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Bec Module 1: Introduction To Economic Theory: Economics

This document provides an introduction to economic theory, including definitions of key economic concepts. It explains that economics is the study of how scarce resources are allocated to meet unlimited human wants. It also describes the basic economic problem of how to satisfy unlimited wants with scarce resources, and outlines the three elements of economic activity: human wants, use of resources, and techniques of production. Economic decision making involves households, firms, governments and the rest of the world. Markets are means through which buyers and sellers exchange goods and services. The goals and problems of economic activity are also summarized.

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44 views4 pages

Bec Module 1: Introduction To Economic Theory: Economics

This document provides an introduction to economic theory, including definitions of key economic concepts. It explains that economics is the study of how scarce resources are allocated to meet unlimited human wants. It also describes the basic economic problem of how to satisfy unlimited wants with scarce resources, and outlines the three elements of economic activity: human wants, use of resources, and techniques of production. Economic decision making involves households, firms, governments and the rest of the world. Markets are means through which buyers and sellers exchange goods and services. The goals and problems of economic activity are also summarized.

Uploaded by

cheska
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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BEC MODULE 1: INTRODUCTION TO ECONOMIC THEORY

ECONOMICS

 Is the social science that studies the production, distribution, and


consumption of goods and services.
 Is the study of ALLOCATION OF SCARE resources to meet
UNLIMITED human wants.
 The study of how people use their scare resources to satisfy their
unlimited wants.

THE ECONOMIC PROBLEM

 Basic economic problem wants are virtually unlimited


o While the resources available to satisfy these wants are scarce
 Economics examines the issue of how people their scare resources in
an attempt to satify their unlimited wants

ECONOMIC ACTIVITY

 Efforts to satisfy human wants with the use of goods and services
 3 Elements:
1. Human wants
 Categories
o Basic needs
o Higher needs
o Created wants
2. Use of resources
 Are the inputs needed for the creation of good or services.
o Capital as a factor
 Human Creations used to produce goods and
services.
 Physical capital
 Human capital
o Entrepreneurship as a factor
 Talent required to dream up a new product or find
a better way to produce an existing one.
o Labor as a factor
 Includes time
 Broad category of human efforts-physical and
mental.
 Labor is scare because the time that can be
allocated to various tasks is scarce or limited.
Payment use for Resources
 Wage
 Interest
 Rent
 Profit
o Land as a factor
 Includes not only land in the conventional sense
but also other natural resources.
 Gits of nature including bodies of water, trees, oil
reserves, etc.
 Renewable or inexhaustible.
3. Technique of production
 How resources are used in the production
 May be:
o Capital-intensive
o Labor-intensive

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BEC MODULE 1: INTRODUCTION TO ECONOMIC THEORY

Consumptions

Use of these Resources

 Divided into 2 groups:


o Households
o Business organization

Economics Decision Making

 Four types of decision-makers in the economy


o Households
 Consumers
 Resource owners
o Firms, governments, and the rest of the world
 demand the resources
 supply the goods and services
 rest of the world – foreign households, firms and
Government

Markets

 means by which buyers and sellers carry out exchanges.


o Product Markets
Market in which goods and services are bought and sold
o Resource Markets
Market in which the resources are exchanged

Goals of Economic Activity

Economic Activity

Channel to improve once standard of living

Problems:

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BEC MODULE 1: INTRODUCTION TO ECONOMIC THEORY

 Unemployment
 Economic instability
 Low level of growth and development
 Inequalities in income distribution
 Determination of the type of economic system

Economic Analysis

 Process of directing economic relationship by:


o Examining Economic behaviors and events
o Determining the causal relationship among date and activities
observed
 Tools in Economic Analysis:
o LOst
o STatistics
o MATHematics

Economic Policy

Intervention or courses of action taken by the government or their


private institutions to manipulate the result of economic activity.

Construction of Economic Theory

STEPS:

1. Definition of POSTULATES.
2. FACTS observation
3. LOGIC application (deductive and inductive reasoning)
4. Testing of HYPOTHESIS.

Rational Self Interest

Individual try to maximize the expected benefit achieved with a given


cost or minimized the expected cost of achieving given benefits.

 Rational- people try to make the best choices they can, given the
available information.

Marginal Analysis

Economic choices are based on a comparison of expected marginal


cost and the expected marginal benefit of the action under consideration.

 Marginal
o Incremental
o Additional
o Extra

Micro and Macro “Economics”

 Microeconomics
o Examines the factors that influence individual economic
choices.
o Examine how market coordinate the choices of various
decision-makers.
o Studies the individual pieces of the economic puzzle.
 Macroeconomics
o Studies the performance of the economy as whole.

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BEC MODULE 1: INTRODUCTION TO ECONOMIC THEORY

o Focuses on the big picture.

Science

 Economic theory or model


o Simplification of economy reality.
o Used to make predictions about the real world
o Focuses on the important elements of the problem under
study.

Scientific Method

 Identify the Question and define the relevant variables


o Other-Things-Constant Assumption
- Ceteris Paribus
o Behavioural Assumption
- Rational Self-interest – consumers maximize satisfaction
and firm maximize satisfaction and firm maximizes profits.

Formulate and Test Hypothesis

 Statement about how the key variable relate to other.


 Provides the predictions of interest based on caused and effect
relationship.
 Test involves comparing these prediction with real world.

NORMATIVE VS. POSITIVE

 Positive Economic Statement


o An assertion about economic reality that can be supported or
rejected reference to the facts.
 Normative Economic Statement
o Reflects an opinion.
o Cannot be shown to be true or false by reference to the facts.
o Most of the disagreements in economics involve normative
debates.

Pitfalls of Economic Analysis

 Fallacy that association is causation


o Occurs when one assumes that event A caused event B
simply because the two are associated in time.
o The fact the one event precedes another or that the two events
occur simultaneously does not necessarily mean that one
event cause the other.
 Fallacy of Composition
o Erroneous belief that what is true for the individual or the
part, is also true for the group, or the whole.
 Ignoring Secondary Effects – Unintended Consequences or policies
or choice.
o Primary Effects
 Effects that are felt relatively quickly
 Easily Observed
o Secondary Effects
 Trend to develop more slowly
 Frequently not obvious

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