Scope & Limitation of Economics
- Microeconomics: The part of economics whose subject matter of study is individual units, i.e. a consumer, a household, a firm, an industry, etc. It analyses the way in which the decisions are taken by the economic agents, concerning the allocation of the resources that are limited in nature.
It studies consumer behaviour, product pricing, firm’s behaviour. Factor pricing, etc.
- Macro Economics: It is that branch of economics which studies the entire economy, instead of individual units, i.e. level of output, total investment, total savings, total consumption, etc. Basically, it is the study of aggregates and averages. It analyses the economic environment as a whole, wherein the firms, consumers, households, and governments make decisions.
It covers areas like national income, general price level, the balance of trade and balance of payment, level of employment, level of savings and investment.
The fundamental difference between micro and macro-economics lies in the scale of study. Further, in microeconomics, more importance is given to the determination of price, whereas macroeconomics is concerned with the determination of income of the economy as a whole.
Nevertheless, microeconomics and macroeconomics are complementary to one another, as they both aimed at maximising the welfare of the economy as a whole.
From the standpoint of microeconomics, the objective can be achieved through the best possible allocation of scarce resources. Conversely, if we talk about macroeconomics, this goal can be attained through the effective use of the resources of the economy.
Economics is a social science that examines how people produce, distribute, and consume goods and services. This means that much of the field is based on human behavior, which can be somewhat irrational and unpredictable. For this reason, it’s a science with certain inherent limitations that prevent its practitioner – economists, that is – from being able to accurately predict markets’ performance and know exactly how certain policies will affect different sectors and economies.
In addition, the field of economics suffers from the problem of non-replicability. It is impossible to precisely recreate market conditions or predict an outcome based on how markets have behaved in the past under similar circumstances. Unlike the hard sciences, where researchers are able to isolate certain variables and figure out direct relationships between cause and effect, there is no way to completely isolate any variable in the world of economics. The markets are simply too large, too intertwined and too influenced by human behavior to act in any way that is 100% predictable. In fact, there are so many variables involved that it is even impossible to identify all the factors in play in the first place.
The limitations of economics become especially problematic in normative economics, which involves recommendations about how things ought to be and what types of policies a government should implement in order to improve a nation’s economy. Different economists come to completely different conclusions about what kind of regulations and controls should be applied to various markets and exactly what outcomes will result. While they can point to data, historic precedence and other facts to support their arguments, there is no way to guarantee that they are right.
Because the field of economics cannot provide concrete conclusions, it is susceptible to criticism from a variety of sources, as is the case with political economics. Politicians often use normative economics to argue for certain policy changes that support their own agendas. They present their beliefs and hypotheses to the public as irrefutable facts when, in actuality, there is no way to verify the validity of their ideas, except to put them into practice and evaluate the results.
Economics was born out of the idea that human beings could study the nature of wealth in order to better the world, but it is a problematic area of inquiry. While positive economics can help people understand what is currently happening, it is much more difficult to use similar modes of thinking to predict the future and influence policies to ensure overall improvements. Even longstanding theories that are considered essential aspects of economics sometimes contradict one another. Ultimately, economists have to choose to subscribe to a particular school of thought that best aligns with their beliefs. These opposing viewpoints can cause controversies and only add to the limitations of economics in actually solving financial problems.