Introductory Economics

Introduction

Economics as a science adopts two methods for the discovery of its laws and principles, viz., (a) deductive method and (b) inductive method.

Deductive method:
Here, we descend from the general to particular, i.e., we start from certain principles that are self-evident or based on strict observations. Then, we carry them down as a process of pure reasoning to the consequences that they implicitly contain. For instance, traders earn profit in their businesses is a general statement which is accepted even without verifying it with the traders. The deductive method is useful in analyzing complex economic phenomenon where cause and effect are inextricably mixed up. However, the deductive method is useful only if certain assumptions are valid. (Traders earn profit, if the demand for the commodity is more).

Inductive method:
This method mounts up from particular to general, i.e., we begin with the observation of particular facts and then proceed with the help of reasoning founded on experience so as to formulate laws and theorems on the basis of observed facts. e.g. Data on consumption of poor, middle and rich income groups of people are collected, classified, analyzed and important conclusions are drawn out from the results.

In deductive method, we start from certain principles that are either indisputable or based on strict observations and draw inferences about individual cases. In inductive method, a particular case is examined to establish a general or universal fact. Both deductive and inductive methods are useful in economic analysis.

Subject Matter of Economics
Economics can be studied through

(a) traditional approach
(b) modern approach.

a) Traditional Approach: Economics is studied under five major divisions namely consumption, production, exchange, distribution and public finance.

Consumption: The satisfaction of human wants through the use of goods and services is called consumption.

Production: Goods that satisfy human wants are viewed as “bundles of utility”. Hence production would mean creation of utility or producing (or creating) things for satisfying human wants. For production, the resources like land, labour, capital and organization are needed.

Exchange: Goods are produced not only for self-consumption, but also for sales. They are sold to buyers in markets. The process of buying and selling constitutes exchange.

Distribution: The production of any agricultural commodity requires four factors, viz., land, labour, capital and organization. These four factors of production are to be rewarded for their services rendered in the process of production. The land owner gets rent, the labourer earns wage, the capitalist is given with interest and the entrepreneur is rewarded with profit. The process of determining rent, wage, interest and profit is called distribution.

Public finance: It studies how the government gets money and how it spends it. Thus, in public finance, we study about public revenue and public expenditure.

b) Modern Approach
The study of economics is divided into Microeconomics and Macroeconomics.

Microeconomics:
This analyze the economic behaviour of any particular decision making unit such as a household or a firm. Microeconomics studies the flow of economic resources or factors of production from the households or resource owners to business firms and flow of goods and services from business firms to households. It studies the behaviour of individual decision making unit with regard to fixation of price and output and its reactions to the changes in demand and supply conditions. Hence, microeconomics is also called price theory.

Macroeconomics:

• It studies the behaviour of the economic system as a whole or all the decision- making units put together. Macroeconomics deals with the behaviour of aggregates like total employment, gross national product (GNP), national income, general price level, etc. So, macroeconomics is also known as income theory.
• Microeconomics cannot give an idea of the functioning of the economy as a whole.
• Similarly, macroeconomics ignores the individual’s preference and welfare. What is true of a part or individual may not be true of the whole and what is true of the whole may not apply to the parts or individual decision making units. By studying about a single small- farmer, generalization cannot be made about all small farmers, say in Himachal Pradesh state. Similarly, the general nature of all small farmers in the state need not be true in case of a particular small farmer. Hence, the study of both micro and macroeconomics is essential to understand the whole system of economic activities.