Economics Definition, Overview and Importance



This site starts with difficulty of having a single and acceptable definition of economics as a result of the puzzling nature of economics. This is followed by the meaning of economics and its various definitions has propounded by some famous Economists. Since economics is defined based on the two assumptions, the assumptions were elaborated on in relation with some other concepts that are interwoven.

Thereby interdependency and complexity of economics become obvious through real life scenario given in this site. Benefit of studying economics and understanding its principles are also part of what we shall find out from here.


Definitions of Economics

Economics is a science which deals with wealth creation through production of goods and services, their distributions as well as consumption. The process plays a huge task in the society because it influences the majority of our decisions in our day-to-day activities.

However, defining economics has pose difficulties because there is no single acceptable definition. Therefore different economists have given economics different types of definitions. Famous among these economists were: Adam Smith, David Ricardo, Thomas Malthus, J.S. Mill, John Stuart Mill., Karl Marx, Alfred Marshall, J. B. Say, James Henderson, John Keynes, Irving Fisher, Lionel Robbins and host of others. Each of these famous economists either gave a definition which others think it is either too narrow or too broad to describe economics. Brooks (2012) is of the view that economics can be confusing therefore

it is difficult to find a single or clear definition of it. However, the definition given by Lionel Robbins in his book, An Essay on Nature and Significance of Economic Science received several criticisms but remains a mainly acceptable definition of economics. Robbins defined economics “as a science which studies human behaviour as a relationship between given ends and scarce means which have alternative uses”. This definition touched on major aspect of economics such as human behaviour (rationality), human needs and scarce resources, choices as a result of scarce resources and alternative uses of resources.

The decisions made by individuals, corporations and governments are vital to their survival. Therefore, studying economics and understanding its principles is imperative. Studying economics provides many helpful benefits. For instance, an individual is assisted in understanding the decisions on household issues; it assists business outfit in understanding the financial sector, the impact of government decision making on their business and latest development in business society and the global economy. It also teaches the concept of relative scarcity as a result of limited resources, supply and demand, choices, opportunities, opportunity cost and benefits and how all these can impact the decision making of individuals, businesses and government. It also teaches how these decision making processes affect the society.

Economics can also be defined as the approach to understanding behaviour that starts from the assumption that people have objectives and tend to choose the correct ways of achieving them. The first half of the assumption is that people have objectives (it is assumed that the objectives are reasonable and by extension, simple) and the second half of the assumption, that people tend to find the correct way to achieve their objectives, is called rationality. The term rationality is somewhat deceptive according to Friedman (1990). He posited that the fact that this term suggests that the way in which people find the correct way to achieve their objectives is by rational analysis does not translate to the fact that the decision is rational. Sometimes somewhat complicated objective can lead to apparently irrational behaviour and decision.

There are main questions which economic science has to directly deal with, and with reference to which its main work of collecting facts, of analyzing them and of reasoning about them should be arranged. The greater part of the practical issues may be lying outside the range of economic science, yet it supplies principal objectives in the milieu to an economist work. This varies not only from time to time but also from place to place. For instance, questions like: what are the causes, in the contemporary world, that affect the production, the distribution, consumption and exchange of wealth? What effects are these having on the group of industry and trade; on the money and capital markets; wholesale and retail businesses; foreign trade and exchange, and the relations between employers and employed? How do all these movements act and react upon one another? How do their ultimate differ from their immediate tendencies? Marshall (1920).

Technically, economics is the study of how diverse alternatives or choices are appraised in order to best achieve a certain objective. The sphere of economics is the study of processes by which scarce resources are allocated to satisfy unlimited wants. Ideally, the resources are allocated to their highest valued uses. Supply, demand, preferences, costs, benefits, production relationships and exchange are tools that are used to describe and evaluate the market processes by which individuals allocate scarce resources to satisfy as many wants as possible (Reynolds, 2005). For example, let consider Mr. A who is stuck in making two decisions: 1. what type of car to buy? 2. Which area to live taking into consideration his place of work? (Note that an individual decision will affect two businesses, one is the car business and two is the estate management business). In either case, Mr. A can perk up his decision by devoting time and effort in studying the alternatives available in each case. In the case of the car, if he considered fuel-efficiency of the cars in his list of choices, then his decision determines with certainty which car he gets and this is considered a rational decision. In the case of which area to live, in his decision (on the choice of house), he may be considering closeness to his office, the traffic in the route from the area to his office, road linkages and networks etc. If the area is far from his office and the road is always with traffic problems, but he choose the area because the house is beautiful; then he has wasted his time and efforts on considering better alternatives and maximizing them; if he choose a house nearer to his office with less traffic problem, then his time is not wasted and the decision may be considered rational.

Though we can predict his correct decision but his mistake in this situation which he may consider rational is not easily predictable. Meanwhile, introspection or rather self-examination does not enable Mr. A to measure what is going on in B's mind, nor Mr. B to measure what is going on in Mr. A's mind. Therefore, comparing the satisfactions of different people is somehow complex. More so, we continually assume that the comparison can be made in daily life. However the very multiplicity of the assumptions actually made at different times and in different places is a confirmation of their conventional nature.

Conventionally, we usually assume for certain purposes that people in comparable circumstances are proficient to have equal satisfactions. Just as for purposes of justice we assume equality of responsibility in similar situations as between legal subjects. Subsequently for purposes of public finance, we agree to assume equality of capacity for experiencing satisfaction from equal incomes in similar circumstances as between economic subjects. But, although it may be suitable to assume this, there is no way of proving that the assumption rests on establish-able reality.


Importance of Economics

According to Adam Smith (1776), economics is concerned with inquiring into the nature and causes of the wealth of nations. This is because the study of economics assists individuals in the society to understand the decisions of households, businesses and governments based on beliefs, human behaviour, structure, needs and constraints as a result of scarcity. Consequently, economics is a study of man and how he thinks, lives, and moves in the ordinary course of business of life. It deals with the ever dynamic and delicate forces of human nature.

Economics as a social science gives larger opportunities for precise methods than any other social science subject. For example, the pleasures which two people derive from drinking yoghurt cannot be unswervingly compared neither can we compare what the same person derives from it at different point in time. Utility and satisfaction derived at each point in time varies even for the same person. But if a person is in doubt on whether to spend his small naira on a pack of yoghurt or a cup of coffee, or on pack of chocolate, then we state by regular custom that he expects from each of these actions an equal satisfaction.

Therefore, economy as a complicated interdependent system thus what to produce is more important in developing economies, as a result of scarcity of skilled manpower. How to produce is another problem, due to differences in availability of resources in differing economy. For whom to produce is another problem of economics and it depends on the socioeconomic ideology while how much to produce is a problem which depends on the production, Potential and size of the market.

The problem of by whom to produce is also very big. For example, in a capitalist economy there is usually an occupational freedom while the aim of a socialist economy is social control over productive activities. However, in a mixed economy there is the permutation of both capitalist and socialist economies. Therefore, a big concern is on how the available resources would be allocated, to get maximum total output.

Basically, economics is important in order to study how people react to and allocate limited resources. However, in the process of taking full advantage of one's own benefit there is the broader benefit of efficient allocation of resources across society.

Economics is a social science that studies the relationship between scarce resources and the process of allocating them in order to satisfy unlimited wants. It studies how individuals, businesses and government goes through process of decision making in order to get most benefit from their choice having compare the cost and benefit before taken a decision. This decision is deemed rational in as much the act is influential to achieving some well-defined end. It is aimed at maximizing resources which hitherto have been allocated efficiently.

Summarily, economists are concerned with choosing the correct way to achieving an objective which may allows us to be able to predict human behaviour while their mistake may not be easily predictable.

Consequently, not all decisions are rational though it is expected that individual goes through the decision making process for the purpose of maximizing the scarce resource. Hence, studying economics is important to assist individual, government and businesses in their day-to-day decision making for overall benefit of the economy.

Also read on << Fundamental Principles of Economics >>

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