Economics: Definition, Branches & Basic Concepts of Economy

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Definition of Economics

Economics like other social science subjects has no specific definition. As there are many Economists, so there are many definitions of the subject Economics.

Economics: Definition and Basic Concepts of Economics

These definitions depend greatly on the perception of the definer of the subject. These inevitable variations in the definition of Economics arise because of the fact that the subject studies human beings and their behaviours which can never be the same.

These divergent human behaviours are subject to different interpretations. To substantiate our argument that Economics has multi-farious definitions, we will quote some definitions given by those we consuder as authorities in Economics.

Adam Smith (1776): “an inquiry into the nature and causes of the wealth of nations“ John Stuart Mill (1843): “the practical scaence of the production and distribution of wealth.” Alfred Marshal (1890): “A study of mankind in the ordinary business of life“.

However, of all the definitions of Economics adduced by Economists, the one that is most widely acceptable by the generality of Economists is the one put forward by Professor (Lord) Lionel C. Robbins in 1932.

According to Professor Robbins, Economics may be defined as “a Science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.”

The above definition is more embracing because it embodies the basic concepts of Economics and the main fundamental problems of man wants, scarcity, choice, exchange and opportunity cost.

To properly explain the above definition adduced by Robbins, we decided to underline the key words.

According to Robbins’ definition, Economics is a science, and below is an explanation why Economics is called a science. Economics is a science which studies human behaviours and that makes it a social science and not a natural or pure science.

As a social science, Economics deals mainly with the activities of man. By ends, it means human wants, desires or needs. These human wants are numerous relative to resources used in satisfying them.

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By scarce means, he means the limited available resources used in satisfying numerous human wants. That is, the resources used m satisfying human wants which he called “means” are scarce or not many, relative to their demand. By alternative uses, it means that these scarce resources can be used for different purposes.

For instance, a piece of land can be used to build a house or for farming. That is, the most pressing needs have to be satisfied first leaving others that are not most pressing till the time more resources will be made avaitabte.

Since human wants are unlimited and insatiable relative to the available resources, human beings have to choose the most pressing needs and leave others that are less important relative to scarce resources.

This is why Economics is also known as a science that studies scarce resources. As a result of the untimited and insatiable nature of human needs, coupled with the scarce resources used in the satisfaction of these wants human beings are faced with the problems of wants, scarcity, scale at preference, choice and opportunity cost.

Scope of Economics

Economics is a social science which covers the actions of individuals, households and firms in the areas of production, distribution and consumption.

Basic Concepts of Economics

The basic concepts of Economics are;

1. Wants – Meaning & Definition in Economics

Wants refers to the goods or services that are desired or needed. In economics, wants are unlimited while the means of acquiring them are limited.

2. Scarcity – Meaning & Definition in Economics

Scarcity means limited supply of resources. It refers generally to the limited nature of our resources e.g. land, labour, money, etc.

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Scarcity occurs when there is a shortage of goods and services compared with our wants. It is not possible to get enough resources to produce goods and services that will go round everybody.

When resources are scarce, individuals, households, firms and governments are forced to economise i.e. make the best use of what they have.

3. Choice – Meaning & Definition in Economics

Since resources are limited and wants are unlimited, the need for choice becomes necessary. Choice has to be made from among the goods and services that are scarce.

An individual must decide how much to spend on commodity A and how much on commodity B, because his resources are not enough for A and B at that specific time. Business firms must decide the various things to produce. Government must choose the proportion of its income that will go to the agricultural, educational and industrial sectors.

Every economic decision is, therefore, a choice between alternatives.

4. Scale of Preference – Meaning & Definition in Economics

Scale of preference refers to the listing or arrangements of wants in order of priority or importance. Since resources are limited and wants are unlimited, a rational man will have to choose. When all these wants are arranged in the order of importance, that order represents his scale of preference.

The importance of scale of preference includes the following:

  • It is a tool for ranking wants in order of priority.
  • It enables individuals, firms and governments to make rational choices.
  • It facilitates optimum allocation of resources.
  • It enables economic agents to maximise their satisfaction.

5. Opportunity Cost – Meaning & Definition in Economics

Economic choice involves the satisfaction of one’s wants at the expense of having to forego others. The cost of the one he enjoys is the one he now fails to enjoy. If, for instance, a student chooses to spend #200, which he has, on a book rather than buying clothes, the opportunity cost of the book he buys is the clothe he foregoes.

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The opportunity cost is often referred to as the ‘real’ cost or the foregone alternative. All choices involve opportunity costs.

  • It helps private individuals in allocating their limited resources among competing needs.
  • It helps producers in allocating their scarce resources in deciding what to produce and what methods or techniques to use.
  • It also helps the government in making effective and efficient use of its resources in areas of activity it considers most important to the people.

Branches of Economics

Economics is divided into two main broad areas of Micro-economics and Macro-economics. Microeconomics is the study of the small units of the economy. Mikros is a Greek word which means small.

Microeconomics therefore involves the analysis of the decisions of the basic decision-making units of households, firms and governments. For instance, how an individual or a household earns income and how the income is spent are examples of micro-economics.

Macro-economics on the other hand deals with the a gregate economic problems of the society at large. Makros is the Greek word for large. Macroeconomics therefore studies such topics as inflation which is concerned with the general level of prices and as it affects everybody in the society, national income, aggregate level of unemployment, etc.

Economics can also be classified into pure and applied categories.

Pure Economics involves a body of laws, theories or principles derived from the study of economic behaviour while Applied Economics is concerned with the use of laws, theories or principles in the analysis and solving of contemporary economic problems.

There are other branches of economics like: Monetary Economics which deals with money and banking; Public Finance which is about taxation, pubIic revenue and expenditure; Business Economics which deals with trade. business organisation and accounting; Development Economics that handles economic planning or development plan and national economies; Mathematical Economics or Econometrics which deals with data collection, analysis and statistics; Demography that deals with population issues; Industrial Economics which talks about personnel management, labour and industrial relations, etc.