Fundamentals of Economics for IIBF CAIIB: The Scottish historian Thomas Carlyle called economics the “dismal science,” but you don’t have to agree with him, though most people consider economics a technical, perplexing, and even mysterious subject. They often opine that it’s a field best left to the professionals, namely economists. But, in reality, economics should be quite simple. After all, economics is simply studying how we work, what we produce, and how we distribute and eventually use what we’ve created. Economics is concerned with who does what, who receives what, and what they do.
Fundamentals of Economics
At the most basic, grass-roots level, we all understand the economy. As a result, we should all have an opinion on economics.
Furthermore, political science, geography, mathematics, sociology, psychology, engineering, law, medicine, and business are all affected by or have a stake in economics.
Interestingly, the English word economics is derived from the ancient Greek word “Oikonomia”, which means family or household management.
In the late eighteenth century, the Father of Economics, Adam Smith, strongly supported economics as a study of wealth.
Since then, the subject has come a long way, and this Greek or Smithian definition is no longer useful. The point of focus of attention has shifted over time. As a result, various definitions have emerged, which can broadly be classified into three categories:
- Adam Smith’s Wealth definition,
- Prof.Alfred Marshall’s Welfare definition, and
- Prof. Lionel Robbins’ (or Lord Robbin’s) Scarcity definition.
Adam Smith’s Wealth definition:
According to Adam Smith, the Father of Modern Economics, Economics is the study of how wealth is created and consumed. As a result, Smith valued wealth more than man, for whom wealth is produced.
His great book, An Inquiry into the Nature and Causes of the Wealth of Nations, or, more popularly known as “Wealth of Nations,” published in 1776, reflects his emphasis on wealth as a subject of economics.
Thus, wealth definition is Smith’s definition. It prioritized wealth over man for whose use, wealth is produced.Prof.Alfred Marshall’s Welfare definition
On the other hand, Alfred Marshall saw wealth as a source of human welfare rather than a means to an end. According to Alfred Marshall: Economics is the study of mankind in the ordinary business of life.
Prof. Lionel Robbins’ (or Lord Robbin’s) Scarcity definition
A more acceptable definition of economics: “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses”. This definition looks more embracing as it incorporates the most fundamental human issues: want, choice and scarcity.
Accordingly:
- Human wants are unlimited, but the means to satisfy them are limited.
- Resources are not only limited but have alternative uses. So a human being has to make a choice.
John Stuart Mill regarded economics as an inexact and separate science which employs a deductive method.
The modern approach: Interspersed between natural and human sciences, economics is a social science that employs a highly quantitative, data-driven, problem-solving approach to understanding human behaviour.
As a result, economics is the field of study best positioned to track, study, project, and predict human behaviour. It is, therefore, one of the most important and relevant skills for the world today, assisting people in making wise decisions in their personal, social, and professional environments.
Classification:
The topics of economics can broadly be divided into Microeconomics and Macroeconomics.
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