GOLDEN UNIVERSITY INSTITUTE

COURSE: GENERAL ECONOMICS 1

SPECIALTY: COMMON
CREDIT LOAD: 2
COURSE FACILITATOR: BIH AWAMOFOR

CHAPTER 0: GENERAL INTRODUCTION

Basics of Economics

Introduction
objectives
After successful completion of this Course you will be able to:
-understand the concept and nature of economics;
-analyze how resources are efficiently used in producing output;
-identify the different methods of economic analysis ;
-distinguish and appreciate the different economic systems;
-understand the basic economic problems and how they can be solved; and
-identify the different decision making units and how they interact with each other

1.1 Definition of economics

Economics is one of the most exciting disciplines in social sciences. The word economy comes
from the Greek phrase ―one who manages a household‖. The science of economics in its
current form is about two hundred years old. Adam Smith – generally known as the father of
economics – brought out his famous book, ―An Inquiry into the Nature and Causes of Wealth
of Nations‖, in the year 1776. Though many other writers expressed important economic ideas
before Adam Smith, economics as a distinct subject started with his book.
There is no universally accepted definition of economics (its definition is controversial). This
is because different economists defined economics from different perspectives:
a. Wealth definition,
b. Welfare definition,
c. Scarcity definition, and
d. Growth definition

Hence, its definition varies as the nature and scope of the subject grow over time. But, the
formal and commonly accepted definition is as follow.
Economics is a social science which studies about efficient allocation of scarce resources so as
to attain the maximum fulfillment of unlimited human needs. As economics is a science of
choice, it studies how people choose to use scarce or limited productive resources (land,
labour, equipment, technical knowledge and the like) to produce various commodities.
The following statements are derived from the above definition.
 Economics studies about scarce resources;
 It studies about allocation of resources;
 Allocation should be efficient;
 Human needs are unlimited
 The aim (objective) of economics is to study how to satisfy the unlimited human needs
up to the maximum possible degree by allocating the resources efficiently.
1.2 The rationales of economics
There are two fundamental facts that provide the foundation for the field of economics.
1) Human (society‘s) material wants are unlimited.
2) Economic resources are limited (scarce).
The basic economic problem is about scarcity and choice since there are only limited amount
of resources available to produce the unlimited amount of goods and services we desire. Thus,
economics is the study of how human beings make choices to use scarce resources as they seek
to satisfy their unlimited wants. Therefore, choice is at the heart of all decision-making. As an
individual, family, and nation, we confront difficult choices about how to use limited resources
to meet our needs and wants. Economists study how these choices are made in various settings;
evaluate the outcomes in terms of criteria such as efficiency, equity, and stability; and search
for alternative forms of economic organization that might produce higher living standards or a
more desirable distribution of material well-being.
Scope and method of analysis in economics

Branches of Economics
Scope of economics
The field and scope of economics is expanding rapidly and has come to include a vast range of
topics and issues. In the recent past, many new branches of the subject have developed,
including development economics, industrial economics, transport economics, welfare
economics, environmental economics, and so on. However, the core of modern economics is
formed by its two major branches: microeconomics and macroeconomics. That means
economics can be analyzed at micro and macro level.
A. Microeconomics is concerned with the economic behavior of individual decision making
units such as households, firms, markets and industries. In other words, it deals with how
households and firms make decisions and how they interact in specific markets.
B. Macroeconomics is a branch of economics that deals with the effects and consequences of
the aggregate behavior of all decision making units in a certain economy. In other words,
it is an aggregative economics that examines the interrelations among various aggregates,
their determination and the causes of fluctuations in them. It looks at the economy as a
whole and discusses about the economy-wide phenomena.

Microeconomics
-Studies individual economic units of an
economy.
- Deals with individual income, individual
prices, individual outputs, etc.
-Its central problem is price determination
and allocation of resources.
-Its main tools are the demand and supply of
particular commodities and factors.
-It helps to solve the central problem of
‗what, how and for whom to produce‘ in an
economy so as to maximize profits
-Discusses how the equilibrium of a
consumer, a producer or an industry is
attained.
Examples: Individual income, individual
savings, individual prices, an individual firm‘s output, individual consumption, etc.

Macroeconomics
-Studies an economy as a whole and its
aggregates.
-Deals with national income and output
and general price level
-Its central problem is determination of
level of income and employment.
-Its main tools are aggregate demand and
aggregate supply of an economy as a
whole.
-Helps to solve the central problem of
‗full employment of resources in the
economy.‘
-Concerned with the determination of
equilibrium levels of income and
employment at aggregate level.
Examples: national income, national
savings, general price level, national output,
aggregate consumption, etc.
Note: Both microeconomics and macroeconomics are complementary to each other. That is,
macroeconomics cannot be studied in isolation from microeconomics.

Methodology of Economics
Positive and Normative Statement
Positive and normative analysis
Is economics a positive science or normative science, or both? What is your justification?
Economics can be analyzed from two perspectives: positive economics and normative
economics.
Positive economics: it is concerned with analysis of facts and attempts to describe the world as
it is. It tries to answer the questions what was; what is; or what will be? It does not judge a
system as good or bad, better or worse.
Example:
 The current inflation rate in Ethiopia is 12 percent.
 Poverty and unemployment are the biggest problems in Ethiopia.
 The life expectancy at birth in Ethiopia is rising.
All the above statements are known as positive statements. These statements are all concerned
with real facts and information. Any disagreement on positive statements can be checked by
looking in to facts.
Normative economics: It deals with the questions like, what ought to be? Or what the
economy should be? It evaluates the desirability of alternative outcomes based on one‘s value
judgments about what is good or what is bad. In this situation since normative economics is
loaded with judgments, what is good for one may not be the case for the other. Normative
analysis is a matter of opinion (subjective in nature) which cannot be proved or rejected with
reference to facts.
Example:
 The poor should pay no taxes.
 There is a need for intervention of government in the economy.
 Females ought to be given job opportunities.
Any disagreement on a normative statement can be solved by voting. Inductive and deductive
reasoning in economics
The fundamental objective of economics, like any science, is the establishment of valid
generalizations about certain aspects of human behavior. Those generalizations are known as
theories. A theory is a simplified picture of reality. Economic theory provides the basis for
economic analysis which uses logical reasoning. There are two methods of logical reasoning:
inductive and deductive.

iv) Basic Economic Concepts

Ends
- Ends refer to the goals or objectives that individuals or organizations aim to achieve through
economic activity.
- Examples of ends include:
- Satisfaction of basic needs (food, shelter, clothing)
- Accumulation of wealth
- Maximization of profits
- Achievement of social status
- Ends are the driving force behind economic decision-making and resource allocation.

Scarcity
The fundamental economic problem that any human society faces is the problem of scarcity.
Scarcity refers to the fact that all economic resources that a society needs to produce goods and
services are finite or limited in supply. But their being limited should be expressed in relation
to human wants. Thus, the term scarcity reflects the imbalance between our wants and the
means to satisfy those wants.
Free resources: A resource is said to be free if the amount available to a
society is greater than the amount people desire at zero
price. E.g. sunshine
Scarce (economic) resources: A resource is said to be scarce or economic
resource when the amount available to a society is less
than what people want to have at zero price.
The following are examples of scarce resources.
- All types of human resources: manual, intellectual, skilled and specialized labor;
- Most natural resources like land (especially, fertile land), minerals, clean water, forests
and wild - animals;
- All types of capital resources ( like machines, intermediate goods, infrastructure ); and
- All types of entrepreneurial resources.
Economic resources are usually classified into four categories.
- Labour: refers to the physical as well as mental efforts of human beings in the
production and distribution of goods and services. The reward for labour is called wage.
- Land: refers to the natural resources or all the free gifts of nature usable in the
production of goods and services. The reward for the services of land is known as rent.
- Capital: refers to all the manufactured inputs that can be used to produce other goods
and services. Example: equipment, machinery, transport and communication facilities,
etc. The reward for the services of capital is called interest.

Scale of Preference
- A scale of preference is a ranking of ends in order of importance or priority.
- Individuals or organizations allocate resources to achieve the most important ends first.
- The scale of preference is influenced by:
- Personal values and beliefs
- Cultural and social norms
- Economic conditions and constraints
- A scale of preference helps individuals and organizations make decisions about how to allocate
resources efficiently.

Choice
If resources are scarce, then output will be limited. If output is limited, then we cannot satisfy
all of our wants. Thus, choice must be made. Due to the problem of scarcity, individuals, firms
and government are forced to choose as to what output to produce, in what quantity, and what
output not to produce. In short, scarcity implies choice. Choice, in turn, implies cost. That
means whenever choice is made, an alternative opportunity is sacrificed. This cost is known as
opportunity cost.
Scarcity → limited resource → limited output → we might not satisfy all our wants
→choice involves costs → opportunity cost
Opportunity cost
In a world of scarcity, a decision to have more of one thing, at the same time, means a decision to
have less of another thing. The value of the next best alternative that must be sacrificed is,
therefore, the opportunity cost of the decision.
Opportunity cost is the amount or value of the next best alternative that must be
sacrificed (forgone) in order to obtain one more unit of a product.
For example, suppose the country spends all of its limited resources on the production of cloth
or computer. If a given amount of resources can produce either one meter of cloth or 20 units
of computer, then the cost of one meter of cloth is the 20 units of computer that must be
sacrificed in order to produce a meter of cloth.
When we say opportunity cost, we mean that:
- It is measured in goods & services but not in money costs
- It should be in line with the principle of substitution.
In conclusion, when opportunity cost of an activity increases people substitute other activities
in its place.

Utility
- Utility refers to the satisfaction or pleasure derived from consuming a good or service.
- Utility is a subjective measure of the value of a good or service.
Types of utility include
- Total utility: the total satisfaction derived from consuming a good or service
- Marginal utility: the additional satisfaction derived from consuming one more unit of a good
or service
- Average utility: the average satisfaction derived from consuming a good or service
- The law of diminishing marginal utility states that as consumption increases, marginal utility
decreases.

V) Goods and Types of Goods

1.Consumer Goods:
- Directly satisfy human wants and needs
- Intended for personal use
- Examples: food, clothing, cars, smartphones

2. Producer Goods:
- Used in the production of other goods and services
- Indirectly satisfy human wants and needs
- Examples: machinery, tools, raw materials, factories

3. Public Goods:
- Non-rivalrous (consumption by one person doesn't reduce availability for others)
- Non-excludable (difficult to exclude people from consuming)
- Examples: national defense, public parks, highways

4. Merit Goods:
- Goods that are considered essential for society, but may not be profitable for private
companies to provide
- Often provided by the government
- Examples: education, healthcare, social security

5. Economic Goods:
- Scarce resources that have a market value
- Can be bought and sold
 - Examples: land, labor, capital, entrepreneurship

6. Free Goods:
- Non-scarce resources that have no market value
- Not bought or sold
- Examples: air, water (in some cases), sunlight

Note that some goods can have characteristics of multiple categories. For example, education can
be considered both a merit good and an economic good.

CHAPTER 1: THE PRODUCTION POSSIBILITIES CURVE( PPC)

Assumptions and Illustrations