Study Notes Microeconomics
Definition and Explanation of Economics:
Economics is growing very rapidly as the years pass. As new ideas are being discovered and
the old theories are being revised, therefore, it is not possible to give a definition of economics
which has a general acceptance.
For the sake of convenience, the set of definitions given by various economists are generally
classified under four heads:
Economics as a science of wealth.
Economics as a science of material welfare.
Economics as a science of scarcity and choice.
Economics as a science of growth and efficiency.
Economics as a Science of Wealth or Definition of Economics By Adam Smith:
There is no one definition of Economics which has a general acceptance. The formal roots of
the scientific framework of economics can be traced back to classical economists.
Economics as a Science of Material Welfare or Definition of Economics By Alfred
Marshall:
The neo-classical school led by Dr. Alfred Marshall gave economics a respectable place
among social sciences. He was the first economist who lifted economics from the bad repute
it had fallen.
Economics as a Science of Scarcity and Choice or Definition of Economics By
Robbins:
Marshall’s definition of economics remained an article of faith with all economists from 1830
to 1932. However, with the publication of Robbins book 'Nature and Significance of
Economic Science' 1932, there developed a fresh controversy in regard to the definition of
economics.
,Economics as a Science of Growth and Efficiency or Definition of Economics By
Modern Economists:
After considering the various definitions of Economics, we can easily conclude that none of
them is satisfactory. If we exclude man and his welfare from the study of Economics, there
will be no use of studying it.
Is Economics Neutral Between Ends:
In economics the term ‘ends’ means the goals which a man wishes to achieve in the
economic aspects of his life. The ‘means’ are the sources which are used to achieve the
ends.
Economics Problems:
Economic problem of mankind owes its origin to the fact that human wants are numerous and
of different kinds. The resources to satisfy the multifarious human wants are limited or
scarce.
Scope of Economics:
The scope of economics is the area or boundary of the study of economics. In scope of
economics we answer and analyze the following three main questions.
Nature of Economic Laws:
Economics, like all other sciences, has drawn its own set of generalizations or laws.
Economic laws are nothing more than careful conclusions and inferences drawn with the help
of reasoning or by the aid of observation of human and physical nature.
Methods of Economic Analysis:
An economic theory derives laws or generalizations through two methods:
(1) Deductive Method and (2) Inductive Method.
(1) Deductive Method of Economic Analysis:
The deductive method is also named as analytical, abstract or prior method. The
deductive method consists in deriving conclusions from general truths, takes few general
principles and applies them draw conclusions.
For instance, if we accept the general proposition that man is entirely motivated by self-
interest. In applying the deductive method of economic analysis, we proceed from general to
particular.
The classical and neo-classical school of economists notably, Ricardo, Senior, Cairnes, J.S.
Mill, Malthus, Marshall, Pigou, applied the deductive method in their economic investigations.
Steps of Deductive Method:
The main steps involved in deductive logic are as under:
,(i) Perception of the problem to be inquired into: In the process of deriving economic
generalizations, the analyst must have a clear and precise idea of the problem to be inquired
into.
(ii) Defining of terms: The next step in this direction is to define clearly the technical
terms used analysis. Further, assumptions made for a theory should also be precise.
(iii) Deducing hypothesis from the assumptions: The third step in deriving generalizations
is deducing hypothesis from the assumptions taken.
(iv) Testing of hypothesis: Before establishing laws or generalizations, hypothesis should
be verified through direct observations of events in the rear world and through statistical
methods. (Their inverse relationship between price and quantity demanded of a good is a well
established generalization).
Merits of Deductive Method:
The main merits of deductive method are as under:
(i) This method is near to reality. It is less time consuming and less expensive.
(ii) The use of mathematical techniques in deducing theories of economics brings exactness
and clarity in economic analysis.
(iii) There being limited scope of experimentation, the method helps in deriving economic
theories.
(iv) The method is simple because it is analytical.
Demerits of Deductive Method:
It is true that deductive method is simple and precise, underlying assumptions are valid.
(i) The deductive method is simple and precise only if the underlying assumptions are valid.
More often the assumptions turn out to be based on half truths or have no relation to reality.
The conclusions drawn from such assumptions will, therefore, be misleading.
(ii) Professor Learner describes the deductive method as ‘armchair’ analysis. According to
him, the premises from which inferences are drawn may not
hold good at all times, and places. As such deductive reasoning is not applicable universally.
(iii) The deductive method is highly abstract. It require; a great deal of care to avoid bad logic
or faulty economic reasoning.
As the deductive method employed by the classical and neo-classical economists led to many
facile conclusions due to reliance on imperfect and incorrect assumptions, therefore, under
the German Historical School of economists, a sharp reaction began against this method.
They advocated a more realistic method for economic analysis known as inductive method.
(2) Inductive Method of Economic Analysis:
Inductive method which also called empirical method was adopted by the “Historical
School of Economists". It involves the process of reasoning from particular facts to general
principle.
, This method derives economic generalizations on the basis of (i) Experimentations (ii)
Observations and (iii) Statistical methods.
In this method, data is collected about a certain economic phenomenon. These are
systematically arranged and the general conclusions are drawn from them.
For example, we observe 200 persons in the market. We find that nearly 195 persons buy
from the cheapest shops, Out of the 5 which remains, 4 persons buy local products even at
higher rate just to patronize their own products, while the fifth is a fool. From this observation,
we can easily draw conclusions that people like to buy from a cheaper shop unless they are
guided by patriotism or they are devoid of commonsense.
Steps of Inductive Method:
The main steps involved in the application of inductive method are:
(i) Observation.
(ii) Formation of hypothesis.
(iii) Generalization.
(iv) Verification.
Merits of Inductive Method:
(i) It is based on facts as such the method is realistic.
(ii) In order to test the economic principles, method makes statistical techniques. The
inductive method is, therefore, more reliable.
(iii) Inductive method is dynamic. The changing economic phenomenon are analyzed and on
the basis of collected data, conclusions and solutions are drawn from them.
(iv) Induction method also helps in future investigations.
Demerits of Inductive Method:
The main weaknesses of this method are as under:
(i) If conclusions drawn from insufficient data, the generalizations obtained may be faulty.
(ii) The collection of data itself is not an easy task. The sources and methods employed in the
collection of data differ from investigator to investigator. The results, therefore, may differ
even with the same problem.
(iii) The inductive method is time-consuming and expensive.
Conclusion:
Definition and Explanation of Economics:
Economics is growing very rapidly as the years pass. As new ideas are being discovered and
the old theories are being revised, therefore, it is not possible to give a definition of economics
which has a general acceptance.
For the sake of convenience, the set of definitions given by various economists are generally
classified under four heads:
Economics as a science of wealth.
Economics as a science of material welfare.
Economics as a science of scarcity and choice.
Economics as a science of growth and efficiency.
Economics as a Science of Wealth or Definition of Economics By Adam Smith:
There is no one definition of Economics which has a general acceptance. The formal roots of
the scientific framework of economics can be traced back to classical economists.
Economics as a Science of Material Welfare or Definition of Economics By Alfred
Marshall:
The neo-classical school led by Dr. Alfred Marshall gave economics a respectable place
among social sciences. He was the first economist who lifted economics from the bad repute
it had fallen.
Economics as a Science of Scarcity and Choice or Definition of Economics By
Robbins:
Marshall’s definition of economics remained an article of faith with all economists from 1830
to 1932. However, with the publication of Robbins book 'Nature and Significance of
Economic Science' 1932, there developed a fresh controversy in regard to the definition of
economics.
,Economics as a Science of Growth and Efficiency or Definition of Economics By
Modern Economists:
After considering the various definitions of Economics, we can easily conclude that none of
them is satisfactory. If we exclude man and his welfare from the study of Economics, there
will be no use of studying it.
Is Economics Neutral Between Ends:
In economics the term ‘ends’ means the goals which a man wishes to achieve in the
economic aspects of his life. The ‘means’ are the sources which are used to achieve the
ends.
Economics Problems:
Economic problem of mankind owes its origin to the fact that human wants are numerous and
of different kinds. The resources to satisfy the multifarious human wants are limited or
scarce.
Scope of Economics:
The scope of economics is the area or boundary of the study of economics. In scope of
economics we answer and analyze the following three main questions.
Nature of Economic Laws:
Economics, like all other sciences, has drawn its own set of generalizations or laws.
Economic laws are nothing more than careful conclusions and inferences drawn with the help
of reasoning or by the aid of observation of human and physical nature.
Methods of Economic Analysis:
An economic theory derives laws or generalizations through two methods:
(1) Deductive Method and (2) Inductive Method.
(1) Deductive Method of Economic Analysis:
The deductive method is also named as analytical, abstract or prior method. The
deductive method consists in deriving conclusions from general truths, takes few general
principles and applies them draw conclusions.
For instance, if we accept the general proposition that man is entirely motivated by self-
interest. In applying the deductive method of economic analysis, we proceed from general to
particular.
The classical and neo-classical school of economists notably, Ricardo, Senior, Cairnes, J.S.
Mill, Malthus, Marshall, Pigou, applied the deductive method in their economic investigations.
Steps of Deductive Method:
The main steps involved in deductive logic are as under:
,(i) Perception of the problem to be inquired into: In the process of deriving economic
generalizations, the analyst must have a clear and precise idea of the problem to be inquired
into.
(ii) Defining of terms: The next step in this direction is to define clearly the technical
terms used analysis. Further, assumptions made for a theory should also be precise.
(iii) Deducing hypothesis from the assumptions: The third step in deriving generalizations
is deducing hypothesis from the assumptions taken.
(iv) Testing of hypothesis: Before establishing laws or generalizations, hypothesis should
be verified through direct observations of events in the rear world and through statistical
methods. (Their inverse relationship between price and quantity demanded of a good is a well
established generalization).
Merits of Deductive Method:
The main merits of deductive method are as under:
(i) This method is near to reality. It is less time consuming and less expensive.
(ii) The use of mathematical techniques in deducing theories of economics brings exactness
and clarity in economic analysis.
(iii) There being limited scope of experimentation, the method helps in deriving economic
theories.
(iv) The method is simple because it is analytical.
Demerits of Deductive Method:
It is true that deductive method is simple and precise, underlying assumptions are valid.
(i) The deductive method is simple and precise only if the underlying assumptions are valid.
More often the assumptions turn out to be based on half truths or have no relation to reality.
The conclusions drawn from such assumptions will, therefore, be misleading.
(ii) Professor Learner describes the deductive method as ‘armchair’ analysis. According to
him, the premises from which inferences are drawn may not
hold good at all times, and places. As such deductive reasoning is not applicable universally.
(iii) The deductive method is highly abstract. It require; a great deal of care to avoid bad logic
or faulty economic reasoning.
As the deductive method employed by the classical and neo-classical economists led to many
facile conclusions due to reliance on imperfect and incorrect assumptions, therefore, under
the German Historical School of economists, a sharp reaction began against this method.
They advocated a more realistic method for economic analysis known as inductive method.
(2) Inductive Method of Economic Analysis:
Inductive method which also called empirical method was adopted by the “Historical
School of Economists". It involves the process of reasoning from particular facts to general
principle.
, This method derives economic generalizations on the basis of (i) Experimentations (ii)
Observations and (iii) Statistical methods.
In this method, data is collected about a certain economic phenomenon. These are
systematically arranged and the general conclusions are drawn from them.
For example, we observe 200 persons in the market. We find that nearly 195 persons buy
from the cheapest shops, Out of the 5 which remains, 4 persons buy local products even at
higher rate just to patronize their own products, while the fifth is a fool. From this observation,
we can easily draw conclusions that people like to buy from a cheaper shop unless they are
guided by patriotism or they are devoid of commonsense.
Steps of Inductive Method:
The main steps involved in the application of inductive method are:
(i) Observation.
(ii) Formation of hypothesis.
(iii) Generalization.
(iv) Verification.
Merits of Inductive Method:
(i) It is based on facts as such the method is realistic.
(ii) In order to test the economic principles, method makes statistical techniques. The
inductive method is, therefore, more reliable.
(iii) Inductive method is dynamic. The changing economic phenomenon are analyzed and on
the basis of collected data, conclusions and solutions are drawn from them.
(iv) Induction method also helps in future investigations.
Demerits of Inductive Method:
The main weaknesses of this method are as under:
(i) If conclusions drawn from insufficient data, the generalizations obtained may be faulty.
(ii) The collection of data itself is not an easy task. The sources and methods employed in the
collection of data differ from investigator to investigator. The results, therefore, may differ
even with the same problem.
(iii) The inductive method is time-consuming and expensive.
Conclusion:
