Chapter 1 Introduction

1. Why Economics?

Economics, at its core, is what the famous economist Alfred Marshall described as “the study of man in the ordinary business of life.” This means it explores how people behave and make decisions when they are involved in activities related to earning a living and satisfying their needs.

In our daily lives, we play various roles, all of which are central to the study of economics. These roles are known as economic agents, and their activities are called economic activities, which are actions undertaken for some form of monetary gain or to earn a livelihood.

The fundamental problem that gives rise to economics is scarcity. Unlike the story of Aladdin, who had a magic lamp to grant his unlimited wishes, we live in a world of limited resources. Our wants are unlimited, but the means to satisfy them (like our income, time, and natural resources) are finite.

This universal problem of scarcity is the root of all economic issues. If there were no scarcity, there would be no need to make choices, and thus no need to study economics. We encounter scarcity everywhere:

• Long queues for train tickets (scarcity of seats).
• Crowded buses (scarcity of space).
• The rush to get tickets for a popular movie (scarcity of tickets).

Scarcity forces us to make choices. Because resources are limited and have alternative uses, we must decide how best to use them. For example, a farmer with a plot of land (a scarce resource) must choose whether to grow food crops like wheat or commercial crops like cotton. Similarly, a student with limited time must choose between studying for an exam or playing a sport.

Consumption, Production And Distribution

The study of economics is traditionally divided into three main parts, which explore the choices made by different economic agents:

1. Consumption: This branch studies how a consumer makes choices. It analyzes how an individual, with a given income and facing various prices, decides which goods and services to buy to get the maximum possible satisfaction.
2. Production: This branch focuses on the decisions of a producer. It examines how a producer, with limited resources, decides what to produce, how much to produce, and which production techniques to use (e.g., more labor or more machinery) to maximize profit.
3. Distribution: This branch studies how the total income generated in an economy (the Gross Domestic Product or GDP) is distributed among those who contributed to its production. It looks at how income is shared in the form of wages for labor, rent for land, interest for capital, and profit for entrepreneurship.

Beyond these, modern economics also addresses critical societal problems like poverty, income inequality, unemployment, and the impact of environmental disasters. To understand and solve these complex issues, we need facts and figures. This is where the role of statistics becomes essential.

Therefore, a comprehensive definition of economics is:

“Economics is the study of how people and society choose to employ scarce resources that could have alternative uses in order to produce various commodities that satisfy their wants and to distribute them for consumption among various persons and groups in society.”

2. Statistics In Economics

Economics and statistics are deeply intertwined. Economic analysis is impossible without facts, and these facts are provided in the form of economic data. The primary purpose of collecting data on economic problems is to understand their causes and potential solutions.

The process follows a logical path:

1. Data Collection: We gather factual information about an economic problem. For example, to study poverty, we collect data on income levels, unemployment rates, literacy, etc.
2. Analysis: We use the collected data to analyze the problem and identify its root causes. For instance, data might show a strong link between poverty and lack of education.
3. Policy Formulation: Based on the analysis, economists can suggest measures or policies to the government to solve the problem. For example, if low productivity is a cause of poverty, the government might formulate a policy to provide vocational training.

Without data, we cannot understand economic problems, and without understanding them, we cannot formulate effective policies. Therefore, statistics provides the empirical foundation upon which the entire structure of modern economics is built.

3. What Is Statistics?

Statistics is a discipline that deals with the collection, analysis, interpretation, and presentation of numerical data. It is a powerful tool used across many fields, including economics, accounting, management, and social sciences.

In economics, we deal with two types of data:

• Quantitative Data: This refers to information that can be measured and expressed numerically. It deals with quantities. For example, the statement, "the production of rice in India increased from 39.58 million tonnes in 1974–75 to 106.5 million tonnes in 2013–14," presents quantitative data.
• Qualitative Data: This refers to information that describes attributes or characteristics that cannot be measured numerically. It deals with qualities. Examples include gender (male/female), skill level (unskilled/skilled), or health status (healthy/sick). While these cannot be quantified directly, they are crucial for economic analysis and are often collected and stored systematically.

The study of statistics involves a sequence of steps:

1. Collecting data.
2. Presenting the data in an organized manner (e.g., tables, graphs, diagrams).
3. Summarizing the data using numerical measures (e.g., mean, median).
4. Analyzing and interpreting the summarized data to draw meaningful conclusions.

4. What Statistics Does?

Statistics is an indispensable tool for an economist. It performs several vital functions:

1. Presents Economic Facts Precisely: Statistics allows us to state facts in a definite, numerical form, which is more accurate and convincing than vague statements. For example, saying "310 people died in the earthquake" is a precise statistical statement, whereas "hundreds of people died" is a vague one.
2. Condenses Mass Data: It helps in summarizing large volumes of data into a few representative figures, like averages or percentages. It is impossible to remember the individual incomes of millions of people, but we can easily understand the 'average income', which gives a single, meaningful summary of the entire dataset.
3. Finds Relationships Between Economic Factors: Statistical techniques like correlation and regression help economists discover and measure the relationships between different economic variables. For instance, statistics can help answer questions like:
   • What happens to the demand for a car when its price falls?
   - Does an increase in a country's average income lead to higher consumption?
4. Helps in Formulating Policies: By understanding these relationships, economists can advise governments on effective policies. For instance, statistical analysis can help determine the right level of taxation to maximize revenue without discouraging economic activity.
5. Aids in Economic Forecasting: Statistical tools are used to predict future trends based on past data. For example, planners can forecast future energy demand to decide how many new power plants need to be built.

5. Conclusion

In modern times, statistics is crucial for analyzing serious economic problems like rising prices (inflation), population growth, unemployment, and poverty. It not only helps in understanding these problems but also in designing and evaluating the policies aimed at solving them. For example, through statistical analysis of birth rates before and after a policy is implemented, we can determine if a family planning program has been effective.

However, it is vital to remember that statistical methods are no substitute for common sense. A famous story illustrates this point: a family of four tried to cross a river. The father, knowing the average depth of the river was less than the family's average height, assumed it was safe. He tragically forgot that the average does not account for variations—the river could be very deep in the middle. Consequently, the children drowned.

This story teaches us that statistics is a powerful tool, but its results must be interpreted with caution and sound judgment. Misusing statistical measures can lead to dangerously flawed conclusions.

Recap

• Economics deals with the problem of making choices due to scarcity—our wants are unlimited, but resources are limited and have alternative uses.
• The main branches of economics are Consumption (study of consumer choices), Production (study of producer choices), and Distribution (study of how national income is shared).
• Statistics is the science of collecting, presenting, analyzing, and interpreting numerical data.
• It provides the factual basis for economic analysis and helps in formulating and evaluating economic policies.
• It allows economists to present facts precisely, condense large data sets, find relationships between variables, and forecast future trends.

Exercises

This section contains questions for practice and self-assessment, designed to test the learner's understanding of the concepts discussed in the chapter, such as the definition of economic activities, the relationship between scarcity and choice, and the importance of statistics in economics.