1. BHARAT POUDEL
Definition and Methodology in
Economics

2. Scheme of Presentation
Definition of Economics
By Adam Smith, Marshall and Robbins

3. Definition of Economics
 Economics is a social science, a body of models and
theories that explains the real world phenomena.
Based on real world phenomena, economics makes
assumptions, builds hypothesis from those
assumptions and tests the hypothesis before
developing it up into a theory.

4. Adam Smith
 Adam Smith (1723 - 1790) - Scottish philosopher and economist,
author of: Inquiry into the Nature and Causes of the Wealth of
Nations (1776). Before Smith there was no economic discussion and
after Smith people started discussing about Economics. In this
sense he is known as the father of Economics

5. Defining Economics
 Economics as a Science of Wealth – Adam Smith
 The last quarter of the eighteenth century heralded a new
era in the field of economics. In the year 1776 a book was
published by Adam Smith, a Scottish philosopher turned
economist. The title of the book was – An Inquiry into the
Nature and Causes of the Wealth of Nations, popularly
known as 'The Wealth and Nations‘
 Main Idea of Adam Smith Definition
 Study of wealth
 Source of wealth
 Study of economic man
 Primary place to wealth

6. Alfred Marshall
 Alfred Marshall (1842 - L924) - British
economist, who envisaged price determination as the
outcome of the interaction of market demand and market
supply, author of 'The Principle of Economics' (1890).

7. Economics as a Science of Material
Welfare -Alfred Marshall
 In the year 1890, Alfred Marshall, a British
economist, published a book entitled the 'Principles
of Economics'. Marshall defined Economics in the
following words - Economics is a study of mankind
in the ordinary business of life. It examines that
parts of individual and social actions which are
closely related the well being of individuals.
 Main Idea of Marshallian Definition of Economics
 Welfare is the Primary Concern
 Study of ordinary man
 Study of material welfare

8. Lionel Robbins
 Lionel Robbins (1898 - 1984) - British
economist, writer of 'An Essay on the Nature and
Significance of Economic Science' (1935) who stressed
the aspect of scarcity in all economic behaviour

9. Economics as a Science of Scarcity and
Choices - Robbins
 Lionel Robbins, a British economist, criticized Marshall's
definition of Economics and proposed his own definition
in the book 'An Essay on the Nature and Significance of
Economic Science'. The book was published in 1935
wherein Robbins laid emphasis on the scarcity aspect of
resources in all economic activities. Robbins defined
Economics as- The science which studies human
behaviour as a relationship between ends and scarce
means which have alternative uses.
 Mani Idea of Robbins Definition
 Unlimited ends
 Scarce means or resources
 Alternative use of resources

10. Micro and Macro Economics
 Micro Economics
It is that part of the economic analysis which is
concerned with the behaviour of individual units:
consumers and firms. It examines how consumers
choose between goods, how workers choose between
jobs, and how a business firm decides what to
produce and what production methods to use.

11. Use/Importance of Microeconomics
 Determination of Price
 Allocation of the Resources and Economic Efficiency
 Welfare Economics
 Tool for Policy Design and Evaluation
 Tool for other branches of the Economics

12. Determination of Price
 Microeconomics helps us to understand the price
determination process under different market
structures
 Demand, Supply and Market
 This is very important as Price acts as Information
for Economic Decision making units which facilitates
decisions

13. Allocation of Resources and Economic
Efficiency
 Tells the process of Resource Allocations-role of economic
agents and resource allocation process
 Eg Circular Flow of Income and Expenditure
 Eg. How consumer is spending his/her money income, or
supply labor etc.
 It also establishes conditions for ensuring economic
efficiency(?)
 Efficient condition for consumption (exchange), production
and mix of both. (pareto efficient)
 A perfectly competitive market ensures economic efficiency

14. Allocation…………………….
 These Conditions serves as benchmark for
comparison if there are imperfections in the
market
 If there are imperfections, this invites the
regulatory role of the public institutions
(market failure arguments)
Monopoly, Monopsony Markets
Externalities

15. Welfare Economics
 Pareto Efficiency
 Pareto Optimum and Social Optimum
Classical-Adam Smith
Utilitatirian (interpersonal comparison and
costs benefits analysis)
Social welfare function and Social Optimum
 Two Fundamental Theorems of Welfare (?)

16. Tool for Policy Design and Evaluation
 Microeconomics is used as tool for public policy
design and Evaluation
 Public Policy (like change in tax and
subsidy, government expenditure etc.)
 Examples: impact of tax using demand and supply
framework (think is increase in VAT rate will
necessarily increase revenue collection?)
 Welfare Impact Analysis: Compensating and
Equivalent Variations

17. Tool for Other Branches of Economics
 Managerial Economics
 Environmental Economics
 International Economics
 Public finance
 Health Economics

18. Macro Economics
 Macroeconomics is the study of the behaviour
of the economy as a whole, such as national
income, total consumption, saving,
investment, total employment, general price
level etc. In macroeconomics, we worry about
aggregate economic goals such as full
employment, control of inflation, economic
stability and growth without considering the
behaviour of individual consumers or firms.

19. Use/Importance of Macro Economics