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Chapter 1 Introduction
Economics is often described as "the study of man in the ordinary business of life," as put by Alfred Marshall. This means it deals with everyday activities related to earning and living. When you buy something, you're a consumer. When you sell goods, you're a seller. Producing goods or providing services makes you a producer. If you work for someone else for pay, you're an employee. If you hire someone, you're an employer. Activities undertaken for monetary gain are considered economic activities. These form the core of what economists study.
A fundamental concept in economics is scarcity. Unlike Aladdin with his magic lamp, our wants are unlimited, but the resources to satisfy them are limited. For example, your pocket money is limited, forcing you to choose which things you can buy. This scarcity is the root of all economic problems. Long queues, crowded transport, and shortages are all signs of scarcity. Resources used in production are also limited and have **alternative uses**. For instance, agricultural land can be used for food crops or non-food crops like cotton. This gives rise to the problem of **choice** – deciding how to use limited resources to produce different commodities.
Why Economics?
Economics studies human activities related to the ordinary business of life, particularly in the context of unlimited wants and scarce resources with alternative uses. The subject can be divided into three main parts: consumption, production, and distribution. Additionally, modern economics addresses societal problems like poverty and inequality, requiring factual data for analysis and policy formulation.
Consumption, Production And Distribution
Economics traditionally studies three core areas:
- Consumption: How consumers decide what to buy given their income, prices, and available goods.
- Production: How producers decide what and how to produce for the market.
- Distribution: How the total income of the country (Gross Domestic Product or GDP) is divided among different factors of production as wages (and salaries), profits, and interest.
Beyond these, modern economics includes the study of basic problems like poverty and inequality. To understand these issues, economists need factual information, often in numerical form, about income disparities, literacy rates, employment opportunities related to education, and the impact of disasters. Such studies are essential for informing government policies aimed at addressing societal ills and can help individuals plan their own lives. Statistics, the systematic study of numerical facts, is crucial for these studies and has become an integral part of modern economics courses.
A widely accepted 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."
Statistics In Economics
Understanding and addressing economic problems requires reliable facts, also known as **economic data**. Collecting data is the first step towards analyzing these problems and formulating policies to solve them.
The purpose of collecting economic data is to understand and explain problems by identifying their underlying causes. For example, analyzing poverty involves explaining it in terms of factors like unemployment, low productivity, or backward technology. However, analysis is only useful if it leads to solutions. Finding measures to solve economic problems is part of policy formulation. Policies cannot be developed without data on the relevant factors. This highlights the fundamental relationship between Economics and Statistics: Statistics provides the data and methods necessary for economic analysis and policy formulation.
What Is Statistics?
Statistics is a field that deals with the collection, analysis, interpretation, and presentation of numerical data. It is a branch of mathematics extensively used in various disciplines, including economics, accounting, management, and social sciences.
In economics, data is often quantitative, meaning it can be measured numerically (e.g., production figures, incomes, prices). For example, stating that "the production of rice in India increased from 39.58 million tonnes in 1974–75 to 106.5 million tonnes in 2013–14" is quantitative data. However, economics also uses **qualitative data**, which describes attributes that are important to record accurately even if they cannot be measured numerically (e.g., gender, health status, skill level). While not numerical, qualitative attributes can sometimes be described in terms of degrees (e.g., better/worse, highly skilled/unskilled). Statistics involves collecting both quantitative and qualitative information, presenting it systematically (tables, diagrams, graphs), summarizing it using numerical indices (mean, variance), and then analyzing and interpreting the results.
What Statistics Does?
Statistics is an essential tool for economists, enabling them to understand economic problems, identify causes, and formulate policies. It helps present economic facts precisely, making them more convincing than vague statements. For example, stating the exact number of deaths in an earthquake is precise statistical data.
Statistics helps condense large amounts of data into summary measures (like averages), providing a meaningful overview. It is crucial for finding and verifying relationships between different economic factors (e.g., price and demand, income and consumption, government expenditure and price levels). Economists use statistical methods to test assumptions about these relationships and to predict changes in one factor based on changes in another (e.g., impact of investment on future national income).
Formulating future plans and policies (e.g., deciding production levels for a future year) requires knowledge of future trends. Statistics helps predict these trends (e.g., future consumption based on past data), enabling the formulation of appropriate economic policies to address problems. Thus, statistical methods are vital for effective economic analysis and policy-making.
Conclusion
Statistics is widely used today to analyze significant economic problems like rising prices, population growth, unemployment, and poverty, and to find solutions. Statistical techniques help evaluate the effectiveness of policies, such as assessing whether family planning policies reduce population growth. In economic decision-making, Statistics plays a vital role. For instance, determining how much oil India needs to import in the future requires predicting domestic production and demand, which can only be done statistically. Without statistical information, such crucial economic decisions cannot be made effectively. However, it is important to remember that statistical methods are tools and should be used with common sense, as highlighted by the story of the family drowning while crossing a river based solely on average depth and height.
Recap:
- Wants are unlimited, but resources are scarce. Scarcity is the fundamental economic problem.
- Resources have alternative uses, leading to the problem of choice.
- Consumption is the purchase of goods to satisfy wants.
- Production is the creation of goods and services.
- Distribution is the division of national income among factors of production.
- Statistics helps find, verify, and predict economic relationships using data.
- Statistical methods are used to analyze economic problems and formulate policies.