INTRODUCTION TO MACROECONOMICS,INTRODUCTORY MACROECONOMICS PDF Download

 Page 1


Introduction to Macroeconomics 
Institute of Lifelong Learning, University of Delhi 
 
 
 
 
 
 
 
 
 
 
Lesson: Introduction to Macroeconomics 
Lesson Developer: Dipavali Debroy 
College/Department: SGGSCC, University of Delhi 
Page 2


Introduction to Macroeconomics 
Institute of Lifelong Learning, University of Delhi 
 
 
 
 
 
 
 
 
 
 
Lesson: Introduction to Macroeconomics 
Lesson Developer: Dipavali Debroy 
College/Department: SGGSCC, University of Delhi 
Introduction to Macroeconomics 
Institute of Lifelong Learning, University of Delhi 
 
 
Table of Contents 
1.Learning Outcomes 
2.Introduction  
3. Evolution of the Subject 
4. Positive Economics and Normative Economics - Methodology 
5. Art or Science  
6. Scope of Economics - Related Subjects 
7. Models and Hypotheses 
8. Macroeconomic Variables 
9. Laws of Economics 
10. Market, Equilibrium, Demand, Supply 
11. Markets in Macro-economics 
12. Concept of Aggregate Demand and Supply 
13. Closed Economy and Open Economy 
14. Partial and General Equilibrium Analysis 
15. Static and Dynamic Equilibrium  
16. Short-Run and Long-Run Equilibrium 
17. Nobel Prize in Economics 
18. Summary 
19. Exercises 
20. Glossary 
21. References 
22. Activity 
 
 
1.Learning Outcomes 
 
After you have read this chapter you should be able to define  Micro-
Economics, Macro-Economics, Market, Demand, Supply, Equilibrium, Partial 
and General Equilibrium, Static and Dynamic Equilibrium, Long Run and 
Short Run, understand  the central problems of an economy, identify        
variables, constants and parameters, real and nominal variables, 
differentiate Micro-Economics from Macro-Economics, the scope of the 
subject of Economics, apply the knowledge of  basic Economics 
 
 
Value Addition:  
Focus of the Section 
Topic Economics  
This section is to make you aware of what Economics is. 
The purpose of this section is to make you familiar with the various 
Definitions of Economics, the Evolution of the subject, its Scope, 
Methodology, Tools and Basic Concepts. 
 
2.Introduction  
 
Macro-Economics is the branch of Economics that studies economic issues in 
aggregative and overall forms, looking at the broad picture. In contrast, Micro-
Economics is the branch of Economics that studies economic issues in minute and  
individual details , as if under a microscope. 
Page 3


Introduction to Macroeconomics 
Institute of Lifelong Learning, University of Delhi 
 
 
 
 
 
 
 
 
 
 
Lesson: Introduction to Macroeconomics 
Lesson Developer: Dipavali Debroy 
College/Department: SGGSCC, University of Delhi 
Introduction to Macroeconomics 
Institute of Lifelong Learning, University of Delhi 
 
 
Table of Contents 
1.Learning Outcomes 
2.Introduction  
3. Evolution of the Subject 
4. Positive Economics and Normative Economics - Methodology 
5. Art or Science  
6. Scope of Economics - Related Subjects 
7. Models and Hypotheses 
8. Macroeconomic Variables 
9. Laws of Economics 
10. Market, Equilibrium, Demand, Supply 
11. Markets in Macro-economics 
12. Concept of Aggregate Demand and Supply 
13. Closed Economy and Open Economy 
14. Partial and General Equilibrium Analysis 
15. Static and Dynamic Equilibrium  
16. Short-Run and Long-Run Equilibrium 
17. Nobel Prize in Economics 
18. Summary 
19. Exercises 
20. Glossary 
21. References 
22. Activity 
 
 
1.Learning Outcomes 
 
After you have read this chapter you should be able to define  Micro-
Economics, Macro-Economics, Market, Demand, Supply, Equilibrium, Partial 
and General Equilibrium, Static and Dynamic Equilibrium, Long Run and 
Short Run, understand  the central problems of an economy, identify        
variables, constants and parameters, real and nominal variables, 
differentiate Micro-Economics from Macro-Economics, the scope of the 
subject of Economics, apply the knowledge of  basic Economics 
 
 
Value Addition:  
Focus of the Section 
Topic Economics  
This section is to make you aware of what Economics is. 
The purpose of this section is to make you familiar with the various 
Definitions of Economics, the Evolution of the subject, its Scope, 
Methodology, Tools and Basic Concepts. 
 
2.Introduction  
 
Macro-Economics is the branch of Economics that studies economic issues in 
aggregative and overall forms, looking at the broad picture. In contrast, Micro-
Economics is the branch of Economics that studies economic issues in minute and  
individual details , as if under a microscope. 
Introduction to Macroeconomics 
Institute of Lifelong Learning, University of Delhi 
 
The word Macro and Micro come from the Greek words macros ( long or huge) and 
micros (small).  
As for Economics, there are two basic definitions.  
 
Economics 
 
According to the famous  economist Alfred Marshall,  Economics is the study of 
human beings as they go about their  everyday life. 
To quote from Marshall’s Principles of Economics (1890, "a study of mankind in the 
ordinary business of life; it (Economics) examines that part of individual and social 
action which is most closely connected with the attainment and with the use of the 
material requisites of wellbeing. Thus it is on one side a study of wealth; and on the 
other, and more important side, a part of the study of man."  
 Lionel Robbins has drawn our attention to another aspect and defined Economics  as  
the study of choice under conditions of scarcity. 
 "Economics is a science which studies human behavior as a relationship between 
ends and scarce means which have alternative uses."  
Productive Resources ( land, labour, capital goods such as machinery, technical 
knowledge) are scarce or limited and the resource applied to the production of a 
certain commodity or service  is unavailable for the production of another alternative 
one. But human wants for the Consumption of goods and services ( cereals and 
pulses, meat and fish and poultry, vegetable, clothes, woolens, houses, roads, cars, 
railways, airplanes, books, theatre , film, television and countless others) are 
unlimited, and come from numerous members of the society .Economics is the study 
of how people can choose to use the scarce or limited resources to produce various 
good and services and distribute them to various members of society for their 
consumption. 
Any society faces three fundamental and interdependent economic problems:  
1. What to Produce and  How Much of them 
2. How to Produce, that is, by whom and by what resources and technology 
3.For Whom to Produce, that is, how is the total amount of production in the 
society to be distributed among its members.  
Economics helps us in analyzing and  understanding these problems. 
 
3. Evolution of the Subject  
 
Etymologically, the word Economics  derives from the Greek word oikos ( house) and 
nomos ( management).  
But since  the second half of the 17th century, the word Economics has come to be 
used  in the wider context of a whole country or nation rather than the household.   
Adam Smith is known as the `father’ of  the subject of Economics. His book An 
Inquiry into the Nature and Causes of the Wealth of Nations, first published in 1776, 
is the first-ever treatise on Economics . Smith’s concern was about nations or 
countries, that is, it was a Macro-type concern, although the term Macro was not in 
use then. 
Later T.R. Malthus, David Ricardo , and J.S.Mill wrote important treatises on the 
subject, taking the same overall perspective and  sweeping generalizations taking 
long-run perspectives. They are known as Classical economists and have also been 
described as Magnificent Economists because they dealt with big issues on a broad 
background. One of the tenets of Classical economists was that in the long run there 
is no unemployment in the economy. Jean-Baptiste Say (1757—1832), a French 
economist, stated that “products are paid with products” which came to be popularly  
interpreted as ‘Supply creates its own Demand.” Given sufficient time, imbalances in 
Page 4


Introduction to Macroeconomics 
Institute of Lifelong Learning, University of Delhi 
 
 
 
 
 
 
 
 
 
 
Lesson: Introduction to Macroeconomics 
Lesson Developer: Dipavali Debroy 
College/Department: SGGSCC, University of Delhi 
Introduction to Macroeconomics 
Institute of Lifelong Learning, University of Delhi 
 
 
Table of Contents 
1.Learning Outcomes 
2.Introduction  
3. Evolution of the Subject 
4. Positive Economics and Normative Economics - Methodology 
5. Art or Science  
6. Scope of Economics - Related Subjects 
7. Models and Hypotheses 
8. Macroeconomic Variables 
9. Laws of Economics 
10. Market, Equilibrium, Demand, Supply 
11. Markets in Macro-economics 
12. Concept of Aggregate Demand and Supply 
13. Closed Economy and Open Economy 
14. Partial and General Equilibrium Analysis 
15. Static and Dynamic Equilibrium  
16. Short-Run and Long-Run Equilibrium 
17. Nobel Prize in Economics 
18. Summary 
19. Exercises 
20. Glossary 
21. References 
22. Activity 
 
 
1.Learning Outcomes 
 
After you have read this chapter you should be able to define  Micro-
Economics, Macro-Economics, Market, Demand, Supply, Equilibrium, Partial 
and General Equilibrium, Static and Dynamic Equilibrium, Long Run and 
Short Run, understand  the central problems of an economy, identify        
variables, constants and parameters, real and nominal variables, 
differentiate Micro-Economics from Macro-Economics, the scope of the 
subject of Economics, apply the knowledge of  basic Economics 
 
 
Value Addition:  
Focus of the Section 
Topic Economics  
This section is to make you aware of what Economics is. 
The purpose of this section is to make you familiar with the various 
Definitions of Economics, the Evolution of the subject, its Scope, 
Methodology, Tools and Basic Concepts. 
 
2.Introduction  
 
Macro-Economics is the branch of Economics that studies economic issues in 
aggregative and overall forms, looking at the broad picture. In contrast, Micro-
Economics is the branch of Economics that studies economic issues in minute and  
individual details , as if under a microscope. 
Introduction to Macroeconomics 
Institute of Lifelong Learning, University of Delhi 
 
The word Macro and Micro come from the Greek words macros ( long or huge) and 
micros (small).  
As for Economics, there are two basic definitions.  
 
Economics 
 
According to the famous  economist Alfred Marshall,  Economics is the study of 
human beings as they go about their  everyday life. 
To quote from Marshall’s Principles of Economics (1890, "a study of mankind in the 
ordinary business of life; it (Economics) examines that part of individual and social 
action which is most closely connected with the attainment and with the use of the 
material requisites of wellbeing. Thus it is on one side a study of wealth; and on the 
other, and more important side, a part of the study of man."  
 Lionel Robbins has drawn our attention to another aspect and defined Economics  as  
the study of choice under conditions of scarcity. 
 "Economics is a science which studies human behavior as a relationship between 
ends and scarce means which have alternative uses."  
Productive Resources ( land, labour, capital goods such as machinery, technical 
knowledge) are scarce or limited and the resource applied to the production of a 
certain commodity or service  is unavailable for the production of another alternative 
one. But human wants for the Consumption of goods and services ( cereals and 
pulses, meat and fish and poultry, vegetable, clothes, woolens, houses, roads, cars, 
railways, airplanes, books, theatre , film, television and countless others) are 
unlimited, and come from numerous members of the society .Economics is the study 
of how people can choose to use the scarce or limited resources to produce various 
good and services and distribute them to various members of society for their 
consumption. 
Any society faces three fundamental and interdependent economic problems:  
1. What to Produce and  How Much of them 
2. How to Produce, that is, by whom and by what resources and technology 
3.For Whom to Produce, that is, how is the total amount of production in the 
society to be distributed among its members.  
Economics helps us in analyzing and  understanding these problems. 
 
3. Evolution of the Subject  
 
Etymologically, the word Economics  derives from the Greek word oikos ( house) and 
nomos ( management).  
But since  the second half of the 17th century, the word Economics has come to be 
used  in the wider context of a whole country or nation rather than the household.   
Adam Smith is known as the `father’ of  the subject of Economics. His book An 
Inquiry into the Nature and Causes of the Wealth of Nations, first published in 1776, 
is the first-ever treatise on Economics . Smith’s concern was about nations or 
countries, that is, it was a Macro-type concern, although the term Macro was not in 
use then. 
Later T.R. Malthus, David Ricardo , and J.S.Mill wrote important treatises on the 
subject, taking the same overall perspective and  sweeping generalizations taking 
long-run perspectives. They are known as Classical economists and have also been 
described as Magnificent Economists because they dealt with big issues on a broad 
background. One of the tenets of Classical economists was that in the long run there 
is no unemployment in the economy. Jean-Baptiste Say (1757—1832), a French 
economist, stated that “products are paid with products” which came to be popularly  
interpreted as ‘Supply creates its own Demand.” Given sufficient time, imbalances in 
Introduction to Macroeconomics 
Institute of Lifelong Learning, University of Delhi 
 
the economy will be smoothed out and people, or governments, need not be worried 
about them. This was the basic standpoint of the Classical economists and is known 
as the “Say’s Law”. 
     While the Classical approach prevailed throughout the 19
th
 century, a Neo-
Classical approach came to be formed  towards the end of the 19
th
 century. 
economists began to study economic issues on a more specific and individual level. It 
concentrated on how the price and quantity of specific goods (and services) were 
determined in the market though a rational balancing of their `marginal’ costs and 
benefits (`utilities and productivities).Foremost among these Neo-Classical 
economists( also described as `marginalists’) were Menger, Jevons and Alfred 
Marshall. It is their work that constitutes the foundation of Micro-economics, where 
the individual consumer or producer was the unit concerned, not the entire national 
entity. 
Although the Classical economists had been concerned with the nation or the country 
as a whole, and therefore are more Macro than Micro, in approach,  Macro-economics 
as a subject developed only  after the Great Depression. On 23 October 1929, the 
New York Stock Exchange ( at Wall Street) crashed. Many rich and successful people 
lost their all and took their own lives in desperation. Widespread unemployment 
followed the closing down of production units. Both employers and employees felt 
the impact. Not just America or Europe but their colonies too suffered. It was a 
global crisis. 
 It was then that John Maynard Keynes came up with his analysis of the 
phenomenon in terms of Aggregate Demand falling short of Aggregate Supply and 
emphasized the role of the Government of a country in stepping up its own 
expenditure in order to correct that shortfall or gap. 
His analysis laid the foundation of Macro-Economics. Later John Hicks, Milton 
Friedman, James Tobin, A.W.Phillips, Edmund Phelps, Robert Lucas, T.J. Sargent, 
Robert Barros and others have contributed to the subject of Macro-Economics, 
bringing in the roles of Money and Expectations. Lucas, Sargent and Barros are often 
called the New Keynesian economists. 
To sum up in the words of Paul A. Samuelson,  “Macroeconomics deals with the big 
picture – with the macro aggregates of income, employment, and price levels. But do 
not think that microeconomics deals with unimportant details. After all, the big 
picture is made up of its parts.” ( Economics, 7
th
 edn, p 362). So he concludes that 
there is no essential opposition  between the two. 
Traditionally and in most universities,   a course in Micro-Economics is taught prior to 
one  in Macro-Economics.  
 
4. Positive Economics and Normative Economics - Methodology 
 
According to economists like Milton Fieldman ( who wrote Essays in Positive 
Economics,  1953), economists should not pass moral strictures or make `value 
judgements’. In other words, Economics should just `posit’ or be Positive, and not 
set any norms of behaviour to be followed by individuals or organizations.  
Economics can provide policy prescriptions, but expressed in an objective way. 
It would be a normative statement to say: ‘If there is economic depression, the 
government of the country should increase its consumption expenditure’. 
But it is permissible to make it in the following positive statement: ‘If there is 
economic depression and the government increases its consumption expenditure, the 
depression is likely to get corrected’. 
 
5. Art or Science ? 
 
Page 5


Introduction to Macroeconomics 
Institute of Lifelong Learning, University of Delhi 
 
 
 
 
 
 
 
 
 
 
Lesson: Introduction to Macroeconomics 
Lesson Developer: Dipavali Debroy 
College/Department: SGGSCC, University of Delhi 
Introduction to Macroeconomics 
Institute of Lifelong Learning, University of Delhi 
 
 
Table of Contents 
1.Learning Outcomes 
2.Introduction  
3. Evolution of the Subject 
4. Positive Economics and Normative Economics - Methodology 
5. Art or Science  
6. Scope of Economics - Related Subjects 
7. Models and Hypotheses 
8. Macroeconomic Variables 
9. Laws of Economics 
10. Market, Equilibrium, Demand, Supply 
11. Markets in Macro-economics 
12. Concept of Aggregate Demand and Supply 
13. Closed Economy and Open Economy 
14. Partial and General Equilibrium Analysis 
15. Static and Dynamic Equilibrium  
16. Short-Run and Long-Run Equilibrium 
17. Nobel Prize in Economics 
18. Summary 
19. Exercises 
20. Glossary 
21. References 
22. Activity 
 
 
1.Learning Outcomes 
 
After you have read this chapter you should be able to define  Micro-
Economics, Macro-Economics, Market, Demand, Supply, Equilibrium, Partial 
and General Equilibrium, Static and Dynamic Equilibrium, Long Run and 
Short Run, understand  the central problems of an economy, identify        
variables, constants and parameters, real and nominal variables, 
differentiate Micro-Economics from Macro-Economics, the scope of the 
subject of Economics, apply the knowledge of  basic Economics 
 
 
Value Addition:  
Focus of the Section 
Topic Economics  
This section is to make you aware of what Economics is. 
The purpose of this section is to make you familiar with the various 
Definitions of Economics, the Evolution of the subject, its Scope, 
Methodology, Tools and Basic Concepts. 
 
2.Introduction  
 
Macro-Economics is the branch of Economics that studies economic issues in 
aggregative and overall forms, looking at the broad picture. In contrast, Micro-
Economics is the branch of Economics that studies economic issues in minute and  
individual details , as if under a microscope. 
Introduction to Macroeconomics 
Institute of Lifelong Learning, University of Delhi 
 
The word Macro and Micro come from the Greek words macros ( long or huge) and 
micros (small).  
As for Economics, there are two basic definitions.  
 
Economics 
 
According to the famous  economist Alfred Marshall,  Economics is the study of 
human beings as they go about their  everyday life. 
To quote from Marshall’s Principles of Economics (1890, "a study of mankind in the 
ordinary business of life; it (Economics) examines that part of individual and social 
action which is most closely connected with the attainment and with the use of the 
material requisites of wellbeing. Thus it is on one side a study of wealth; and on the 
other, and more important side, a part of the study of man."  
 Lionel Robbins has drawn our attention to another aspect and defined Economics  as  
the study of choice under conditions of scarcity. 
 "Economics is a science which studies human behavior as a relationship between 
ends and scarce means which have alternative uses."  
Productive Resources ( land, labour, capital goods such as machinery, technical 
knowledge) are scarce or limited and the resource applied to the production of a 
certain commodity or service  is unavailable for the production of another alternative 
one. But human wants for the Consumption of goods and services ( cereals and 
pulses, meat and fish and poultry, vegetable, clothes, woolens, houses, roads, cars, 
railways, airplanes, books, theatre , film, television and countless others) are 
unlimited, and come from numerous members of the society .Economics is the study 
of how people can choose to use the scarce or limited resources to produce various 
good and services and distribute them to various members of society for their 
consumption. 
Any society faces three fundamental and interdependent economic problems:  
1. What to Produce and  How Much of them 
2. How to Produce, that is, by whom and by what resources and technology 
3.For Whom to Produce, that is, how is the total amount of production in the 
society to be distributed among its members.  
Economics helps us in analyzing and  understanding these problems. 
 
3. Evolution of the Subject  
 
Etymologically, the word Economics  derives from the Greek word oikos ( house) and 
nomos ( management).  
But since  the second half of the 17th century, the word Economics has come to be 
used  in the wider context of a whole country or nation rather than the household.   
Adam Smith is known as the `father’ of  the subject of Economics. His book An 
Inquiry into the Nature and Causes of the Wealth of Nations, first published in 1776, 
is the first-ever treatise on Economics . Smith’s concern was about nations or 
countries, that is, it was a Macro-type concern, although the term Macro was not in 
use then. 
Later T.R. Malthus, David Ricardo , and J.S.Mill wrote important treatises on the 
subject, taking the same overall perspective and  sweeping generalizations taking 
long-run perspectives. They are known as Classical economists and have also been 
described as Magnificent Economists because they dealt with big issues on a broad 
background. One of the tenets of Classical economists was that in the long run there 
is no unemployment in the economy. Jean-Baptiste Say (1757—1832), a French 
economist, stated that “products are paid with products” which came to be popularly  
interpreted as ‘Supply creates its own Demand.” Given sufficient time, imbalances in 
Introduction to Macroeconomics 
Institute of Lifelong Learning, University of Delhi 
 
the economy will be smoothed out and people, or governments, need not be worried 
about them. This was the basic standpoint of the Classical economists and is known 
as the “Say’s Law”. 
     While the Classical approach prevailed throughout the 19
th
 century, a Neo-
Classical approach came to be formed  towards the end of the 19
th
 century. 
economists began to study economic issues on a more specific and individual level. It 
concentrated on how the price and quantity of specific goods (and services) were 
determined in the market though a rational balancing of their `marginal’ costs and 
benefits (`utilities and productivities).Foremost among these Neo-Classical 
economists( also described as `marginalists’) were Menger, Jevons and Alfred 
Marshall. It is their work that constitutes the foundation of Micro-economics, where 
the individual consumer or producer was the unit concerned, not the entire national 
entity. 
Although the Classical economists had been concerned with the nation or the country 
as a whole, and therefore are more Macro than Micro, in approach,  Macro-economics 
as a subject developed only  after the Great Depression. On 23 October 1929, the 
New York Stock Exchange ( at Wall Street) crashed. Many rich and successful people 
lost their all and took their own lives in desperation. Widespread unemployment 
followed the closing down of production units. Both employers and employees felt 
the impact. Not just America or Europe but their colonies too suffered. It was a 
global crisis. 
 It was then that John Maynard Keynes came up with his analysis of the 
phenomenon in terms of Aggregate Demand falling short of Aggregate Supply and 
emphasized the role of the Government of a country in stepping up its own 
expenditure in order to correct that shortfall or gap. 
His analysis laid the foundation of Macro-Economics. Later John Hicks, Milton 
Friedman, James Tobin, A.W.Phillips, Edmund Phelps, Robert Lucas, T.J. Sargent, 
Robert Barros and others have contributed to the subject of Macro-Economics, 
bringing in the roles of Money and Expectations. Lucas, Sargent and Barros are often 
called the New Keynesian economists. 
To sum up in the words of Paul A. Samuelson,  “Macroeconomics deals with the big 
picture – with the macro aggregates of income, employment, and price levels. But do 
not think that microeconomics deals with unimportant details. After all, the big 
picture is made up of its parts.” ( Economics, 7
th
 edn, p 362). So he concludes that 
there is no essential opposition  between the two. 
Traditionally and in most universities,   a course in Micro-Economics is taught prior to 
one  in Macro-Economics.  
 
4. Positive Economics and Normative Economics - Methodology 
 
According to economists like Milton Fieldman ( who wrote Essays in Positive 
Economics,  1953), economists should not pass moral strictures or make `value 
judgements’. In other words, Economics should just `posit’ or be Positive, and not 
set any norms of behaviour to be followed by individuals or organizations.  
Economics can provide policy prescriptions, but expressed in an objective way. 
It would be a normative statement to say: ‘If there is economic depression, the 
government of the country should increase its consumption expenditure’. 
But it is permissible to make it in the following positive statement: ‘If there is 
economic depression and the government increases its consumption expenditure, the 
depression is likely to get corrected’. 
 
5. Art or Science ? 
 
Introduction to Macroeconomics 
Institute of Lifelong Learning, University of Delhi 
 
Is Economics  a science or an art? Etymologically, a science ( derived from sci, to 
know) provides theoretical knowledge while an art ( derived from artem, to do) 
teaches us how to practice or do it. Now Economics teaches us all about, say, why 
there may be unemployment in the economy.. But it does not teach him how to 
generate employment From this point of view, it is a science rather than an art. 
Again, the recent theoretical developments in Economics have made so much use of 
Mathematics, that a sound knowledge of  Mathematics is essential even for its  
undergraduate  Honours course, e.g., in Delhi University itself. This takes Economics 
closer to being a Science subject. 
However, the hallmark of science is experiment. A science must provide room for 
controlled experiment so as to verify its hypotheses. But human beings cannot be 
subjected to experiments just to find out the effects of , say, fiscal or monetary 
policies. In this sense. Economics definitely belongs to the Humanities stream. 
Most universities, regard Economics  as an art and award BA and MA degrees in it. 
However The London School of Economics does, in fact, award BSc and MSc degrees 
to its students of Economics. 
Indeed the scope of Economics is so wide that it is difficult to categories it as either 
science or art. It is perhaps a mixture of both. 
As Paul Samuelson put it, “ Not only is Economics at once art and a science, 
economics as a subject can combine the attractive features of  both the humanities 
and the sciences”(Economics, 7
th
 edn, Chapter 1,p 4).      
 
A Social Science 
 
Even if we use the term science to describe Economics, we must remember that it is 
a Social Science. It does not study individuals in isolation, doing everything by 
oneself. It studies individuals as members of a society or nation or Economy. 
An economy is the same as country or society but considered only in its economic 
aspects. Every society or country has numerous people engaged in activities of all 
sorts. Some work in the fields, some work in factories, and yet others in offices. 
Some perform agricultural activities, some industrial, and some do services. Those 
who are in agriculture need to get industrial products and, say, banking services. 
Those who are factory-workers, say, need to get hold of foodstuff, and use some 
kind of transport services. The people engaged in the services sector need both food 
and clothing . Thus all the three sectors with their separate kinds of activities need to 
have relations. All the people of an economy need to act as well as inter-act. This 
they do by exchanging the products of their various activities in various markets. 
 The epithet `Social’ covers this aspect of the subject of Economics. 
However, for analytical purposes, Economics sometimes uses the concept of a 
Robinson Crusoe Economy, or an economy consisting of a single person performing 
all the economic activities by himself. Robinson Crusoe is the title of a book written  
in 1719 by Daniel Defoe based on the life of Alexander Selkirk who was marooned on 
an island and survived all by himself for 28 years. A Robinson Crusoe Economy is 
thus a theoretical concept where the economy has a singleton member. 
 
6. Scope of Economics - Related Subjects 
 
Economics has a wide scope and has connections with various subjects. 
Mathematics and Statistics are necessary for the study of Economics. Mathematics 
helps economists to analyze  economic realities, to and derive conclusions from 
them. Statistics aids this process by systematizing the economic realities as data and 
inferring from them by accepted statistical tools. In fact, the application of Statistics 
to Economics had led to the development of a relatively new subject: Econometrics.