Economics is the study of how people, businesses, and governments make choices about how to use limited resources to satisfy their unlimited wants. One popular definition of economics is by Lionel Robbins, who defined it as “the science which studies human behaviour as a relationship between ends (wants) and scarce means (resources) which have alternative uses.”
Adam Smith (Father of Economics) defined Economics as “the science of wealth — how people produce and consume goods and services.“
Alfred Marshall said; “Economics is the study of man in the ordinary business of life.“
In simple terms, economics helps us understand how to use what we have (like money, time, land, and labour) to get what we need or want.
Table of Contents
Scope Of Economics
The scope of economics is divided into two main areas: Microeconomics and Macroeconomics.
Microeconomics looks at individual parts of the economy. It studies how individuals, households, and firms make decisions. For example, how a person decides to spend their salary, or how a company decides how much to produce.
Macroeconomics deals with the whole economy. It studies big issues like inflation, unemployment, economic growth, and the total amount of goods and services a country produces.
Together, micro and macroeconomics help us understand both the small and large parts of economic life.
Importance Of Economics
To Individuals
Economics is important because it helps individuals make better decisions in their daily lives. Every day, people face the challenge of choosing how to spend their limited money, time, and energy. By understanding basic economic principles, such as opportunity cost and scale of preference, individuals can plan their budgets wisely and avoid waste. For example, a student who understands economics will know how to manage their allowance and prioritise spending on essential items like school materials instead of unnecessary luxuries.
To Governments
For governments, economics is a vital tool in planning and policy-making. The government needs to decide how to spend public money, how to create jobs, and how to control inflation. With the help of economic knowledge, policymakers can design programs that improve the economy, reduce poverty, and ensure the fair distribution of resources. For instance, if the government understands the causes of unemployment, it can create strategies to provide more job opportunities for citizens.
To Firms and Businesses
Firms and businesses also benefit from the study of economics. Business owners learn how to reduce production costs and increase profit by making informed decisions about resource allocation, pricing, and investment. Economics helps them understand market trends, consumer behaviour, and competition, which are essential for running a successful business in any industry.
For Managing Scarcity
Furthermore, economics plays a crucial role in solving the problem of scarcity. Since resources like land, capital, and labour are limited, economics teaches us how to use these resources wisely and efficiently. This knowledge is key to ensuring that the needs of as many people as possible are met without waste or inequality.
For National Development
Lastly, the study of economics helps promote national development. A country with citizens, leaders, and businesses who understand economic principles is better prepared to grow its economy, improve living standards, and compete in the global market. Economics provides the tools to measure growth, manage resources, and set national goals, all of which are necessary for progress and stability.
Methodology Of Economics
The methodology of economics refers to how economists study problems and draw conclusions. Economics uses both positive and normative methods.
Positive economics deals with facts. It tries to explain what is happening in the economy without making judgments. For example, “Unemployment is currently at 15%.”
Normative economics involves opinions or value judgments. It suggests what ought to be done. For example, “The government should reduce unemployment.”
Economists also use models, data, graphs, and mathematical tools to analyse economic problems and suggest solutions.
Economics uses a scientific method to study and analyse how people and societies make decisions regarding the use of limited resources. This method involves a logical and step-by-step process that helps economists understand economic problems and propose solutions. Here are the major steps involved:
1. Observation
The first step in the economic method is observation. Economists begin by closely observing what is happening in the real world. For instance, they may notice that the prices of goods are rising rapidly or that unemployment is increasing. This observation helps them identify and define a specific economic problem that needs to be studied. The goal at this stage is to understand the situation clearly and gather general information about it.
2. Hypothesis Formulation
After observing a problem, the next step is to suggest a possible explanation or answer, known as a hypothesis. A hypothesis is an educated guess based on logic or prior knowledge. For example, if food prices are rising, an economist might hypothesize that it is due to poor harvests or increased demand. The hypothesis must be specific and testable so that it can be proved right or wrong using real data.
3. Data Collection
Once a hypothesis is formed, economists move on to collect relevant data to test it. Data can come from various sources such as government statistics, surveys, reports, or real-time market data. This information must be accurate and sufficient to support or disprove the hypothesis. Data collection is a very important step because weak or false data can lead to wrong conclusions.
4. Hypothesis Testing
With data in hand, the hypothesis is tested to see whether it matches the real-world evidence. This involves analyzing the data using mathematical tools, charts, or simple comparisons. If the data supports the hypothesis, it is accepted (for now); if it does not, the economist may reject or modify it. For example, if the data shows that poor harvests did lead to higher prices, the hypothesis is supported.
4. Conclusion Or Theory Formation
After the hypothesis is tested, the economist draws a conclusion. If the hypothesis is consistently supported by various tests and data, it can become a general principle or theory. A theory explains how certain parts of the economy work and can be used to predict future outcomes. For example, the law of demand — that when prices rise, demand falls — was formed through this scientific process.
This scientific method makes economics a more reliable and logical subject. Though it deals with human behaviour (which can be unpredictable), economists use these steps to make informed decisions, develop policies, and understand economic trends in society.
Economics As a Science
Economics is considered a social science because it studies human behaviour in relation to the use of resources. Like other sciences, economics follows steps such as observation, formulation of hypotheses, testing, and drawing conclusions. However, unlike natural sciences (like chemistry or physics), economics deals with people, whose behaviour can be unpredictable. This makes economics a science with limitations, but still scientific because it uses careful methods to study and explain how the economy works.
Key Concepts in Economics
1. Wants
Wants are the desires people have for goods and services. They are unlimited, meaning that people always want more, even when some of their needs are already met. Wants include both basic needs (like food, water, and shelter) and luxury items (like smartphones and designer clothes). Because resources are limited, not all wants can be satisfied.
2. Scarcity
Scarcity means that resources are limited and cannot satisfy all human wants. For example, there is not enough money, time, or materials to produce everything people desire. Scarcity is the central problem of economics and forces people to make choices. Even rich people experience scarcity because they cannot have everything they want at the same time.
3. Scale Of Preference
A scale of preference is a list of wants arranged in order of importance. It helps individuals, businesses, and governments decide which needs to satisfy first, based on urgency or value. For example, a student may want a new phone, new clothes, and textbooks, but may place textbooks first on their list.
4. Choice
Because of scarcity, people cannot have everything they want. Therefore, they must make choices. Making a choice means selecting one option and giving up another. Choice is necessary in everyday life—for example, choosing between buying food or saving money for school fees.
5. Opportunity Cost
Opportunity cost is the next best alternative that is given up when a choice is made. If a student has ₦5,000 and chooses to buy a textbook instead of shoes, the opportunity cost is the shoes that were not bought. Opportunity cost helps people make better decisions by thinking about what they are giving up.
Final Thoughts
Economics is a subject that helps us understand how people make decisions in a world of limited resources and unlimited wants. It explains concepts like scarcity, choice, and opportunity cost, which affect everyone daily. By learning economics, students are better prepared to manage their resources and make smarter financial decisions.
Read also: The Relevance of the Study of Economics to Career Prospects
