WHAT IS SUBJECT MATTER OF ECONOMICS?

 

Traditional Approach

Economics is studied under five major divisions namely consumption, production, exchange, distribution and public finance.

1. Consumption: The satisfaction of human wants through the use of goods and services is called consumption.

2. Production: Goods that satisfy human wants are viewed as “bundles of utility”. Hence production would mean creation of utility or producing (or creating) things for satisfying human wants. For production, the resources like land, labor, capital and organization are needed.

3. Exchange: Goods are produced not only for self-consumption, but also for sales. They are sold to buyers in markets. The process of buying and selling constitutes exchange.

4. Distribution: The production of any agricultural commodity requires four factors, viz., land, labor, capital and organization. These four factors of production are to be rewarded for their services rendered in the process of production. The land owner gets rent, the labor earns wage, the capitalist is given with interest and the entrepreneur is rewarded with profit. The process of determining rent, wage, interest and profit is called distribution.

5. Public finance: It studies how the government gets money and how it spends it. Thus, in public finance, we study about public revenue and public expenditure.

Modern Approach

Microeconomics analyses the economic behavior of any particular decision making unit such as a household or a firm. Microeconomics studies the flow of economic resources or factors of production from the households or resource owners to business firms and flow of goods and services from business firms to households. It studies the behavior of individual decision making unit with regard to fixation of price and output and its reactions to the changes in demand and supply conditions. Hence, microeconomics is also called price theory.

Macroeconomics studies the behavior of the economic system as a whole or all the decision-making units put together. Macroeconomics deals with the behavior of aggregates like total employment, gross national product (GNP), national income, general price level, etc. So, macroeconomics is also known as income theory.

Microeconomics cannot give an idea of the functioning of the economy as a whole. Similarly, macroeconomics ignores the individual’s preference and welfare. What is true of a part or individual may not be true of the whole and what is true of the whole may not apply to the parts or individual decision-making units.

By studying about a single small-farmer, generalization cannot be made about all small farmers, say in Tamil Nadu state. Similarly, the general nature of all small farmers in the state need not be true in case of a particular small farmer. Hence, the study of both micro and macroeconomics is essential to understand the whole system of economic activities.

WHAT IS SUBJECT MATTER OF ECONOMICS?

Download