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Introduction to Economics
Introduction
The term "economy," from which we get “Economics," comes most directly
from the
Old
French word "economie," meaning "management of a
household."
Definition —Lionel Robbins
‘Economics is a social science, which studies human behaviour as a
relationship between ends and scarce means, which have alternative uses’.
Four basic issues
 Multiplicity of wants
 Wants are listed in preference
 Scarcity of resources
 Alternative use of resources
Modern Definition
The scientific study of the choices made by individuals and societies in
regard to the alternative uses of scarce resources, which are employed to
satisfy wants.
Meaning
Economics is the study of the way people organize themselves to sustain life
and enhance its quality. Individuals engage in four essential economic
activities: resource maintenance, production of goods and services,
distribution of goods and services, and consumption of goods and services. It
is a social science that studies the allocation of scarce resources used to
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produce goods and services that satisfy consumers' unlimited wants and
needs.
Social Science
Social Science can be defined as a systematised body of knowledge
pertaining to human relationship and groups living in society. Different
aspects of human behaviour or social life of human beings is dealt with as
parts of group or society and not as independent individuals.
e.g. History, psychology, sociology, economics, political science.
Scientific Methodology
 Organise reality in a rational manner by observation and gathering of
data.
 Spotlighting aspects of data to see for emerging patterns.
 Formulate hypothesis.
Reliability and validity of the data must be checked along with the value of
sources.
Economics as a Social Science
Economics is a social science because it is a systematised body of
knowledge regarding economic behaviour of man in society. It seeks to
explain how society deals with the scarcity problem It adapts a scientific
framework & it is particularly concerned with studying human behaviour
and about economy as a whole
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Steps in scientific method
 Recognising the problem or issue.
 Cutting away unnecessary details by making assumption.
 Developing a model or story of the problem or issue.
 Making predictions.
 Testing the model i.e. how well it predicts events.
Scarcity
 The Excess of wants resulting from having limited resources (land,
labour capital and entrepreneurs) in satisfying the endless wants of people
 Economics concerns itself with only those things, which are scarce.
 It is a Universal Problem
 If something is scarce, it will have value
Micro Economics
Microeconomics is the branch of economics that studies individual units:
e.g. households, firms and industries. It studies the interrelations between
these units in determining the pattern of production and distribution of goods
and services.
Macro Economics
Macroeconomics is the branch of economics that studies the entire economy,
aggregate consumption, aggregate production, aggregate investment,
unemployment, inflation, business cycles and so on(grand totals):e.g. the
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overall level of prices, output and employment in the economy. It is
concerned with the economy as a whole.
Positive statements
 They are objective statements
 Deal with matters of fact, evidence or they question about how things
actually are.
 Involves no value-judgements, opinions, emotions
 Can be proved disproved using a scientific approach
 Can be described as “what is, what was, and what probably will be”
economics
 Unbiased or Detached
 Depends on Logic, reason & Empiricism.
 Explains the way the economy actually operates
E.g.Women are paid less than men.
Inflation rate in 1999 was 2.5 %
Normative statements
 Subjective Statements
 Value judgments based on opinion only.
 Cannot be proved or disproved as right or wrong.
 Biased and Attached.
 Depends on values, beliefs, preferences, self interest.
 Contain words such as: should, ought, or prefer.
 Seeks to recommend the way the economy should operate. It is the policy
side of economics
E.g. Women should be paid the same as men.
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Ceteris Paribus
This is a very basic (essential) assumption, which allows economic models
to predict outcomes and relationships with a degree of certainty and
conviction simply by assuming that variables not addressed in the model are
kept constant.
Ceteris paribus is an old Latin phrase that translates as ‘other things being
equal’, or ‘other factors remain unchanged’. A quick method of showing that
we have made the assumptions is to write ceteris paribus alongside
Example
 What would happen to the quantity demanded of Coca-Cola in
Germany if prices increased by 10%, ceteris paribus
 ‘ An increase in the amount of hours spent studying economics will
lead, ceteris paribus, to an increase in average marks received on
economics test’.
Factors of Production
Land, Labour, capital, and entrepreneurship used by society to produce
consumer satisfying goods and services are termed as factors of production,
they are also known as resources or scarce resources.
Land
In economics land refers to all kinds of natural resources that are freely
found in nature, which are limited in supply, which can be controlled by man
as used in the production of goods. Reward for land is rent.
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Labour can be defined as any mental or physical effort
(excluding
entrepreneurial organization), which contributes to the production of goods
and services for which it receives income. Reward for labour is wages /
salaries
Capital refers to that part of wealth, which is used along with labour for
producing additional wealth. Reward for capital is interest.
Entrepreneurship is the special sort of human effort that takes on the risk
of bringing labour, capital, and land together to produce goods. or services in
the expectation of a future reward. That reward is called profit in economics.
Functions of an entrepreneur
 Management and control
 Risk and uncertainty bearing
 Innovation
Factor Income
Rent
It is the factor payments to the owners of land for using the various
resources of land in the production of goods and services
Wages
A factor payment to the owner of labour for using labour services in the
production of goods and services
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Interest
It is the payments for the use of borrowed funds or the price paid for the use
of loanable funds’
Profit
Profit refers to a reward enjoyed by an entrepreneur for his entrepreneurship
or for his contribution to the process of production. It is a reward for bearing
of risks and uncertainties and introducing innovations.
Specialisation (also known as the division of labour)
This is a concept introduced into economics by Adam Smith. Smith believed
that production became more efficient when workers specialized in a
particular task. Rather than each worker taking responsibility for each stage
of the production process, the entrepreneur would instruct each worker to
take ownership of a particular task. In this way, through constant repetition
and practice the worker would become more efficient. However, this
situation may turn negative if the worker becomes demotivated due to the
monotony of the task repetition.
Utility
Utility is defined as want satisfying power of a commodity so all the
commodities having capacity to satisfy a want possess utility. Total utility of
a commodity refers to the sum total of the utility derived by a consumer
from all the units of that commodity taken together at a point of time or
during a period of time. Marginal utility refers to an addition made to the
total utility by consuming one more unit of a commodity
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Opportunity cost
Opportunity cost is defined as the cost of the next best alternative foregone.
Opportunity cost is the option foregone in making a choice of alternative A
over alternative B. When the best alternative is chosen from a range of
alternatives the second best choice is known as opportunity cost.
E.g .The opportunity cost of deciding not to work is the lost wages foregone
The opportunity cost of spending money on a foreign holiday is the lost
opportunity to buy a new dishwasher or the chance to enjoy two short breaks
inside the Hong Kong.
Free Goods
 It refer to those goods which are provided freely by nature , their supply
is abundant that no price is paid for securing them .e.g. air, water,
sunlight etc .All free gifts of nature are free goods
 Does not incur any opportunity costs in its production I.e. resources
involved have no alternative uses.
Economic Goods
 Economic goods are those goods which have utility and which are
relatively scarce.
 Cost is incurred for producing them and price is paid for purchasing
them.
 It uses scarce resources in being provided.
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 They have an opportunity cost of the alternative goods foregone and are
the things which economists are interested in.
 Limited availability in relation to desired use.
 Exchanged through markets
Basic Economic Decisions
1. What should be produced in the economy and in what quantities ?
It deals with the allocation of resources to make the goods and services in
right quantities that society wants with society's limited resources
2. How should production be organised?
It deals with production, methodology, organization and technology for best
outcome.
It determines the way society's limited resources are combined in the
production of goods and services
3. For whom should production take place?
It is the problem of distributing Economic goods and services.
Production possibility frontier
Production possibility frontier shows the boundary of what is possible to
produce and is used as an illustration in economics to show the choices
facing all countries in producing goods, which use limited factors of
production. Thus it draws the boundary between what can and cannot be
achieved. PPC is also known as production transformation curve.
 Show the different combinations of goods and services that can be
produced with a given amount of resources
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 There is no ‘ideal’ point on the curve
 Any point inside the curve – suggests resources are not being utilised
efficiently
 Any point outside the curve – not attainable with the current level of
resources
Marginalism
Marginal changes are small, incremental adjustments to an existing plan of
action. People make decisions by comparing costs and benefits at the
margin.
Marginal changes in costs or benefits motivate people to respond. The
decision to choose one alternative over another occurs when that
alternative’s marginal benefits exceed its marginal costs! I.e. people make
decisions at the margin and will normally adopt a positive course of action if
the marginal benefits exceed the marginal costs.