TOPIC 1 INTRODUCTION TO ECONOMICS.

Introduction to Economics

Economics is a social science which studies the allocation of scarce resources which have
alternative uses among competing and usually limitless wants of the consumers in the society. It
is thus concerned with the way people apply their knowledge, skills and effort to the gift of nature
in order to satisfy human their material wants

It is also defined as the study of how human beings strive to satisfy their unlimited wants using
limited resources.

BASIC ECONOMIC CONCEPTS

1) HUMAN WANTS.

This are basic needs that human beings need to function normally this include; food, shelter,
clothing and air. Things like radio, education, watches, and vehicles are not very basic. They are
meant to have an individual have a happy and comfortable and luxurious life.

• Form utility-This is created through changing the form of a raw material to a finished
product. It is usually done during various manufacturing processes. The finished goods are
in a better form for use than the raw materials.
• Time utility-this is created through warehousing or storage
• Possession utility-This is created through trade or exchange.
• Place utility-this is created through distribution. After goods have been produced, they
must be moved to the places where they are required for use.

Characteristics of human wants.

• They are many, numerous and unlimited.

• They continually change with time and other factors.
• Some are repetitive e.g. supper, lunch etc.
• Wants are competitive
• Wants are complementary-Used together e.g. shoe polish and a shoe.
• Wants are habitual that they always occur e.g. toothpaste, perfume etc.
• Wants are universal-Everybody wants them.

Characteristics of basic wants.

• One can’t do without them.

• They are felt needs
• Can’t be postponed
• They are satisfied before secondary wants.
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Difficulties in satisfying human wants.

Although human wants are there to satisfy man with lives requirements, it is not always possible
to have them this is because;

• They are too many and new ones keep cropping up.
• Resources to satisfy them are never enough (limited).
• They are repetitive hence people will always strive for more resources.
• They continually change with time and other factors like age and gender.
• Some are habitual making life unbearable without them.
• Due to scarcity of resources, a problem of deciding which want to satisfy first with scarce
resources arise.

Types of humans wants.

They are classified into two groups.

1. Basic human needs-This are things one cannot do without e.g. food. They always come
at the top for the scale of preference and failure to satisfy them one can lead a miserable
life or even die.
2. Secondary human wants-they are things one cannot do without. They help one lead a
happy meaningful and comfortable life e.g. TV set, radio, cars, education, sodas etc.

NB. one must satisfy basic needs before attaining secondary wants.

Since the resources to satisfy human wants are scarce, one has to select on what wants are to be
satisfied first and which can wait.

2) ECONOMIC RESOURCES

These are ingredients that are available for providing goods and services in order to certify the
human wants. A resource must be scarce and have money value.

Characteristics of economic resources.

1. They are scarce in relation to their uses

2. They have a monetary value.
3. They have alternative uses.
4. They are unevenly distributed
5. They have utility
6. Can be combined to produce goods and services. They are transferrable from one place to
another.

Types of economic resources.

There are three main ways of classifying economic resources namely;

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1. Natural resources-They are also called the gifts of nature and are fixed in such by they
are held in trust by the government for the citizens. They include; forest, river,
mountain, minerals and lakes.
2. Artificial resources-They are created by people through various production activities
e.g. machinery, tools, roads, railway, airport, dams, bridges, h.e.p, harbours, soaps,
books.
3. Human resources-They are mental/physical efforts offered by people to the production
society. These efforts cannot be separated from their providers e.g. teaching, health
services, mechanics, carpentry, engineers etc.

3) Natural Resources refer to anything given by God or nature such as fertile soil, rivers,
lakes, mountains etc.
4) Man Made Resources refers to anything created by man to assist in further production
such as tools, equipment’s, roads and buildings etc.
5) Scarce and Choice if the resources available are not enough to produce goods and services
to satisfy all the wants then they are said to be scarce. As a result, individuals and society
cannot have all the things that they want. Since resources are limited, choices have to be
made. The choice to satisfy one want implies others are forgone. Individuals have to make
choices e.g. consumers with their limited income and unlimited wants have to choose how
they spent their income.

Importance of scarcity.

1. Makes people to work hard

2. Stimulates usage of available resources

6) Opportunity Cost refers to the value of benefit expected from the best second alternative
forgone. It is based on the fact that resources being scarce have competing alternative uses.
The choice to satisfy one alternative means that another is forgone. The value of the second-
best forgone alternative is the opportunity cost.
7) Utility-this is the quality of that commodity that satisfies human want.
8) Economics-subject/discipline.
9) Economy-this is the country’s financial position.
10) Economies-this are the benefits of large scale.
11) Ceteris paribus-this is a major concept meaning, other factors held constant
12) Pareto efficiency-this is a situation in which it is not possible to make someone better off
without making someone worse off.
13) Consumer sovereignty-this refers to the freedom of individuals and households to decide
for themselves what they want to buy in a given market.

Production Possibility Frontier/Capacity (PPF/PPC)

It provides a graphical illustration of the problem of scarcity and choice which is the basic
economic problem. The curve shows what a country produces with existing supply of land, capital
and entrepreneurship ability. With limited supply of economics resources, a country has a wide
variety of options and variety of goods and services it can produce. Assume a simple hypothetical
 TOPIC 1 INTRODUCTION TO ECONOMICS.

economy where a country produces two types of goods i.e. agriculture and manufactured goods.
The two extreme possibilities are:

1. a) The country commits all its resources to the production of agriculture and non to
manufacturing.
2. b) All the resources are put to manufacture and none to agriculture.

These two extreme cases are unlikely and the country will most likely choose to produce goods of
both commodities. The opportunity cost of producing either of them is increasing which the law
of diminishing return.

The main branches of economics are:

1. MICROECONOMICS

This is the study of the smallest economic decisions making units of the society. Microeconomics
theory is a branch of economics that studies the behavior of individual decision-making units such
as consumers, resource owners and business firm as well as individual markets in a free market
economy. The aim of microeconomics is to explain the determination of prices and quantities of
individual goods and services. Microeconomics also considers the impact of government
regulation and taxation of individual markets. For example, microeconomics analyses the forces
that determine the prices and quantities of television sets sold. Microeconomics can be considered
as the ultimate cellular structure of economics. It is the study of individuals, households and firms.
The major areas are

demand and supply analysis, market equilibrium, consumer theory, theory of the firm, market
structure and distribution theory
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2. MACROECONOMICS

This is the study of bigger and complex systems. Macroeconomic theory is the study of the
behavior of the economy as a whole whereby the relationship is considered between broad
economic aggregates such as national income, employment and prices. The economy is
disaggregated into broadly homogenous categories and determinants of the behavior of these
aggregates are integrated to provide a model to the entire economy.

Macroeconomics focuses on the economic stabilization whereby government policy is used to

moderate business cycles and encourages real economic growth. Macroeconomics became a
separate topic of discussion in the aftermath of John Maynard Keynes and the great depression.
The line between microeconomics and macroeconomics is, however, blurred and there are many
areas of overlap between the two. Key areas of macroeconomics are:

national income, economic growth and development, money and banking, public finance
unemployment, inflation and international trade

Why Study Economics?

It is useful to study economics for the following reasons

1. Economics provides the underlying principles of optimal resource allocation and thus
enables individuals and firms to make economically rational decisions. Thus for example
the preparation of budgets involves knowledge of demand and elasticity analysis. The
making of price policy decisions draws heavily on the concept of elasticity in economics.
Additionally, the theory of production in economics is concerned with the principles that
facilitate the optical combination factors of production.
2. A study of economics enables individuals and organizations to appreciate the constraints
imposed by the economic environment within which any entity operates. Thus an
individual or firm is more fully enabled to appreciate the implications of the annual budget
considering how for example the increased liberation of the economy will affect a
particular business entity and the economy in general. Additionally, the student of
economics is able to appreciate the effects of such economic variables as inflation,
exchange rates, interest rates money supply and so on.
3. The area of development economics is fundamentally concerned with the reasons why
societies develop and means of accelerating development. It is vital for individuals as
citizens to appreciate the parameters that determine the development process so that they
contribute more fully to facilitate and contribute to solving the economic problems that
characterize their society.
4. Economics is an analytical subject and its study can help develop logical reasoning which
is never superfluous.
5. It is an examinable and mandatory for students perusing business courses
6. Students appreciate the effect of economic variables e.g. inflation, exchange rate, interest
rate, money and supply etc.
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The Methodology of Economics

The methodology used in studying and applying economics can be divided into three. These are
basically the methods of solving economic problems.

1. Positive economics is concerned with what is, or how the economic problem facing
societies are actually solved. it deals with facts using positive statements. for example;
“Kenya is a member of the East African community” and “Uganda is currently Kenya’s
major trading partner” are positive statements. For example, a dispute over whether
Uganda is currently Kenya’s major trading partner can be settled by looking at the statistics
of Kenya’s trade with its partners.
2. Normative economics refers to the part of economics that deals with the value of
judgments. This implies that normative deals with what ought to be, or how the economic
problems facing the society should be solved. Normative statements usually reflect
people’s moral attitudes and are expressions of what particular individuals group thinks
ought to be done. A statement such as “Uganda to should join the Southern Africa

Development Community” or “upper income classes ought to be taxed heavily”, are normative
statements.

3. Scientific method

Economics make use of scientific method to develop theories. Inquiry is generally confined to
positive questions. One of the major objectives of sciences is to develop theories. A theory is a
general or unifying principle that describes and explains the relationship between things observed
in the world around us. The purpose of a theory is to predict and explain. The search for a theory
begins whenever a regular pattern is observed in the relationship between two or more variables
and one asks why this should is so. A theory refers to a hypothesis that has been successfully
tested. It is important to note that economics hypothesis is not tested by realism of its assumptions
but its ability to predict accurately and explain. The following procedures are adopted in the
scientific method:

i. The concepts are defined in such a way that they can be measured in order to be able
to test the theory against the facts.
ii. A hypothesis formulated.
iii. The hypothesis is then used to make predictions.

1. The hypothesis is tested by considering whether its predictions are supported by facts.

Economic Systems

These refer to the way in which different societies solve the three different basic economic
problems which are: which goods should be produced and in what quantities?

1. How should various goods and services be produced?

2. How should various goods and services be distributed?
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To answer this question, various political and economic structures have been put in place, whereby
we have;

• Free market/capital system/laser faire economy

It refers to a system where decisions about allocation of resources are made by individuals on the
basis of prices generated by forces of market prices of demand and supply.

FEATURES /CHARACTERISTICS

1. Private property individuals have the right to own or dispose off their property as they may
consider it fit.
2. Freedom of choice and enterprise Individuals have the right to buy or hire economic
resources, organize them for production purpose and sell them in the market of their choice.
Such persons are referred to as entrepreneurs.
3. Self interest in the pursuant of personal goals. The individuals are free to do as they wish
and have the motive of economic activity in self-interest.
4. Competition There is a large number of buyers and sellers such that each buyer and seller
accounts for but is insignificant to influence the supply and demand and hence prices.
5. Reliance on price mechanism. This is an elaborate system of commerce in which numerous
choices of consumers and producers are aggregated and balanced against each other. The
interaction of demand and supply determine prices.
6. No government intervention hence no price controls, taxes and subsidies.
7. There are property rights provided and enhanced by the government through copy rights
patents, trademarks etc. e.g. on innovating and inventing one is protected from absorption
and thus you enjoy the benefits.
8. There is excessive advertising.

Advantages of free market economy

1. There is the matching of demand and supply. Production takes place in response to demand
hence a balance between what is produced and consumed. No wastage.
2. There is flexibility of the market in responding to changes in demand and supply conditions
thus variety products are offered.
3. There are no resources wasted in planning as no planning is required
4. Consumer sovereignty and competition gives rise to a wide variety of goods and services
giving consumers a wide range to choose from.
5. Higher rates of economic growth due to the incentive available for hard work which is
motivated by profits.
6. No wastage of resources on unrealistic projects because investment decision are based on
profits.
7. The costs associated with government bureaucracy are highly reducing encouraging
entrepreneurship in the economy.
8. Better quality products are produced due to innovation and inventions
9. Intensive innovation and invention is prevalent due to competition.
10. Affordable prices of products.
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Disadvantages of free market economy

1. Income inequality the ability of some people and firms to acquire excessive market power
leads to greater inequality in income and wealth.
2. There is likelihood of developing Monopoly powers whereby one firm controls the
production and distribution of commodities.
3. The price mechanism on its own cannot allocate resources to production of public goods
e.g. schools, security etc.
4. Instability in economy and unemployment. This is due to trade cycle i.e. recession,
depression, recovery and boom.
5. The inability to deal with structural changes caused by wars, natural calamities among
others.
6. Inadequate provision of merit goods. Merit goods are goods of importance to the
community such as health, education, security among others
7. Due to excessive advertising consumers are likely to make irrational choices at the expense
of moral life/health
8. Over-exploitation of resources

• Planned economy/command/government controlled/socialism/communism

It refers to an economic system where the crucial decisions are determined a body appointed by
the state. The body takes up the role of mechanism which prevails in a free market economy

Features of a command economy

1. Leadership and control of economies. All important means of production (resources) are
publicly owned such as land, power generation, housing among others.
2. Rationing of certain commodities if supply of such fall below demand.
3. Existence of production targets for different sectors of the economy. The government
determines how resources are allocated through planning.
4. Fixing of prices and wages
5. Occasional existence of restricted labor market in which workers take up jobs assigned to
them.
6. Government decides what is to be produced, how it will be produced and for whom to
produce.

Advantage of planned economy

1. Avoids economic instability

2. Minimize negative externalities
3. Makes adequate provision of public and merit goods ie education, health and safety.
4. Facilitate the shift of resources in pursuant of grand schemes such rapid industrialization
5. Puts checks on monopoly power which are controlled by state monopolies (Parastatals).
6. Ensures there is full employment.
7. Low inflation rate is being experienced.
8. Minimum waste of resources.
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9. Minimum inequalities of wealth and income

10. Easier government control.

Disadvantages of Planned economy

1. There is wastage of resources in production because consumers demand is judged in

advance without the use of price mechanism.
2. The cost of gathering information for planning is expensive to the state.
3. There is no individual incentives and initiative for hard work and innovation.
4. The power of consumer sovereignty is curtailed.
5. There is no incentive for hard work and this discourages the suppliers
6. Some resources may end up being underutilized
7. Difficulty in estimating demand due to different time frames i.e. Decembers and end
month and sometimes during certain occasions such as valentine demand tends to rise.

(c) Mixed economy

Refers to an economic system where resource allocation is determined by the state-i.e. the
government and price mechanism. Both the government and private sector have a role to play in
resource allocation.it is widely adopted in many countries and results varied depending on nature
of the economy. The government normally intervenes when the private sector of market fails to
allocate resources effectively as long as the objective of the economic growth and development is
achieved.

Advantages of mixed economic systems.

1. Optimal utilization of nations resources

2. Relatively wider tax base
3. Consumers are protected from consumption of harmful products
4. A considerable degree of consumer sovereignty.
5. High quality products and services due to competition
6. More equal distribution /allocation of resources.
7. Relatively stable prices.

Role of government.

1. Checking quality of products.

2. Offering government subsidies
3. Offering import and export tariffs.
4. Ensuring price controls
5. Foreign exchange market
6. Taxation by ensuring there is redistribution of income through a system of taxation.
7. To create a framework of regulations and rules to ensure fair competition thus promoting
competition between firms both small and big ones.
8. Government intervention can prevent market failures in price mechanism.
9. Stabilization of the economy.
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10. The government is able to maintain competition by controlling monopoly power.

TAKE AWAY ASSIGNMENT

MIXED ECONOMIC SYSTEMS ARE NOT THE BEST. DISCUSS. (15 MARKS)

Format

1. Introduction
2. Body

• Conclusion

1. References
2. Type-times new roman, font-1.5, line spacing 1.5, page numbers-must.