MODULE -1
Nature & Scope of Economics
UNLIMITED WANTS + LIMITED RESOURCES =
THE NEED TO ECONOMICS
Scarcity
Sothen the big two concepts
are that:
Resources are scarce!
Society has unlimited needs
and wants!
Economics decides the
“best” way of providing one
to the other
SCARCITY – RESOURCES
Because of scarcity, it is impossible
to satisfy every desire; wealth does
not solve the problem of scarcity
Scarcity is a fact of life throughout
the world
Resources – Anything that is used to
produce goods or services
EX: Land, Labor, Capital,
Entrepreneurship
FOUR FACTORS OF
PRODUCTION
Four factors of
production are also
called resources
(1) Land
* All the natural
resources found in
nature
* EX: Water,
minerals, forests,
gold, diamonds, oil,
air, animals, sun,
moon
LAND
Although largely in limited supply , it can
be improved through technical advances,
for eg. Irrigation.
The reward accruing to land in the
production process is - RENT
FOUR FACTORS OF
PRODUCTION
(2) Labor
* The mental & physical talents that
people use to produce goods & services
LABOUR
Specific category of human resource
The quality of labour can be raised
through education and training.
The application of capital, through
the use of machinery, will improve
labour productivity
The reward for labour : wages
FOUR FACTORS OF
PRODUCTION (3) Capital
* The physical
plants, machinery,
and equipment
used to produce
goods
* EX: Machinery,
tools, computers,
trucks,
buildings, factories
(Each of these is
used to produce
some other good)
CAPITAL
These are man made resources
Capital may be fixed or working capital
Fixed capital - For eg; Factory
Working capital, for eg; raw materials
The reward for capital is - INTEREST
FOUR FACTORS OF
PRODUCTION
(4) Entrepreneurship
* The creative ability that some people
have for searching out & taking
advantage of new business opportunities
and for developing innovative new
products or new ways of doing things
* EX: Bill Gates – Microsoft
Sam Walton – Wal-Mart
* Entrepreneurs are willing to take great risks
Another human resource but refers to the
role played by the organizer of
production, including risk.
In return for risk taking, organizing and
decision making entrepreneurs receive
PROFIT
Fourth Factor of Production – Enterprise
ENTREPRENEURS
Bill Gates Sam Walton
Central Economic Problems
1. Whichgoods are to be produced & in
what quantities
Example: not only how many television
receivers but what mix in terms of, for
example, screen size, digital or
analogue, flat screen or conventional,
stereo or non stereo, picture-in-
picture capability or not and so on.
THREE FUNDAMENTAL
ECONOMIC
PROBLEMS/QUESTIONS
(2) How will the goods be produced?
* This question requires society to decide
the resource mix used to produce goods
* Will a production technique be more or
less capital-intensive?
* EX:how should an animated film or
TV program made? should it be
made using many graphic artists or
should it be largely computer
generated? In no animated films,
should scenery and special effects
be done on location or created
digitally?
THREE FUNDAMENTAL
ECONOMIC QUESTIONS
We must decide how to distribute the products of
society.
Did Apple market the ipod to the large
population of elderly people in the U.S. or
the youth? Why?
Most goods and services are distributed to
individuals through a price system.
Ifyou want it and can afford to buy it…you
will.
Products can also be distributed through other
means; force, first come, lottery, majority,
ect.
ECONOMICS
Economics: The study of how society manages its scarce
resources(N.Gregory Mankiw- Principles of Micro Economics)
Microeconomics : The Branch of economics that examines the
functioning of individual industries and the behaviour of
individual decision making units-i.e, firms and households.
Macroeconomics is the branch of economics that examines the
economic behaviour of aggregate-income, employment, output
and so on – on a national scale
(Karl.C.Case, Ray C. Fair & Oster –Principles of Economics)
1-20
Why study Economics?
Relevance of Economics
There are four main reasons:
To learn a way of thinking
To understand society
To understand global affairs and
To be an informed voter
To learn a way of thinking
The most important reason for studying
economics is to learn a way of thinking
and help us to make decisions.
Key concepts which help us to make
decisions
Opportunity Cost
The true cost of choosing one alternative over the
other.
Trade offs – giving up one thing in order to
obtain another.
The one that you give up when the choice is made.
Give an example of a time when you had to
make an economic choice. What was the
opportunity cost?
“Opportunity cost is the opportunity lost”
Opportunity cost - example,
A plot of land could have several possible uses:
• develop shopping centre
• develop office block
• develop private housing estate
Marginalism
The marginal benefit of an activity is the
additional benefit resulting from a small
increase in the activity.
Example: the marginal benefit of keeping
a book store open for one more hour
equals the additional revenue from book
sales.
The marginal cost is the additional cost
resulting from a small increase in the
activity.
Example: the marginal cost of keeping a
book store open for one more hour equals
the additional expenses for workers and
utilities for that hour.
According to this principle, we can
increase the level of an activity as
long as its marginal benefit exceeds
its marginal cost when we reach the
marginal benefit equals marginal
cost, we cannot do any better and
the fine tuning is done
Efficient markets – no free lunch
An efficient market is one in which there
are large number of buyers and sellers,
all having knowledge and incentives to
use the knowledge.
Since all consumers and producers are
equally placed, there is no reason that
any producer earn above normal Profit
Efficient markets – no free
lunch
Efficient market is a market in which
profit opportunities are eliminated almost
instantaneously.
There are no such things as a free lunch is
expresses the central idea of economics,
that every choice involves a cost.
To understand Society
Past and present economic decisions have
an enormous influence on the character
of life in a society.
The current state of the physical
environment, the level of material well
being, and the nature and number of jobs
are all products of the economic system.
The economic consequences of things like
environmental policy, free trade and
immigration play a huge role in
international negotiations and policies.
To understand Global affairs
An understanding of economics is
essential to an understanding of global
affairs. News headlines are filled with
economic stories. The destruction of the
world trade centre towers in New York
City and the subsequent war on terror in
Afghanistan and elsewhere led to a huge
decline in both tourism and business
travel.
To be an informed voter
In a democratic country, people
participate in the process through voting.
People rate on issues.
The issue may be political social, or
economic. But most of the issues are
essentially economic issues having direct
or indirect influence on the economic life
of people. voting on issues require a basic
understanding of economics.
