Module 1

INTRODUCTION TO ECONOMICS

Introduction
This module entitled Introduction to Economics is all about concept of economics particularly Microeconomics, the
fundamental economic problem which is scarcity and the context of opportunity cost.

What Is Economics?

Economics is a social science concerned with the production, distribution, and consumption of goods and services. It
studies how individuals, businesses, governments, and nations make choices about how to allocate resources.

Economics can generally be broken down into macroeconomics, which concentrates on the behavior of the economy
as a whole, and microeconomics, which focuses on individual people and businesses.

The principle (and problem) of economics is that human beings have unlimited wants and occupy a world of limited
means. For this reason, the concepts of efficiency and productivity are held paramount by economists. Increased
productivity and a more efficient use of resources, they argue, could lead to a higher standard of living.

Types of Economics
The study of economics is generally broken down into two disciplines.

• Microeconomics focuses on how individual consumers and firm make decisions; these individuals can be a
single person, a household, a business/organization or a government agency. Analyzing certain aspects of
human behavior, microeconomics tries to explain they respond to changes in price and why they demand
what they do at particular price levels. Microeconomics tries to explain how and why different goods are
valued differently, how individuals make financial decisions, and how individuals best trade, coordinate and
cooperate with one another. Microeconomics' topics range from the dynamics of supply and demand to the
efficiency and costs associated with producing goods and services; they also include how labor is divided
and allocated, uncertainty, risk, and strategic game theory.
• Macroeconomics studies an overall economy on both a national and international level. Its focus can
include a distinct geographical region, a country, a continent, or even the whole world. Topics studied
include foreign trade, government fiscal and monetary policy, unemployment rates, the level of inflation and
interest rates, the growth of total production output as reflected by changes in the Gross Domestic Product
(GDP), and business cycles that result in expansions, booms, recessions, and depressions.
Micro- and macroeconomics are intertwined; as economists gain an understanding of certain phenomena, they can
help us make more informed decisions when allocating resources. Many believe that microeconomics' foundations of
individuals and firms acting in aggregate constitute macroeconomic phenomena.

The Economics of Labor, Trade, and Human Behavior

The building blocks of economics are the studies of labor and trade. Since there are many possible applications of
human labor and many different ways to acquire resources, it is difficult to determine which methods yield the best
results.
 Economics demonstrates, for example, that it is more efficient for individuals or companies to specialize in specific
types of labor and then trade for their other needs or wants, rather than trying to produce everything they need or
want on their own. It also demonstrates trade is most efficient when coordinated through a medium of exchange, or
money.

Economics focuses on the actions of human beings. Most economic models are based on assumptions that humans
act with rational behavior, seeking the most optimal level of benefit or utility. But of course, human behavior can be
unpredictable or inconsistent, and based on personal, subjective values (another reason why economic theories
often are not well suited to empirical testing). This means that some economic models may be unattainable or
impossible, or just not work in real life.

Economic Indicators
Economic indicators are reports that detail a country's economic performance in a specific area. These reports are
usually published periodically by governmental agencies or private organizations, and they often have a considerable
effect on stocks, fixed income, and forex markets when they are released. They can also be very useful for investors
to judge how economic conditions will move markets and to guide investment decisions.

Below are some of the major U.S. economic reports and indicators used for fundamental analysis.

Gross Domestic Product (GDP). The Gross Domestic Product (GDP) is considered by many to be the broadest
measure of a country's economic performance. It represents the total market value of all finished goods and services
produced in a country in a given year or another period (the Bureau of Economic Analysis issues a regular report
during the latter part of each month). Many investors, analysts, and traders don't actually focus on the final annual
GDP report, but rather on the two reports issued a few months before: the advance GDP report and the preliminary
report. This is because the final GDP figure is frequently considered a lagging indicator, meaning it can confirm a
trend but it can't predict a trend. In comparison to the stock market, the GDP report is somewhat similar to the income
statement a public company reports at year-end.

Retail Sales. Reported by the Department of Commerce during the middle of each month, the retail sales report is
very closely watched and measures the total receipts, or dollar value, of all merchandise sold in stores.The report
estimates the total merchandise sold by taking sample data from retailers across the country—a figure that serves as
a proxy of consumer spending levels. Because consumer spending represents more than two-thirds of GDP, this
report is very useful to gauge the economy's general direction. Also, because the report's data is based on the
previous month sales, it is a timely indicator. The content in the retail sales report can cause above normal volatility in
the market, and information in the report can also be used to gauge inflationary pressures that affect Fed rates.

Industrial Production. It is preferable for a country to see increasing values of production and capacity utilization at
high levels. Typically, capacity utilization in the range of 82–85% is considered "tight" and can increase the likelihood
of price increases or supply shortages in the near term. Levels below 80% are usually interpreted as showing "slack"
in the economy, which might increase the likelihood of a recession.

Employment Data.The Bureau of Labor Statistics (BLS) releases employment data in a report called the non-farm
payrolls, on the first Friday of each month. Generally, sharp increases in employment indicate prosperous economic
growth. Likewise, potential contractions may be imminent if significant decreases occur. While these are general
trends, it is important to consider the current position of the economy. For example, strong employment data could
cause a currency to appreciate if the country has recently been through economic troubles because the growth could
be a sign of economic health and recovery. Conversely, in an overheated economy, high employment can also lead
to inflation, which in this situation could move the currency downward.
Consumer Price Index (CPI).The Consumer Price Index (CPI), also issued by the BLS, measures the level of retail
price changes (the costs that consumers pay) and is the benchmark for measuring inflation. Using a basket that is
representative of the goods and services in the economy, the CPI compares the price changes month after month
and year after year. This report is one of the more important economic indicators available, and its release can
increase volatility in equity, fixed income, and forex markets. Greater-than-expected price increases are considered a
sign of inflation, which will likely cause the underlying currency to depreciate.

KEY TAKEAWAYS
• Economics is the study of how people allocate scarce resources for production, distribution, and
consumption, both individually and collectively.
• Two major types of economics are microeconomics, which focuses on the behavior of individual consumers
and producers, and macroeconomics, which examine overall economies on a regional, national, or
international scale.
• Economics is especially concerned with efficiency in production and exchange and uses models and
assumptions to understand how to create incentives and policies that will maximize efficiency.
• Economists formulate and publish numerous economic indicators, such as gross domestic product (GDP)
and the Consumer Price Index (CPI).

Three Basic Economics Decisions

The concepts of opportunity cost and scarcity are vital to understanding how the economy works. Because of the
inevitable imbalance between limited productive resources and unlimited wants, the following questions must be
considered.

1. What will be produced? – the productive potential of the economy must not be wasted to do everything for
everybody. Decisions must be made about what to produce and how much of each item to be produced with
the limited resources available.
2. How will goods and services be produced? – there is more than one way to accomplish any given
objective. Machines or other products (such as chemicals) can be substituted for labor or land when
producing any mix of goods. This involves a certain kind of technology.
The second question an economy must answer involves deciding how the desired goods are to be
produced. There is more than one way to grow wheat, train lawyers, refine petroleum, and transport
baggage. The efficient production of goods and services requires that certain fundamental rules be followed:
no resources should be used in producing one thing when it could produce something more valuable
elsewhere and each product should be made with the smallest-possible amount of resources. A functioning
price system induces all participants in the economy to steer their resources towards activities that yield a
reward. Jobs that pay a high price for labor will attract workers seeking the reward of a high salary. Crops
that yield a greater profit will attract more farmers to cultivate them.
3. To whom will goods and services be distributed? – are they to be distributed equally to everyone so that
each lives in the same type of house, eats the same amount and kind of food and wears the same clothes?

The distributions of material things are never perfectly equal. No society has yet discovered how to provide
equally for the needs and wants of everyone while still offering the incentives that encourage high quality
production and technological innovations.
Microeconomics versus Macroeconomics
Economic analysis is divided into two main branches, microeconomics and macroeconomics – Both of them
are essential in the study is SCARCITY.
Microeconomics deals with a close-up view of the economy by concentrating on the choices made by the
individual participants in the economy, like the consumers, workers, business manager, and inventors.
Macroeconomics looks at the economy from a broader perspective by considering its overall performance
and the way various sectors of the economy relate to one. “The performance of the economy is measured by the total
of annual production, the capacity of the economy to provide jobs, changes in the purchasing power of the peso, and
the growth of employment and output.
Microeconomics deals with the ways individuals choose any various courses of action by weighing the
benefits and cost of alternatives available to them. It emphasizes the role of prices in business and personal decision.
One of its main goals is to understand how the prices particular goods and services are determined and how prices
influence decisions. It is because of this behavior that microeconomics is also known as price theory.
Unemployment and inflation are true issues which are carefully dealt with in macroeconomics.