Introduction to econ new 1
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The document provides an introduction to economics. It defines economics as the study of how societies allocate scarce resources to satisfy unlimited wants. It identifies Adam Smith as the father of economics and discusses how he introduced economics as a social science that studies human behavior. The document also summarizes the key concepts of microeconomics, macroeconomics, positive and normative economic statements, and the basic economic problems of what to produce, how to produce, and for whom to produce.
Introduction to econ new 1
- 2. RASHAIN PERERA 077 059 37 52 rashainperera@gmail.com Prepared by
- 3. Who is the Father of economics????? Adam Smith
- 6. What is economics??? Define economics????
- 7. Economics is the social science that aims to describe the factors which determine the production, distribution and consumption of goods and services
- 8. What is economics? Adam Smith is considered to be the father of economics Is a social science Studies human behavior Teaches how to take rational decisions Society is the laboratory concerned with any test related to economics Can be basically divided into two branches as micro and macro economics according to the scope
- 9. Micro-economics Is a study of individual parts Study how individual parts known as micro economic agents takes decisions in the dynamic environment Look at one economic agent at once and come up with informational phrases or economic statements Ex; market demand for SOAP
- 10. Macro-economics Studies the economy in aggregate Look at the entire economy as a whole and come up with economic statements. Ex; inflation rate
- 11. As you can see, the primary objective of both micro and macro economics is to give or generate economic statements. Now let us classify economic statements
- 12. Economic statements There are two types of economic statements They are positive and normative economic statements
- 13. Positive economic statements Deals with facts Can be proved Can be measured Realistic Objective Quantitative Ex; disposable income is the income that is arrived after deducting taxes from gross earnings
- 14. Normative economic statements Can not be measured Is only a judgment Subjective Qualitative Words such as aught to and should to are used Ex; minimum wage should be increased in an effort to increase standards of living
- 15. Now try to present your own examples for Positive macro economic statements Positive micro economic statements Normative macro economic statements Normative micro economic statements Test your understanding
- 16. Why do we study economics??? What is the purpose???
- 17. What gave birth to the subject economics? Scarcity
- 19. What is scarcity? Amal wants to buy an iphone ..hmm a macbook. .and…an.ipod…ipad..and ………. What? But has Amal got enough money to buy them all? No
- 20. Scarcity………. The gap between unlimited wants and limited resources could be simply known as scarcity In the previous example Amal had lot of wants but he didn’t have enough money to buy them all So he should make a choice This is simply called economizing
- 21. What is “Economizing”? Economizing simply means avoiding wastes or reducing expenditures. Economics teaches how to economize To economize, we have to take rational decisions
- 22. Rational decisions? What is that? A method for systematically selecting among possible choices that is based on reasons and facts. In a rational decision making process, a business manager/individual/decision maker will often employ a series of analytical steps
- 23. So u say to make a choice? We cant have all what we want. We have to make choice among alternative options available This is simply known as “choice”.
- 25. So what about other options? As mentioned before we cant have all what we want. Its due to scarcity. So we have to make a choice Choice involves an opportunity cost
- 26. Opportunity cost? The cost of the next best alternative forgone when making a choice can be simply known as opportunity cost Opportunity cost can be measured by dividing forgone production by increased production.
- 27. What is the opportunity cost of holding money? What is the opportunity cost of economic growth? What is the opportunity cost of going for a movie cutting the lecture? What is the opportunity cost of marriage? Test your understanding
- 28. A person is available with following options Option 1; investing 1mn in a business and getting a salary of 10k per month Option 2; making a deposit at 10% interest p.a. Option 3; holding the money in hand Determine the opportunity cost of selecting option 1 Test your understanding
- 29. X and Y are produced in ABC limited using the same machine. To produce 100 more units of X, 250 units of Y should be sacrificed. What is the opportunity cost of producing one unit of X? Test your understanding
- 30. Scarcity, alternative options, choice and opportunity cost??? All inter-related?? Yes it is Scarcity Alternative options Choice Opportunity cost
- 31. A busy girl finds time to be scarce She can either marry or not marry (options) So she decides not to marry (choice) The opportunity cost is the marriage forgone or the love, family responsibilities she has to give up.
- 32. Needs Essential requirements Basic Primary Taken from birth Common Limited Broader concept Can be shown in terms of a hierarchy
- 33. Self actualization needs Esteem needs Social needs Health and safety needs Physiological needs Maslow’s hierarchy of needs
- 34. Ways of satisfying needs Vary Secondary Unlimited Business create Narrow concept No theories introduced as yet Wants
- 35. What are the solutions for needs and wants? Goods and services In economics the term goods refers to both goods and services Goods are the final outcome of production process Hence studying on production process is vital
- 36. Production process What are economic inputs? Economic inputs are: Factors of production Factors of productivity Input Process Output
- 37. Factors of production Property resources Land Capital Human resources Labour Entrepreneurship Time Knowledge Skills Experiences
- 38. Includes all the natural resources The supply of land is limited Immobile Productivity of land can be improved through Cultivation Fertilizing etc. Land is used in production and the return given is RENT. (factor payment/factor income) Land
- 39. Live factor Labor productivity can be improved through Training, education etc Factor payment is WAGE Can be moved P.S. the composition, activity rates and many theories of labor will be covered in unit 10 Labour
- 40. Is a man made resource Improves the productivity of the production The return is INTEREST There are various types of capital Human capital Natural capital Social capital Infrastructure Money capital Fixed capital Working capital Capital
- 41. Investment is the way of generating capital Savings are the sources of investments Gross investments include depreciation Net investment excludes depreciation Capital V Investments
- 42. Combines all the other factors of production Manages the production Takes decisions Bears risks Innovates Plan the production Return is PROFIT/LOSS Entrepreneurship
- 43. Factors of productivity Human capital Technological developments Specialization and division of labour Management and administration
- 44. Assigning different tasks to different people in the same production line can be simply known as division of labour For an example a person might be assigned to cut the clothes only where another person is assigned to sew. Division of labour
- 45. Specialization is the special ability or skill gained by an individual by performing a certain task for a long period of time DOL results in specialization Levels of specialization Personal Institutional Regional National Specialization
- 46. Explain how factors of productivity contributes to the improvement of the productivity of the production process? (10 marks) Introduction & conclusion – 2marks Explanation of each FOP – 2*4=8marks Test your understanding
- 47. Resources? Economic input? Yes Factors of production and productivity together stands for “RESOURCES” Resources are inputs that can be used up in production Anything that can be used in production is a resource.
- 48. Classification of resources Economic resources Vs non economic resources Renewable resources Vs non renewable resources Finite and infinite resources
- 49. Economic resources Non economic resources The resources that are scarce in relation to the demand are simply known as economic resources Scarcity involves making a choice, therefore consumption or extraction of economic resources involves an opportunity cost Abundant in supply No opportunity cost involved Economic resources V non- economic resources
- 50. Renewable resources are the resources that re-generates themselves with their usage. Ex; forests Non renewable resources are the resources that exhaust with the usage. Ex; minerals, oil etc Note; since all the resources here in consideration are natural ,this classification is also the classification of LAND Renewable resources V non- renewable resources
- 51. Finite resources are those that are limited in supply Infinite resources are those that are unlimited in supply Finite V infinite resources
- 52. Now try to give examples for each of the following Finite non renewable resources Finite renewable resources Economic resources Non economic resources Test your understanding
- 53. What are the economic outputs? Goods and services Anything that satisfies a want for a need can be known as a good or a service
- 54. Classification of goods Economic goods Vs non economic goods/free goods Consumer goods Vs producer goods Consumer goods Durable consumer goods Non durable consumer goods Producer goods/industrial goods Investment goods/Capital goods Intermediate goods
- 55. Economic goods Non economic goods Are scarce in relation to the demand Opportunity cost is involved As a result of production Has an economic value A price can be charged Naturally abundant in supply No opportunity cost is involved Naturally available No economic value A price can not be charged Economic goods V non-economic goods
- 56. Explain the relationship between a non economic good and an economic good using a suitable example. Test your understanding
- 57. Consumer goods are the goods that consumers buy for final consumption purposes. Durable consumer goods; the consumer goods with a relatively higher life span Non durable consumer goods; shorter life span Consumer goods
- 58. These are the goods that are used to make other goods and services Investment goods/capital goods; the goods that helps in production. Most of them are non current assets. Ex; Machines Intermediate goods; is a final good that is a part of the final product. Ex; tire is a final product that is a part of the car Producer goods/industrial goods
- 59. Production = Productivity???? No!!!!! Productivity is the relationship between output and the input Productivity= output / input Production is the conversion of input into outputs.
- 60. What is economic efficiency? “Doing the thing right” Can be divided in to 2 Allocative efficiency; Allocative efficiency occurs when MB=MC. In other words if resources are allocated optimally is said that Allocative efficiency exists. Productive efficiency; productive efficiency can be defined as producing goods and services for the lower cost
- 61. Productive efficiency Full employment Full production Allocative efficiency MB=MC MC=P Measurement criteria
- 62. What is effectiveness? “Doing the right thing”
- 63. Inter relationship among effectiveness, efficiency and productivity. Productivity = effectiveness / efficiency productivity = output / input
- 65. What are basic economic problems? Are also called central/fundamental economic problems The economic problems arise due to two main reasons. Human wants are unlimited But means to satisfy wants are limited In other words due to scarcity of resources.
- 66. What are the basic economic problems? What in what quantity to produce? How to produce? For whom to produce?
- 67. What in what quantity to produce? This is a problem of resource allocation Decide what goods to produce Determine or estimate the demand of products to be used in production decisions so that resources are not wasted or over used
- 68. How to produce? Deciding the means of production This is a production problem Deciding the method or technique of production Either labour intensive method Or capital intensive method Land intensive Technology intensive
- 69. For whom to produce? This is a distribution problem A product can be targeted at poor people Or rich people Or entire community
- 70. Static efficiency Static advantage occurs when an economy is able to solve all 3 basic economic problems in an efficient way at once
- 71. Dynamic efficiency Dynamic advantage occurs when all three basic problems are optimally solved over a long period of time. If the economy achieves static efficiency over a period of time then it is dynamically efficient
- 72. Scarcity Rational decisions Economizing Options Choice Opp. cost Basic economic problems