1.1 What is Economics? (Economics Definition)

Economics is the study of how people fulfill their unlimited wants with limited resources. This is the common definition used worldwide as the answer to “What is economics?”. All the problems associated with the production, consumption, and distribution of goods and services in society fall within the scope of economics.

The common problem behind all the economic problems (petrol shortage, medicine shortage) is that we have a greater number of wants, but the extent to which each of these wants can be met by each person depends on his income, their prices, and the amount of time available. Thus, in the end, every person is disappointed with several unfulfilled wants. This is true for the individual as well as for society as a whole.

As society’s natural resources, human resources, equipment, tools, and other physical resources are limited, so is the amount of goods and services that can be produced. We refer to this as “scarcity“. Every individual and every society facing the problem of “scarcity” must make a choice. When all their wants cannot be met by the available resources, they must choose between the options or alternatives.

Some economists point out that there would be no age for economics without the problem of scarcity. Lionel Robbins (1898-1984) defined economics as the study of how people behave in order to meet unlimited human wants using scarce resources with alternative uses.

1.2 Why is economics considered a science, not art?

Art is the study primarily concerned with human creativity, but science is the investigation of natural phenomena through observation, experimentation, and theoretical explanation. Since we study (studying is the same as investigation) the behaviour of people, economics is considered a science.

1.2.1 Why is economics considered a social science?

There are 2 types of science subjects.

• Natural sciences
• Social sciences

Economics is considered a social science due to the following reasons. 

1. The economic behaviors of people are examined by economics.
2. Economic theories developed cannot be proved in laboratories (even though the human body/monkeys can be examined in a lab – biology, but human behaviors can’t be examined in a lab – economics).
3. Economic behaviors are sensitive to factors such as time, region, and social environment (even though monkeys eat the same – bananas in any country they live, humans eat different types of food in different countries/a child eats differently compares to an old person – wants change with time).

1.3 The importance of learning Economics

• Important in ruling a country
• Important as a successful citizen
• Ability to understand economic phenomena well
• Important to vote for a party
• Important to make logical decisions for students/Important in selecting a better job

1.4 Positive and Normative statements

Some examples of positive statements are given below;

• A positive relationship exists between the money supply and the price level.
• Sri Lanka’s unemployment level in 2013 was 44%.
• The population growth rate in Sri Lanka is 1%.

The statements that can be verified are called positive statements. A positive statement can be right or wrong. The accuracy of such a statement can be verified by real-world facts (information and data found in the real world).

The statements that can’t be verified with real-world facts are called normative statements. For example, statements such as that every citizen should be provided with free medical care, and that the minimum wage should be raised, are normative statements. Such statements are judgments or opinions of people. That is, those statements depend on the beliefs or values ​​of the person making the statement.

1.5 Microeconomics and Macroeconomics

Microeconomics focuses on studying the behavior of the various decision-making units within an economy, such as consumers, workers, manufacturing companies, and government separately.

Some examples of the units that are studied under microeconomics are given below.

• Studying demand-supply and price determination of a good
• The production function of a firm
• The production cost of a firm

The aggregate functioning of an economy (the structure, performance, and behavior of an economic system) is studied in macroeconomics.

Some examples for the units studied in macroeconomics are given below.

• Aggregate output level
• Aggregate income level
• Economic fluctuations and depressions
• Inflation
• Employment level
• Unemployment level
• Investment
• Economic Growth
• Economic recession
• Balance of payments
• Exchange rate
• Money supply

This is all you need to know to answer the question of “what is economics?”. If you want to test yourself on the knowledge of “what is economics?”, you can click the following link and enroll in free quizzes provided by our website.

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