Chapter 1: Basic Concept of Economics and Allocation of Resources

In this article, you’ll find all the notes of Chapter 1 (Basic Concept of Economics and Allocation of Resources) of Economics of Class 11.

Basics

Economics is a science that studies human behavior as a relationship between unlimited ends and scarce means which have alternative uses. It is a subject that deals with the economic activities, economic phenomenon, and economic issues or problems of the society.

What is the Origin of Economics?

Economics is derived from the Greek word “Oeconomicus” or “Okionomia.

What Are Economic Agents?

Economic agents are:

1. Individuals
2. Households
3. Consumers
4. Producers
5. Industries
6. Government

What Is The difference between Economics, Economic, and Economy?

1. Economics: Economics is the subject that deals with economic activities, economic phenomenon, and economic issues or problems of the society.
2. Economic: Economic means costing less. For example: The trip was economic. In the given statement economic means less expensive.
3. Economy: Economy are the wealth and resources of a country or region, especially in terms of the production and consumption of goods and services.

Who are Economists?

Economists are the intellectuals and scholars:

1. Who develop their theories and principles,
2. Who make in-depth analysis of the economy, and
3. Who give the clear cut and valuable suggestions to address the economic problems of the society and to get prosperity.

Introduction

What Is Economics?

Economics is a science that studies human behavior as a relationship between unlimited ends and scarce means which have alternative uses. It means managing a household with limited funds or resources, that is, how people earn their income and use it to fulfill their unlimited needs.

Its etymological meaning is household management.

When And How Was Economics Born?

Economics was born with the publication of Adam Smith’s revolutionary book “An Inquiry into the Nature and Causes of Wealth of Nations”, also known as the “Wealth of Nations”, in 1776 AD.

What Was Economics A Part Of Before It Became A Separate Subject?

Before Economics became a separate subject in 1776 AD, Economics used to be studied as a part of the Political Economy.

Why is Adam Smith considered the Father of Economics?

Adam Smith is considered the “father of economics” because before he published his book, An Inquiry Into the Nature and Causes of Wealth of Nations in 1776 AD, economics was taken as a part or sub-subject of Political Economy. It was only after his book was published in 1776 AD that Economics became a separate subject

Development of Economics

1. Classical Period

1. Date: 1776 AD- 1890 AD
2. Leader of the age: Adam Smith (Scottish Economicsts)
3. Other Economicsts: J. B. Say, J. S. Mill, T. R. Malthus, etc.
4. Main Concern: Wealth
5. Main Contribution: Seperating Economics from other social sciences and formulating economics theories and principles.

2. Neo-Classical Period

1. Date: 1890 AD- 1932 AD
2. Leader of the age: Alfred Marshall (British Economicsts)
3. Other Economicsts: A. C. Pigou, Carl Menger, etc.
4. Main Concern: Welfare of Mankind
5. Main Contribution: Reforming economic theories and principles.

3. Modern Period

1. Date: 1932 AD- Present
2. Leader of the age: Lionel Robbins (British Economicsts)
3. Other Economicsts: Barbara Wotton, Paul A. Samuelson, etc.
4. Main Concern: Scarcity of resources, and Choice of wants.
5. Main Contribution: Estabishing economics as a science.

Definitions of Economics

1. Wealth Definition (Classical Definition)

Introduction

Wealth definition of Economics was given by Adam Smith in his book “An Inquiry into the Nature and Causes of Wealth of Nations” which was published in 1776 AD.

Statement

According to Adam Smith, “Economics is the science of wealth.”

Main Points/Features of Wealth Definition of Economics

1. Study of Wealth: The definition of economics given by Adam Smith assumes that economics is only concerned with the study of wealth. Wealth can fulfill all the desires of human society, and that the entire effort of human society is found to be directed towards earning more and more wealth.
2. Secondary Place to Mankind: This definition givees primary importance to wealth and secondary place to mankind. Smith assumed that mankind is for wealth but wealth cannot be for mankind.
3. Study of Economic Man: Adam claimed that economics studies the behavior of those human beings who have only one objective: to earn more and more wealth by any means and at any cost. A person of that nature, in words of Smith, is an “Economic Man.”
4. Source of Wealth: This definition of Economics has assumed that wages earned by labor is the only source of income of a nation. Smith has concluded that there is nothing else, beside wages, which can be regarded as sources of wealth of a nation.

Criticisms of Wealth Definition of Economics

Main critics: Carlyle, Ruskin, and Alfred Marshall

1. Over Emphasis on Wealth: The wealth centered definition has given over emphasis to wealth rather than to mankind. Primary importance has been given to wealth, and secondary place to mankind.
2. Narrow or Limited Scope: The wealth centered definition of economics has emphasized only on those activities which are related with earning wealth. It has excluded the activities of humans who are engaged in social services, i. e., without taking money, etc. It justifies that wealth definition has narrow scope.
3. Single Source of Wealth: Smith said that wages earned by the laborers is the only one way of earning wealth. But, the critics pointed out that natural resources, and physical resources are also sources of wealth of a nation.
4. Unrealtistic Concept of Economic Man: Smith assumed that every human being who wants to earn money by hook or crook is known as an economic man. The critics said that almost all humans have their own qualities of human life such as feelings of love, respect, self-esteem, sympathy, trust, etc which might provide greater satisfaction than wealth in their lives. So, a pure economic man doesn’t exist in real life.

2. Welfare Definition (Neo-Classical Definition)

Introduction

The welfare definition of economics was given by Alfred Marshall in his book “Principles of Economics” in 1890 AD.

Statement

According to Alfred Marshall, “Economics is the study of mankind in the ordinary business of life. It inquires how a man earns his income and how he uses it. Thus, it is, on the one hand, the study of wealth and on the other, the most important part is the study of mankind.”

Main Points/Features of Welfare Definition of Economics

1. Primary Importance to Mankind: Alfred Marshall explained that economics is the study of mankind in relation to wealth. He further added the wealth is for the betterment of mankind, but mankind is not for wealth. He also suggested that primary importance should be given to mankind and the secondary importance to wealth.
2. Study of Ordinary Human Beings: This definition has highly stressed on the study of ordinary human beings rather than economic man of Adam Smith. Ordinary human beings, in the view of Marshall, are those who get involved not only in accumulating more and more wealth, but also try to experience love, sympathy, respect, honor, prestige, etc to make their social lives more meaningful.
3. Study of Material Welfare: Alfred Marshall has focused on material welfare (i.e., satisfaction or utility obtained from the consumption of physical goods or material goods) rather than human welfare.
4. Social Science: According to Alfred Marshall, economics studies those human beings who live in society. It doesn’t include isolated persons not belonging to a society such as beggars, saints, priests, monks, etc . As economics studies the economic behavior of the people living in a society, it is called social science.
5. Normative Science: According to Marshall, economics is a normative science. Normative means value based (as in what economy ‘should be’ or ‘ought to be’). Marshall said that wealth should be utilized for human welfare.

Criticisms of Welfare Definition of Economics

Main Critics: Lionel Robbins

1. Classificatory in Nature: Welfare definition only classifies human activities into material & non-material welfare, ordinary and other business. However, he could not clarify the differences between these terms. Therefore, in the view of Robbins, this definition is classificatory rather than analytical (using analysis or logical reasoning) in nature.
2. Narrow or Limited Scope: In the neo-classical definiton given by Alfred Marshall, he explained that economics studies only about material welfare obtained from material activities carried out by human beings. But the critics pointed out that there are some other non-material activites which fulfill human desires and needs. For example, the services of doctors, professors, engineers, etc are non-material activities. Therefore, this definition has narrow scope.
3. Lack of Clear Concept of Welfare: In the welfare definition, Marshall only talks about the material welfare without paying much attention to the fact that welfare is a subjective phenomenon. Robbins pointed out that the concept of welfare differs from person to person according to the time, place, and circumstance.
4. Excludes Human Science: According to Marshall, economics studies the behavior of only the people actively living in a society. Critics argue that economics should study total human beings whether they’re actively living and participating in the society or not.
5. Involves Value Judgement: The word “welfare” in Marshall’s definition involves value dudgement and relates economics to the branch of ethics. But according to Robbins, economics should be neutral regarding moral judgements and about what is good and what is bad.

3. Scarcity Definition (Modern Definition)

Introduction

The modern or scarcity definition of economics is given by Lionel Robbins in his book “An Essay on the Nature and Significance of Economic Sciences” which was published in 1932 AD.

Statement

According to Lionel Robbins, “Economics is the science which studies human behavior as a relationship between unlimited ends and scarce means which have alternative uses.”

Main Points/Features of Scarcity Definition of Economics

1. Unlimited Ends or Wants: According to Lionel Robbins, human wants are unlimited and cana never be fulfilled. Once the first and the most important want is fulfilled, new wants crop up and arise immediately in the human mind. Therefore, the cycle of one’s wants can never be fulfilled during one’s lifetime.
2. Scarce Means or Resources: Human wants are unlimited but the resources to fulfil them are not, i. e., there is scarcity of resources in the economy. Here the word “means” refers to the natural resources, human resources, capital resources, and physical resources which are available to mankind. The quantities supplied of these resources are very scarce or limited in comparison to the increasing human demand in the society.
3. Alternative Use of Resources: Robbins explains that the scarce resources can be used for alternative purposes. For example, a liter of milk is a means. It can be used for preparing 10 cups of tea or butter or cheese or to feed a baby, etc; but not all at the same time.
4. Science of Choice: When the characteristics of human life, namely unlimited wants, scarce means, and alternative uses of means are kept together, there arises the problem of choice. One has to make a choice of which want to satisfy first and by what means. It is done according to hte urgency and priority.
5. Positive Science: Lionel Robbins said that human wants are unlimited and resources are limited in the economy. It explains the real situation as it is without any value judgement. So according to Robbins, economics is a positive science, not normative.

Criticisms of Scarcity Definition of Economics

Main Critics: Barbara Wotton, William Beveridge, and Fraser

1. Neglects the Burning Issues of Modern Economy: The critics said that Robbins was unable to address the burning issue of modern economy. Issues such as unemployment, poverty, inequality, trade cycle, etc were not addressed in the modern definition of econmics. They argued that the modern definition of economics must analyze these macroeconomic issues in a better way.
2. Unnecessary Emphasis on Scarcity: The critics of the modern definition pointed out that Robbins’ definition of economics has given unnecessary emphasis to the scarcity problem. They argued that economic problems arise not only because of scarcity but also because of plenty or overproduction of resources.
3. Similar to Marshall’s Definition: As pointed out by the critics, Robbins’ definition of economics is not entirely different from that of Marshall’s. Robbins’ definition concludes that scarce means or resources should be allocated to fulfill unlimited wants of mankind. Similarly, Marshall explained that wealth should be utilized to secure maximum satisfactio. Hence, they have a common conclusion.
4. Limited to Only Allocation of Resources: The modern definition of econmics is entirely absed on the allocation of resources. But critics say economics should study not only about the allocation but also about the production, distribution, exchange, consumption, and reutilization of resources.
5. Economics is not only a Positive Science: The critics of Robbins’ definition of economics are of the view that economics is not only a positive science but also a normative science. It is the responsibility of economists to provide suggestions to solve a particular economic problem.

Also Read

1. Accounting Terminologies | Class 11 Accountancy (Notes)
2. Cash Book | Class 11 Accountancy (Notes & Exercises)