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Intro ch-1

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Yonas Addam
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59 views

Intro ch-1

Uploaded by

Yonas Addam
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Outline

CHAPTER ONE:INTRODUCTION
1.1 Definition of Economics
1.2 Branches of Economics (Scope of
Economics)
1.3 Economic Resources
1.4 Basic Economic Problems
1.5 Economic Systems
1.6 Opportunity Cost and Production
Possibility Frontier
CHAPTER ONE:INTODUCTION
1.1 Definition of Economics
There are two fundamental facts that laid the
foundation for the field economics.
I. Human wants are unlimited.
II. The available resources to satisfy these wants are
limited.
The imbalance between the unlimited wants and the
limited means to satisfy these wants is called Scarcity.
Scarcity implies that resources need to be used
efficiently (optimally) so as to get the maximum
possible satisfaction for society.
Cont’d
Thus: Economics is a branch of social science that deals
with the optimal allocation of scarce resources to
maximize the satisfaction of human Needs (for
survival, such as food, clothing, and housing) and wants
(desired to have but it may not necessarily ).
Economics also aims to explain how economies work
and how economic agents interact (households,
business sector, government sector and foreign sector).
Economic analysis is applied throughout the society, not
only in business, finance and government, but also in
crime, education, the family, health, law, politics,
religion, social institution, war and science etc.
1.2 Branches of Economics (Scope of Economics)
Economists tend to categorize themselves among two
branches of Economics based upon the unit of analysis:
Microeconomics and Macroeconomics.
A. Microeconomics is the study of economics at
individual level. It studies the behaviours of individual
decision makers in a particular market and the
interaction among individual markets.
For instance, the theory of demand and supply helps to
analyse how prices and output levels are determined.
Consumer equilibrium(Utility maximization), firm
equilibrium (profit maximization or cost
minimization).
Cont’d
B. Macroeconomics is the study of the economy as a
whole. i.e, it studies economic variables at aggregate
level. It addresses issues affecting an entire economy,
including; unemployment, inflation, economic growth
and monetary and fiscal policy.
Microeconomics Macroeconomics
individual consumption aggregate consumption
individual saving aggregate saving
prices of individual commodities aggregate price level

the output level in individual markets aggregate output


Cont’d
Macroeconomics puts all the small pieces that are
subjects of microeconomics together to focus on the big
picture, as at a national or a global level.
1.3 Economics Resources
Economic resources, in economics, are Land, Capital,
Labor and Entrepreneurship. These four resources are
classified into two main heads:
1. Property Resources and
2. Human Resources
Cont’d
1. Property Resources: these include Land and Capital.
The term Land is used to describe all the natural
resources; includes agricultural Land, forest, mineral
deposits, fisheries, rivers, lakes, oil deposits, etc. The
return for Land is called Rent.
The term Capital refers to all man-made resources
which aid to production. Thus, machinery, equipment,
tools, factories, storage, transportation, etc.., which are
used in the production of new goods and service are called
Capital resources. The return for capital is called Interest.
Sometimes people consider money as synonymous with
capital. However, money, by itself, is not capital. It uses to
acquire capital.
Cont’d
2. Human Resources: These resources are found inside
individuals. Human resources include Labor and
Entrepreneurial ability. Labor in economics refers to
human effort, both physical and mental, which is
directed to the production of goods and services. For
example, factory worker, clerk, typist, teacher, doctor,
Judge, Physicist, etc., The return for labor is called
Wage.
Entrepreneurial ability is the ability to take risks and
organize or bring other factors of production together
to produce goods and services. The return for
entrepreneurship is called Profit.
1.4 Basic Economic Problems

The economic problem sometimes called the basic,


Central, or fundamental economic problems.
Three main economic questions arise from scarcity
and implied choice:
what to produce,
how to produce and
for whom to produce.
These questions are answered differently according to
the economic system a country adopts.
1.5 Economic Systems
There are four economic systems viz Traditional, Command,
Free Market and Mixed Economic systems.
A. The Traditional Economic system
In such economies, economic questions are answered by
custom, which is built over time.
B. Command Economic System
Derived from the idea of socialism, this economic system
argues that all major economic choice (i.e. economic
questions) should be answered through central planning
by the government.
Old Soviet Union, Communist China, Cuba and North
Korea are typical examples
Cont’d
C. Free Market Economic System
Private individuals (producers and consumers) are the
main actors in this system. The forces of demand and
supply (termed by Adam smith as invisible hand)
determine the answer to economic questions.
Adam Smith’s “…Wealth of Nations” book has been an
extremely influential book for this school of thought.
Cont’d
D. Mixed Economic System
This is a system where economic questions are
answered partly by the government as in the case of
command economy and partly by the market forces as
in free market economic system and some elements of
traditional economic system.
Practically, most countries follow mixed economic
system even though there are wide differences in
the roles played by the market and the state.
1.6 Opportunity Cost and Production
Possibility Frontier
A. Opportunity Cost
Scarcity implies choice
When we make a choice again, it has a cost. This is
because once we choose to use a resource for some
purpose, it will no longer be available for other
purposes.
In economics, such cost is termed as Opportunity Cost.
Formally, it is the value of the one which we forgo when
making a choice or making a decision.
Cont’d
However, opportunity cost is not all that we are not
choosing added up, instead, it is the most valued
among all that we let go. Because the person choose
valued most.
Example of Opportunity Cost
Lunch VS theater/movie
B. Production Possibility Frontier (PPF)
Production Possibility Frontier (PPF) is a curve or a
boundary which shows the combinations of two or more
goods and services that an economy can produce using
all the available factor resources efficiently.
Cont’d
PPF Y (Teff)

.C
. B

Production Possibility Frontier (PPF)

. A

X (Cotton)
Cont’d
Normally draw a PPF on a diagram as concave to the
origin.
Points below the PPF are inefficient (point A), Points
above the PPF are not attainable for the given level of
resource endowment and level of technology (point B) .
But production on point C is both efficient and
attainable.
Technological innovation or identification of new
resource base would shift the PPF outwards to the
right showing the possibility of producing more goods
and services. The broken PPF.
1.6 Methodology of Economic Analysis

There are two methods of analysis in economics;


1. Positive analysis
2. Normative analysis
1. Positive Analysis
This is the study of economics based on objective
analysis.
It uses what is and what has been occurring in an
economy as the basis for any statements about the
future. It does not involve value judgment.
Cont’d
2. Normative Analysis
It is the study or presentation of “what ought to be”
rather than what actually is. Normative economics deals
heavily on value judgment and theoretical scenarios.
Identify the following statement
1. The inflation rat of Ethiopia is around 40% currently.
2. The unemployment rate will be 25% in the coming
year.
3. The government should decrease money supply to
reduce the inflation rate.

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