Approaches of Economics

Traditional and modern approaches of economics

1. Traditional Approach

Traditionally, the subject matter of economics can be studied under four divisions. These are consumption, production, exchange, and distribution.

Consumption

It means the use of wealth to satisfy innumerable wants. It also means the destruction of utility. All the goods that are produced are consumed immediately or sometime in the future. Through the consumption activity, we use utilities hence consumption represents using up of utilities.

Production

It is an activity that helps to create utility. It simply means the addition of utilities. Hence production is defined as the creation of utility. Through the process of producing one set of goods is transformed into the other. In the economic sense, the mere creation of utilities is not treated as production, and in fact, the goods that are produced should have value too. In the production process, inputs or resources are transformed into products.

Exchange

The word exchange of goods implies the transfer of goods from one person to the other. Exchange of goods takes place among groups of individuals, countries, markets, regions, and so on. The exchange of goods leads to an increase in the welfare of individuals through the creation of higher utilities for goods and services.

Distribution

It refers to the sharing of wealth produced by the community among the agents of production. Proper distribution of wealth and resources leads to the growth and economic welfare of the people in the nation.

2. Modern Approach:

Microeconomics and Macroeconomics

As has been mentioned earlier, it is only an old approach to divide Economics into these four divisions. The modern approach is different. The study of Economics is now usually divided into two parts: a) income theory or Macro-Economics; and b) price theory or Micro- Economics.

The term “microeconomics” has been derived from the Greek word “MICROS” meaning small. In other words, micro means the millionth part. It is otherwise known as price theory. It focuses on price determination. Microeconomics fundamentally deals with the economic behaviour of individual economic units such as consumers, resource owners and business firms. It is concerned with the flow of goods and services from business firms to consumers and also the flow of resources or their services from resource owners to business firms. Microeconomics covers the theory of consumer behaviour, the theory of value (product pricing and factor pricing) and the theory of economic welfare.

The term "macroeconomics" has been derived from the Greek word “MACROS” meaning large. Macroeconomics otherwise is called income theory. It treats the economic system as a whole, rather than treating the individual economic units of which it is composed. Macroeconomics is concerned with the value of the overall flow of goods and the value of the overall flow of resources. Thus, it covers the theory of income and employment, the theory of money and prices, banking, the theory of economic growth macro theory of distribution, general equilibrium analysis, policy formulation and analysis, etc. Thus, it is concerned with the study of aggregates.