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Limitations of Economics

VSAT 2023

What is Economics?

Last updated date: 23rd Jan 2023
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Economics is the economic problem or study of economic problems arising from the fact that resources are scarce relative to our needs and that scarce resources have other uses. It focuses on rationally managing scarce resources in ways that maximise economic benefits at both micro and macro levels. One of the major limitations of economics is that it assumes economic agents are rational and that only economic equilibrium exists. Economics is divided into two parts:

  • Microeconomics 

  • Macroeconomics. 

Below is a brief explanation of micro and macro concepts in Economics.


Microeconomics

Microeconomics is the study of economics at the individual, group, or firm level. This is considered to be basic economics. Microeconomics may be defined as that branch of economic analysis which studies the economic behaviour of the individual unit, maybe a person, a particular household, or a particular firm. This is a study of specific entities rather than all entities combined. Microeconomics is also known as the theory of prices and values, the theory of households, firms, and industries. Most production and welfare theories are microeconomics in nature. A key role of microeconomics is to study how firms can maximise their production and capacity so that they can lower prices and compete in their industry.

Microeconomics


Microeconomics


Limitations of Microeconomics

The main limitations of microeconomics are as follows: 

  • Microeconomic studies assume that other values ​​are constant, which is not realistic. All factors are subject to change and are not constant. 

  • One of the important limitations of Microeconomics is that it assumes full employment. In other words, all resources are fully used in the production process, but this is only an illusion and not true.

  • Adopting a laissez-faire policy is unrealistic in the real world, where we see government interference in economic activity.

  • Knowledge of the economy as a whole is very important for people as it encompasses all economic factors. But microeconomics only focuses on a small part of the economy as a whole.

  • The scope of microeconomics is limited and narrow. It does not include income theory, inflation, monetary policy, etc., which are very important for economic analysis.

Macroeconomics

Macroeconomics may be defined as that branch of economic analysis which studies the behaviour of not one particular unit but all the units combined. Macroeconomics is a study in aggregates. Macroeconomics studies the links between different countries in terms of how the policies of one country affect others. Within that framework, an analysis of the successes and failures of government strategies is presented.


Limitations of Macroeconomics

The limitations of macroeconomics are as follows: 

  • Macroeconomics deals with aggregates, which refer to individual totals. However, overall results may differ from individual behaviour. 

  • It does not study the different effects of the aggregate on different sectors of the economy.

  • It ignores the contribution of Individual units.

  • If each data unit is different, it becomes difficult to judge.

  • The aggregate tendency may not affect all sectors equally.

  • Aggregate values ​​cannot be used when individual items need to be considered separately.

Business Economics

Business economics is the application of microeconomics focused on subjects of great importance and interest. Business Economics deals with the organisation and allocation of a company's scarce resources to achieve desired goals. Thus, it combines the fundamentals of economics and business. The primary concern of business economics is with the company, the environment in which the company is located, and the business decision a company must make. Business Economics seeks to examine and analyse how and why a company behaves. It looks at the impact of actions, the policies of the companies that act, and the economy as a whole.


Limitations of Business Economics/Managerial Economics

The limitations of managerial economics are listed below:

  • Business economics focuses on business analysis based on financial and costing data. The reliability of this data, therefore, depends on the accuracy of the financial accounting information. 

  • This analysis is based on historical information. But things change when new systems are introduced, and conclusions cannot be predicted from this previous information. Management controls are subject to the personal preferences of individual managers, which may influence to some extent, the final decisions of managers.

  • It is a costly process as the company usually needs a certain number of managers to keep it functioning properly.

  • The science of business management is relatively new and not fully developed. So, it can be ambiguous in certain scenarios.

Business Economics


Business Economics


Case Study

“Economics is the study of choice under the conditions of scarcity.” Explain the statement concerning scarcity. 

Ans: Scarcity is the basis of an essential problem in Economics. Even free natural resources when there is a cost to acquire or consume them, or when consumer demand for previously unnecessary resources increases due to changing tastes or newly discovered uses. Without scarcity, there would have been neither economic problems nor choice problems. Without a shortage of resources, the concept of infinite needs does not exist. If resources are not limited and desires are no longer unlimited, there would no longer be a question of choice. The question of choice ceases to exist. Therefore, there should be no economic problems and no economics.


Summary

Economics is derived from the Greek word ‘oikonomia’, which can be divided into two parts: ‘Oikos’ means house and ‘nomos’ means management, so together, they mean the management of household finances. The subject of Economics revolves around the central question of the rational use of resources. At the micro level, it rationalises limited resources so that individuals can maximise their satisfaction as consumers and profits as producers, and at the macro level, economies can maximise social welfare along with rapid economic growth.

FAQs on Limitations of Economics

1. State the importance of macroeconomics.

The importance of macroeconomics is as follows:

  • It explains how the economy works as a whole and how levels of national income and employment are determined based on aggregate demand and aggregate supply. This helps achieve the goals of economic growth, higher GDP levels, and higher employment levels. It analyses the forces driving a country's economic growth and explains how to achieve and sustain peak economic growth.

  • It explains the factors that determine the balance of payments. At the same time, it identifies the causes of the balance of payments deficit and proposes corrective actions.

  • It helps solve economic problems such as poverty, unemployment, inflation, and deflation that can only be solved at the macro level, i.e., the level of the economy as a whole.

2. State the limitations of Economic growth.

Economic growth can be defined as the increase in the monetary value of all goods and services produced in an economy over some time. It reflects the potential increase in the number of commerce taking place in the economy. This can be measured by the increase in the total market value of additional goods and services produced using economic concepts such as GDP and GNP. The limitations of economic growth are discussed below:

  • The quest for better performance tends to increase the burden on the environment, often resulting in increased air, water, noise, and other pollution. This could be water pollution or air pollution, but this growth also greatly increases noise pollution. Increased traffic and increased congestion are classic examples of this.

3. Do you think there are any similarities between micro and macroeconomics? Explain.

The similarities between microeconomics and macroeconomics stem from the fact that they both study different economic problems. Microeconomics examines the economic problem of scarcity and choice at the individual level and how individuals make economic decisions, while macroeconomics extends it further to the economy as a whole, where countries determine their economic budgets and budgets. 


The relationship between microeconomics and macroeconomics is that they are interdependent because microeconomic variables depend heavily on macroeconomic variables, and macroeconomics likewise depends on the economy's microeconomic variables.

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