Chapter one-Introduction to economics ppt
- 1. Chapter One Basics of Economics Introduction Have you ever heard anything about Economics? Yes!!! It is obvious you heard about economics and even you talked a lot about economics in your day to day activities. And you may have questions such as: What are resources? What does efficient allocation mean? What are human needs? What does demand mean? What is economics? This course will answer those questions and introduce you to the nature of economics, demand and supply theories, theories of consumer, production, cost, market structure and fundamental concepts of macroeconomics at large. In this chapter you will be introduced to the subject matter of economics and the rationale that motivates us to study economics.
- 2. Conti… 1.1. Definition of economics There is no universally accepted definition of economics (its definition is controversial). This is because different economists defined economics from different perspectives: a. Wealth definition b. Welfare definition, c. Scarcity definition d. Growth definition Hence, its definition varies as the nature and scope of the subject grow over time. But, the formal and commonly accepted definition is as follow. Economics is a social science which studies about efficient allocation of scarce resources so as to attain the maximum fulfilment of unlimited human needs. As economics is a science of choice, it studies how people choose to use scarce or limited productive resources (land, labour, equipment, technical knowledge and the like) to produce various commodities.
- 3. Conti…. The following statements are derived from the above definition. Economics studies about scarce resources; It studies about allocation of resources; Allocation should be efficient; Human needs are unlimited The aim (objective) of economics is to study how to satisfy the unlimited human needs up to the maximum possible degree by allocating the resources efficiently. 1.2 The rationales of economics There are two fundamental facts that provide the foundation for the field of economics. 1) Human (society‘s) material wants are unlimited. 2) Economic resources are limited (scarce).
- 4. Conti….. 1.3 Scope and method of analysis in economics 1.3.1 Scope of economics Modern economics is formed by its two major branches: microeconomics and macroeconomics. That means economics can be analysed at micro and macro level.
- 5. Conti… 1.3.2 Positive and normative analysis Economics can be analysed from two perspectives: positive economics and normative economics. 1. Positive economics: it is concerned with analysis of facts and attempts to describe the world as it is. It tries to answer the questions what was; what is; or what will be? It does not judge a system as good or bad, better or worse. Example: The current inflation rate in Ethiopia is 12 percent. 2. Normative economics: It deals with the questions like, what ought to be? Or what the economy should be? It evaluates the desirability of alternative outcomes based on one‘s value judgments about what is good or what is bad. Example: The poor should pay no taxes.
- 6. Conti… 1.3.3. Inductive and deductive reasoning in economics There are two methods of logical reasoning: inductive and deductive. a) Inductive reasoning:. From particular to general. b) Deductive reasoning: From general to particular. 1.4 Scarcity, choice, opportunity cost and production possibilities frontier 1. Scarcity: The fundamental economic problem that any human society faces is the problem of scarcity. Scarcity refers to the fact that all economic resources that a society needs to produce goods and services are finite or limited in supply. It reflects the imbalance between our wants and the means to satisfy those wants. 2. Choice: If resources are scarce, then output will be limited. If output is limited, then we cannot satisfy all of our wants. Thus, choice must be made. Scarcity → limited resource → limited output → we might not satisfy all our wants →choice involves costs → opportunity cost.
- 7. Conti… 3. . Opportunity cost: In a world of scarcity, a decision to have more of one thing, at the same time, means a decision to have less of another thing. The value of the next best alternative that must be sacrificed is, therefore, the opportunity cost of the decision. For example: suppose the country spends all of its limited resources on the production of cloth or computer. If a given amount of resources can produce either one meter of cloth or 20 units of computer, then the cost of one meter of cloth is the 20 units of computer that must be sacrificed in order to produce a meter of cloth. It is measured in goods & services but not in money costs . It should be in line with the principle of substitution.
- 8. Conti…. 4. The Production Possibilities Frontier or Curve (PPF/ PPC) The production possibilities frontier (PPF) is a curve that shows the various possible combinations of goods and services that the society can produce given its resources and technology.
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- 10. Conti… An economy can grow because of an increase in productivity in one sector of the economy. For example, an improvement in technology applied to either food or computer would be illustrated by a shift of the PPF along the Y- axis or X-axis. This is called asymmetric growth (figure 1.3).
- 11. Conti… 1.5 Basic economic questions i. What to Produce? ii. How to Produce? iii. For Whom to Produce? 1.6 Economic systems iv. Capitalist economy v. Command economy vi. Mixed economy 1.7 Decision making units and the circular flow model There are three decision making units in a closed economy. These are households, firms and the government. The three economic agents interact in two markets: Product and factor markets.
- 12. Conti… Circular-Flow Model The circular-flow diagram is a visual model of the economy that shows how money (Birr), economic resources and goods and services flows through markets among the decision making units.
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- 14. Chapter Two: Theory of Demand and Supply