Basic concepts of economics and distribution of resources

An economic good is a good that is scarce relative to its demand and therefore commands a price in the market, such as food, clothing or a mobile phone.

Marshallian Definition of Economics

Alfred Marshall, in his book Principles of Economics (1890), defined economics as:

"Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well-being."

Explanation of the definition:

1. Study of mankind in the ordinary business of life: Economics studies ordinary human beings — how they earn a living, spend income, save, and satisfy wants in day-to-day life. It is not concerned with extraordinary or isolated actions.

2. Study of material requisites of well-being: Economics deals only with the material means (goods and services, wealth, income) that promote human welfare. Non-material aspects such as love, affection, and religious feelings are outside its scope.

3. Wealth as a means, not an end: Unlike the classical economists, Marshall treated wealth as a means to human welfare, not as the final goal. The central aim is the well-being of people.

4. Study of individual and social action: It covers both individual actions (a consumer buying goods) and social actions (taxation, price determination in a market).

5. Welfare-oriented: Because it studies how material wealth is produced, distributed, and consumed for human welfare, Marshall's definition is called the welfare definition of economics.

Conclusion: Marshall widened the scope of economics from the mere study of wealth (Adam Smith) to the study of human welfare, but he limited it to material welfare only. Hence his definition is known as the material welfare definition.

Labour refers to all human effort, both physical and mental, used in the production of goods and services. In economics, labour is a factor of production and includes the work of a farmer, a teacher, a doctor, or a factory worker. It does not include machines or tools, since those are capital. The reward for labour is wages.

Features of labour:

1. Human factor: Labour is inseparable from the human being who supplies it. A worker cannot sell his labour without being present himself, unlike capital or land which can be sold separately from the owner.

2. Perishable / cannot be stored: Labour cannot be stored for future use. If a worker does not work on a given day, that day's labour is lost forever. It is, therefore, perishable.

3. Inseparable from the labourer: The labourer and his labour cannot be separated. When a worker is hired, the employer gets the right to use his labour, not to own him.

4. Active factor: Labour is an active factor of production. It activates the other factors — land, capital and organisation — and puts them to productive use. Without labour, land and capital remain idle.

5. Heterogeneous: Labour is not a uniform factor. The quality and type of labour differ from person to person and from job to job — a doctor's labour differs from a porter's labour. Hence labour is heterogeneous.

6. Labour has human feelings: Labour cannot be bought and sold like a commodity. A worker has emotions, needs rest, and cannot be forced to work beyond his capacity. This makes labour different from other factors.

7. Labour supply is inelastic in the short run: The supply of labour cannot be increased or decreased quickly in response to changes in wages. It takes time to train workers, so supply is relatively inelastic in the short period.

8. Labour is mobile: Labour is more mobile than land. Workers can move from one place to another, or from one occupation to another, in search of better wages and working conditions.

9. Labour is both a means and an end: Labour is used to produce goods and services (a means), but the ultimate aim of production is also to satisfy human wants (an end). Thus labour occupies a special place among the factors of production.

Robbins' definition (scarcity and choice)

Lionel Robbins, in An Essay on the Nature and Significance of Economic Science (1932), defined economics as:

"Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses."

Explanation of the main elements

1. Unlimited ends (wants): human wants are unlimited and keep recurring and expanding.
2. Scarce means: the resources (land, labour, capital, time, money) available to satisfy wants are limited relative to the wants.
3. Alternative uses: the scarce resources can be put to different uses, so using them for one purpose means giving up another.
4. Choice: because of scarcity and alternative uses, people must choose which wants to satisfy first. This gives rise to the problem of choice and the idea of opportunity cost.

Features

• It is a positive science: it studies what is, not what ought to be, and is neutral between ends. It does not judge whether wants are good or bad.
• It is wider than earlier definitions: it applies to all human behaviour involving scarcity, not only to wealth or material welfare.
• It makes economics an analytical study of the economising problem, applicable to all societies.

Criticism

• It is too general, making economics cover almost any human activity that involves choice.
• It ignores economic growth, development and the problems of unemployment and fluctuations.
• Its complete rejection of welfare and value judgements is unrealistic, since economic policy needs such judgements.
• Scarcity is also not the only cause of economic problems; resource underuse matters too.

Despite these weaknesses, the definition is widely accepted as the foundation of modern economics because it highlights scarcity and choice.

Normative economics deals with what ought to be: it makes value judgements about economic matters and gives opinions on policy. For example, "the government should raise the minimum wage" or "income inequality should be reduced."

Allocation of resources means the distribution of scarce resources, such as land, labour, capital and organisation, among their alternative uses, so as to produce the goods and services that society wants.

Since resources are limited and wants are unlimited, every economy must decide what to produce, how to produce, and for whom to produce. The allocation is done through the price mechanism in a market economy, through central planning in a socialist economy, and through both in a mixed economy like Nepal. Efficient allocation means that resources are put to the use that gives the greatest satisfaction or output, avoiding waste.

Complementary goods are goods that are used together to satisfy a single want, so the demand for one depends on the other. Examples are a car and petrol, or pen and ink. If the price of one rises, the demand for the other falls.

Microeconomics is the branch of economics that studies the economic behaviour of individual units such as a consumer, a household, a firm or a single industry. It deals with how the price of a particular good is determined and how resources are allocated among them, for example the theory of demand, supply, production and cost. The word comes from the Greek mikros, meaning small, and it is also called price theory.

Alfred Marshall (Principles of Economics, 1890) defined economics as "a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well-being." This is called the welfare definition.

Lionel Robbins (An Essay on the Nature and Significance of Economic Science, 1932) defined economics as "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses." This is called the scarcity definition.

Comparison

Similarities: both define economics as a social science that studies human behaviour.

Criticism

• Marshall: welfare is hard to measure and the division into material and non-material is artificial. It also ignores scarcity, which is the real root of the economic problem.
• Robbins: it ignores welfare and growth, treats economics as completely neutral about ends, and is too wide because scarcity-based choice appears in non-economic life as well.

Conclusion: Robbins' definition is broader and more scientific, and it is widely accepted today. Marshall's definition remains important because it keeps human welfare at the centre of economics.

Opportunity cost is the value of the next best alternative that is given up when a choice is made. For example, if a farmer uses land for rice instead of maize, the maize forgone is the opportunity cost.

Microeconomics studies the behaviour of individual economic units such as a consumer, a firm or a single market. Macroeconomics studies the economy as a whole through aggregates such as national income, total employment and the general price level.

The two are interdependent: macro outcomes arise from the sum of micro decisions, and micro decisions are affected by macro conditions. A complete understanding of the economy needs both.

Positive economics is the branch of economics that studies "what is": it describes and explains economic facts and relationships objectively, without value judgements, and its statements can be tested against facts. For example, "an increase in the price of a good reduces its quantity demanded".

According to Adam Smith, economics is the science of wealth: it studies the nature and causes of the wealth of nations, that is, how a nation produces and increases its wealth.

Adam Smith defined economics as the science of wealth, and Alfred Marshall defined it as the study of mankind in the ordinary business of life, concerned with the material requisites of well-being.

Similarities

1. Both treat economics as a study of human beings and their economic activities.
2. Both concentrate on material things, goods and wealth, and not on non-material matters.
3. Both describe economics as a social science related to the production and use of wealth.

Differences

Conclusion: Marshall improved on Smith by placing human welfare at the centre of economics. Robbins later criticised both and defined economics in terms of scarcity and choice.

1. Marshall treats economics as a study of mankind in the ordinary business of life, so it is a social science concerned with human welfare.
2. It is concerned only with material welfare, and wealth is only a means to promote welfare, not an end.

A producer must decide which goods and services, and in what quantity, to produce using scarce resources. The decision is guided by consumers' demand, prices and expected profit.

Resources are scarce and have alternative uses, so a producer must decide how to allocate land, labour, capital and organisation among different lines of production. The producer faces the following problems and solutions.

Problems

1. What to produce: Limited resources cannot produce everything, so the producer must choose the goods that give the most profit.
2. How to produce: The producer must choose between labour-intensive and capital-intensive techniques.
3. How much to produce: Output must be fixed where cost and revenue give maximum profit.
4. For whom to produce: The producer must identify the market and the buyers' purchasing power.
5. Scarcity and high cost of inputs: Raw materials, skilled labour and capital may be costly or hard to get.

Solutions

1. Study market demand and price before choosing the product (what).
2. Select the technique with the lowest cost per unit, given the relative prices of labour and capital (how).
3. Produce up to the level where marginal cost equals marginal revenue (how much).
4. Do market research and target the right consumer group (for whom).
5. Use inputs efficiently, avoid waste, and plan purchases and borrowing carefully.

In this way the producer allocates scarce resources to the best use and earns the maximum profit.

Robbins' definition (scarcity or choice definition) of economics is based on scarcity and choice.