CHA P T ER

1

Studying this chapter should
enable you to:
• know what the subject of
economics is about;
• understand how economics is
linked with the study of economic
activities in consumption,
production and distribution;
• understand why knowledge of
statistics can help in describing
consumption, production and
distribution;
• learn about some uses of
statistics in the understanding of
economic activities.

1. W H Y

ECONOMICS?

You have, perhaps, already had
Economics as a subject for your earlier
classes at school. You might have been

Introduction

told this subject is mainly around
what Alfred Marshall (one of the
founders of modern economics) called
“the study of man in the ordinary
business of life”. Let us understand
what that means.
When you buy goods (you may
want to satisfy your own personal
needs or those of your family or those
of any other person to whom you want
to make a gift) you are called
a consumer.
When you sell goods to make
a profit for yourself (you may be
a shopkeeper), you are called a seller.
When you produce goods (you may
be a farmer or a manufacturer), you
are called a producer.

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STATISTICS FOR ECONOMICS

When you are in a job, working for
some other person, and you get paid
for it (you may be employed by
somebody who pays you wages or a
salary), you are called a serviceholder.
When you provide some kind of
service to others for a payment (you
may be a lawyer or a doctor or a
banker or a taxi driver or a transporter
of goods), you are called a serviceprovider.
In all these cases you will be called
gainfully employed in an economic
activity. Economic activities are ones
that are undertaken for a monetary
gain. This is what economists mean
by ordinary business of life.
Activities
• List different activities of the
members of your family. Would
you call them economic
activities? Give reasons.
• Do you consider yourself a
consumer? Why?

We cannot get something for
nothing
If you ever heard the story of Aladdin
and his Magic Lamp, you would agree
that Aladdin was a lucky guy.
Whenever and whatever he wanted, he
just had to rub his magic lamp on
when a genie appeared to fulfill his
wish. When he wanted a palace to live
in, the genie instantly made one for
him. When he wanted expensive gifts
to bring to the king when asking for
his daughter’s hand, he got them at
the bat of an eyelid.

In real life we cannot be as lucky
as Aladdin. Though, like him we have
unlimited wants, we do not have a
magic lamp. Take, for example, the
pocket money that you get to spend.
If you had more of it then you could
have purchased almost all the things
you wanted. But since your pocket
money is limited, you have to choose
only those things that you want the
most. This is a basic teaching of
Economics.
Activities
• Can you think for yourself of
some other examples where a
person with a given income has
to choose which things and in
what quantities he or she can
buy at the prices that are being
charged (called the current
prices)?
• What will happen if the current
prices go up?

Scarcity is the root of all economic
problems. Had there been no scarcity,
there would have been no economic
problem. And you would not have
studied Economics either. In our daily
life, we face various forms of scarcity.
The long queues at railway booking
counters, crowded buses and trains,
shortage of essential commodities, the
rush to get a ticket to watch a new
film, etc., are all manifestations of
scarcity. We face scarcity because the
things that satisfy our wants are
limited in availability. Can you think
of some more instances of scarcity?
The resources which the producers
have are limited and also have

INTRODUCTION

3

alternative uses. Take the case of food
that you eat every day. It satisfies your
want of nourishment. Farmers
employed in agriculture raise crops
that produce your food. At any point
of time, the resources in agriculture
like land, labour, water, fertiliser, etc.,
are given. All these resources have
alternative uses. The same resources
can be used in the production of nonfood crops such as rubber, cotton, jute
etc. Thus alternative uses of resources
give rise to the problem of choice
between different commodities that
can be produced by those resources.
Activities
• Identify your wants. How many
of them can you fulfill? How
many of them are unfulfilled?
Why you are unable to fulfill
them?
• What are the different kinds of
scarcity that you face in your
daily life? Identify their causes.

Consumption,
Distribution

Production

and

If you thought about it, you might
have realised that Economics involves
the study of man engaged in economic

activities of various kinds. For this,
you need to know reliable facts about
all the diverse economic activities like
production, consumption and
distribution. Economics is often
discussed in three parts: consumption, production and distribution.
We want to know how the
consumer decides, given his income
and many alternative goods to choose
from, what to buy when he knows the
prices. This is the study of Consumption.
We also want to know how the
producer, similarly, chooses what to
produce for the market when he
knows the costs and prices. This is the
study of Production.
Finally, we want to know how the
national income or the total income
arising from what has been produced
in the country (called the Gross
Domestic Product or GDP) is
distributed through wages (and
salaries), profits and interest (We will
leave aside here income from
international trade and investment).
This is study of Distribution.
Besides these three conventional
divisions of the study of Economics
about which we want to know all the
facts, modern economics has to
include some of the basic problems
facing the country for special studies.
For example, you might want to
know why or to what extent some
households in our society have the
capacity to earn much more than
others. You may want to know how
many people in the country are really

4

poor, how many are middle-class, how
many are relatively rich and so on. You
may want to know how many are
illiterate, who will not get jobs,
requiring education, how many are
highly educated and will have the best
job opportunities and so on. In other
words, you may want to know more
facts in terms of numbers that would
answer questions about poverty and
disparity in society. If you do not like
the continuance of poverty and gross
disparity and want to do something
about the ills of society you will need
to know the facts about all these
things before you can ask for
appropriate actions by the
government. If you know the facts it
may also be possible to plan your own
life better. Similarly, you hear of —
some of you may even have
experienced disasters like Tsunami,
earthquakes, the bird flu — dangers
threatening our country and so on
that affect man’s ‘ordinary business
of life’ enormously. Economists can
look at these things provided they
know how to collect and put together
the facts about what these disasters
cost systematically and correctly. You
may perhaps think about it and ask
yourselves whether it is right that
modern economics now includes
learning the basic skills involved in
making useful studies for measuring
poverty, how incomes are distributed,
how earning opportunities are related
to your education, how environmental
disasters affect our lives and so on?
Obviously, if you think along these
lines, you will also appreciate why we
needed Statistics (which is the study

STATISTICS FOR ECONOMICS

of numbers relating to selected facts
in a systematic form) to be added to
all modern courses of modern
economics.
Would you now agree with the
following definition of economics that
many economists use?
“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.”
Activity
• Would you say, in the light of the
discussion above, that this
definition used to be given seems
a little inadequate now? What
does it miss out?

2. STATISTICS

IN

ECONOMICS

In the previous section you were told
about certain special studies that
concern the basic problems facing a
country. These studies required that
we know more about economic facts
in terms of numbers. Such economic
facts are also known as data.
The purpose of collecting data
about these economic problems is to
understand and explain these
problems in terms of the various
causes behind them. In other words,
we try to analyse them. For example,
when we analyse the hardships of
poverty, we try to explain it in terms
of the various factors such as

INTRODUCTION

unemployment, low productivity of
people, backward technology, etc.
But, what purpose does the
analysis of poverty serve unless we are
able to find ways to mitigate it. We
may, therefore, also try to find those
measures that help solve an economic
problem. In Economics, such
measures are known as policies.
So, do you realise, then, that no
analysis of a problem would be
possible without the availability of
data on various factors underlying an
economic problem? And, that, in such
a situation, no policies can be
formulated to solve it. If yes, then you
have, to a large extent, understood the
basic relationship between Economics
and Statistics.

3. WHAT

IS

STATISTICS?

At this stage you are probably ready
to know more about Statistics. You
might very well want to know what the
subject “Statistics” is all about. What
are its specific uses in Economics?
Does it have any other meaning? Let
us see how we can answer these
questions to get closer to the subject.
In our daily language the word
‘Statistics’ is used in two distinct
senses: singular and plural. In the
plural sense, ‘statistics’ means
‘numerical facts systematically
collected’ as described by Oxford
Dictionary. Thus, the simple meaning
of statistics in plural sense is data.
Do you know that the term statistics
in singular means the ‘science of
collecting, classifying and using
statistics’ or a ‘statistical fact’.

5

By data or statistics, we mean both
quantitative and qualitative facts that
are used in Economics. For example,
a statement in Economics like “the
production of rice in India has
increased from 39.58 million tonnes
in 1974–75 to 58.64 million tonnes in
1984–85”, is a quantitative fact. The
numerical figures such as ‘39.58
million tonnes’ and ‘58.64 million
tonnes’ are statistics of the
production of rice in India for
1974–75 and 1984–85 respectively.
In addition to the quantitative
data, Economics also uses qualitative
data. The chief characteristic of such
information is that they describe
attributes of a single person or a group
of persons that is important to record
as accurately as possible even though
they cannot be measured in
quantitative terms. Take, for example,
“gender” that distinguishes a person
as man/woman or boy/girl. It is often
possible (and useful) to state the
information about an attribute of a
person in terms of degrees (like better/
worse; sick/ healthy/ more healthy;
unskilled/ skilled/ highly skilled etc.).
Such qualitative information or
statistics is often used in Economics
and other social sciences and
collected and stored systematically
like quantitative information (on
prices, incomes, taxes paid etc.),
whether for a single person or a group
of persons.
You will study in the subsequent
chapters that statistics involves
collection and organisation of data. The
next step is to present the data in

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STATISTICS FOR ECONOMICS

tabular, diagrammatic and graphic
forms. The data, then, is summarised
by calculating various numerical
indices such as mean, variance,
standard deviation etc. that represent
the broad characteristics of the
collected set of information.
Activities
• Think of two examples of
qualitative and quantitative data.
• Which of the following would give
you qualitative data; beauty,
intelligence, income earned,
marks in a subject, ability to
sing, learning skills?

4. WHAT STATISTICS DOES?
By now, you know that Statistics is
an indispensable tool for an economist
that helps him to understand an
economic problem. Using its various
methods, effort is made to find the
causes behind it with the help of the
qualitative and the quantitative facts
of the economic problem. Once the
causes of the problem are identified,
it is easier to formulate certain policies
to tackle it.
But there is more to Statistics. It
enables an economist to present
economic facts in a precise and
definite form that helps in proper
comprehension of what is stated.
When economic facts are expressed in
statistical terms, they become exact.
Exact facts are more convincing than
vague statements. For instance,
saying that with precise figures, 310
people died in the recent earthquake
in Kashmir, is more factual and, thus,

a statistical data. Whereas, saying
hundreds of people died, is not.
Statistics also helps in condensing
the mass of data into a few numerical
measures (such as mean, variance
etc., about which you will learn later).
These numerical measures help
summarise data. For example, it
would be impossible for you to
remember the incomes of all the
people in a data if the number of
people is very large. Yet, one can
remember easily a summary figure like
the average income that is obtained
statistically. In this way, Statistics
summarises and presents a
meaningful overall information about
a mass of data.
Quite often, Statistics is used in
finding relationships between different
economic factors. An economist may
be interested in finding out what
happens to the demand for a
commodity when its price increases
or decreases? Or, would the supply of
a commodity be affected by the
changes in its own price? Or, would
the consumption expenditure increase
when the average income increases?
Or, what happens to the general price
level when the government
expenditure increases? Such questions can only be answered if any
relationship exists between the
various economic factors that have
been stated above. Whether such
relationships exist or not can be easily
verified by applying statistical
methods to their data. In some cases
the economist might assume certain
relationships between them and like

INTRODUCTION

to test whether the assumption she/
he made about the relationship is valid
or not. The economist can do this only
by using statistical techniques.
In another instance, the economist
might be interested in predicting the
changes in one economic factor due
to the changes in another factor. For
example, she/he might be interested
in knowing the impact of today’s
investment on the national income in
future. Such an exercise cannot be
undertaken without the knowledge of
Statistics.
Sometimes, formulation of plans
and policies requires the knowledge
of future trends. For example, an

7

consumption of past years or of recent
years obtained by surveys. Thus,
statistical methods help formulate
appropriate economic policies that
solve economic problems.

5. CONCLUSION
Today, we increasingly use Statistics
to analyse serious economic problems
such as rising prices, growing
population, unemployment, poverty
etc., to find measures that can solve
such problems. Further it also helps
evaluate the impact of such policies
in solving the economic problems. For
example, it can be ascertained easily

Statistical methods are no substitute for common sense!
There is an interesting story which is told to make fun of statistics. It is said
that a family of four persons (husband, wife and two children) once set out
to cross a river. The father knew the average depth of the river. So he
calculated the average height of his family members. Since the average height
of his family members was greater than the average depth of the river, he
thought they could cross safely. Consequently some members of the family
(children) drowned while crossing the river.
Does the fault lie with the statistical method of calculating averages or
with the misuse of the averages?

economic planner has to decide in
2005 how much the economy should
produce in 2010. In other words, one
must know what could be the
expected level of consumption in 2010
in order to decide the production plan
of the economy for 2010. In this
situation, one might make subjective
judgement based on the guess about
consumption in 2010. Alternatively,
one might use statistical tools to
predict consumption in 2010. That
could be based on the data of

using statistical techniques whether
the policy of family planning is
effective in checking the problem of
ever-growing population.
In economic policies, Statistics
plays a vital role in decision making.
For example, in the present time of
rising global oil prices, it might be
necessary to decide how much oil
India should import in 2010. The
decision to import would depend on
the expected domestic production of
oil and the likely demand for oil in

8

STATISTICS FOR ECONOMICS

2010. Without the use of Statistics, it
cannot be determined what the
expected domestic production of oil
and the likely demand for oil would
be. Thus, the decision to import oil

cannot be made unless we know the
actual requirement of oil. This vital
information that help make the
decision to import oil can only be
obtained statistically.

Recap
•
•
•
•
•
•
•
•

Our wants are unlimited but the resources used in the production
of goods that satisfy our wants are limited and scarce. Scarcity is
the root of all economic problems.
Resources have alternative uses.
Purchase of goods by consumers to satisfy their various needs is
Consumption.
Manufacture of goods by producers for the market is Production.
Division of the national income into wages, profits, rents and interests
is Distribution.
Statistics finds economic relationships using data and verifies them.
Statistical tools are used in prediction of future trends.
Statistical methods help analyse economic problems and
formulate policies to solve them.

EXERCISES
1. Mark the following statements as true or false.
(i) Statistics can only deal with quantitative data.
(ii) Statistics solves economic problems.
(iii) Statistics is of no use to Economics without data.
2. Make a list of activities that constitute the ordinary business of life. Are
these economic activities?
3. ‘The Government and policy makers use statistical data to formulate
suitable policies of economic development’. Illustrate with two examples.
4. You have unlimited wants and limited resources to satisfy them. Explain
by giving two examples.
5. How will you choose the wants to be satisfied?
6. What are your reasons for studying Economics?
7. Statistical methods are no substitute for common sense. Comment.