•

Principles of Economics
Lecture 1 & 2
Prof. Dr. Qais Aslam
Text Books
• Principle of Microeconomics. Gregory N. Mankiw & Others.
International Edition Harcourt 2018
• Microeconomics. Roger A. Arnold. 12th Edition Cenage Learning 2018
 Science

• Science is a systematic way of thinking and working that

builds and organizes knowledge in the form of testable
(empirical) explanations and predictions
• Natural Science: (Objective) irrespective of human
emotions or interventions. For all times – past, present,
future (Physics, Chemistry, Botany, Biology, Zoology,
Astronomy, Space Sciences, & Earth Sciences)
• Social Science: (Subjective) Man Made, and change with
change in human knowledge, practices, emotions and
behaviors. (Economics; Political Science; Psychology;
Sociology)
 Laws
• Natural Laws: (Objective laws) Laws of Nature are laws of science, irrespective of
humans and are for all times. Example Laws of Physics, Chemistry, Biology,
Botany , zoology etc.
• State Laws: Made by the Parliament or the Sovereign (Government). These are
average behaviors defining the society and are punishable with fines, loss of
freedom and in extreme cases loss of life as determined by these laws. Criminal
Laws, Traffic laws, Family laws and other civil laws. They can be changed by the
law making authority (Parliament)
• Social Laws: (Subjective Laws) Not Laws, but Our observation “ how ordinary
people behave in ordinary economic, political and sociological life. Economics,
Political Science, Sociology, Psychology etc. are social sciences. Economics is a
more perfect social science because economic laws can be measured through
Money and Time. Therefore economics laws can be measured Mathematically
 Micro Economic Concepts & application
• Concept of Consumer’s & Producer’s Supply &
Consumers Demand & its application
Macro Economic Concepts
• Concept of Aggregate Demand & Aggregate Supply
• GNP, GDP & its application in Economic Governance
 Micro vs. Macro Economics
• Microeconomics is the study of how households and firms
make decisions and how they interact in specific markets
• Macroeconomics is the study of the economy as a whole or
of Aggregates therefore macroeconomics is a economy-
wide phenomena with Government Interventions & policy
Adam Smith’s definition of Economics
• “Economics is a Science of Wealth”
• Wealth is not money or gold
• Wealth means Goods and Services produced = Value
addition to the existing stock of goods and services
(GDP)
• Incremental change in GDP = wealth
 Wealth
• Goods and services produced (Value Addition to the existing
stock of wealth) = Wealth
• Wealth in Accountancy = Assets minus Liabilities
Characteristics of Wealth:
1. Scarcity: The Diamond – Water Paradox
2. Mobility:
a)Territorial mobility (Geographical or Physical) or taking things from one place to another
b) Legal mobility (Transfer of Ownership or property rights). Ownership is transferred by i. Buying
and selling; ii. Gift; iii. Inheritance
c) Economic mobility (Different usages of an Asset or Resource or Factors of Production = how
an asset will be used to earn an income) or how quickly resources can be shifted from producing
one thing to another
and
3. Utility: Power of a thing to satisfy a human need = Satisfaction of human needs
 Definition of Economics
• Adam Smith: Economics is a Science of Wealth
• Economics is a more perfect Social Science: Because Economic parameters
can be measures through Money and Time
• Economics is a Science of Value Addition = Wealth
• Economics is a Science of Managing Scarce Resources
• Robins (Modern Definition of Economics) : Economics is a Science
that tells us how to satisfy Maximum Wants (Needs) with
Minimum use of Scarce Resources
• Alfred Marshal: Economics is a science of Every day Business life. It tells us
how to attain the prerequisites of material welfare. On one side it is a
science of wealth, and on the other more important side, it is the science
of humans (social science) themselves
• Economics as the science of opportunity costs
 Limits, Alternates & Choices
• What is Economics
• Economic & Non-Economic Goods = Anything that goes through the market and has a price is economic good
• Value in use (Commodity Value = Value) and
• Value in Exchange (Price)
• Wealth: Utility; Scarcity; Mobility
•Scarcity & Choice = Trade offs = Opportunity costs
•Marginal Analysis ( Rate of Change = Value addition)
•Benefits & Costs Analysis
• Theories; Principles; Models
• Microeconomics & macroeconomics
• Positive & Normative Economics
• Limited Resources vs. Unlimited Wants = Economic Problem
• Trade Off’s & opportunity Costs = Optimum ( Best under the Restraints)
• Growth & opportunity
 Ten Principles of Economics
1. People Face Tradeoff’s
2. There are Opportunity Costs to every Decision
3. Rational People think on the Margin
4. People Respond to Incentives
5. Trade Increases Welfare of all
6. Markets are efficient
7. Governments can increase efficiency of the market
8. Production of Goods and services increases Incomes and wealth
9. Increase in incomes increases inflation and prices
10. Short-term tradeoff’s have to be made between inflation and employment
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Rationality
• It is assumed that Buyers are rational when they make
decisions and that their preferences of more to less at
a give price is the best judge of how much benefits
the consumers are going to receive from the goods
that they buy in the market at a price
 Rational people Think at the Marginal
• Economists assume that ordinary people think rationally in
ordinary business life – consumers would demand (d) more for less
money and suppliers would supply (s) less for more money
• Economists take into consideration the small incremental changes
(adjustments) for every action and call them marginal changes
(∆x/ ∆y)
• Economists assume that rational people think on the margin
Equi-marginal Principle = The rate of change of
opposing forces in economics is equal
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 Marginal
Rational people think on the marginal = incremental

•marginal utility,
•marginal revenue,
•marginal cost,
•marginal product
 People Respond to Incentives
• Because people make decisions by comparing costs (c) and
benefits, their behavior may change when costs or benefits
change, therefore incentives help change behavior of
people
• Incentives are rewards or punishments that induce people
to change behaviors
• Change in costs or benefits through increase or decrease in
Price would change demand or supply of different goods
and services
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Laws
• There are three types of Laws:
1. Natural Laws (Objective laws) Made by God and are for
all times irrespective of human beings. We study these
laws in Natural Sciences
2. Governmental Laws: Made by the Sovereign
(Parliament or the Ruler). They will be changed by the
sovereign
3. Social Laws (Subjective Laws) = Our observation of how
ordinary people behave in ordinary circumstances.
These are not laws but behaviors. Laws of Economics;
Political Science; Sociology; Physiology are such laws.
They change when circumstances change
 Thank You
• Text:
• Mankiw, N. G, Gans, J, King, S. (1999) Principles of Microeconomics, Harkot,
International Edition
• Froyen, T. R. (1999) Macroeconomics Theories & Policies, Printice Hall,
International Edition
• Meier, Gerald M. 1995, Leading Issues in Economic Development Sixth edition,
Oxford University Press New York, Oxford

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Other• A.Readings
Koustsoyiannis, Modern Microeconomics
• Boyes - Melvin. Economics. Houghton Mifflin Company Boston, USA.
• Edward Shapiro. Macroeconomics Analysis. Fifth Edition. Harcourt Brace Inc. New
York.
• F. S. Budsrich, Mathematics For Business, Economics And Social Science
• Glaha. F. Macroeconomics Theory and Practice. N.Y. Harcourt Brace Jovanovich
• McConnel, C. R. And Brue, S. L. Economics, McGraw- Hill, Toronto, 14th
International Edition,
• Paul A. Samuelson. Economics An Introductory Analysis. 14th Edition. McGraw -
Hill Boo Company Inc. New York, Toronto, London. 1990.
• R. G. Lipsey & Chrystal, Introduction To Positive Economics
• Stanley Fisher & R. Dornbusch. Macroeconomics. Fifth Edition. Mcgraw - Hill
Publishing Company. Ny, London Etc.
• Stonier, Alfred W. & Hague, Douglas C. A Textbook of Economic Theory. The English
Language Book Society and Longman Group Limited. London. 1977
• William Boys & Michael Melvin. Economics. Houghton Mifflin Company. Boston.
• Field, C Barry & Martha K. Field. 2002. Environmental Economics – An
Introduction. Third Edition Mc Graw-Hill Higher Education International
Edition, NY
• Hyman, David N. 1999. Public Finance: A Contemporary application of
Theory and Policy. Sixth Edition, The Dryden Press, Harcourt Brace College
Publishers. New York, London, Tokyo
• Mountjoy, Alan B. 1982 Industrialization and Developing Countries. 5 th
Edition, Hutchinson University Library, London, Sydney, Johannesburg
• Ochs, Jack 1974. Public Finance. Harper & Row Publishers NY, London
• Ray, Debraj, 1998, Development Economics, Princeton University, Press,
Princeton, New Jersey
• Wood, Ellen M Unhappy Families: Global Capitalism In The World Of Nation
States. Monthly Review, Volume 51 Number 3. . July August 1999, Monthly
Review Foundation, NY
• World Development Report, 1999/2000., Entering The 21 st Century, World
Bank Oxford University, Press, Washington D.C
• World Development Report, 2006, 2009, Equity and Development, The
World Bank, Oxford University Press
• World Development Report, 2009, The World Bank, Oxford University Press 19