Class 11 Business Studies Lesson 1

About

The word economy is derived from ancient Greek work ‘Oikonomia’. In Greek word, Oiko means House and Womia means customs and rule. Thus, Economics is defined as study of household management or the rules of household.

Economics is the study of different economy activities like production, exchange and consumption of goods and services. It is also the study of economic behaviour of people, the society and as a whole world. Thus, it is the science of making effective choice and decision and allocate the Scars resources among unlimited ones and to fulfill them.

Different Economists and scholars have defined economics differently. Some of them are as follows

Economics is the Science of household management – Xenophon

Economics is not only the science of household management, it is also the science of exchange – Aristotle

Economics is the study of material welfare – Cannon

In this way, economics has defined differently by different economists in ancient time but after the 17th Century, Adam Smith in his famous book “An inquiry into the nature and causes of wealth of nation” defines economics in different view and was accepted universally. So that’s why he is considered as father of economics. After all. economics has got separate subject and definition. which is used for every individuals, Society and even the entire world.

Adam Smith (1776–1890 AD) is one of the famous economists to establish the wealth definition. He is also known as the father of economics and the leader of classical period. He published the famous book “An inquiry into the nature and causes of wealth of nation” in 1776 AD. He defined economics as science of wealth from the above book. So the above book give birth to economics as a separate subject. The other economists like J.B Say, J. S. Mill, David, Ricardo are the supporters of the wealth definition of economics.

Features of wealth Definition are explained below:

Study of wealth:

👉 Adam Smith centered his definition as the study of wealth. According to him wealth is the major factor of shaping the life of every individuals: Thus, Economics is related with the economic activities like production, distribution exchange and consumption of goods & services which are scars but related with wealth.

Secondary place to mankind:

👉 Smith has given first priority to the wealth and second to the man. According to him man is for wealth but wealth is not for man. It means man is a means and wealth is an end.

Study of economic man:

👉 According to Smith, economics is only concerned with the activities of economic man who used to perform the production, distribution exchange and consumption of goods & Services. Economic man thinks nothing other than collecting the wealth throughout the whole life. So, the definition of economics is focused throughout the Whole life.

Source of wealth:

👉 According to Smith the wealth within the country will be increased only through the productivity of labour and division of labor. Wealth is the wages receipt by labour through the economic activities and by the degree of labour and their potentiality.

Only material goods contain wealth:

👉 The definition of Smith has focused on only the production of material goods are considered it as of main source of wealth. It assume that economic is not related with non-material goods like air, water, service of doctors, teachers, etc.

Criticism of Health Definition given by Adam Smith

👉 The definition of Adam smith has been bitterly criticized by different economists by like Altered Marshall, John Ruskin i to William Morris, etc. The definition assumes that wealth is an end to human activities. If it is accepted there will be no place for love, attention, sympathy and patriotism because wealth makes man selfish. So some of the criticism are as explained below:

Narrow definition of wealth:

👉 Smith consider economics as a science of wealth. This wealth includes only the material goods like table chair gold, silver book etc. But it don’t includes non-material goods like services of doctors, teachers, nurses, lawyers, etc. In practice the wealth should include both material and non-material goods for the satisfaction of human needs. So Smith limited the scope of economics in the form of wealth.

Unnecessary focus to the wealth:

👉 Adam Smith assumes that economics is the science of wealth and more focus has given to the wealth and then human. But critics point out that wealth is tor human and human is not for wealth. So man should be at first and then wealth.

Unrealistic concept of economics:

👉 According to Smith man work only for their self interest i.e. increasing personal wealth. Social interest is downgraded in the background of wealth definition. But Marshall has suggested that economics does not study a selfish man who involve in economy activities, but it studies a common man. Thus, the concept given by Smith as economic man is unrealistic.

Emphasis on a Single Source of wealth:

👉 Adam Smith has regarded wage earned by the active labour is the main source of wealth. But in-fact the accumulation or creation of wealth depends on the combine use of human resources, natural resources, physical & capital resources so critics point out that wealth 16 the combination of all the factors of production such as land. labour capital interest and organization.

Incomplete definition:

👉 Smith’s definition of economics is incomplete itself. It gives more focus on the earning and spending of the wealth. But it knows the means and resources which are scars for the earning of wealth.

Despite the above criticism Smith definition of economics has been considered as a great milestone in the evolution of economics as a separate subject of study.

Marshall / Welfare / NEO- Classical Definition of Economics (1890–1936 AD)

Alfred Marshall, and eminent British economists recognized the incompleteness of Smith definition of economics and bought a fundamental change in it. According to him, economics is on the one side study of wealth and on the other more important side study of man. He published book “Principles of Economics” in 1890 AD and defines economics as a subject concern with the activities of ordinary human beings which promote the material welfare of mankind. The view of Marshall was supported by many economists like A.C. Pigon, Cannon, Biviridge etc.

Features

Primary concern to mankind:

Ans 👉 Marshall has focused his definition towards the human mankind and material welfare. According to this definition, wealth is not required for it’s own sake but it is required for the sake of man and for his welfare. So Marshall has given primary importance to man and then wealth.

Study of ordinary human being:

👉 Marshall consider economics as the study of ordinary people but not the study of economic man. It means it study about the rational man and ignores the activities of irrational man like hermit, priest, monks etc

Study of material welfare:

👉 Marshall has focused his definition towards the material welfare for satisfaction only through consumption of material goods. But this definition has not include the non-material welfare like services of doctors, teachers etc.

Study of Social Science:

👉 The welfare definition doesn’t concern with the people living outside the society such as isolated person But all the ordinary and extra-ordinary people needs satisfaction. So, Marshall has focused his dentition only about the study of social science.

Study of Normative Science:

👉 Normative Science is the study about norms, values, ethics. Marshall has focused his definition towards the normative science since it deals with the study what should be done to promote the material welfare for mankind.

Criticisms of welfare Definition:

The definition of economics given by Marshall was remained for popular for longer time until the arrival of Lionel Robbins. After then it was criticized by different scholars like J-M Keynes, Robbins , etc on the following headings:

Classificatory:

👉 The definition of economics is focused on the classification of subject matter rather than analytical. Marshall has classified the human activities into material and non material welfare and non-welfare, ordinary and extra-ordinary. In fact, it is very difficult to make the clear distinctions between them.

Narrow or limited scope of welfare:

👉 Marshall has included his definition into the material activities of human beings as a subject matter and excluded non-material activities like services to doctors, teachers, lawyers, etc. According to Robbins, the above activities also come into the subject of economics. So this definition has narrowed scope of welfare.

Lack of clear concept about welfare:

👉 Marshall has tried to established the connection between welfare and economics but the concept of welfare differs from place to place, person to person, Country to country and time to time. For eg the medicine gives the welfare to the sick person but it don’t promote welfare for other person though the medicine is material goods:

Excludes human Science:

👉 According to Marshall, economics is the study of the man which are suited to society but it ignores the isolated person like hermit, priest, monk from his definition but critics like Robbins pointed that the people either living in the and society or out of the society needs welfare and satisfaction. So, economics should study about all the human beings.

It involves value’s Judgement:

👉 According to Marshall the economics is based on ethics, norms and values. It means, it only suggest for the material welfare but do not tells what is the fact for the welfare. So, Robbins point out that economics should be neutral and positive science.

Scarcity / Modern / Robbins / Scientific Definition of Economics (1930-still)

👉 The third definition of economics was given by Lionel Robbins. He is one of the modern economists who gave the scientific and logical definition of economics in terms of scarcity and choice by publishing the book “An essay on the nature and significance of economics” in 1932 AD. According to this book, economics is the study of human behavior in relation with unlimited wants or ends, and limited scarce means which have alternative uses. His argument is concerned with the economic problem which arises due to scarcity and choice.

Features of the Scarcity Definition:

👉 According to Robbins, human wants and desires are unlimited and these desires are never fulfilled all at once. If one want is fulfilled, another automatically arises in the mind. Therefore, economics is based on scarcity and choice. Resources are limited compared to human wants. These resources include money and time; a person can only work limited hours in a day and earn limited money, but desires are unlimited. Because resources are scarce, they have alternative uses — for example, a liter of milk can be used to prepare tea, curd, butter, or feed a baby, but not all at once. Therefore, the best alternative use of scarce resources must be chosen. Although wants are unlimited, not all wants have equal importance; more important wants should be fulfilled first and less important ones later or postponed. Robbins also stressed that economics is a positive science studying real situations of individuals, society, and the nation.

Differentiate between wealth-centered and welfare-centered definitions:

👉 Wealth-centered economics defines economics as the science of wealth and is based on the concept of economic man, assigning primary importance to wealth, and considers wages earned by labor as the single source of wealth of a nation. Welfare-centered economics defines economics as the science of material welfare, is based on the concept of ordinary human beings, assigns primary importance to mankind, and recognizes both labor and other resources as sources of wealth.

Criticisms of Robbins’ Scarcity Definition:

👉 Although Robbins’ definition was superior, reliable, and realistic, it was criticized on several grounds. Critics said it neglects burning issues of the modern economy like over-debt, unemployment, inflation, economic growth, and depression. It places unnecessary emphasis on scarcity, ignoring problems caused by resource abundance or underutilization. It is similar to Marshall’s definition, focusing on human satisfaction but limited to allocation of scarce resources and neglects broader economic activities like production, distribution, exchange, and consumption. Finally, while Robbins considers economics as a positive science studying real facts, critics argue economics also needs to include normative aspects, giving suggestions and value judgments. Despite criticism, Robbins’ definition remains scientific, logical, and practical, applicable worldwide.

What are the similarities between welfare and scarcity definitions?

👉 Both welfare-centered and scarcity-centered definitions study mankind or human behavior. Welfare definition focuses on wealth in relation to mankind, while scarcity focuses on scarce resources to meet human wants. Both aim to utilize limited resources to achieve maximum satisfaction or welfare. Welfare is related to using limited quantities of wealth, scarcity is related to alternative uses of limited resources.

What are the differences between welfare and scarcity definitions?

👉 Welfare-centered economics is the science of material welfare aiming to promote material welfare to mankind and is classificatory, dividing activities as material/non-material and economic/non-economic, based on normative science. Scarcity-centered economics is the science of scarcity and choice, aiming to satisfy the maximum possible wants from scarce resources, based on economic analysis and positive science.

 Subject matter of economics:

👉 The subject matter or scope of economics is broad and somewhat vague but can be studied through three approaches. First, the Representative Approach: Smith sees economics as the study of wealth and its accumulation; Marshall as the study of mankind’s ordinary business life to achieve satisfaction through material goods; Robbins as the study of scarcity and choice to achieve satisfaction. Second, the Traditional Approach: Economics focuses on unlimited wants and limited means, requiring production, consumption, distribution, exchange, and public finance activities to satisfy human wants in a cyclical manner. Third, the Modern Concept: Economists divide economics into Microeconomics — studying individual units like households and firms (single trees in a forest), and Macroeconomics — studying aggregate economic activity (all trees in a forest).

 Traditional Approach activities in economics:

👉 Production is transforming inputs like land, capital, labor, interest, and organization into outputs, studied under laws such as variable proportions and returns to scale. Consumption is the process of satisfying human wants, involving laws like demand and diminishing marginal utility. Distribution is the determination of factor prices such as rent, wages, profit, and income. Exchange studies pricing of goods and services in markets including competition and monopoly. Government or public finance studies government expenditure, revenue, public debt, and taxation.

 Microeconomics and Macroeconomics

👉 Microeconomics is derived from the Greek word ‘Micros’ meaning small unit. It studies economic behavior of individual units like consumers, producers, firms, individual prices, demand, and income. It focuses on how individuals make effective choices about what to produce and price to charge. It is also called price theory of economics. Macroeconomics, derived from Greek ‘Makros’ meaning large, studies the economy as a whole or aggregate variables such as national income, aggregate demand and supply, investment, consumption, expenditure, saving, and general price level. It studies how prices are determined and resources allocated for people’s welfare, focusing on income and employment levels. It is known as the theory of income and employment.

Importance of Microeconomics:

👉 Microeconomics is important because it helps determine factor payments like rent, interest, wages, and profit. It assists in economic decision-making, planning, and policy formulation, especially in public sector activities and pricing of public utilities. It helps fix prices of goods and services by analyzing market demand and supply. It aids understanding the efficient allocation of resources to maximize satisfaction and supports government policy formulation and implementation including fiscal, monetary, trade, and development policies.

Importance of Macroeconomics?

👉 Macroeconomics is crucial for formulating aggregate price policies, taxation, fiscal and monetary policies for national economic growth and development. It studies social problems like unemployment, poverty, inequality, and regional disparity and implements policies to solve them. It is essential for measuring national income components such as GDP, GNP, and PCI annually. It helps control inflation and deflation by economic and monetary policies. Macroeconomics also supports international comparison of economic indicators such as national income, output, investment patterns, and consumption behavior.

What is the concept of Positive and Normative Economics?

👉 Positive economics, developed by classical and modern economists like Smith, Say, Ricardo, Robbins, and Keynes, studies economic activities as they are. It focuses on ‘what is’, ‘what was’, or ‘what will be’ using scientific analysis and factual information, explaining causes and effects without judgments, thus considered neutral. Normative economics, developed by neo-classical economists like Marshall, Pigou, and Cannon, deals with ‘what ought to be’. It studies economic activities with value judgments and ethics, focusing on whether economic activities meet societal norms and values, giving suggestions but not stating facts, hence called ethical science.

Distinguish between Positive and Normative Economics.

👉 Positive economics concerns ‘what is’ and focuses on factual, statistical information explaining cause and effect, describing how the economy really works. Normative economics concerns ‘what should be’, deals with value judgments, presents ideal situations, and prescribes what the economy ought to do. For example, positive economics states unemployment is high, while normative economics suggests unemployment should be reduced.