CHAPTER ONE: INTRODUCTION TO ECONOMICS

Definition
The term economics was derived from the Greek word “Oikonomia” which
is a combination of two names “oikos” meaning house and “nomos”
meaning managing.

The study of economics has been forwarded by several scholars and each
one of them defines it differently. Let us look at the various definitions by
various scholars.

1. Arisotle who the first analytical economist was proposed that

economics is about the study of production, distribution and exchange.
He believed that foreign trade is important to any nation if it has to
achieve economic and political supremacy over others.
2. Adam Smith (1723-1790) who is a classical economist proposes that
economics is a science that studies wealth. He actually defines
economics as a science that studies the nature and causes of national
wealth. Adam smith argued that there was harmony between
individual and social interests in that what was done by the individual
in pursuit if self interest was also in the interest of the society. In
addition he contended that whatever was most profitable to produce
from an entrepreneurs view point was also the best option to increase
the community welfare.
3. Lionel Robbins (1898-1984) stressed the notion of scarcity in all
economic behavior. He defined economics as the science which
studies human behavior as a relationship between ends and scarce
means which have alternative uses.
4. Alfred Marshall (1842-1924) defined economics as a study of mankind
in the ordinary business of life. Marshall emphasized that mankind and

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 wealth go hand in hand. He considered wealth as an end in itself ,but
not as a means to achieving welfare to improve the human condition.

Branches of Economics
1. Micro econonomics is the branch of economics that studies the
behavoiur of individual decision making units such as consumers,
governments and business units within a free market economy.
The aim of micro economics is to explain the determination of prices and
quantities of individual goods and services.
Micro economics also considers the impact of government regulations such
as taxation on individual markets.

2. Macro economics is the study of the behavior of the economy as a whole

and the relationship is considered between broad economic aggregates such
as national income, employment and prices. Macro economics focuses on
economic stabilization whereby the government develops policies to
moderate the business cycle and encourage real economic growth.

SCOPE OF ECONOMICS
Scope means province or field of study. In discussing the scope of
economics, we have to indicate whether it is a science or an art and a
positive science or a normative science.

Economics as a science
Science deals with systematic studies that signify the cause and effect
relationship. In Science facts and figures are collected and are analyzed
systematically so as to arrive at a certain conclusion. For these attributes,
economics can be considered as a social science with the below features
1) It involves the collection of facts and figures
2) Economics is based on theories and laws.
3) It deals with cause and effect relationships.

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Economics as an Art
There is a saying that Knowledge is science, action is art. Economic theories
are used to solve various economic problems in the society, thus it can be
inferred that besides being a social science it is also an art.

OPPORTUNITY COST
This is one of the most important concepts in economics. The opportunity
cost of an action is the value of the best forgone alternative action. The
aspect of opportunity cost arises because resources are scarce but the needs
are unlimited. The choice of one thing means that another has to be missed.
The opportunity cost applies to individuals, small and large firms because
they have to decide what combination of goods and services they have to
produce or consume at any given time. For an individual purchasing of one
item may at times involve having to forgo another and in the case of a
company producing more of one commodity or getting additional equipment
involves forgoing alternatives.

The government also considers the concept of opportunity cost in the

process of resource allocation. E.g. if the allocate funds to build a road the
same funds cannot be used to build a school. While determining which
project to undertake the social costs and benefits for each project must be
evaluated.

If resources were limitless, no action would be at the expense of another,

since all needs would be met and the opportunity cost of any single action
would be zero.

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In a world of scarcity, the opportunity cost is always positive. Additionally for
opportunity cost to exist the resources must have alternative uses. Where
the resources can only be used for only one purpose, no opportunity cost
arises because the value of the alternative use is zero.
The concept of opportunity cost is also used in international trade where it
provides a basis for advocating that countries specialize in lines where they
have a comparative cost advantage that is produce commodities that involve
the lowest opportunity cost.

The Production Possibility Frontier

The PPF is a graph which shows the combination of goods and services which
can be produced with a given level of resources. That is when all resources
have been fully and efficiently employed. It shows the options that are
available for increasing the output of one good by reducing the output of
another and therefore provide an excellent application of the concept of
opportunity cost.

We normally draw a PPF as a concave to the origin ie as we move along the

PPF as more resources are allocated towards goods Y the alternative output
gets smaller.

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Source:textbook.stpauls.br

SCARCITY AND CHOICE

Resources are limited and yet the needs and wants are unlimited. Choices
have thus to be made because one can only have more of X by having less of
Y. All economic agents whether individuals, producers, businesses and
consumers have to make choices from time to time. Let’s have a look at two
examples
1. Producers: They have to allocate resources so as to maximize profits.
Producers have scares factors of production and they have to make
decisions on which goods and services need to be produced. Therefore
they have to decide on the composition of the output that will
maximize profit.
2. Consumers: They have limited income and unlimited wants that
require to be addressed with the money at hand. It is wise to be
rational and hence prepare a list of preferences; the items top on the

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 list get more priority while those at the bottom of the list get least
priority.

CLASSIFICATION OF RESOURCES
1) Economic Resources: They are scares or limited and they command a
high price e.g. Land, Labor and capital.

2) Non-Economic Resources: They are unlimited in supply and are free

and do not command a price tag e.g. Air.

Because resources are scares there are three fundamental choices that
any society has to make as outlined as below

A. What goods and services are to be produced and in what

quantities? This is fundamentally the composition of total output.
For example the government has to decide in the ministry of
Education how much is allocated to paying teachers Vis a vis the
free feeding programe.

B. How should the goods and services be produced? This allocation

decision arises because most goods and services can be
produced using different methods, with the methods being
distinguished by the quantities of resources used in production.

The production methods include

i. Capital Intensive Method: Production where a higher

proportion of capital is used relative to other factors of
production for example the economy of Japan.

ii. Labour Intensive method: This method of production requires

a higher proportion of labour is used relative to other factors of
production. For example the Kenyan economy is labour intensive

3. How should the goods and services be distributed? This is concerned

with the relative share that is going to be distributed to each
household and the criteria to be used in allocation.

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 Central Problems of the Economy

Allocation of Efficient use Economic

Resources of Allocated Development or
Resources growth of resources

What to How to For whom to

Produce Produce produce

Why Study Economics

1. Economics provides the underlying principles of capital resource allocation

and thus enables individuals and firms to make economically rational
decisions.

2. Enables individuals and organizations to appreciate the constraints

imposed by the economic environment within which entity operates.

3. Development economics gives reasons why societies develop the means

for accelerating the development of a nation.

4. Economics is an analytical subject and its study can help to develop logical
reasoning which is beneficial

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