Introduction to Economics

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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

    1 Multiplicity of wants     2 Gradability of wants     3 Scarcity of resources

4 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.

It is a social science that studies the

allocation of scarce resources used to 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.

Economics as Social Science It 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

Steps in Scientific method

1 Recognising the problem or issue.

2 Cutting away unnecessary detail by making assumption.

3 Developing a model or story of the problem or issue.

4 Making predictions.

5 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.

Universal Problem  If something is scarce , it will have value

Micro Economics

  Micro means small

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

Macro means large.

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 overall level of prices, output and employment in the economy.

It is concerned with the economy as a whole.

Examples studying how firms react to increasing costs of

production by raising the price and subsequently how consumer/ household spending is adjusted when the price rises .

If we use the analogy of a car, the study of the engine, axle, and brakes separately are micro issues

how to keep the rate of change of prices under control,how to increase the number of jobs

Growth

Growth is the process of increasing the economy's ability to produce goods

The main sources of growth are increases in the quantity and quality of the economy's resources (land, labour ,capital and entrepreneurship).

It is the increase in national output within an economy during a time period usually 12 months

Economic Growth

Economic growth is a term usually associated with a region, country or area

Economic growth means that the actual output of that area increases. that means, the amount of goods and services produced in that area increased.

It is measured by measuring total national output in an economy in two different time periods.

Development

Development means goals such as access to basic necessities such as food water shelter, availability of employment, education & culture , having social choices and basic freedom such as freedom of speech and democratic elections.

Economic Development

It is a measure of welfare ,a measure of well being.

It is measured not just in monetary terms but also in terms of other indicators such as education indicators health indicators and social indicators.

Sustainable development

Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs

If a country’s capital and land assets remain constant or increase over time then it is sustainable development ,

It means not using up resources faster than the Earth can replenish them.

Definition

 UNDP

Development that meets the need of the present without compromising the ability of future generations to meet their own needs.

Brundtland Report

"Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs."

Positive concepts 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.

Normative Concepts 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

Examples An increase in the price of wheat to $5 a bushel gives farmers a

higher living standard and helps save 1,000 family farms. The United States spends $10 billion more on national defense

than on higher education. A market-based economy has less income inequality that other

economic systems The price of wheat should be $5 a bushel to give farmers a

higher living standard and to save the family farm.  The United States would be better off spending $10 billion

more on national defense than higher education.  A market-based economy is clearly the best possible

economic system 

Examples

Women should be paid the same as men.

Defence spending ought to be cut.

Spending on defence is greater than spending on education

Socrates is a man . He was sentenced to death .

Women are paid less than men.

      Spending on defence is greater than spending on education       Socrates is a man . He was sentenced to death .      Women are paid less than men.

Ceteris Paribus 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.

e.g. An increase in the amount of hours spent studying Economics will lead ceteris paribus , to an increase in average marks received on economics test.

Ceteris Paribus

Ceteris paribus is an old Latin phrase that translates as ‘other things being equal’ or ‘other factors remain unchanged

It makes possible to identify the cause-and-effect relation between two factors ,

It is a quick method of showing that we have made the assumptions

e.g. What would happen to the quantity demanded of Coca-Cola in Germany if prices increased by 10%, ceteris paribus

Factors of Production

Anything which contributes to production is called a factor 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 and used in the production of goods. Reward for land is rent

Labour

It 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

In Economics 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

Factor Payments 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

Factors of Production 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

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

Features of utility      It is a subjective term      It cannot be measured objectively      It is a relative term      It has no ethical significance      It is different from pleasure      It depends upon the intensity of the want      Utility of the good can be multipurpose      Utility does not mean satisfaction      Utility is distinct from usefulness.

Opportunity cost The cost of any activity measured in

terms of the benefit from the next best alternative forgone or sacrificed.

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.

Opportunity cost Opportunity cost for different people will not be the same. An opportunity cost can be either explicit, usually

involving a monetary payment, or implicit, which does not involve a transaction

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 United Kingdom

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.

No cost so no choice .No market , zero price & no relevance for surplus.

Production using free goods undertaken with free resources.

Does not appeal to the economist.

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, 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.