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Introduction to Economics
The Science of
Economics is made
for the benefit and
development of the
world.
- Kautilya Chanakya
What is Economics?
• Economics covers all kinds of topics.
• At the core it is devoted to understanding
how society allocates its scarce resources.
• Along the way to studying the implication
of scarcity, economics tries to figure out
the 1001 puzzles of everyday life.
Definitions of Economics
1. Economics asks what goods are produced, how
these goods are produced, and whom they
are produced.
2) Economics analyzes movements in the overall
economy
--- trends in prices, output, unemployment and
foreign trade.
Once such trends are understood, economics helps
to develop the policies by which
Governments can improve the performance
of the economy
3) Economics is the study of commerce among
nations. It helps explain why nations export some
goods and import others, and analyses the effects of
putting economic barriers at national frontiers.
4) Economics is the science of choice. It
studies how people choose to use scarce
or limited productive resources ( labour,
equipment, technical knowledge) to produce
various commodities and to distribute these
goods for consumption
5) Economics is the study of money, banking,
capital and wealth.
In a common theme
Economics is the study of how societies
use scarce resource to produce valuable
commodities and distribute them among
different people.
We distinguish two types of
Economics
Micro Economics
• It analyses the behaviour of individual
components like industries, firms and
households.
• Micro Economics means economics
through microscope.
• ---How individual prices are set, consider what
determines price of land, labour and capital, and
inquire in to the strengths and weaknesses of the
market mechanism.
Macro Economics
• It studies the functioning of the economy as a
whole.
• we examine the economy through wide-lens.
• It examines how the level and growth of output
are determined, analyzes inflation and
unemployment, asks about the total money supply
and investigates why some nations thrive while
others stagnate.
The scientific Approach
• Economists have no monopoly on the truth about
the important issues of the day. Indeed, many
phenomena are poorly understood and highly
controversial. But economists and other
scientists have developed techniques- called the
scientific approach- that give a head start in
understanding the complex forces that affect
economic growth, prices and wages, income
distribution and foreign trade.
Observation
• One of the major sources of economic
knowledge is observation of economic
affairs, especially drawing upon the
historical record.
E.g.: consider inflation- meaning a rise in the
general level of prices.citizens, bankers and
political leaders often worry about inflation and
take painful steps,contradicting output and
increasing unemployment, to prevent or slow a
threatening inflation.
Economic Analysis
• This is an approach that starts with a set of
assumptions and then deduces logically certain
predictions about the economic behavior of people,
firms or the overall economy.
E.g.: Attempts to restrict the import of foreign
goods in order to ‘protect’ domestic workers and
firms from foreign competition.
Statistical Analysis
• A complete understanding of economic activity
relies upon the use of economic data and statistical
analysis.
• Governments and businesses issue volumes of
data that can help us to analyze economic behaviour
quantitatively.
• While the actual application of such information
requires advanced tools in probability and
econometrics, understanding the results requires
only careful reading and common sense.
Experiments
• The economic world is enormously
complicated with millions people and billions
of prices. In an exciting new development,
economists are turning to laboratory and
other controlled experiments.
• It is more difficult to perform experiments in
economies than in the laboratory sciences. To begin
with, economists cannot measure economic
Variables with precision that physical
scientists can apply in measuring mass,
velocity, or distance
• Moreover it is very difficult to replicate
the economy in a laboratory.
Pitfalls in Economic Reasoning
• In all areas of economics, old and new,
certain pitfalls lie in the path of the serious
economist.
• Falling to keep “others Things Equal”
• The Post Hoc Fallacy
• Fallacy of Composition
others Things Equal
• Most of economic problems involve
several forces interacting at the same.
E.g.: the number of cars bought in a given
year is determined by the price of cars,
consumer incomes, gasoline prices etc.
How can we isolate the impact on car sales
of a single variable such as the price of gasoline.
The Post Hoc Fallacy
• A common mistake in studies of cause-and-effect
relationships is the Post Hoc Fallacy.
E.g.: Dr.Optimist’s observation is that after the
Govt. has cut tax rates, the Govt.s total tax revenues
began to rise. Dr.Optimist then claims “Aha, if we
lower the tax rates, we will rise revenues and reduce
the budget deficit.”
Dr.Optimist fallacy was to assume that the
tax cut was responsible for the increase in
Govt.s revenues; overlooked was the fact that
the growing economy was raising people’s
income and might have increased tax
revenues even more had taxes not been cut.
Fallacy of Composition
• It is the misconception that what is true for
a part is therefore true for the whole.
• One thing that is true for an individual is
not necessarily true for everyone.
E.g: If all farmers produce a bog crop, total
farm income will probably fall.
The Law of Scarcity
• Economics study the way goods are
produced and consumed because people want
to consume far more than an economy can
produce.
• The law of scarcity states that goods are scarce
because there are not enough resources to produce
all the goods that people want to consume. All of
economics flows from this central fact.
• No country has reaches utopia of limitless
possibilities. Goods are limited while wants
seem infinite. Even in U.S., the most
productive economy ever known, production
is not high enough to meet everyone’s
desires.
The uses of Economics
• Economic knowledge serves us in
managing our personal lives, in
understanding society and in improving the
world around us.
• The ways that economics can help us
individually will be as different as are our
personal lives.
• Learning about stock market may help
people manage their own finances.
• Better awareness of the determinants of
cost and revenue will produce better business
decisions.
• The doctor, the investor and the farmer all
need to know about profit from their businesses.