Lecture1 Economic problem, Economic Agents, Types of economic analysis

Lecture #1

Economic problem, Economic Agents, Types of economic analysis

Contents• Definitions of Economics

―Wealth concept―Welfare Concept―Scarcity Concept

• Economic Problem• Economic choice and Opportunity cost• Samuelson’s solution of scarcity• Economic Analysis• Branches of Economics

remember you and I are here “to learn from each other”

Stages & Definitions of Economics

Wealth Definition

(Adam Smith)

Welfare Definition

(Ayred Marshall)

Scarcity Definition

(L. Robbins)

• Wealth Concept : Adam Smith, who is generally regarded as father of economics, defined economics as “ a science which enquires into the nature and cause of wealth of nation”. He emphasized the production and growth of wealth as the subject matter of economics.

• Welfare Concept : According to A. Marshall “Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of material requisites of well being. Thus, it is on one side a study of wealth; and on other; and more important side, a part of the study of man.

• Scarcity Concept : According to Lionel Robbins: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternate uses”.

• Economics is a social science concerned with the efficient use of scarce resources to achieve the maximum satisfaction of economic wants.

• Scarce resources: There are only limited number of resources such as workers, machines, factories, raw materials etc. Yet there are a number of different ways in which they could be used.

• Similarly people only have limited amount of money. Yet they have lots of needs and wants to satisfy.

• Also Government has limited amount of money!!! However, it is unable to satisfy all its wants.

ECONOMIC PROBLEM arises because of….• Scarce Resources• Unlimited wants

Economic choice and Opportunity cost

• Due to scarce resources available people have to make economic choices which create sacrifice because alternatives must be given up.

• Economic choice is deciding between different uses of scarce resources.

Opportunity Cost• The amount of other product that must be

forgone or sacrificed to produce a unit of a product.

• It is the value of the second best alternative forgone.

• It is the benefit that is lost in making a choice between two competing uses of scarce resources.

• Everything has an opportunity cost.

Samuelson’s solution of scarcity

What to produce? How to produce? For whom to produce?

Societies have to decide the best combination of goods and services to meet their needs. For example, how many resources should be allocated to consumer goods, how many resources to capital goods, how many resources should go to schools, and so on.

Societies also have to decide the best combination of factors to create the desired output of goods and services. For example, how much land, labor, and capital should be used produce consumer goods such as computers and motor cars.

Societies need to decide who will get output from country’s economic activity, and how much they will get.For example, who will get computers and cars that have been produced? This is often called the problem of distribution?

Economic Agents• Economic agents are participants in the

economy that engage in specialization, production, exchange, and consumption. There are two economic agents:

1. Producers 2. Consumers

• Government is also consider as economic agent.

Economic Analysis

• Economic analysis is the process of driving economic principles from relevant economic facts.

Types of economic analysis

Positive Economic Analysis Normative Economic Analysis The analysis of facts and data to establish the scientific generalizations about economic behavior. “Statements about how the world actually operates—what is”. E.g. what is the unemployment rate in an economy, what is country’s GDP.

The part of economics involving value judgments about what the economy should be like, focused on which economic goals and policies should be implemented. “Statements about how the world should be”. E.g. How unemployment rate could be reduced or How can a country raise its GDP.

Branches of Economics

• Microeconomics: concerned with the behavior of individual entities such as market, firms and households e.g. How individual prices are set, how prices of land, labor, capital are set, inquires into the strength and weakness of the market mechanism.

• Macroeconomics: concerned with the overall performance of the economy e.g. Total income, total output, aggregate expenditure, employment, inflation, etc.