Unit 02: Introduction to economics

Lesson 1

Basic Economic Concepts

 Needs: Are goods or services that you must have. This would include basic requirements
for survival like the needs for food, clothing, shelter and health care. In recent years we
have seen a perceived shift of certain items from wants to needs such as: Internet and
telephone service, to many, are needs.

 Wants: Are goods or services that are not necessary but that we desire or wish for, wants
are broader than needs. For example, one needs clothes, but one may not need designers’
clothes. One does not need toys, entertainment, games …etc. One needs food, but does not
have to have a steak or dessert. One does not need glamorous trips, mall shopping …etc.

 Economy: Is the relationship between production, trade and the supply of money in a
particular country or region.

 Economics: Is a science that studies economies and develops possible models for their
functioning. It is also the study of human efforts to satisfy unlimited wants with limited
resources.

 Scarcity: The fundamental economic problem facing all societies is the situation where
you don’t have enough of something. Essentially it is how to satisfy unlimited wants with
limited resources. This is the issue that plagues all government and peoples. How do we
conquer the issue of scarcity? Many people have thought they had the answer (see Marx,
Smith, Keynes, etc.) but the issue of scarcity still exists. There are two types of scarcity,
relative and absolute scarcity.

 Market: A place or an area where the forces of supply and demand meet.

 Competition: describes the activity of trying to sell more and be more successful. When
competition is strong, you can say that it is intense, stiff, fierce or tough. If not, it may be
described as low-key.

 Factors of production/resources: These are those elements that a nation has at its disposal
to deal with the issue of scarcity. How efficiently these are used determines the measure of
success a nation has. They are
 Land - natural resources, etc.
 Capital - investment money.
 Labor - the work force; size, education, quality, work ethic.
 Entrepreneurs - inventive and risk taking spirit.
The "Three Basic Economic Questions" these are the questions all nations must ask when
dealing with scarcity and efficiently allocating their resources.
  What to produce?
 How to produce?
 For whom to produce?

 Opportunity cost: The cost of an economic decision. The classic example is "guns or
butter." What should a nation produce; butter, a need, or guns, a want? What is the cost of
either decision?
If we choose the guns the cost is the butter. If we choose butter, the cost is the guns.

 Free products: Air, sunshine are and other items so plentiful no one could own them.
Economists are interested in "economic products" - goods and services that are useful,
relatively scarce and transferable.

 Good: Tangible commodity. These are bought, sold, traded and produced.

 Services: Work that is performed for someone. Service cannot be touched or felt.

 Consumer goods: Goods that are intended for final use by the consumer.

 Capital goods: Items used in the creation of other goods: Factory , machinery, trucks,
etc.

 Durable goods: Any good that lasts more than three years when used on a regular basis.

 Non durable goods: Any item that lasts less than 3 years when used on a regular basis.

 Consumer: Is the one who is the end user who consumes goods or services.

 Customer/client: Is the one who is purchasing the goods or services for several time, the
client has the notion of loyalty.

 Consumption: The using up of goods and services having an exchangeable value.

 Utility: capacity to be useful.

 Wealth: the sum collection of those economic products those are tangible, scarce and
useful.

 Productivity: the ability to produce vast amounts of goods (economic products) in an

efficient manner. The American capitalist economy is productive because:
 It uses its resource efficiently.
 It specializes to increase efficiency and productivity.
 It invests in Human Capital.
Activities
Activity 01: All these sentences are wrong. Underline the mistakes and correct them (There
may be more than one mistake in each sentence).
1- economic products are goods and services that are useless
- ………………………………………………………………………………………
2- cheese, phone , jeans are capital goods
- ………………………………………………………………………………………
3- durable goods are any type of manufactured items that are not intended to last for an
extended length of time .
- ………………………..………………………………………………………………
………………………
4- Economics is the study of what constitutes rational human behavior to fulfill limited
needs with unlimited wants.
- …………………………………………………………………………………………
………………………..
5- Services is work that is performed for someone. Services are material. They can be
touched and felt.
- …………………………………………………………………………………………
………………………..

Activity 02: Give synonyms, and opposites to these words.

words synonyms words opposites
Tangible Useless
Infinite Excess
Severe Weak
Total Few

Activity 03: fill in the gaps with the following words: debts, salary, lost, costs profit, cash,
price, budget.
1. The ......................... is just too expensive
2. When you buy a new house there are so many ……………..
3. Most people have trouble balancing ……………..
4. We had a big ....................... this year
5. The company........................ more than 600.000 euro due to the pandemic
6. We’ve got a lot of...................... to spend
7. I get my ...................... at the end of every month
8. We are really in ...................... now
Unit 02: Introduction to economics
Lesson 02
What is Economics?

Definition of 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 focuses on the actions of human beings, based on
assumptions that humans act with rational behavior, seeking the most optimal level of benefit
or utility.
Some economist definition of Economics:
 Adam Smith defined it in his book “An inquiry into the Nature and causes of the Wealth
of Nations” in 1776 as: < It is the science that deals with the study of the means by which
nations can be financially enriched > Adam Smith focuses on wealth and how to maximize
it.
 Alfred Marshall defined it as the study of man in the ordinary business of life. Marshall
argued that the subject was both the study of wealth and the study of mankind. He believed
it was not a natural science such as physics or chemistry, but rather a social science.
 Johan Knut Wicksell defined it as: < It is the science that studies every organized human
effort made to satisfy material needs towards achieving social and economic well-being>,
that is, it emphasizes the satisfaction of needs, which in turn is linked to production, as
production aims to satisfy needs in the first place.
 Lionel Robbins focused on satisfying the largest possible amount of human needs
through his concept of economics, where he defined it as: < it is the science that studies
scarcity and choice > Satisfying as many human needs as possible.

Economic activities: Economic activities can be grouped into three categories,

production, exchange and consumption.

 Production: is a process of transforming (converting) inputs (raw-materials) into outputs

(finished goods). So, production means the creation of goods and services. It is done to
satisfy human wants. Thus, production is a process of transformation.
-factors of production: are land, labor, capital, and entrepreneurship. And its return are
rent for land , wages for labor, interest for capital, and profits for entrepreneurship.

 Consumption: is the final purchase of goods and services by individuals. The purchase
of a new pair of shoes, a hamburger at the fast food restaurant, or services like getting
your house cleaned, are all examples of consumption. It is also often referred to as
consumer spending. When a consumer divides his income into various products or
services, he/she is involved in the consumption of the goods.

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  Exchange: Exchange services are essential for goods produced. It is through exchange
that a product reaches to its consumer. The following services are included in exchange
activities:
- Transportation and distribution services.
- Exchanging services and ideas by telecommunication or face-to-face contact.
- Satisfying the needs of people by changing their location (passenger trans-portation)
- Warehousing and distribution.
- Wholesale trade marketing activities.
- Retail trade marketing activities.
These exchanges increase the value of an item because of services provided and also play an
important role in modern economies.

sectors of the Economy:

classifications Economists say there are three basic types of economic
sectors: extraction of raw materials (primary), manufacturing (secondary), and service
industries which exist to facilitate the transport, distribution and sale of goods produced in the
secondary sector (tertiary).

The Tertiary Sector

i.e., services
The Secondary Sector
industry and manufacturing
The Primary Sector
i.e., raw materials

Branches of Economics: The two main branches of economics are microeconomics

and macroeconomics.

Micro Macro
Economics Economics

individual markets whole economy

price of a good inflation (general price

level)

consumer behavior employement/unemployem

ent

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1- Micro Economics:is the study of particular markets, and segments of the economy. It looks
at issues such as consumer behaviour, individual labour markets, and the theory of firms.
2- Macro Economics: is the study of the whole economy. It looks at ‘aggregate’ variables,
such as aggregate demand, national output and inflation.

Activity01: comprehension question

1. Name the three essential economic activities.

2. What are the main sectors of the economy?
3. What are two types of economics?
4. Based on the definitions in the text, provide a comprehensive definition of economics?

Activity02: Fill in the gap with the correct answer.

Q: is the economic activity that comprises the transformation of raw materials into
goods and services
a. Industry
b. Economy
c. production
d. None of the above

Q: is the economic activity that comprises the satisfaction of desires and needs.
a. disribution
b. Consumption
c. Economy
d. None of the above

Activity03: Classify the following activities into primary, secondary and tertiary sector:

1. Agriculture 2. Travel 3.Fishing 4. manufacturing of technologie 5.Furniture

6. Advertising 7.mining and forestry 8. Clothing 9. information
technology services 10. fast moving consumer goods

Primary sector Secondary sector Tertiary sector

............................. ............................. .............................
............................. ............................. .............................
............................. ............................. .............................
............................. ............................. .............................

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Unit 02: Introduction to economics
Lesson 03

The Economic Problem

Definition of Economic Problem: An economic problem generally means the

problem of making choices that occurs because of the scarcity of resources. It
arises because people have unlimited desires but the means to satisfy that desire
is limited. Therefore, satisfying all human needs and wants is difficult with
limited resources.

Causes of Economic Problem

 Unlimited human wants: wants of humans never end, as one is satisfied they
want something else. It is not possible to satisfy all wants.
 Scarcity or Limited resources : It means that the resources required to
produce goods and services are less than its demand.
 Alternate uses of resources: Resources are not only limited but also have
alternate uses, which mean the same resources are used for different purposes.
Hence a choice has to be made for where the resource is going to be used .

Characteristics Wants and resources:

Characteristics of wants:
1. Human wants are unlimited : there is no limit to what he wants to have. They
are unlimited in number. When he gets a thing desired, he wants something
else, then another and this process continues like this for indefinite period.
Man is never satisfied as new wants appear
2. Wants are recurring: Some wants can be satisfied for the time being. After
sometimes these wants may revive. There is recurrence of the wants of basic
necessities like food and clothing. This may arise in case o f comforts and
luxuries. For example, the want for food cannot be satisfied once for all. After
sometimes one can again feel hungry and wants food.
3. Wants are complementary: some wants are complementary and are felt
together. Some commodities are wanted jointly and single article of the group
is unable to satisfy the whole want. Simultaneous consumption of different
 goods increases the satisfaction of each other. They complement one another.
Sometimes a thing by itself is useless without the presence of some other
things, For example, ink and penl, motor car and petrol are complementary to
each other.
4. Wants are competitive : As human wants are unlimited, all of them cannot be
satisfied at a time because of limited resources. All these wants compete
among themselves to be satisfied first. A person may want a television and a
wrist watch, books and garments or anything else at the same time. He cannot
purchase them all due to limited resources at his disposal. In this case he is to
choose between different commodities. The Law of Equi-marginal Utility or
the principle of substitution is based on this characteristics of wants.
5. Wants are alternative: A particular want may be satisfied in alternative ways.
For example, a man can satisfy his hunger by taking bread, rice, fruits or
sweets. When there are alternative ways of satisfying a want, we choose one
of the ways depending upon our income, prices of alternative ways and our
personal taste.
6. Wants vary in urgency: All wants are not equally urgent or important. Some
wants are more urgent than others. The most urgent wants should be given a
priority to be satisfied. For example, the want for food is more important than
visiting a film. As our resources are limited we have to satisfy the urgent wants
first.
7. Wants vary according to person, place and time: Wants differ from person
to person. It all depends on environment, attitude and social status of the
individual. Two persons may not require the same commodity under the same
circumstances. One may prefer a simple living, other may prefer a luxurious
life. Some may like sweets and other sour things. Personal wants are different
from one another. Wants also differ from place to place.

Characteristics of resources:
1. Resources are limited: both qualitatively and quantitatively: Limitation is
one of the main characteristics of resources.
2. Resources are Useful: resources are used to make food, fuel and raw materials
for the production of goods. All of the food that people eat comes from natural
resources such as land, plants, animal, coal, natural gas and oil provide heat,
light and power
3. Resources are interrelated and interdependent: The resources are
interrelated and interdependent. People often have to use a “resource-mix” or
a combination of resources to achieve the goals, e.g. for interior decoration,
money, time, energy, knowledge, skill and other resources are combined
together to purchase furniture.
 4. Resources have alternative uses: means the different ways in wich resource
can be used e.g, the alternative uses of land are: the possibility of using it to
grow crops or build school, it can be used to build hospital ..,etc.
5. One resource may be substituted for another: substitution means replacing
one resource with another, for exemple instead of coal, solar energy may be
used for electricity generation.

The determinants of the economic problem: All choices mean that one alternative is
selected over another. Selecting among alternatives involves three ideas central to
economics: scarcity, choice, and opportunity cost.

Solving the economic problem: in order to solve the economic problem societies must
endeavour to answer three basic questions :
1. What to produce?
Societies have to decide the best combination of goods and services to meet their varied wants
and needs. Societies must decide what quantities of different resources should be allocated to
these goods and services.
2. How to produce?
Societies also have to decide the best combination of factors to create the desired output of
goods and services. For example, precisely how much land, labor, and capital should be
used to produce consumer goods such as computers and motor cars?
3. For whom to produce?
Finally, all societies need to decide who will benefit from the output from its economic
activity, and how much they will get. This is often called the problem of distribution.
Different societies may develop different ways to answer these questions.

Activities:
Activity01: choose the correct answer

1. Alternative uses of resources gives rise to the ............................... between different commodities
that can be produced by those resources.
A.problem of inequality B.problem of choice C.social problem D.none of the above

2. 'labor' in economics mean …………………………………...

A. Hard physical work used to produce manufactured goods
B. Natural resources used in the productive process
C. Human mental and physical effort used for producing goods and services
D. Risk taking and organising the factors of production

3. Scarcity continue to be a problem in the future because ……..…………………..

A. Prices will rise
B. Resources will always be finite
C. Needs will decrease in the future
 D. World population will fall

4. Organizing land, labor and capital (factors of production), in the production of goods or
services is called ……………………….
A.Entrepreneurship B.Mixed Economy C.Profit D.Planned Economy

5. Which basic economic question addresses the issue of using finite resources with
productive efficiency?
A. What to produce?
B. How to produce?
C. When to produce?
D. For whom to produce?

6. What does it mean to say that a resource is scarce?

A. A society does not have enough money to purchase this resource.
B. The resource is no longer available
C. There is not enough of this resource to satisfy all the wants and needs of a society.
D. There is an unlimited amount of the resource available.