassical definition of economics is narrow. If confines the study of economics to material welfare only. As said above, the division of welfare into material and non-material is a false one. So it is not possible to limit economics to the study of material welfare only on the basis of a false division.
(3) Neoclassical definition of economics concerns itself chiefly with those motives which affect, most powerfully and most steadily, man’s conduct in the ordinary business part of his life. Now the distinction between ordinary business and non-ordinary business is not clear.
(4) Objection is raised against the term ‘welfare’ as well. If economics is a study of material welfare, it means that only those activities will be considered which add to welfare. Production and consumption of wine cannot form a part of the study of economics as they are destructive of welfare. But they are studied in economics because they add to national income. Further, welfare implies value judgment.
Activities which are conducive to welfare will be studied, but those not conducive will be left out. It means that we have to apply our judgment and declare which activities are welfare-increasing and which are not. But Robbins says that economics is neutral between ends. So Robbins stated that “Whatever Economics is concerned with, it is not concerned with the causes of material welfare as such.” His contention was that Economics actually dealt with both material goods and non-materials services. Therefore, any correct definition of Economics must cover the entire ambit of the subject.
3. Science of Scarcity
Robbins was of the view that the definition of Economics that he has provided is free from the above defects. Before we come to his definition, we must have a close look on the economy surrounding us. Robbins says that men feel innumerable wants which he calls ends. But resources available to them to satisfy these ends are limited. These resources are termed as means. Let us analyse them a little closely.
Our ends or wants are unlimited. When one want is satisfied, another crops up. Man, like animal, is not satisfied by merely filling the stomach. We always hanker for what we do not have. Our hankering is insatiable. There is no end to what we may want. Limited wants would give rise to no economic problems. Another important fact about ends is that all of them are not equally important.
Limited or Scarce Means
Economics was once described as a dismal science. It may still be regarded as dismal in the sense that we cannot have everything we want; economics deals with scarcity. Resources at our disposal to satisfy wants are limited in relation to the ends we want to satisfy. Had resources been unlimited like endless wants, there would have been no economic problem.
Scarcity is a relative term. Economic resources are limited in relation to our wants. In other words, scarcity is a condition where there is less of something than people would like to have if it cost nothing to buy.
Alternative Uses of Means
Mere scarcity does not give rise to economic problems. If resources are capable of one use only they are specific, their utilisation is an engineering problem, not an economic problem. Economic problem arises when resources are not only scarce but also capable of alternative uses. It means that a resource can be put to many uses. A piece of land can be used for growing corn or building a residential house or a commercial complex.
The importance of the existence of scarcity is that it gives rise to a need to allocate the available resources among alternative uses. Given unlimited wants, it is important that an economy makes the best use of its limited resources. So Robbins defined economics thus:
“Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.”
Logic of Choice
Time and means for achieving ends are limited and are capable of alternative application. Ends are unlimited and are capable of being distinguished in order of importance. These factors cause human behaviour to assume the form of choice. He has to choose between competing ends.
Choices are necessary because there are insufficient resources to satisfy all human wants. A country cannot produce everything its citizens would like to consume. So it has to decide, that is, it has to make a choice about, which goods to be produced and which left unproduced; what quantity of each to be produced; and whose wants to be satisfied and whose left unsatisfied.
Thus the fact of scarcity means that we must always be making choices. We cannot escape the fact of scarcity and the necessity of choice. Households, the smallest economic units, must choose how best to employ their limited incomes between competing ends, such as, food and housing, necessities and entertainment, consumption and saving and so on.
In all these choices, household decisions are guided by market prices. Business firms too must constantly choose in the face of scarcity. All public economic policy decisions are also subject to choice, though less explicitly. Every society, rich or poor, makes choices because its production is limited by its resources and technological knowledge.
If the society chooses to have more of one thing, then it must have less of something else. Such a choice is called as efficient choice.
Scarcity and efficiency are, according to Samuelson and Nordhaus, the twin themes of economics. In their words, “the essence of economics is to acknowledge the reality of scarcity and then figure out how to set-up society in a way which produces the most efficient use of resources.”
Scarcity, the imbalance between our desires and the means of satisfying those desires, is the fundamental economic problem and a unifying topic in economics. So economics can also be defined as “the study of how human beings make choices to use scarce resources as they seek to satisfy their seemingly unlimited wants.” –Hyman
It is scarcity that gives rise to choice. We must make choices about how much of our limited resources available to us will be spent of on each possible activity. When choices are made among alternatives, it becomes plain that choosing one alternative often involves giving up another. This gives rise to the concept of opportunity cost.
There are many alternative things we can do with our resources. So economics is very much a science (logic) of choice a study of how choices are made by both societies and individuals.
Scarcity is experienced by human beings as a universal fact. Economists do not measure it in physical terms but in terms of human wants. “The potentially unlimited nature of human wants means that we can never have enough of everything we want, or enough at one time, or enough soon enough.
The fact of scarcity means that we must always be making choices. How should we divide our limited time between work and liesure? How should we divide our limited incomes between food and shelter? How should we direct our limited abilities to make our way in life as best we can? Choices like these underlie all economic action.”
No amount of our effort can help us to escape the fact of scarcity and the necessity of choice. Abundance of material goods, vast wealth or limiting wants can allow us to escape from scarcity and choice. Thus scarcity and choice underlie all of economics. And to choose means to economize, i.e., to act with a minimum of expenses, effort, and waste.
Another aspect of choice or the act of choosing does not imply that we choose either food or flower. “The choosing consists in deciding at what point to say ‘No’ to our wish for more of one thing, in order to have, a little more elbow room in meeting our wish for something else.” -G.L.S. Shackle
Superiority of Robbin’s Definition
Robbins’ definition of economics gained wide acceptance and holds till today. It is superior to all other definitions for the following reasons:
1. It is a scientific definition. It is not classificatory. It does not divide wants and goods into material and non-material.
2. Robbinsonian definition has widened the scope of economics. Materialas well as non- material goods and wants come under the purview of Economics if they arise in the context of scarcity.
3. Robbinsonian definition of economics makes it a science only. Others definitions regard Economics as being both a science and an art.
4. Robbins considers Economics a positive science only; it steers clear of value judgment as is the case in a normative science. So economics is neutral between ends.
In spite of the above merits, Robbinsonian definition suffers from a number of weaknesses:
1. Economics is not only light-giving; it is also fruit-bearing. Robbins’ definition ignores this normative aspect of the economic life. In order to be fruit-bearing, the study of what it is, is not enough: what ought to be cannot be ignored.
2. Robbins’ definition which assigns only an allocative role to economics does not cover macro-economics. But, then, macro-economics was in the womb of the future when Robbins wrote.
3. Similarly, the theory of economic growth remains outside the purview of Robbinsonian definition. He takes resources as given and discusses only their allocation. The theory of growth explains how an economy grows where resources are not given, but increasing.
4. The problem of unemployment, where there is not scarcity but abundance of man-power, cannot come under this definition.
Economists never agree on any one definition of their subject; they criticize most suggestions for the following reasons:
• no definition covers all aspects of the subject; or
• the definitions beg questions by committing some circularity.
Robbinsonian definition seems to capture the essence of micro-economics but does not convey much of the spirit of macro-economics. Definition which says that “Economics is what economists do” is meaningless unless an economist is defined.
Baxter and Rees offered the following definition: “Economics is a science concerned with those aspects of social behaviour, and those institutions, which are involved in the use of scarce resources to produce and distribute goods and services in the satisfaction of human wants.”
Samuelson and Nordhaus define it in the following way:
“Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people.”
Yet another definition says:
“Economics is the study of the way in which mankind organises itself to tackle the basic problem of scarcity.”
Perhaps, it is more correct to say that a wholly acceptable definition of economics does not exist; it is better to go into the contents of economics than try for any compressed definition.