Chapter 1 — Introduction

Chapter 1 is an introduction to both Economics and Statistics. It explains why economics is studied, defines economic activities, introduces the three divisions of economics (consumption, production and distribution), and explains how Statistics — the collection, analysis, interpretation and presentation of numerical data — is an essential tool for understanding economic problems.

The chapter quotes the definition: '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.' Alfred Marshall, one of the founders of modern economics, described it as 'the study of man in the ordinary business of life.'

Scarcity arises because human wants are unlimited while the resources used to satisfy those wants are limited in availability. Resources also have alternative uses — for example, land used in agriculture could produce food crops or non-food crops like rubber, cotton and jute. This creates the problem of choice, which is at the heart of all economic problems.

Economic activities are those undertaken for a monetary gain. The chapter identifies several roles in economic activity: a consumer buys goods to satisfy needs, a seller sells goods to make a profit, a producer manufactures goods or provides services, and an employee works for wages or a salary. All such people are described as 'gainfully employed in an economic activity.'

Economics is divided into Consumption (how consumers decide what to buy given their income and prices), Production (how producers choose what and how to produce for the market), and Distribution (how the national income — the Gross Domestic Product or GDP — is distributed through wages, salaries, profits and interest).

Statistics is defined in this chapter as the study that deals with 'the collection, analysis, interpretation and presentation of numerical data.' It is described as a branch of mathematics and is used across disciplines including accounting, economics, management, physics, finance, psychology and sociology.

Quantitative data are numerical — for example, rice production in India increased from 39.58 million tonnes in 1974–75 to 106.5 million tonnes in 2013–14. Qualitative data describe attributes that cannot be measured numerically, such as gender (man/woman) or skill level (unskilled/skilled/highly skilled), though they can be expressed in degrees.

Statistics helps economists present economic facts in a precise and definite form (for instance, stating that 310 people died in the Kashmir earthquake is more factual than saying 'hundreds'). It condenses mass data into measures like mean, variance and standard deviation, finds relationships between economic factors such as price and demand, and predicts future trends to help formulate economic policies.

Policymakers use statistical tools to analyse problems like poverty, unemployment and rising prices, and to predict future trends. The chapter gives the example of deciding how much oil India should import in 2025 — without Statistics, expected domestic production and likely demand cannot be determined, making the import decision impossible.

The story illustrates that statistical methods are no substitute for common sense. A father calculated his family's average height and the river's average depth and concluded they could cross safely; some family members (the children) drowned because the average masked the variation in individual heights. The fault lies not with the statistical method of averaging but with its misuse.

Modern Economics needs to study problems like poverty, income distribution, illiteracy, unemployment and the cost of environmental disasters such as tsunamis and earthquakes. Answering these questions requires collecting and systematically analysing numerical facts. Statistics — the study of numbers relating to selected facts in a systematic form — provides the tools needed to do this.

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