WHAT IS ECONOMICS?

 The term economics comes from the Ancient Greek word oikonomia, "management or
administration of a household.

 Although the word oikonomia made reference to the household,

 Economics studies how households/individuals, firms and the society use scare productive
resources to best satisfy their unlimited material wants.

 Put differently, economics focuses on how the economic agents (individual, firms and
government) interact and how the economy works;

 The goal of economics is to predict economic occurrences and develop policies that might
prevent or correct such problems as unemployment, inflation, or waste in the economy.
 DEFINITIONS OF ECONOMICS
Different scholars have given different definition of economics.
 Adam smith (1776) defines it has “an inquiry into the nature and causes of wealth of
nations”.

 J.B Say (1803) defines it as the science of production, distribution and consumption of
wealth.

 Alfred Marshal (1890) defines it as the study of man in the ordinary business of life.

 However, one of the widely accepted definitions of economics was given by Lionel
Robbins (1932) who defined “economics as a SOCIAL SCIENCE which studies
HUMAN BEHAVIOUR as a relationship between ENDS and SCARCE MEANS
which have ALTERNATIVE USES”

 First, economics is a social science;

 Like other social sciences such as psychology, sociology, and political science; it seeks to
explain something about society.
 But economics is different from these other social sciences, because of what economists
study and how they study it.

 Economists ask fundamentally different questions, and they answer those using tools that
other social scientists find rather exotic.

 Secondly, economics studies human behaviour

 Unlike natural sciences like physics, chemistry, biology which studies physical, biological
and chemical processes economics studies human behaviour.

 Although human behaviour is unpredictable, economics assume that human behaviour is

rational and explainable through economic theories.

 Thus, economics establishes a premise and assumption on how human being reacts to
changes in policy and incentives in the economy.
 ENDS AND SCARCE MEANS

 Given unlimited wants and scarcity of economic resources (land, labour, capital and
entrepreneurship) to achieve those insatiable wants;

 Economics seeks to ensure that economic agents (household/individuals, firms and

government) use the limited resources to achieve their individual insatiable wants or ends
(utility-profit-welfare maximization) as best as possible.

 ALTERNATIVE USES

 Since wants are unlimited and means (economic resources) are limited, economic
agents will have to use available scarce resources to achieve their most important or
pressing needs.

 This implies that unlimited alternative uses compete for limited resources.
 BASIC CONCEPTS IN ECONOMICS
The six basic concepts in the definition of economics are:
1. Economic Agents: Participants in the economy such as households, governments and
business firms that engage in specialization, production, exchange, and consumption.
2. Scarce Resources:
Productive resources are land, labour, and capital while scarcity is a situation in which human
wants are greater than the capacity of available resources to provide for those wants.
It is important to note that scarcity is the essence of economics
3. Choice: Because resources are scarce, people must decide how to use them. People must
choose among the competing alternatives so as to maximize their resources.
4. Specialization: Agents produce a limited number of things that they can make better than
others.
5. Exchange: Because agents produce only a few things, to consume other goods they must
engage in trade with other (specialist) producers.
6. Economic System: The set of arrangements society uses to deal with the fact that there are
only a limited amount of products and resources available. In a capitalist society, people own
the productive resources; in a socialist economy, the government owns most of the scarce
resources.
7. Wants: Human wants are insatiable and unlimited which means as a particular want is
satisfy, other wants will crop up so leading to a continuous chain of wants.
8. Scale of Preference: Since resources are scare and wants unlimited, individual will make
rational choice among competing alternative using their scale of preference. It is the rank of
individual preferences in order of importance or in the order that the consumer derives
maximum satisfaction from the consumption of the first item on the scale.
9. Opportunity Cost:
Since there are alternative uses for resources, we have to select the best way to use these
resources. The next best alternative which is left out is known as the opportunity cost of making
a choice.
Opportunity cost measures the cost of any choice in terms of the next best alternative foregone.
In other words opportunity cost is the benefit we lost and could have achieved from the next
best alternative.
A Free Good has zero opportunity cost because no other good has to be given up in order to
have more of the free good (sunlight, air).
A Scarce Good has a positive opportunity cost, because in order to have more of it some other
good must be sacrificed.
FIELDS OF ECONOMICS
Economics is subdivided into Macroeconomics and Microeconomics.
 Macroeconomics;
 studies the whole economy from a holistic perspective.

 studies economic phenomenal like inflation, unemployment, general price level, aggregate
output,

 Microeconomics;
 studies just a part of the economy with concentration on a particular sector. It takes a
microscopic view of the economy

 studies economic behaviour of individual decision makers such as consumers, resource

owners, and business firms.
 BRANCHES OF ECONOMICS
Branches of economics include applied economics, public sector economics, public finance,
energy economics, environmental economics, monetary economics, health economics etc.

METHODOLOGY OF ECONOMICS
The discipline of economics as a social science has developed principles, theories, and models
that isolate the most important determinants of economic events.
In constructing a model, economists make assumptions to eliminate unnecessary detail to
reduce the complexity of economic behaviour.
A model is a simplification of reality. It is base on series of assumption to explain economic
inter-relationship between economic variables.
The tools economics uses for empirical investigation include the tables, charts, graphs to depict
economic relationships.
Economists thus observe a pattern in economic occurrences thereby establishing cause and
effect so as to proffer a sound policy to effect positive changes in future manifestation of such
occurrences.
Economists do base their study on hypothesis which after being empirically tested, it becomes
theory which can be validated in each economies.
INDUCTIVE AND DEDUCTIVE APPROACH
The significant difference between economics and pure science is that the empirical
investigation examine by economists are not conducted in a laboratory but rather through
observation. The approach to this observation method includes the inductive and deductive
approach.
When economists observe relationship between economic phenomena from a general view and
therefore particularize it to a small unit out of the whole, it is called a deductive approach.
Economists deduce from the whole and apply it to the part.
But when the relationship observe is from a small unit to the general, it is refer to as an
inductive approach. Economists induce from the part and generalize it to the whole.
 POSITIVE AND NORMATIVE ECONOMICS
The micro versus macro distinction is based on the level of detail we want to consider. Another
useful distinction has to do with the purpose in analyzing a problem.
Positive economics deals with what is, what was and what is to come while normative
economics deals with what should be. That is what ought to be. It is based on value judgement.
The distinction between positive economic and normative economics makes us to understand
why economists disagree.
Two economists have the same positive conclusion, but their different values judgement may
lead them to different normative conclusions.
SOCIETAL ECONOMIC PROBLEMS
Scarcity is a fundamental problem for every society. Given scarcity, decisions must be made
regarding what to produce, how to produce it, and for whom to produce.
 WHAT TO PRODUCE

 What to produce involves decisions about the kinds and quantities of goods and services
to produce.

 For instance a country faces a trade off between the production of capital goods
(machineries, capital equipment, motor vehicle, etc.) and consumer goods (beverages, cloth
furniture etc.) and in what quantity.

 A country that produces capital goods in the short run will have abundance of both capital
goods and consumer goods in the future;

 while a country that produces consumer goods in the short run will scarcity of both capital
and consumer goods in the long run. This relationship is explained by the production
possibility frontier.
 HOW TO PRODUCE

 How to produce deals with the production techniques that will achieve optimal production
from the limited productive resources.

 This is shown by a production function, which shows the technical relationship between
productive inputs (land, labour, capital) and output generated.

 How to produce involves making a choice between capital intensive and labour intensive
production technique or the optimal combination of both to attain optimum production.

 Developing countries use more of labour intensive production technique than capital
intensive while in advanced economies; more capital is used than labour intensive.

 FOR WHOM TO PRODUCE

 For whom to produce is concern with the distribution of the goods and services among the
economic agents interrelating in the economy.
  Thus, this problem deals with the mode of the distribution which is determined by the
economic system been operated. (capitalist/ centrally planned, mixed etc)

 For whom to produce deals with equity in the distribution of the goods and services in the
economy.

PRODUCTION POSSIBILITY FRONTIER/CURVE (PPC):

A PPC Shows the maximum number of alternative combinations of goods and services that a
society can produce at a given time when there is full utilization of economic resources and
technology.
Each point on the curve shows potential total output for the economy, which is the maximum
feasible output of one good, given a feasible output quantity of the other good.
Scarcity is represented in the figure by people being willing but unable in the aggregate to
consume beyond the PPF (such as at X) and by the negative slope of the curve.
If production of one good increases along the curve, production of the other good decreases, an
inverse relationship. This is because increasing output of one good requires transferring inputs
to it from production of the other good, decreasing the latter.
The slope of the curve at a point on it gives the trade-off between the two goods. It measures
what an additional unit of one good costs in units forgone of the other good, an example of a
real opportunity cost. Thus, if one more Gun costs 100 units of butter, the opportunity cost of
one Gun is 100 Butter. Along the PPF, scarcity implies that choosing more of one good in the
aggregate entails doing with less of the other good. Still, in a market economy, movement along
the curve may indicate that the choice of the increased output is anticipated to be worth the cost
to the agents.
By construction, each point on the curve shows productive efficiency in maximizing output for
given total inputs. A point inside the curve (as at A), is feasible but represents production
inefficiency (wasteful use of inputs), in that output of one or both goods could increase by
moving in a northeast direction to a point on the curve.
Examples cited of such inefficiency include high unemployment during a business-cycle
recession or economic organization of a country that discourages full use of resources. Being on
the curve might still not fully satisfy allocative efficiency (also called Pareto efficiency) if it
does not produce a mix of goods that consumers prefer over other points.