NATURE OF ECONOMICS

CHAPTER 1

Economic science is but the working of common sense aided by

appliances of organized analysis and general reasoning.
Alfred Marshall (1842-1924)

By: Joelie Mae B. Montesclaros

QUESTIONS WE ASK

A knowledge of economics will prove useful in understanding some

questions about the society we live in.

 Why do people receive different incomes?

 Is it true as a rule that with higher income people also tend to have
longer life expectancies and higher literacy?
 Are there economic explanations for this?
ECONOMICS CAN BE SUMMARIZED AS FOLLOWS:

 Economics is a scientific study which deals with how individuals and

society generally make choices. Individuals and groups in society
have innumerable wants. To satisfy those wants, there are resources
that can be used. These resources are not freely available. They are
therefore scarce and they have alternative uses. Such uses may also
apply between now (today) and tomorrow (the future). Therefore, a
dimension of choice includes present and future use of available
resources. Moreover, the uses of these resources carry with them
costs and corresponding benefits. Concern with costs and benefits
requires efficiency in resource use.
“ the study of mankind in the ordinary business of life”

“ the study of things having to do with man’s material welfare”

“the study of things having to do with man’s material welfare

which can be measured by money”

“the science which studies human behavior as a relationship

between ends and scarce means which have alternative uses”

( Any effort to give a one-sentenced definition is bound to fail

in that it has to be explained further, to be fully understood)
Aspects of Economics:

1.It is a science concerned with human behavior.

2. It’s principal concern is with choices, in the present

and over time, affecting the production of
commodities, the distribution of the rewards from such
production, and finally the consumption of
commodities.
Is economics then a science?

Over hundred of years, economics has developed into a body of

knowledge, sifted and improved upon by various thinkers or writers,
some of whom are called earlier as philosophers, mercantilists,
pamphleteers, arithmeticians, political economists and economists. In
the course of this development, particular economists have built upon
a body of knowledge with specialized techniques of fact-finding,
interpretation and analysis.

Theory
As the study of economics progresses, many theories are
encountered.
• Theory of competition and the firm.
• Theory of production, and the law of diminishing returns.
• Theory of employment and the role of government.
Economics as a Social Science

Economics is concerned with human individual or group behavior. As such, it has

common ground with other social sciences ( psychology, politics, sociology,
anthropology, etc. ) which are concerned with the study of individuals, acting alone or
in group.

Scientific Statements versus value judgments

One of the eminent dangers facing a social science is that discussions of problems
can be affected by value judgments. Such judgments derive from frames of mind
nourished by a philosophical, religious, cultural, or political – in short, an ethical – belief.
A person’s belief on what is proper or good for an individual or society may seep into
the analysis of particular problems.

Theory versus practices

“ It is true in theory but not in practice.”
A theory, therefore, must explain what happens in practice. If it fails to do so, then
there must be alternative theory which is a better explanation of what happens in
practice.
Why economic problems arise?

Fundamentally, human beings have MANY wants. The problems of economics arise because
human wants can be satisfied only at a SACRIFICE. It is possible to have something only if effort is
spent on having it. The efforts required use up scarce resources.
“The best things in life are free.” These were the words of a popular song some years back. The
air we breath is free. It is as basic as life itself. Without it, life would not be there to be lived. Nature
has given us which are very essential to us, but which we take for GRANTED , because they are
FREE.

Economics and Development

Being citizens of a relatively less developed country, we may be fascinated by the study of
economics because it answers questions rated to why some economies have higher standards of
living while less developed countries are generally poor. Hence their people have low living
standards.

Clearing up semantics

Before proceeding, certain problems of semantics, or the way words are often used, may be
cleared. Most of these problems arise only because certain words or descriptions conjure unwanted
or unnecessary meanings.
Some of this terminology may also be misleading. There are some developing countries which are
not even DEVELOPING. Yet this term has gained wide usage especially in the political forums of
nations – the United Nations and its agencies – and consequently in the economic literature.
Nowadays, one cannot read UN document that refers to backwards or underdeveloped nations,
although in the early 1950s, this was commonly used. If one is not in the league of developed
nations, it is “developing”

Countries, low-, middle-, and high-income

There are today about 4.5 billion people, two-thirds of whom live in low-income countries. The
developed high-income countries account for 20 per cent. And countries in between the high- and
the low- income, those we can call middle-income countries, have only as many people as the
developed countries.
In short, there are more people who are POOR. If the growth in population are examined, those
in low-income countries increase in numbers also much faster.

Economics and the developing economies

Some segments of the economy would be modernizing fast. These immediately modernizing
components may be more responsive to the standard of normal economic factors, such as high or
low prices. Other sectors will be more tradition bound. Ignorance due to illiteracy and the heavy
Dualistic Economic Structure

The modernizing sector may not interact with the tradition-bound sector. In a “dualistic
structure” between the modernizing and traditional sectors, markets would tend to be FRAGMENTED
rather than UNIFIED. Fragmented markets limit the prospects of greater “specialization” of activities.
Specialization happens only when the market size allows it. The modernizing sector may take time
to attain an adequate size.

Nationalism and Economics

Nationalism is a strong force affecting national economic development. It could make or unmake
development. A knowledge of economics is a very important element in making a positive
contribution to nation-building.

Microeconomics and macroeconomics: small and large economic units

Economics may be divided as to subject matter by referring to the economic unit that is the
object of the study. The economic analysis of the individual economic unit, whether he be an
individual or an enterprise, is known as microeconomics. This subject deals with the problems of
individual choice, demand, cost of production of the firms, and the structure of markets.
Macroeconomics, as the macro in contrast to micro implies, is concerned with aggregative
economic analysis. It deals with the study of national income, consumption, investment, savings and
 SUMMARY

1. Economics is a scientific study concerned with human behavior. It is

therefore a social science. Its principal concern is with choices, in the
present and over time. These choices cover the production of
commodities, their distribution in terms of rewards to factors of the
consumption of commodities. In this regard, it is concerned with man’s
welfare, now and in the future.
2. Economics has some advantageous over other social sciences. The
economic motives of human beings are more regular and therefore
predictable. Secondly, there are available more factual information (in
the form of economic statistics) that can be the basis of theoretical
verification.
3. Economic problems arise because of the scarcity of goods. Goods that
are valuable to life may be abundant and for that reason may become
free goods (like air). Only scarce goods give way to economic problems
4. Economics can be useful in the understanding of why countries
grow or remain poor. Economic growth is a concept that refers to
sustained increase in output. Economic development refers to a
complex process describing changes in economic and
noneconomic institution and also include those aspects necessary
to economic growth to take place.

5. Macroeconomics refers to the analysis of aggregate economic

magnitudes like national income, investment, savings and the
price level. Microeconomics refers to the analysis of choice at the
level of the individual, the firm, and the market. Both aspect of
economics are relevant to the subject of economics.