Economics is study of mankind in the ordinary business of life - Discuss the statement

Economics is study of mankind in the ordinary business of life - Discuss the statement

Civic Economy or Economics is a study of society in the regular business of life. It examines that part of the individual & social behavior which is most closely connected with the achievement & with the use of material requisites of well-being".

This definition Money states that Economics is on the one side a study of property and on the additional and more significant side “a part of the study of man well-being Marshall’s followers like Pigou, Cannon and Beveridge have also defined Economics regarding element progress.

Features of Marshall’s Description:
The Marshall’s explanation of Economics has the following primary functions:

(1) Wealth is not the be-all and end-all of economic activities: Economics does not regard property as the be-all and the end-all of economic movements. Property sought for promoting human welfare. Hence, wealth is only a means to the fulfillment of an end which is people's health. Thus, capital is committed to a secondary place.

(2) Study of an ordinary man: Economics is not concerned with what called in Economics ‘economic man,' i.e., a man whose only motive is to acquire wealth for its sake and who is not affected by human thoughts in the pursuit of wealth. Rather, Economics bargain with ordinary male and females who are influenced by love, friendship, and fellow-feelings and not merely driven by the desire to get a maximum monetary advantage.

(3) Economics is a social science: Economics is a social science and not one which studies isolated individuals or Robinson Crusoe. Economics surveyed people living in society controlling other people and influenced.

(4) Economics does not study all actions of man: Economics does not study all the liveliness of man. It is involved with those actions which can be brought directly or obliquely with the measuring-rod of money. Marshall clearly explains that business is different from other work. For example,

• If a student visits a friend who is ill, it is a social movement,
• If a person gives his vote in selection, it is a political action.
• If a person goes to church/temple, it is a religious activity.

Marshall says that business is different from the activities mentioned above. A farmer going to the field or a worker going to the factory to work is an economic activity—they are trying to earn money. With that money, they will buy goods to satisfy their wants. In other words, economics deals with desires, efforts, and satisfaction.

In the words of Marshall, "man earns money to get material welfare." Marshall gives importance to well-being and man. As such this sense came to be described the welfare meaning.

(5) Study of material welfare: Economics regarded as the ways in which man applies his knowledge and skill to the benefits of nature for the satisfaction of his material welfare. Economics studies only ‘material requisites of well-being’ or causes of material welfare.

Features:
The definitions given by Welfare School of Professors have the following essential features of Business as Material Good:

(i) Wealth is negative the be all and the ending all of the individual activities: Economics does not regard property as the be all and the end all of the human activities. It is only a mean to the achievement of an end which is social welfare. Welfare and not the property is; therefore, of primary importance to man.

(ii) Study of an ordinary man: Economics is a study of a common man who lives in free society. A person who cut away from the community is not the case of the subject of Distribution.

(iii) It does not study all actions of man: Economics does not investigate all the activities of man. It is involved with those actions which can be brought immediately or obliquely with the mapping rod of cash.

(iv) Study of material progress: Economics is concerned with the processes in which man uses his knowledge, skill to the benefits of Nature for the satisfaction of his material well-being.

Thus, Why Economics is study of humanity in the ordinary business of life.

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Compare the Definition of Economics offered by Adam smith and Leonel Robins.

Compare the Definition of Economics offered by Adam Smith and Leonel Robins.

OR

"Economics is a science, which studied human behavior as a relationship between ends and scarce mean, which have alternative uses." - L Robins. Discuss the definition.

OR

"Economics is the science of Wealth" Discuss.

Adam Smith wrote a book in 1776 whose title was “Wealth of Nations.” In his book, he discussed the word ‘wealth’ through its four aspects: production of wealth, exchange of money, distribution of wealth and consumption of wealth. Therefore, it can be said according to Adam Smith: “Economics is a science of wealth.” Capital means goods and services transacted with the help of money. Let’s discuss four aspects of property; the first one is the production of wealth it shows as to how goods and services produce. Goods and services produce by the combination of four factors of production i.e. land, labor, capital and organization. The second aspect is the exchange of wealth there are many procedures of goods and services in society. Every process produces goods and services more than his personal requirement. The exchange of property enables everyone in the society to satisfy his multiple wants. The third aspect is the distribution of wealth, which means the distribution of goods and services among different sections or individuals of society. The last and fourth point is consumption of wealth that is using up the utility of goods and services for the satisfaction of wants is called the use of capital.
According to Robbins, economics is a positive science but in reality, it is not active science deals with substantial things, the results of which are individual but economics contracts with individual behavior which is unknown. Only A Relevant Theory: Robbins has reduced economics merely to the estimate theory. According to 'Frazer' economics is higher than a valuation method. Robbins has widened the scope of economics. He has included some matters in economics which are in fact not discussed in economics. According to Robbins, it involves the entire human life. For example, if you are to choose among the church of God and that of Mammon (riches), it will be an economic difficulty while it is the spiritual issue. According to Robbins, economics has no regulating aspect while it is wrong. Normative science is that which bargain with the matter of material well beings. It also points out that Robbins definition ignores the macro aspect of determination of national income and employment. But in reality, this is vital work of economists. It points out that Robbins definition has made economics colorless, abstract and challenging. It is, in fact, a description of economics only for economists. A common man cannot get any utility from it. Person Love Missing: Human love is entirely missing in Robbins definition of economics. He has not mentioned anything about people welfare. According to Robbins, a supply-sider is a neutral person. He has no concern whether the ends are good or bad. But in reality, an economist cannot be the neutral person. He must give opinions on the resolution of actual economic problems. Any writers point out that it fails to explain the problem of unemployment which is a central economic issue near time. According to Robbins, means are ever scarce. Labor is not rare. It means Robbins definition base on the wrong assumption. The system of economic growth or economic development has become the important branch of economics. This definition ignores it. It means it should discuss in economics that how does economy grow and which factors bring about the increase in nation income and productive capacity of the economy.

Definition of Economics offered by Leonel Robins:

Prof. Lionel Robbins provided his explanation of economics in his book” Nature and Significance of Economic Science” in the year 1932.He defined economics as, “Economics is the ability that examines human act as a relationship between objects and scarce means which have alternative uses.”

Robbins definition base on:
1.The multiplicity of wants. 2.The scarcity of means, In other words, Robbins definition says that: 1.The ends are unlimited, 2.Ways to achieve those ends are limited, and 3.

Characteristics OF THE DEFINITION

Followings are some of the features of Robbins description:

1. Multiplicity of Ends
As a subject of fact, never come to an end. They are always endless. As soon as one want is happy, another comes first. Thus, it is the unlimitedness of a person requires that never prevents him from working and keeps him interested in the work of making money for the pleasure of his desires.

2. Scarcity of Means
It refers to the limited supplies due to which economic obstacles arise. But if the resources were unlimited, then consequently there would have no financial difficulties and all the demands would have been filled. But it should be remarked that the means are scarce on their demand.

3. Selection / Urgency of Wants
It is evident that some of the wants are more urgent for us as compared to others. Naturally, we go to satisfy our immediate needs/wants first and then the outstanding ones. If all the demands are identical, there would be no urgency to fulfill then, and therefore, no economic difficulty would occur.

4. Alternative Uses
According to the Robbins description, all the scars means are capable of alternative uses i.e. they can put to some applications, e.g., water can use for drinking as well as for cooking. The main dilemma arises that where the utilization should make primary.

5. Human Science
Robbins in his definition has broadened the range of economics. According to him, commerce is the knowledge of human conduct as a whole both within and outside the society. It does not limit the subject matter within particular limits.

CRITICISM OF THE DEFINATON

Robin’s description also faces criticism from many economists. Some of the criticizing points are as follows:

1. Economics as a Positive Science
According to Robins, economics discovers only the facts that give rise to particular problems and does not offer advice as to how to trade with human behavior that differs from man to man and from generation to generation. So it is not a natural science, which deals with matter and energy and remains unchanged at any place. Finance is therefore not a physical science. It discovers both causes/efforts and suggestions.

2. Human Touch Missing
In Robbins definition, the human touch is only missing. It does not take into account the precise thinking, human sympathy, imagination and the variety of personal time.

3. Abstract and Complex
Robbins has made economics more challenging and complex and hence difficult. Utilities of economics lie in being a concrete and realistic study.

4. Macro Concept
Another criticism of Robbins explanation is that it neglects the macro aspect. It has ignored the concerns like employment, national income from its sides.

5. Does not Covers Economics of Growth
The economic growth theory or economic development system has overlooked in Robbins definition. Economics of extension describes how an economy grows and the factors that bring regarding an increase in governmental income and productivity of the economy. Robbins takes the resources as given and discusses only their allocation

Definition of Economics By Adam Smith:

There is no one meaning of Economics that has a universal acceptance. The formal roots of the scientific framework of economics can trace back to classical economists. The pioneers of the science of business defined economics as the science of wealth.
Adam Smith (1723 -1790), the founder of economics, described it as a body of knowledge which relates to property. Accordingly to him, if a nation has a larger amount of money, it can assist in completing its improvement. He described economics really:

“The study of nature and causes of producing of the wealth of a nation”.

Adam Smith in his famous book, “An Inquiry into the Reality and Causes of the Wealth of Nations” indicated the production and expansion of wealth as the name matter of business.
Ricardo, another British classical economist, shifted the importance from production of wealth to the distribution of wealth in the study of economics. J.B. Say, a French classical economist, described economics as:

The science which treats of wealth”.
J.S. Mill in the middle of 19th century looked upon economics is as:
"Practical science of generation and distribution of wealth”.
According to Malthus:“Man is driven by self Interest only. The desire to collect money never leaves him till he goes to the grave”.
The main points of the explanations of economics given by the above classical economists are that:
(i) Economics is the art of wealth only. It trades with consumption, production, exchange and distribution aspects of property.

(ii) Only those commodities which are scarce Includes In wealth. Non-material goods such as air, duties, etc., are excluded from the category of property.

Criticism on the Classical Definition of Economics:
The explanations give by Adam Smith and other classical economists measured by social reformers and men of words of that time Ruskin and Carlyle. They dubbed economics as a ‘dismal art’ and a 'science of getting rich'. The central criticisms on these definitions are as following:
(i) Too much importance to property: The descriptions of economics give primary importance to wealth and unimportant importance to man. The fact is that the knowledge of man is more value than the study of money.

(ii) The narrow definition of wealth: The word ‘wealth’ in the traditional economist’s definitions of economics means only material goods such as a chair, book, pen, etc. These do not involve services of doctors, nurses, soldiers, etc. In new economics, the word ‘wealth’ includes material as well as non-material welfares.

(iii) The concept of economic man: According to wealth definitions, the person works only for his self-interest Social interest ignore. Dr. Marshall and his supporters were of the opinion that economics does not study a greedy man but an ordinary man.

(iv) No notice of man’s welfare: The 'Wealth' definitions ignore the importance of man’s health. Wealth is not be all and the end all of all human activities.

(v) It does not study means: The descriptions of economics lay importance on the earning of capital as an end in itself. They neglect the means which are scare for the acquiring of money.

(vi) Defective logic: The definitions economics given by classical economists were unduly criticize by the literary writers of that era. The fact is that what Adam Smith composed in his book ‘Wealth of Nations' (1776) still operates well. The central discussion of the book that market economy enables every individual to contribute his supremacy to the production of wealth of society still not only holds good but is also being practiced and promoted throughout the capitalistic world. Since the word 'property' did not have a precise meaning, therefore the definition economics converted controversial. It was regarded unscientific and close. At the end of the 19th centenary, Dr. Alfred Marshall gave his definition of economics, and there he laid emphasis on man and his welfare.

Significance of Wealth:

A.Smith assumed that wealth is the only important factor in human society. It can fulfill all the desires of a person in society. He also thought that the entire efforts of human society are found to directed towards earning more and more wealth.

Smith claims that economics studies the behavior of those people who have only one objective. That objective is the making of more and more money at any cost by any means. The human being of such nature in the words of Smith is an "Economic Man".

Priority Given in Definition:

In the definition of economics, priority is given to wealth and the second priority to society. He assumes that society is for wealth but wealth is not for society. He also believed and argued that money and only property can give higher satisfaction to all humanity. Therefore, wealth is of primary importance in his definition.

Sources of Wealth
Smith in his definition of economics assumed that wages earned by active human resources are to be the only one and most important source of income for a nation. He also suggested that the active labors can make the high amount of wages only through the division of labor in production and distribution of goods and services. He concludes that apart from salaries, there is nothing else which can regard as sources of wealth of a nation.

Criticisms
The wealth definition of economics given by Adam Smith has criticized on several grounds. It sharply criticized by eminent scholars like Carlyle Ruskin, Alfred Marshall, etc. In short, the critics dubbed economics as the "Bread and Butter Science", "the Gospel of Mammon" and " a Dismal Science". The major points of criticisms of wealth definition discuss below

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What are the Main Goals of Macro Economics?

Macroeconomic aims are three of the five economic goals of a mixed economy that are most relevant to the learning of macroeconomics. They are full using, stability, and financial extension. The Three Main Goals of Macro Economics are :

Full Employment

Full employment reached when all usable supplies (labor, capital, land, and entrepreneurship) are used to produce goods and services. This object is commonly indicated by the employment of labor resources (measured by the unemployment rate). Though, all resources in the economy--labor, capital, land, and entrepreneurship--are essential to this goal. The economy profits from complete employment because resources produce the goods that meet the wants and needs that lessens the scarcity dilemma. The resources are not employed they are not building, and achievement is not achieved.

Stability

Stability obtains by avoiding or limiting fluctuations in production, employment, and prices. Security seeks to prevent the recessionary declines and inflationary expansions of business periods. This goal symbolizes by month-to-month and year-to-year variations in several economic dimensions, such as the inflation rate, the unemployment rate, and the mass rate of production. If these remain unchanged, then stability is at hand. Maintaining balance is profitable because it means uncertainty and disruptions in the marketplace are avoided. It means consumers and businesses can safely pursue long-term consumption and production plans. Methods makers are usually most concerned with price stability and the inflation rate.

Economic Growth

Financial germination is achieved by expanding the economy's ability to produce goods and services. This purpose is best indicated by measuring the rate of growth of result. The economy provides more goods this year than last; then it is growing. The Economic extension is also indicated by increases in the quantities of the resources--labor, capital, land, and entrepreneurship--used to produce goods. With economic growth, the community gets more rights that can be applied to satisfy more wants and needs--people are better off; living standards rise; and scarcity is less of a problem.

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Define Working Capital and its Significance for a Firm and Explain the Factors Affecting Working Capital Requirements.

Working capital is a financial metric which describes operating liquidity available to business, organization or other entity, including a regulatory object. Forward with fixed assets such as plant and machinery, working capital is considered a part of operating capital. Gross working capital equals to current assets.

 The working capital calculates as: 

Working Capital = Current Assets – Current  Liabilities

To operate the purposes of a firm working capital is imperative. A firm is a unit of industry to produce the finished goods for earning a profit. The importance of working capital for a company is as below:

01. For smooth production;
02. For Sufficient stock;
03. For Smooth sales;
04. For Bearing regular expenses;
05. Establish as a solvent firm;
06. Earning profits;
07. For Creation of goodwill;
08. For Wealth maximization;
09. Protection of fixed Capital;
10. Increase credit rating.

Description : 

01.For smooth Production: for the continuous production of a firm, healthy working capital is vital.

02.Sufficient stock: To stock sufficient new materials working capital is crucial for business.

03.Smooth sales: To sell produced goods working capital of a company is required.

04.Bearing regular expenses: Various types of costs not even related to production bears by a strong important to have healthy working capital.

05.Establish as a solvent company: To build a solvent firm working capital is an essential parameter to hold.

06.Earning profit: For the best level of production and sales promotion working capital of a company is very necessary.

07.Creation of Goodwill: Goodwill of business is the asset of it. To create goodwill of the company working capital plays a significant role.

08.Wealth maximization: For the expedite production goods and services a firm can earn profit increase day by day to enhance its wealth.

09.Protection of fixed capital: For the decent protection of the fixed capital of a firm consistency of working capital is extremely demanded.

10.Development credit rating: Credit from a bank of business institutions credit rating is crucial. The healthy working capital of a firm increases the credit score.

The explanations above denote that working capital is vital for a company.

Explain the factors affecting working capital requirements. 

The central determinants affecting working capital are as below:

01Nature of Business: The need of working capital depends on the variety of business. The nature of business is regularly of two types: Manufacturing Business and Trading Business. In the case of manufacturing business, it takes a lot of time in converting raw material into finished goods. Therefore, capital remains invested for an extended period in raw material, semi-finished products and the stocking of the finished goods.

02.The scale of Operations: There is an immediate link between the working capital and the level of actions. In other words, more working capital is needed in case of large organizations while less working capital needs in case of small groups.

03.Business Cycle: The requirement for the working capital influence by various stages of the business cycle. During the boom period, the demand for product increases and sales also increase. Therefore, more working capital is needed. On the contrary, during the term of crisis, the demand declines, and it affects both the result and sales of goods.

04.Seasonal Factors: Fascinating products are needed throughout the year while others have seasonal demand. Goods which have uniform demand the whole year their production and sale are continuous. Consequently, such enterprises need little working capital.

05.Production Cycle: Production period means the time involved in converting raw material into finished product. Thus, more working capital will be needed. On the contrary, where the stage of production cycle is little, less working capital will be necessary.

06.Credit Allowed: Those enterprises which sell products on cash payment basis demand little working capital, but those who give credit facilities to the customers require more working capital.

07.Credit Avails: If the raw material and other inputs are easily available on credit, less working capital is required. On the opposite, if these things are not available on credit then to make cash payment quickly the considerable amount of working capital will be necessary.

08.Operating Efficiency: Operating profitability means efficiently completing the different business operations. Operating efficiency of every company happens to be different.

09.Availability of Raw Materials: Availability of raw goods also influences the amount of working capital. If the company makes use of such raw material which is accessible simply throughout the year, then less working capital will be required as there will be no need to stock it to a high quantity. Reversely happened when the raw elements are not available anytime and anyplace.

10.Growth Prospects: Growth means the growth of the scale of business processes (production, sales, etc.). The companies which have sufficient possibilities of growth require more working capital while the case is different in respect of enterprises with fewer growth prospects.

11.The level of Competition: High level of competition increases the need for more working capital. More stock needed for quick delivery and credit facility for an extended period has to be made available.

12.Inflation: Inflation means the rise in prices. In such a circumstance more capital is required than before to keep the previous scale of result and sales. Therefore, with the accelerating rate of inflation, there is a corresponding increase in the working capital. 

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MXY Chemical needs working capital of Tk. 500,000. There are three alternative methods of financing.

MXY Chemical needs working capital of Tk. 500,000. There are three alternative methods of financing:

·         To forgo cash discount granted on basis of 3/15, net 30;

·         To borrow from a bank at 14% interest rate per annum. The bank requires 25% compensating balance on loan amount;

·         To issue commercial paper at 15%. The cost of issuing the commercial paper would be Tk. 25,000 per year. The maturity of the journal is one year.

Requirement: Suggest the best alternative.

SOLUITION:

Case-I: Cost of Trade Credit:

Cost of Trade Credit = (CDR/100-CDR X 360 days/CP-DP)  X 100

Here,

            Cash Discount Ratio (CDR)     = 3%

            CP                                            = 30 days

DP                                            = 15 days

Effective Interest Rate (EIR)   = ?      

So, Cost of Trade Credit                      = (CDR/100-CDR X 360 days/CP-DP) X 100

                                                            = (3/100-3 X 360/30-15) X 100

                                                            = (3/97 X 360/15) X 100

                                                            = (.03 X .24) X 100

                                                            = .74 X 100

                                                            = 74.23%

Case-II: Borrowing from a Bank:

Here,

            Interest (I)                               =14%

Working Capital                      = 500,000

Compensating Balance           = 25%

Effective Interest Rate (EIR)   = ?      

I = Annual Interest                  = 500000 X 14%

                                                = 500000 X 14/100

                                                = 70,000

Compensating Balance (CB)   = 500000 X 25%

                                                = 500000 X 25/100

                                                = 1,25000

We know that,

Effective Interest Rate (EIR)  =  (I/P-CB) X 100

                                                = (70000/500000-125000) X 100

                                                = (70000/375000) X 100

                                                = .1867 X 100

                                                = 18.67%

Case-III: Cost of Commercial Paper:

We know that,

Cost of Commercial Paper     = (FV-SV/NSV x 360/DM) X 100

                                               

Here,

            Face Value (FS)           = 500,000

            Sale Value (SV)            = Sale Value – Interest

                                                = 500000 – 500000X 15%

                                                = 500000 – 75000

                                                = 425000

Net Sale Value (NSV)              = Sale Value – Other Cost

                                                = 425000 – 25000 [Other Cost=Commercial Paper Cost=25000]                                                      = 400000

Days of Maturity (DM)           = 360 Days

So,

Cost of Commercial Paper     = (FV-SV/NSV x 360/DM) x 100

                                                = {(500000-425000)/400000 x (360/360)} x 100

                                                = (75000/400000) x 1) x 100 

                                                = (.1875 x 1) x 100

                                                = .1875 x 100

                                                = 18.75%        

Comparison:

Case-I                                      = 74.23%

Case-II                                     = 18.67%

Case-III                                                = 18.75%

Decision:

Amongst the three cases, Bank Loan is the cheapest. So, MXY Chemical should choose the Case-II.

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