ECONOMIC NOTES..

Definition Of Economics

Every scholar tends to define economics to suit his purpose, for instance,

Adam Smith (1776) defined economics as an enquiry into the nature and causes of the wealth of
nations.

John Stuart Mill defined economics as the practical science of production and distribution of wealth.

Davenport defined it as the science that treats phenomena from the standpoint of price.

Alfred Marshall, on his part, did not consider wealth as a means itself but rather a source of human
welfare. Therefore he defined Economics as a study of mankind in the ordinary business of life.

Davenport defined it as the science that treats phenomena from the standpoint of price.

Alfred Marshall, on his part, did not consider wealth as a means itself but rather a source of human
welfare. Therefore he defined Economics as a study of mankind in the ordinary business of life.

Scope of Economics

- Economics relies on the findings of other social sciences which include ethics, political science,
sociology, geography, psychology, philosophy, anthropology, etc. in order to reach a sound conclusion
concerning human behaviour. This inter-relationship with other social sciences promotes a wider
general understanding of social behaviour.

- Economics is a social science which studies human behaviour or mankind’s economic activities in
relation to production, exchange, distribution and consumption of goods and services.

- It deals with how people react to economic situations and how they behave while engaged in their
daily economic activities.
- Economics deals with the administration of scarce resources in society.

- Economics is positive in its study of human behaviour by concerning itself with “What is’, and not
normative with “What should be’, and thus point out the full cost - the real or opportunity cost - of
achieving our ends.

Branches of Economics

Micro Economics: This is the branch of economics that studies the economy in units, e.g individual
consumers, households and firms. It is concerned with the pattern and structure of individuals, firms and
industries.

Macro Economics: This is the branch of economics that studies the economy as a whole e.g aggregate
demand, national income, investment, unemployment, the balance of payments, etc.

Positive Economics: This is an approach to economic analysis that is scientific in nature. It uses tested
economics theories for analysis and economic predictions.

Normative Economics: This aspect of economics entails analysis of economic issues or situation on the
basis of opinions and not generally accepted theories. it is based on value judgment

Reasons for Studying Economics

It helps individuals, firms, and societies in national choice making.

It enables us to understand our economic environment and to design ways of positively influencing
them.

It assists the government to design and package programs that would be beneficial to the people.

It guides us in the rational allocation of resources towards ensuring efficiency and avoiding wastages.

It encourages rational thinking and positive solution to life’s material problems.

Basic Concepts of Economics

The basic concepts of economics include:

1. Want

2. Scarcity
3. Choice

4. Opportunity cost

5. Scale of preference

Want, Scarcity & Choice

Want

This is the desire to acquire and use various goods and services in order to satisfy human needs,
expectations, and objectives. It includes human basic needs such as food, shelter and other needs such
as cars, aircraft, etc. therefore, human wants are said to be insatiable, that is unlimited.

Scarcity

It is defined as the limited supply of resources which are used for the satisfaction of unlimited wants. In
other words, scarcity is the inability of human beings to provide themselves with all the things they
desire or want. Individuals, households, firms and government alike are faced with limited (scarce)
resources and as such, they cannot all satisfy all their wants.

Choice

It is the act of selecting one out of a number of alternatives. Human wants are many and we cannot
satisfy all of them because of our limited resources. We, therefore, decide which of the wants we can
satisfy first. Choice arises as a result of the scarcity of resources. Since it is difficult to produce everything
one wants, Choice has to be made by taking up the most pressing wants for satisfaction based on the
available resources.

Opportunity Cost
Opportunity cost is the best alternative that is forgone. It is also referred to as real cost. It is the
satisfaction of one’s want at the expense of another want. It refers to the wants that are left unsatisfied
in order to satisfy another more pressing need.

A student who has only #100 and wants to buy a textbook and a pair of sandals may discover that he
cannot get both items for #100. He would therefore choose which one he has to buy with the money he
has. If he decides to buy a textbook, it means he has decided to forgo the pair of sandals. The pair of
sandals is thus what he has sacrificed in order to own a textbook. The pair of sandals he has sacrificed is
the forgone alternative and this is what is referred to as opportunity cost.

Importance of Opportunity Cost

Importance of Opportunity Cost to Individuals

It helps individuals to make decisions.

It helps individuals to allocate scarce resources.

Judicious use of resources.

Prioritizing our wants.

It helps an individual to make wise choices.

Importance of Opportunity Cost to Firms

It helps in decision making.

It helps to decide the method of production.

It helps in project execution.

It guides policy formulation and implementation.

Importance of Opportunity Cost to the Government

It helps in resource allocation.

It helps in decision making.

It helps in the preparation of budget.

Scale of Preference

This is a list of wants in ranking order of importance. It facilitates rational choice-making by placing the
most important want first and the least important one last. For instance, a household may have the
following as its scale of preference;

Foodstuff

Rent

Children's school fees

Clothing

Importance of Scale of Preference

It is a tool for arranging human wants.

It helps in making choices.

It ensures optimum allocation of resources.

It shows human wants at a glance.

It helps consumers to utilize their resources.

Production Possibility Curve (PPC)

PPC is a curve or graph that shows the combination of two commodities that can be produced, given the
available resources and state of technology. The slope of the PPC is sometimes called the Marginal Rate
of Transformation.

Basic Assumptions of PPC

1. Only two commodities i.e, consumer goods (x) and capital goods (y) are produced in various
proportions in the economy.
2. There is a fixed supply of input factors.

3. Employment of resources is full.

4. A short production period is involved.

5. The level of technology is constant.

Relationship between PPC & Concept of Opportunity Cost

Opportunity cost refers to the best alternative forgone and it is related to PPC in that the use of
resources are involved in each combination and a shift from one combination to another involves a shift
in resources.

The PPC also slopes downwards from left to right which indicates that opportunity cost is involved in any
combination.

Importance of PPC

1. It leads to technical progress.

2. It causes economic growth.

3. It leads to economic efficiency.

4. To reduce the unemployment rate.

Land

Land is a gift of nature used in production. It includes minerals, rivers, vegetation, rocks, etc.

The reward for land is rent.

1. It is a gift of nature.

2. It is fixed supply.

3. It is subject to the law of diminishing returns.

4. Geographically, land is immobile.

5. It is heterogeneous.

Importance of Land to Economic Activities

- Agricultural activities providing food for consumption and raw materials for industrial and exports
takes place on land.

- It provides areas for forestry and wild life resources.

- It aids production because it is on it that firm, individual and government build factories, schools,
hospitals. roads etc.

- Different mineral resource such as crude oil, gold, coal, etc. are derived from land.

- Water bodies such as rivers, lakes and sea which are part of land are used for transportation purposes
which aids foreign trade.

- It is the host of other factors of production in bringing about meaningful productive activities

Labour
Labour is the human efforts (mental or physical) used in the process.

The reward for labour is wages.

Types of Labour

Skilled labour: This is the labour that makes use of mental effort in the production of goods and services.
They are people who have undergone some training in institutions of higher learning. E.g. Accountants,
doctors, engineers, lawyers, etc.

Semi-Skilled Labour: This category of labour is between unskilled and skilled labour These are workers
who have little education and training. They combined both physical and mental efforts in carrying out
their work. E.g. typist, tailors, carpenters, drivers, clerks, e.t.c

Unskilled labour: This category of labour require no or little formal education. They make use of their
physical and energy in the production process; their jobs are referred to as brown collar jobs. They are
employed guards, messengers, cleaners, etc.

Characteristics of Labour

1. It is a human factor. It directs other factors.

2. It can improve through education and training.

3. It varies in quantity.

4. It is mobile both geographically and occupationally.

5. It is perishable.

Efficiency of Labour
Labour efficiency is a measure of how efficiently a given workforce accomplishes a task when compared
to the standard in that industry or setting. There are several different ways to measure labour efficiency,
depending on the type of products and services being produced, and the end goal.

Companies periodically assess efficiency along with other characteristics to identify weak points in the
labour force and determine where they have room for improvement, with the goal of improving the
overall quality of goods and services while keeping costs down.

Factors Affecting the Efficiency of Labour

A moderate increase in the wages and salaries of workers.

Provision of social amenities such as medical services, pipe-bone water, recreational facilities, electricity,
canteen, etc.

Provision of a better condition of services.

Improvement in the working condition of workers.

The efficiency of other factors of production.

Level of educational attainment and training.

Improvement in the level of technological development.

Granting of encouragement in terms of incentives to workers.

Importance of Labour

1. It is required for the operation of machines in industries.

2. It provides the required skills and personnel necessary for production.

3. It influences other factors of production since without labour, capital and land will remain idle.
4. It is important for producing the human effort required needed in the production of goods and
services.

Capital

Capital is man-made assets used in the production process or wealth set aside for the production of
further wealth.

Some examples of capital are machines, tools, factories, buildings, raw materials, fuel, money, semi-
finish goods and other equipment used in the production of goods and services.

The reward for capital is interest.

Characteristics of Capital

1. It is man-made.

2. It takes different forms.

3. It may be mobile (e.g cash) or immobile (e.g buildings).

Types of Capital

1. Fixed Capital: These are the durable assets of a business or productive unit that can last for a very
long time. These assets or capital do not change their form in the process of production. In other words,
they are the durable investment which requires renewal only at fairly long intervals. It includes items
such as factory building, machinery, tools, etc.

2. Circulating or Working Capital: This consists of capital goods which either change their form or are
used up in the process of production. Examples of working capital include raw materials, fuel, water, etc.
Most forms of circulating capital are required on a regular basis in order to maintain production.
3. Current or Liquid Capital: This refers to those things needed for day to day running of the business.
Examples include money used to buy raw materials, money used in paying wages and salaries, etc.

4. Social Capital: This includes those forms of capital or assets provided by the government that aid
production. Examples of social capital are amenities provided by the government such as roads,
electricity, water, telephones, etc

Importance of Capital

1. Capital facilitates production.

2. It improves efficiency in production.

3. Capital improves the standard of living.

4. It improves the quality of goods.

5. Capital ensures the smooth running of the business.

6. It saves time in productive activities.

7. It provides the availability of a variety of goods.

Entrepreneur

An entrepreneur is a person who organizes, controls and coordinates other factors (land and capital) to
obtain maximum production at minimum costs, with a view to making a profit.

The reward for entrepreneur is profit.

Functions of Entrepreneur
1. The entrepreneur bears the risk associated with the business.

2. He provides the capital required for running the business.

3. He makes policies/strategic decisions.

4. The entrepreneur controls and coordinates other factors of production.

5. He remunerates other factors of production.

6. He controls and manages the business.

7. The entrepreneur also plays the role of maintaining efficient management in production lines.