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Module 1

The document defines economics as the proper allocation of resources to maximize human satisfaction. It identifies the four factors of production as land, labor, capital, and entrepreneurship. It discusses Adam Smith and his support of laissez-faire economic policies against mercantilism. Finally, it outlines the five major divisions of economics as consumption, production, exchange, distribution, and public finance.

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Chin Keanna Buizon
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35 views

Module 1

The document defines economics as the proper allocation of resources to maximize human satisfaction. It identifies the four factors of production as land, labor, capital, and entrepreneurship. It discusses Adam Smith and his support of laissez-faire economic policies against mercantilism. Finally, it outlines the five major divisions of economics as consumption, production, exchange, distribution, and public finance.

Uploaded by

Chin Keanna Buizon
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Economics is the proper allocation of and efficient use of available resources for

maximum satisfaction of human wants.

Economic Resources, also known as factors of production, are the resources used to
produce goods and services.

Four Factors of Production

1. Land
Land as a factor of production includes the natural resources used to create a
good or service.

2. Labor

Labor is the work done by the people in a workforce.

3. Capital

Capital as a factor of production refers to capital goods, or man-made resources,


such as tools and infrastructure, used in the production of a good or service. 

4. Entrepreneurship

Entrepreneurs are the people who combine the other factors of production – land,
labor and capital – to generate profit. 

Adam Smith – an economist, philosopher, and author who is considered the father
of modern economics. Smith argued against mercantilism and was a major
proponent of laissez-faire economic policies.

Mercantilism refers to an economic policy or trade system wherein a country


focuses on maintaining a favorable trade balance by maximizing exports and
minimizing imports with other countries.

Laissez-faire is an economic theory from the 18th century that opposed any
government intervention in business affairs. The driving principle behind
laissez-faire, a French term that translates to "leave alone"

Five Major Division of Economics

1. Consumption
Since the existence of human wants is the starting point of economic activity, we
study consumption first. In this, we study about the consumption of wealth for the
satisfaction of human wants. In this division, we study about the characteristics of
human wants, the behavior of the consumer, diminishing utility and consumer’s
surplus, etc.
2. Production
This division covers the factors of production viz., Land, Labor, Capital and
Organization. The laws governing production, mobility of factors and the role of
factors are studied in this division.

3. Exchange
In this division, we study about trade and commerce, money and banking.
Consumption will be possible only if the produced commodity is placed in the hands
of the consumer. For this, trade and commerce are essential for the movement
of goods and services from one place to another.

4. Distribution
Production is the result of the cooperation of factors of production. Since a
commodity is produced with the efforts of land, labor, capital and organization, the
produced wealth has to be distributed among the cooperating factors. The reward
for factors of production is studied in this division under rent, wages, interest and
profit. Distribution studies about the pricing of factors of production.

5. Public Finance
This division studies about the income, expenditure and financial administration of
the State. This tells about taxation and expenditure, budgeting and financial
administration. Public Finance has been separated from Economics and is treated as
an independent branch.

2 Diviosion of Economics

The two major divisions of economics are macroeconomics and


microeconomics. Macroeconomics is the branch of economics that deals with the
behavior of an entire community or country, and microeconomics is the branch of
economics that deals with the economic behavior of a specific segment.

Economic recession is a period of general economic decline and is typically


accompanied by a drop in the stock market, an increase in unemployment, and a
decline in the housing market. 

5 Basic Problems of an Economy


1. What to Produce and in What Quantities?
The first central problem of an economy is to decide what goods and services are to
be produced and in what quantities. This involves allocation of scarce resources in
relation to the composition of total output in the economy. 

2. How to Produce these Goods?


The next basic problem of an economy is to decide about the techniques or
methods to be used in order to produce the required goods. This problem is
primarily dependent upon the availability of resources within the economy.

3. For whom is the Goods Produced?


The third basic problem to be decided is the allocation of goods among the
members of the society. The allocation of basic consumer goods or necessities and
luxuries comforts and among the household takes place on the basis of among the
distribution of national income.

4. How Efficiently are the Resources being Utilized?


This is one of the important basic problems of an economy because having made
the three earlier decisions, the society has to see whether the resources it owns are
being utilised fully or not. In case the resources of the economy are lying idle, it has
to find out ways and means to utilise them fully.

5. Is the Economy Growing?


The last and the most important problem is to find out whether the economy is
growing through time or is it stagnant. If the economy is stagnant at any point
inside the production possibility curve, says in Figure 5, it has to be moved on to
the production possibility curve PP whereby the economy now produces larger
quantities of consumer goods and capital goods.

A good is anything which yield satisfaction to someone. It is anything used to satisfy a person’s
wants and desires. Goods may be tangible when they are in the form of material goods or commodities.
They may also be intangible in the form of services.

Goods may also be classified according to use. Goods which yield satisfaction directly, just like
soft drinks and food are called consumer goods. Goods used in the production of other goods and
services are called capital goods. Examples are building, machinery and equipment.

Goods may also be essentials, if they are used to satisfy the basic needs of man such as food,
shelter and medicine.
Luxury goods are those goods man may do without, but are used to contribute to his comfort
and well being.

Basic types of goods

Private goods are excludable and rival, meaning consumers need to pay for them and there’s a limited
supply.

Common goods are non-excludable and rival, meaning they are free but limited supply.

Club goods are excludable and nonrival, meaning consumers pay fro them and they are unlimited supply.

Public goods are non-excludable and nonrival, meaning they are free for everyone and unlimited supply.
The public sector typically manages public goods.

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