Scope of Economics: The scope of economics includes whether it is a science or an art, whether it is a positive or normative science, and the fundamental economic problems that every economy faces.

Fundamental Questions in Economics:

Every economy, regardless of its size or type, must answer three key questions due to limited resources:

1. What to produce?
   • This refers to the allocation of resources to determine which goods and services should be produced and in what quantities.
   • Example: Should we produce consumer goods (for immediate use) or capital goods (for long-term economic growth)? Should more resources be allocated to space research or food production?
2. How to produce?
   • This question focuses on the choice of production techniques for maximum efficiency.
   • Example: In agriculture, should we use extensive farming (using more land with minimal inputs) or intensive farming (maximizing output on limited land with high inputs)? Should industries rely on capital-intensive (more machines) or labor-intensive (more workers) techniques?
3. Whom to produce for?
   • This relates to the distribution of goods and services in an economy. It addresses economic inequality and ensures fair access to resources.
   • The concern is not only about increasing national income but also about improving individual standards of living.

Economics: A Science and an Art

1) Economics as a Science

• Science is a systematized body of knowledge that explains cause-and-effect relationships.
• Economics follows a scientific method by collecting data, classifying it, and analyzing human economic behavior.
• Since economic activities like demand, supply, and price changes can be measured and studied systematically, economics qualifies as a science.

2) Economics as an Art

• Art is a practical application of knowledge to achieve specific goals.
• Economics provides guidelines to solve real-world economic problems such as inflation, poverty, and unemployment.
• Science helps us understand economic laws, while art helps us apply them in policymaking and business decisions.

Thus, economics is both a science (studying causes and effects) and an art (applying knowledge for problem-solving).

Positive and Normative Economics

1) Positive Economics (What is)

• Positive economics explains facts and relationships without making judgments.
• It studies economic behavior as it exists and makes objective statements.
• Example:
  • “An increase in the minimum wage will lead to unemployment in some sectors.”
  • This statement is fact-based and can be tested.

2) Normative Economics (What ought to be)

• Normative economics involves opinions and value judgments about what is desirable.
• It suggests policies to improve human welfare.
• Example:
  • “The government should increase the minimum wage to improve living standards.”
  • This statement is value-based and depends on ethical considerations.

Since economics includes both factual analysis (positive science) and policy recommendations (normative science), it is considered both positive and normative.

Subject Matter of Economics

Economics can be studied through two main approaches:

1. Traditional Approach
2. Modern Approach

1. A) Traditional Approach The traditional approach classifies economics into five major divisions:

1) Consumption

• Consumption refers to the satisfaction of human wants through the use of goods and services.
• It is also known as the destruction of utility, meaning that goods and services lose their usefulness once they are consumed.

2) Production

• Production is the creation of utility or the process of producing goods and services that satisfy human wants.
• Production requires four main factors of production:
  • Land (natural resources)
  • Labour (human effort)
  • Capital (machinery, tools, money)
  • Organization (entrepreneurship)

3) Exchange

• Goods are produced not only for self-consumption but also for selling in markets.
• The process of buying and selling constitutes exchange.
• Markets facilitate the movement of goods from producers to consumers.

4) Distribution

• Distribution refers to the process of determining the rewards for the four factors of production:
  • Land → Rent
  • Labour → Wage
  • Capital → Interest
  • Entrepreneurship → Profit

5) Public Finance

• Public finance studies how the government generates revenue and how it spends money.
• It includes two key aspects:
  • Public revenue (taxes, duties, etc.)
  • Public expenditure (government spending on infrastructure, welfare, etc.)

B) Modern Approach

The modern approach classifies economics into two broad divisions:

Microeconomics (Price Theory)

• Definition: Microeconomics analyzes the economic behavior of individual units, such as a household, a firm, or an industry.
• Focus areas:
  • Demand and supply
  • Consumer behavior
  • Market structures (perfect competition, monopoly, etc.)
  • Production and cost analysis
• Importance: Helps in understanding how prices are determined in different markets.

Macroeconomics (Income Theory)

• Definition: Macroeconomics studies the economy as a whole and deals with aggregates like:
  • Total employment
  • Gross National Product (GNP)
  • National income
  • General price levels (inflation, deflation)
• Importance: Helps in formulating government policies related to growth, inflation, and unemployment.