Unit 1 Introduction Exercise

A. Very Short Answer Type Questions

1. Who is considered the father of economics?
👉 Adam Smith is considered the father of economics.
2. What is an economic man as per Adam Smith?
👉 An economic man is a rational person who always tries to maximize self-interest.
3. What is the main focus of economics as per the wealth definition?
👉 The production, accumulation, and consumption of wealth.
4. Why Carlyle and Ruskin called economics a dismal science?
👉 Because it focused only on wealth and ignored human welfare and ethics.
5. What is meant by material welfare?
👉 Satisfaction derived from material goods and services.
6. Who defined economics as a science of scarcity and choice?
👉 Lionel Robbins.
7. What is the root cause of economic problems as per Robbins?
👉 Scarcity of resources in relation to unlimited wants.
8. How is economics neutral between ends as per Robbins?
👉 It does not judge whether ends are good or bad.
9. What are called economic goods?
👉 Goods that are scarce, have price, and satisfy human wants.
10. What is meant by positive economics?
👉 Study of economics based on facts, not value judgments.
11. What is normative economics concerned with?
👉 What ought to be (value judgments).
12. Why consumer goods are called goods of first order?
👉 Because they directly satisfy human wants.
13. What do you mean by conventional necessities?
👉 Goods required due to social customs (e.g., decent clothing).
14. Define wealth.
👉 Wealth refers to material goods having value and exchangeability.
15. What is demand?
👉 Desire for a good supported by ability and willingness to pay.
16. What is supply?
👉 Quantity of goods producers are willing to sell at a given price.
17. What is the want-satisfying power of a commodity called?
👉 Utility.
18. What is meant by relative price?
👉 Price of one good in terms of another good.
19. Define microeconomics.
👉 Study of individual economic units like consumers and firms.
20. Define macroeconomics.
👉 Study of the economy as a whole.

B. Short answer type questions

1. Main points of wealth definition

  Economics is a science of wealth because it studies activities related to earning and using wealth.
 It focuses on material wealth, as only material goods can be produced, exchanged, and measured.
 Production of wealth is studied because wealth increases only through production.
 Exchange of wealth is important since goods gain value through buying and selling.
 Distribution of wealth is studied to know how income is shared among land, labour, capital, and
enterprise.
 Consumption of wealth is included because wealth is meaningful only when it satisfies wants.
 Human welfare is considered indirectly, as wealth helps satisfy human needs.

2. Criticisms of wealth definition

 It gives too much importance to wealth, ignoring human happiness beyond money.
 It ignores non-material services like teaching and medical care, which clearly increase welfare.
 It treats humans as selfish wealth-seekers, which is unrealistic.
 It ignores moral and social values, making economics mechanical.
 It gives a narrow scope, limiting economics only to money matters.
 Because of these limits, economics appeared gloomy and pessimistic.
 Hence, it was called a dismal science.

3. Subject matter of economics

 Economics studies human wants, because human life revolves around satisfying wants.
 Wants are unlimited, while resources are limited, creating economic problems.
 It studies production to understand how goods are created.
 It studies consumption to know how goods satisfy wants.
 It studies exchange, as goods are shared through markets.
 It studies distribution, since income must be divided among factors.
 Thus, economics studies human behavior under scarcity.

4. Features of material welfare definition

 Given by Alfred Marshall, focusing on humans rather than wealth.
 Economics studies material welfare, because material goods strongly affect well-being.
 It focuses on the ordinary business of life, such as earning and spending.
 Income is emphasized because higher income generally increases welfare.
 Non-material aspects are excluded as they are difficult to measure.
 This definition connects economics with real-life problems.
 Hence, it is more practical than earlier definitions.

5. Superiority of Robbins’ definition over Marshall’s

 Robbins explains economics through scarcity, the root of all economic problems.
 Since wants are unlimited, choice becomes necessary, proving the economic nature of problems.
 It avoids welfare judgments, making economics scientific.
 Economics is neutral between ends, as it does not judge wants.
 It applies to all societies, rich or poor.
 It explains both individual and social choices.
Therefore, Robbins’ definition has a wider scope.
6. “Economics is light giving and fruit bearing”
 Economics is light giving because it explains economic laws like demand and supply.
 These laws help understand why economic problems arise.
 Economics is fruit bearing because it suggests solutions.
 For example, fiscal policy helps control inflation.
 It helps governments make effective policies.
  It guides businesses in decision making.
 Thus, economics is both theoretical and practical.

7. Concept of positive economics

1. Positive economic studies facts, which can be observed.
2. It explains what actually happens in the economy.
3. It avoids value judgments, ensuring objectivity.
4. It uses cause-and-effect logic.
5. Statements can be tested using data.
6. Example: If price rises, demand falls.
7. Hence, positive economics is scientific.

8. Free goods and economic goods

Free goods Economic goods

Those good which are given by nature as free Those goods which have less supply than
of cost demand and have price value.
Free goods are abundant, so no choice is Economic goods are scarce, making choice
needed. essential.

Free goods have no price because supply Economic goods have price, reflecting
exceeds demand. scarcity.

9. Practical importance of economics

 Economics helps in efficient use of scarce resources.
 It guides governments to frame policies logically.
 It helps solve poverty and unemployment.
 Businesses use economics for profit planning.
 Consumers use it for rational choice.
 It supports economic development.
 Thus, economics is useful in daily life.

10. Characteristics of wealth

 Wealth must be material, as non-material things cannot be exchanged.
 It must satisfy human wants, otherwise it has no value.
 It must be scarce, otherwise it will not command price.
 It must have exchange value to be considered wealth.
 It must be transferable, enabling trade.
 It must be measurable in money for accounting.

11. Explain types of demand.

 Price demand changes due to price variation.
 Income demand changes when consumer income changes.
 Cross demand shows relation between substitutes and complements.
 Joint demand arises when goods are used together.
 Composite demand exists when a good has many uses.
 Derived demand depends on demand for final goods.
 Each type explains different market situations.
12. Concept of microeconomics 13. Concept of macroeconomics

microeconomics macroeconomics

 Microeconomics studies individual units to  Macroeconomics studies the entire

understand behavior. economy.

 It explains how consumers maximize  It explains national income to measure

satisfaction. economic performance.

 It studies firms to explain cost and profit.  It uses aggregates like total demand and
supply.

 It is called price theory.  It is called income theory.

14. Limitations of economics

 Economics is based on assumptions, not exact conditions.
 Human behavior is not predictable, unlike machines.
 Economic laws work only under ceteris paribus.
 Moral and ethical values are ignored.
 Results vary from place to place.
 Hence, economics is not an exact science.
 Its conclusions are approximate.

C. Very long answer type questions

1. Critically Explain the Marshallian Definition of Economics.

 According to Alfred Marshall, “Economics is a study of mankind in the ordinary business of life.”
 Alfred Marshall defined economics as a study of mankind in the ordinary business of life, focusing
on activities related to earning and using income for material well-being. This definition shifted
economics away from the narrow concept of wealth and gave importance to human welfare,
making economics a social science.
  The main merit of this definition is that it connects economics with daily human activities, such
as consumption, production, and distribution of goods. It also emphasizes material welfare, which
can be measured objectively.
 However, the definition has some limitations. It ignores non-material welfare such as mental
satisfaction, social harmony, and moral values. It also excludes economic activities that do not
directly involve material goods, like voluntary services. Despite these limitations, Marshall’s
definition is widely appreciated for making economics practical, realistic, and people-oriented.

2. Critically Explain Robbins’ Definition of Economics.

 Lionel Robbins defined economics as the science that studies human behavior in relation to
unlimited wants and limited means with alternative uses.
 This definition made economics a positive science, free from value judgments. It highlights three
important elements: unlimited wants, scarcity of resources, and choice.
 The main strength of Robbins’ definition is its clarity and universality. It applies to individuals,
firms, and governments alike. It also explains the problem of resource allocation, which is central
to economics.
 However, the definition has several criticisms. It completely ignores human welfare, which was
central to Marshall’s economics. It also neglects social problems like poverty, unemployment, and
inequality. Moreover, not all economic activities arise due to scarcity. Thus, Robbins’ definition is
scientific but too abstract and narrow.

3. Explain the Importance of Economic Analysis.

 Economic analysis is very important for understanding the functioning of an economy. It helps in
analyzing how resources are produced, distributed, and consumed. Through economic analysis,
individuals can make better choices regarding consumption and saving, while firms can make
decisions about production and investment.
 For governments, economic analysis is essential in formulating economic policies related to
taxation, budgeting, employment, and development planning.
 It also helps in identifying economic problems such as inflation, unemployment, and income
inequality.
 Moreover, economic analysis promotes efficient use of scarce resources, leading to higher
economic growth and social welfare. It provides a scientific basis for decision-making at both
micro and macro levels. Hence, economic analysis is essential for sustainable development.

4. Distinguish Between Microeconomics and Macroeconomics

 Microeconomics and macroeconomics are the two main branches of economics. Microeconomics
deals with individual economic units such as households, firms, and industries. It studies topics
like demand, supply, price determination, and consumer behavior.
 On the other hand, macroeconomics studies the economy as a whole. It focuses on aggregate
variables such as national income, inflation, unemployment, economic growth, and monetary
policy.
  Microeconomics has a narrow scope and helps in efficient resource allocation at the individual
level. Macroeconomics has a wide scope and helps governments in policy formulation. Although
different in scope, both branches are closely related and complement each other.

5. Describe the Subject Matter of Economics

 The subject matter of economics is concerned with the study of human economic activities. It
mainly includes production, which deals with the creation of goods and services.
Consumption explains how individuals use goods to satisfy their wants. Exchange studies
buying and selling in the market, and distribution deals with the sharing of income among
factors of production.
 Economics also studies the problem of scarcity, as resources are limited and wants are
unlimited. It examines how choices are made to allocate resources efficiently. Modern
economics includes both microeconomic and macroeconomic aspects.
 Furthermore, economics studies issues like economic growth, poverty, unemployment, and
development. Hence, the subject matter of economics is wide and dynamic, covering all
aspects of economic life.

Adam Smith (1723–1790)

Book: An Inquiry into the Nature and Causes of the Wealth of Nations (1776)
Supporters: Classical economists like David Ricardo, Thomas Malthus
Definition of Economics: Economics is the study of wealth and how it is produced, distributed, and
consumed.
Key Idea: Father of economics, focused on wealth creation, free markets, and division of labor.

2. Alfred Marshall (1842–1924)

Book: Principles of Economics (1890)
Supporters: Neo-classical economists, A.C. Pigou
Definition of Economics: Economics is a study of mankind in ordinary business of life, focusing on
human welfare.
Key Idea: Shifted focus from wealth to welfare, introduced marginal utility, consumer surplus, and
practical economics.

3. Lionel Robbins (1898–1984)

Book: An Essay on the Nature and Significance of Economic Science (1932)
Supporters: Modern and neo-classical economists
Definition of Economics: Economics is the science of scarcity and choice, studying human behavior in
allocating limited resources to alternative uses.
Key Idea: Made economics a positive, scientific discipline, focusing on decision-making and resource
allocation rather than welfare.