Nature and Scope of Economics
Domain 1 examines what economics studies and how it studies it: the competing definitions, the micro-macro split, methods of reasoning, and the scarcity core on which the rest of the syllabus rests. Questions usually ask you to identify a definition, classify a statement as positive or normative, or decide whether an analysis is micro or macro.
Definitions in sequence
- Wealth (Adam Smith, 1776): economics is the science of wealth - production, accumulation and distribution of riches.
- Welfare (Marshall, 1890): economics studies mankind in the ordinary business of life, focusing on material welfare.
- Scarcity (Robbins, 1932): economics studies human behaviour as a relationship between unlimited ends and scarce means with alternative uses. It is positive and universal.
- Growth (Samuelson): economics studies how people and society choose to employ scarce productive resources over time.
Divisions and methods
- Microeconomics (price theory): individual units - one consumer, one firm, one market; uses partial equilibrium.
- Macroeconomics (income theory): aggregates - national income, employment, price level; uses general equilibrium.
- Deduction moves from general to particular; induction from particular to general. Statics ignores time; dynamics allows it. Positive statements are testable; normative ones carry value judgements.
Worked example
A farmer with one acre can grow paddy worth Rs 40,000 or sugarcane worth Rs 55,000. Choosing sugarcane means the paddy forgone - Rs 40,000 - is the opportunity cost. The choice exists only because the land is scarce and has alternative uses, which is exactly Robbins point. Because the sacrifice rises as more land moves to sugarcane, the production possibility curve is concave, not a straight line.
Traps that cost marks
- Calling Robbins definition normative; it is strictly positive.
- Treating the welfare definition as universal - Marshall limited economics to material welfare.
- Labelling a single-market study macro; anything aggregated is macro.
- Drawing a straight-line PPC when constant opportunity cost is assumed, then presenting it as the general case.