Why Economics?

Economics, as defined by Alfred Marshall, one of the founders of modern economics, is "the study of man in the ordinary business of life." This involves understanding the various roles people play in economic activities.

An economic activity is any action undertaken for a monetary gain. People engaged in these activities can be categorized into several roles:

Consumer: A person who buys goods to satisfy their own needs, their family's needs, or to give as a gift.
Seller: A person who sells goods to make a profit, such as a shopkeeper.
Producer: A person or company that creates goods (like a farmer or a factory) or provides services (like a doctor, taxi driver, or transporter).
Employee: A person who works for someone else in exchange for a wage or salary.
Employer: A person who hires others and pays them a wage.

We cannot get something for nothing

In real life, we face a fundamental economic problem: our wants are unlimited, but the resources to satisfy them are limited. This core issue is the foundation of economics.

Example

Think about your pocket money. You might want to buy a new book, go to the movies, and get a snack. However, your pocket money is limited. Because of this, you have to choose which of these wants are most important to you and spend your money accordingly.

Scarcity is the root of all economic problems. It is the situation where the things that satisfy our wants are limited in availability. If there were no scarcity, there would be no need to make choices and, therefore, no economic problems to study. We see scarcity all around us in daily life, such as long queues for train tickets, crowded buses, or a rush to see a new movie.

Furthermore, the resources that producers use are not only limited but also have alternative uses. This means a single resource can be used to produce different things, which creates the problem of choice.

Example

A farmer has a plot of land, along with limited labor, water, and fertilizer. They can use these resources to grow food crops. However, the same resources could also be used to grow non-food crops like cotton or rubber. The farmer must choose how to best use these limited resources.

A widely used definition of economics summarizes these ideas: "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."

Consumption, Production and Distribution

Economics is often discussed in three main parts, which correspond to the primary economic activities:

Consumption: This is the study of how a consumer decides what to buy. Given a limited income and the prices of many different goods, a consumer has to make choices to satisfy their needs.
Production: This is the study of how a producer decides what goods to produce and how to produce them for the market, considering their available resources.
Distribution: This is the study of how the total income generated in a country, known as the Gross Domestic Product (GDP), is distributed among the population. This income is divided into wages (for labor), profits (for entrepreneurs), and interest (for capital).

Beyond these three areas, modern economics uses facts and numbers to study critical issues like poverty, income inequality, and the economic impact of natural disasters. To understand and address these problems, we need reliable facts, which is why the study of Statistics is essential in modern economics.

Statistics in Economics

To understand and solve economic problems, we need facts. These economic facts are also known as economic data.

The process generally involves two steps:

Analysis: The first step is to collect data to understand and explain the causes behind an economic problem. For instance, to analyze poverty, we would collect data on factors like unemployment, low productivity, and backward technology.
Policy Formulation: Analysis alone is not enough. The goal is to find solutions. In economics, measures designed to solve economic problems are known as policies.

Note

The relationship between economics and statistics is fundamental. Without data, it is impossible to analyze an economic problem, and without analysis, it is impossible to formulate effective policies to solve it.

What is Statistics?

Statistics is a field of study that deals with the collection, analysis, interpretation, and presentation of numerical data. While it is a branch of mathematics, it is used across many disciplines, including economics.

Economic data can be of two main types:

Quantitative Data

Most economic data is quantitative, meaning it is expressed in numbers. [!example] The statement, "the production of rice in India has increased from 39.58 million tonnes in 1974-75 to 106.5 million tonnes in 2013-14," is an example of quantitative data.

Qualitative Data

Economics also uses qualitative data, which describes attributes or characteristics that cannot be measured with numbers but are still important to record. This information can often be expressed in degrees. [!example] Gender (man/woman) is qualitative data. Other examples include skill level (unskilled/skilled/highly skilled) or health status (sick/healthy). This type of data is collected and stored systematically, just like quantitative data on income or prices.

The process of using statistics involves several steps:

Collection of data.
Presentation of data in tables, diagrams, and graphs.
Summarization of data by calculating numerical measures like mean (average), variance, etc.
Analysis and interpretation of the data.

What Statistics Does?

Statistics is an indispensable tool for an economist for several key reasons:

Presents facts in a precise form: Statistics allows economists to state economic facts with precision. Saying "310 people died in the recent earthquake" is a statistical statement and is more exact and convincing than saying "hundreds of people died."
Condenses mass data: Statistics helps in summarizing large volumes of data into a few meaningful figures. It is impossible to remember the individual incomes of thousands of people, but an average income figure provides a clear summary.
Finds relationships between economic factors: Statistical methods can be used to verify if a relationship exists between different economic variables. For example, an economist can use statistics to determine what happens to the demand for a product when its price changes.
Helps in predicting future trends: Statistical tools are used to predict future changes. For example, by analyzing past data on consumption, an economic planner can forecast the expected level of consumption in the future and plan production accordingly.
Aids in policy formulation: By helping to understand economic problems and predict future trends, statistics plays a crucial role in formulating plans and policies to solve those problems.

Conclusion

Today, statistics is widely used to analyze serious economic problems like rising prices, unemployment, and poverty. It helps in identifying the causes of these problems, formulating policies to address them, and evaluating the impact of those policies. For instance, statistical techniques can help determine if a family planning policy has been effective in controlling population growth.

Decision-making in economics heavily relies on statistics. To decide how much oil India should import in the future, policymakers need to know the expected domestic production and demand. This vital information can only be obtained through statistical analysis.

Statistical methods are no substitute for common sense!

It is important to remember that statistical tools must be used with care and common sense. A famous story illustrates this point: a father calculated that the average height of his family was greater than the average depth of a river, so he assumed they could cross safely. However, his children, being shorter than the average, drowned. The fault was not with the statistical method (calculating an average) but with the misuse of that information without applying common sense.

Chapter Notes