1. Nature of Economics
When someone asks about the Nature of Economics, they are asking two big questions:
- Is Economics a Science or an Art (or both)?
- Is Economics a Positive Science or a Normative Science?
Let’s answer both clearly!
Understanding the Nature of Economics
1. Social Science
Systematic body of knowledge with cause-and-effect laws (e.g., Law of Demand)
2. Practical Art
Applies economic rules in real life to solve poverty, inflation, and business problems
3. Positive Economics
Studies "What is" — facts without value judgment (Robbins)
4. Normative Economics
Studies "What ought to be" — ethics and welfare judgment (Marshall)
A. Economics as a Science
A subject is called a Science if it is a systematic body of knowledge that links cause and effect, has universal laws, and can make predictions.
- Why Economics IS a Science:
- Systematic Study: It collects data on prices, income, and employment systematically.
- Cause-and-Effect Laws: For example, Cause = Price of mangoes falls; Effect = Demand for mangoes rises (Law of Demand).
- Measuring Rod of Money: As Alfred Marshall said, Economics uses money as a measuring scale to measure human motives and economic activity.
- Why Economics is a Social Science (Not an Exact Science like Physics):
- Physics deals with non-living matter (gravity pulls an apple at the exact same speed every time).
- Economics deals with living human beings whose tastes, emotions, and habits change! Therefore, economic laws are statements of tendencies (true on average), not 100% rigid laboratory laws.
B. Economics as an Art
- Science teaches us to know (theory); Art teaches us to do (practical application).
- For example, knowing the causes of inflation in India is Science; designing the RBI’s monetary policy to control inflation is Art.
- Conclusion (Cossa’s View):
“Science requires art; art requires science, each being complementary to the other.” Therefore, Economics is both a Science and an Art!
C. Positive Economics vs. Normative Economics
| Basis | 1. Positive Economics (“What Is”) | 2. Normative Economics (“What Ought to Be”) |
|---|---|---|
| Core Meaning | Deals with actual facts and reality — What is, what was, and what will be. | Deals with value judgments, ethics, and ideals — What should be or ought to be. |
| Main Champions | Classical Economists & Lionel Robbins | Alfred Marshall, A.C. Pigou, Amartya Sen |
| Value Judgment | Strictly Neutral: Does not say whether something is good or bad, fair or unfair. | Prescriptive: Judges whether an economic outcome is good or bad for society. |
| Testability | Can be verified and tested using real statistical data. | Cannot be proved solely by data because it depends on moral/social values. |
| Simple Examples | • “India’s unemployment rate is 7%.” • “Higher taxes on cigarettes reduce cigarette sales.” |
• “India’s unemployment rate should be brought below 3%.” • “The government ought to tax rich people more to help the poor.” |
2. Scope of Economics
The Scope of Economics means the area of study or the boundaries of topics covered under Economics. It is divided into two main parts:
- Traditional Approach (Subject Matter of Economics)
- Modern Approach (Microeconomics vs. Macroeconomics)
Part A: Traditional Approach — The 5 Divisions of Economic Activity
Every rupee earned and spent in the world passes through five basic economic activities:
The 5 Traditional Divisions of Economics
Division 1
Consumption
Using goods to satisfy human wants (Law of Demand, Utility)
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Division 2
Production
Creating utility using Land, Labour, Capital & Enterprise
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Division 3
Exchange
Buying & selling in markets, pricing, money & banking
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Division 4
Distribution
Sharing income as Rent, Wages, Interest & Profit
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Division 5
Public Finance
Government revenue (Taxes), spending & budget
- Consumption: How consumers spend their income to get maximum satisfaction (Law of Diminishing Marginal Utility, Consumer Surplus, Law of Demand).
- Production: How firms combine the 4 Factors of Production (Land, Labour, Capital, and Entrepreneur) to produce goods and services at minimum cost.
- Exchange: How goods are traded across different market structures (Perfect Competition, Monopoly, Oligopoly) and how prices are determined.
- Distribution: How total national income is distributed among the 4 factors of production:
- Land gets Rent
- Labour gets Wages
- Capital gets Interest
- Entrepreneur gets Profit
- Public Finance: How the government raises money (GST, Income Tax, borrowing) and spends it on roads, schools, defense, and welfare schemes.
Part B: Modern Approach — Microeconomics vs. Macroeconomics
In 1933, Nobel Laureate Ragnar Frisch divided the scope of Economics into two branches: Microeconomics and Macroeconomics.
| Basis | 1. Microeconomics (Price Theory) | 2. Macroeconomics (Income & Employment Theory) |
|---|---|---|
| Greek Origin | From Mikros meaning “Small” (studying a single tree in a forest). | From Makros meaning “Large” (studying the entire forest as a whole). |
| Unit of Study | Studies individual economic units — a single consumer, a single household, a single firm, or the price of one product. | Studies the economy as a whole (aggregates) — National Income (GDP), Total Employment, General Inflation, Aggregate Demand. |
| Main Champion | Alfred Marshall | John Maynard Keynes (Father of Macroeconomics, 1936) |
| Alternative Name | Price Theory (explains how prices of individual goods and factors are determined). | Income and Employment Theory (explains what determines national income and employment). |
| Key Topics Covered | • Demand & Supply of a product • Consumer Behaviour • Production & Cost of a firm • Market Pricing (Monopoly, Perfect Competition) |
• National Income (GDP, GNP) • Inflation & Deflation • Unemployment & Poverty • Fiscal Policy, Monetary Policy & Balance of Payments |
| Real-Life Example | “Why did the price of Amul milk increase by ₹2 per litre?” | “Why did India’s overall inflation rate reach 5.5% this year?” |
💡 DAVV Exam Tip
Question (10 Marks): “Discuss the Nature and Scope of Economics. Distinguish between Microeconomics and Macroeconomics.”
- Under Nature, explain Science vs. Art and draw the Positive vs. Normative Economics table.
- Under Scope, draw the 5-Box Flowchart (Consumption → Production → Exchange → Distribution → Public Finance) and the Micro vs. Macro comparison table.