IEC 1301- Principles of

Economics

Lesson 01
Recap on
Introduction to Economics
 Content

ØProblem of Scarcity

ØFactors of Production
ØWhat is Economics

ØTen principles in Economics

HUMAN WANTS
Scarcity???
The Problem of Scarcity
üScarcity – The condition in which human
wants are forever greater than the
available supply of time, goods and
resources.
üBecause of scarcity it is impossible to
satisfy every desire.
üScarcity is not only applicable at the
individual level but also at the societal level
as well.
üBecause of scarcity no society has enough
resources to produce goods and services.

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 Factors of production

Resources are the basic

categories of inputs used to
produce goods and services.
Resources Alternatively known as
factors of production.
There are four types of
resources.
q Land
q Labour
q Capital
q Entrepreneurship
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Factors of production The inputs into the production process. Land,
labor, and capital are the three key factors of production.

Profit
Wage

Interest

Rent
 Resources Cont.

Land
§ Land includes those resources that are
gifts of nature available for use in the
production process. Ex: Water, Air,
Forests, Climatic conditions
§ Two broad categories of natural resources
are renewable resources and
nonrenewable resources.
§ Renewable resources are basic inputs
that nature can automatically replace. Ex:
lakes, crops, and clean air.
§ Nonrenewable resources are basic inputs
that nature cannot automatically replace.
Ex: Coal, Oil
Resources Cont.

Labor

Physical and mental capacities/efforts

of human in producing goods and
services.
Ex: Efforts of Cab Driver to Brain
Surgeon.
 Resources Cont.
Capital

Ø The physical plants, machinery, and equipment used

to produce other goods. Capital goods are human-
made goods that do not directly satisfy human wants.
Ø Capital consists of factories, office buildings,
warehouses, robots, trucks, distribution facilities etc.
Ø In the study of economics, capital does not refer to
money assets. Instead, capital in economics means a
factor of production, such as a factory or machinery.

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 Resources Cont.
Entrepreneurship

ØEntrepreneurship is a special type of labor.

ØEntrepreneurship is the creative ability of individuals to seek
profits by taking risks and combining resources to produce
goods and services
ØAn entrepreneur is a motivated person who seeks profits by
undertaking such risky activities as starting new businesses,
creating new products or inventing new ways of
accomplishing tasks.
ØEntrepreneurship is a scarce human resource because
relatively few people are willing or able to innovate and make
decisions involving greater-than-normal chances for failure.
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Resources Cont.
Active Learning 01
True or false statements
Questions Answers

Statements True False

01 Factors of production are resources used to produce goods and services

02 Renewable resources are resources which are replaced by nature

03 Inputs refer to the produced goods and services

04 Capital refers to man-made resources used in the production of goods and

services

05 The reward for capital is profit

06 Diamonds and land are examples of natural resources

07 A person who starts a new business is called an entrepreneur

Active Learning 01- Answers
True or false statements
Questions Answers

Statements True False

01 Factors of production are resources used to produce goods and services True

02 Renewable resources are resources which are replaced by nature True

03 Input refers to the goods and services produced False

04 Capital refers to man – made resources used in the production of goods and True
services

05 The reward for capital is profit False

06 Diamonds and land are examples of natural resources True

07 A person who starts a new business is called an entrepreneur True

Economics ???
The word economy comes from the Greek word “oikonomos”, which
means ‘one who manages a household”.
Economics: the study of how society manages its scarce resources,
e.g.
v how people decide what to buy,
how much to work, save, and spend
v how firms decide how much to produce,
how many workers to hire
v how society decides how to divide its resources between national defense,
consumer goods, protecting the environment, and other needs

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The study of how
society chooses to
allocate its scarce
resources to the
production of goods
and services in order
to satisfy unlimited
wants.
“Economics is a science of wealth”
- Adam smith, 1996, Father of modern economics

“Economics is the science which studies human behavior as a relationship

between ends and scarce means which have alternative uses”
- Lionel Robins, 1935

ANC
General Definition of Economics:
The English word economics is derived from the ancient Greek word oikonomia—
meaning the management of a family or a household.

Marshall defines economics as “a study of men as they live and move and think in
the ordinary business of life.”

The branch of knowledge concerned with the production, consumption, and transfer
of wealth.

The condition of a region or group as regards material prosperity.

ANC
 Economics is the study of the use of scarce resources that have alternative uses
Unlimited
human
wants

Scarce
resources

ANC
 Unlimited Wants and Limited
Resources

Scarcity

Alternative Uses of Scarce

Resources

Question of Choice

Opportunity Cost

ANC
 Opportunity Cost
qOpportunity cost is the best
alternative sacrificed for a
chosen alternative.

qIt is the cost of not choosing the

next best alternative.
Opportunity Cost
Opportunity cost is your second choice what you gave up when selecting the best
alternative.
For example, if you choose to go to college instead of working, you have given up
the salary you could have earned from your employment.
Microeconomics and Macroeconomics
 Microeconomics
§Microeconomics is the branch of economics that studies
decision-making by a single individual, household,
firm, or industry.
§Microeconomics applies a microscope to study specific
parts of an economy.
Macroeconomics §The focus is on small economic units, such as the
and economic decisions of groups of consumers and
Microeconomics businesses.
Cont. §Ex: Microeconomic analysis would be to study
economic units involved in the market for eggs.
Will suppliers decide to supply more, less, or the same
quantity of eggs to the market in response to price
changes?
Will individual consumers of these eggs decide to buy
more, less, or the same quantity at a new price?
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 Macroeconomics

§The branch of economics that studies decision-

making for the economy as a whole.
Macroeconomics
§Macroeconomics applies an overview perspective to
and an economy by examining economywide variables,
Microeconomics such as inflation, unemployment, growth of the
economy, the money supply, and the national
incomes.
§Macroeconomic decision-making considers such “big
picture” policies

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Difference between micro and macro economics

Micro Economics Macro Economics

The branch of economics that studies the The branch of economics that studies the
behavior of an individual consumer, firm, family behavior of the whole economy, (both national
is known as Microeconomics and international) is known as Macroeconomics
Individual Markets (Particular segment of the Whole Economy (GDP) (Covers several market
economy) segments)
Effect on price of a good Inflation ( General Price level)

Individual consumer behavior Aggregate Demand

Scope: Demand, Supply, Production, Scope: General Price level (Inflation),

Consumption Employment, Money, Economic Growth.

ANC
Difference between micro and macro economics
Micro Economics Macro Economics
Covers issues like how the price of a particular Covers major issues of an economy like
commodity will affect its quantity demanded and unemployment, monetary/ fiscal policies, poverty,
quantity supplied and vice versa international trade and etc.
Its central problem is Its central problem is
price determination and determination of level of
allocation of resources income and employment

ANC
 Difference between micro and macro economics
Microeconomics Macroeconomics
It helps to solve the central problem of what, how It helps to solve the central problem of full
and for whom to produce in the economy employment of resources in the economy
Narrow Scope Wider Scope
Focus on growth and development of individuals Focus on betterment and growth of entire economy

Macro economics analysis is simple Macroeconomics is complex due to the study of

large groups
Total Revenue Nominal GDP
Marginal Revenue Unemployment Rate
Average Revenue Money Multiplier
Total costs Real GDP
Average Costs Consumer price index
Average fixed costs Inflation Rate
Average Variable Costs Real Interest Rate
ANC
 Difference between micro and macro economics
Microeconomics Macroeconomics

Microeconomics takes a bottom-up approach Macroeconomics takes a top-down approach

while analyzing the economy while analyzing any economy

Helpful in determining the prices of a product Maintains stability in the general price level and
along with the prices of factors of production resolves the major problems of the economy like
inflation, Unemployment and poverty as a whole

It discusses how the equilibrium of a consumer, a It is concerned with the determination of

producer or an industry is attained equilibrium level of income and employment of
the economy

ANC
 Positive economics deals with facts and
therefore addresses “what is” or “verifiable”
questions. Positive economics is an analysis
Positive limited to statements that are verifiable.
Economics Positive statements can be proven either
true or false.
and
Normative
Ex: If the national unemployment rate rises
Economics to 9 percent, then teenage unemployment
exceeds 80 percent.
Positive Economics and Normative Economics

Normative economics attempts to determine “what should

be.”
It is an analysis based on value judgments.
Normative statements express an individual or collective
opinion on a subject and cannot be proven by facts to be true
or false.
Ex: Maintaining the purchasing power of the dollar is more
important than teenage unemployment.
Basic Economic Questions
 Three Fundamental
Economic Questions

Whether rich or poor, every nation must

answer the same three fundamental economic
questions:

(1) What to produce?

(2) How to produce?
(3) For whom to produce?
Three Fundamental Economic Questions
What to produce?

The problem of scarcity restricts our ability to produce

everything we want during a given period, so the choice to
produce “more” of one good requires producing “less” of
another good.
Ex: Should society devote its limited resources to producing
more health care and fewer military goods?
Three Fundamental Economic Questions
How to produce?

After deciding which products to make, the second question for society to decide is
how to mix technology and scarce resources in order to produce these goods.

Ex: A towel can be sewn primarily by hand (labor), partially by hand

and partially by machine (labor and capital), or primarily by machine
(capital)
Three Fundamental Economic Questions

For whom to produce?

Among all those desiring the produced goods, who actually receives them?
Active Learning 04
State whether the following statements are true or false

1. Microeconomics is defined as that branch of economics,

which studies economic activities of an economy as a whole.
2. Inflation, Unemployment and economic growth can be
considered as the scope of macroeconomics
3. Normative economics is an analysis based on value
judgments.
4. Normative statements can be proven either true or false
Active Learning 04 - Answers
State whether the following statements are true or false

1. Microeconomics is defined as that branch of economics, which studies

economic activities of an economy as a whole. - False
2. Inflation, Unemployment and economic growth can be considered as
the scope of macroeconomics - True
3. Normative economics is an analysis based on value judgments. - True
4. Normative statements can be proven either true or false - False
Active Learning 5
Following are some of the economic decisions to be made by the
managers of a firm. Determine whether each is a decision of what,
how, or for whom

i) Should the firm expand its business to international markets or focus

only on domestic market

ii) Should the firm makes vehicles or vehicle spare parts

iii) Should the company continue to provide the products only using
labor or with a combination of both labor and machines
Active Learning 5 - Answers
Following are some of the economic decisions to be made by the
managers of a firm. Determine whether each is a decision of what,
how, or for whom

i) Should the firm expand its business to international markets or focus

only on domestic market – For whom to produce

ii) Should the firm makes vehicles or vehicle spare parts – What to
produce

iii) Should the company continue to provide the products only using
labor or with a combination of both labor and machines – How to
produce
THANK YOU