ECONOMICS: MEANING AND BASIC CONCEPTS

By: SENATHON IPIA

Classification of Definitions of Economics

Economics definitions by different economists are classified as follows:

1. wealth definition of Economics

2. scarcity definition of Economics

3. material welfare definition of Economics

4. growth-centred definition of Economics

Going by exam questions trend, let’s explain the first two.

Wealth Definition of Economics

Adam Smith defined Economics as the ‘study of the nature and causes of wealth of nations’. This definition is contained in his book: “Inquiry into the Nature and Causes of the Wealth of Nations”, published in 1776. Adam Smith is considered to be the father of modern Economics.

Scarcity Definition of Economics

This remains the most widely acceptable definition of Economics. It is the definition of Economics by Prof Lionel Robbins, which states:

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

If we replace some keywords in his definition with some synonyms, as used in today’s English, we have the definition as:

“Economics is a science which studies human behaviour as a relationship between limited resources and unlimited wants which have alternative uses”.


Main Points of Lionel Robbins’ Definition of Economics

1. Ends (which means unlimited wants):
Want means desire. So, ends is desire to have or use goods and services that satisfy human wants. 

Humans have unlimited wants (i.e. unlimited desires). They constantly make effort to satisfy the the unlimited wants. That’s why they produce more goods and services and work to get more income to meet the ever increasing wants

2. “Scarce means (which implies scarce resources):
Scarcity of economic resources is the reason we have economic problems - economic lack, economic hardship, etc.

3. Alternative uses of the scarce resources:
Yes, economic resources can be put to different uses. For example, the same human labour can be applied to produce books, or pens, or desk.

4. Human Behaviour:
Different human have different approach to the same thing. That is why different economists give different answer to the same economic question.



Economics as a Social Science
Economics is a social science, because it studies human behaviour.

A science whose study involves the consideration of human behavioural attitude is referred to as social science. Other social sciences are Sociology, Political Science, Psychology, etc.

Economics as a Science
Economics is a science if scientific method is adopted in its study.

Scientific method of study involves the following:

Step 1: Observation: Economists observe economic phenomenon or economic situation

Step 2: Formulate a Hypothesis: Economic statement that is yet to be verified is made about the observed economic situation.

Note: A hypothesis is a statement that is yet to be verified.

Step 3: Collection of Data: This involves carrying out research to gather data.

Step 4: Organize, present, analyse and interpret the data collected:

This means working on the data gathered to get a result.

Step 5: Formulate the economic theory (or economic law):

Based on the result generated from the data, a theory is formulated.

Note: "Theory"  is a statement following verified hypothesis. And if verified by many scientists, a theory becomes a "Law"   

Step 6: Testing the economic theory (or economic law)

Step 7: Using the economic law or economic theory to make predictions

Hint: 1. If any study applies the steps enumerated above, then such a study is a scientific study.

2. For pure sciences like Physics and Chemistry, their step 3 is referred to as conducting experiments. But for social sciences, it is referred to as conducting research or collecting data.

Basic Economics Concepts

1. Want: Wants are desires to have or use goods and services that give satisfaction.
Desires are both necessities and luxuries. Necessities are important needs or basic needs. Luxuries are what people like to have for prestige. Human wants are numerous, unlimited and insatiable. Remember, another term for wants is “ends”.

2. Scarcity: Scarcity means that supply of resources is never enough to satisfy all human wants.
OR
Scarcity means unlimited wants but limited resources to meet the wants.

Note: That resources are never enough for humankind is what we mean by scarcity in Economics.

3.Choice: Choice is selecting from alternatives.

Choice is necessitated by scarcity of resources, as it is extremely impossible or difficult for one to produce or have all his desires at once, so one has to make CHOICE based on one’s best of judgment.
Note: The process of making Choice is a normative Economics issue.

4. Opportunity Cost: Opportunity Cost is the alternative foregone when a choice is made.
OR
The sacrifice of one benefit for another.

That is, the benefit you forfeit because you have to make a choice. 

Another name for opportunity cost is Real Cost. So, to an economist, the real cost of a commodity is its opportunity cost, not its money cost. Opportunity cost is NOT money cost. Money cost is the amount of money spent on goods and services.

5. Scale of Preference: This refers to a list of a consumer’s wants, arranged in order of importance.

Illustration

The table below shows the scale of preference of a student – Mr Tony whose disposable income is ₦7,000. Prices of the items are shown. Use the information to answer the questions that follow.

Items needed               Amount

Textbook           -           ₦5,000

Shirt                 -            ₦2,000

Shoes               -            ₦3,000

Trousers           -            ₦3,000

Notebooks      -             ₦1,000

School fees     -             ₦7,000

Mattress         -            ₦10,000


(a) What would Mr Tony spend his money on? Explain your answer.

(b) What is the opportunity cost of Mr Tony’s decision? Explain your answer.


Answer
(a) Textbook and shirt.
The textbook and shirt are at the top of his scale of preference and cost ₦7,000, the amount of his limited resources (the available money).

(b) The opportunity cost are shoes, trousers and notebook. These three items cost the same amount that Mr Tony has.

Note: Mattress is out of it because it costs more than what Mr Tony has money for.

Importance of Scale of Preference
A one-point summary of the importance of scale of preference would be:

Scale of preference helps an individual, a firm or a government to satisfy the most important wants first with the limited (available) resources.

But the many points are:

1. Scale of preference helps us to rank and meet our necessities first, before considering luxuries.

2. It helps us to make good choice, as the most important wants are met first.

3. It helps the consumer to make rational decisions, that is, to consume goods and services that give maximum satisfaction first, before considering others.

4. It leads to efficient utilization of scarce resources, because the most important use of the resources is considered first.

5. As human wants are numerous but resources limited, scale of preference helps to eliminate the dilemma of which wants to meet first before others.

Why They are Called “Basic Concepts in Economics”
In Economics, the concepts of wants, scarcity, scale of preference, choice and opportunity cost are referred to as basic concepts because they are present in every economic decision we make.

Whether as individuals, firms or governments, we have unlimited WANTS, but resources to meet the wants are SCARCE, so we prioritize by drawing up a SCALE OF PREFERENCE, and make CHOICE of the wants we can meet now, and forgo the rest – OPPORTUNITY COST.

THANK YOU!

For more, send e-mail to: senaipia@gmail.com or call: +2347052802574

Senathon Ipia is a Chartered Accountant with the Institute of Chartered Accountants of Nigeria (ICAN).