Economics: The study of how societies use scarce resources to produce valuable goods and services and distribute those among people with the view to satisfying human needs.
Microeconomics vs macroeconomics :
o Microeconomics: The study of economic behavior of individual decision making units, such as: individual consumers, resource owners and business firms and the operation of individual markets in a free economic system (an economic system where economic decisions are made by individuals and firms).
o It attempts to explain some of the most important economic and social problems.
o It focuses on two economic units: households and business units .
o It examines two types of markets: the market for goods and services and market for economic resources.
o Macroeconomics: Deals with the overall performance of the economy.
o Studies the aggregate level of output, national income, national employment, consumption, investment and prices for the economy as a whole.
Logic of economics: how it works
Economic life is an enormously complicated hive of activity, with people buying, selling, bargaining, investing, persuading, and threatening. The ultimate purpose of economic science and of this text is to
understand this complex undertaking. How do economists go about their task?
o Scientific Approach: Economics apply scientific approaches to understand economic life. Ex: observing economic affairs, drawing upon statistics.
o Theoretical Approach: Economics apply theoretical approaches to develop broad generalizations. Ex: theories of international trades.
o Econometrics: Economics apply econometrics that apply the tools of statistics to solve economic problems.
Functions of economic system/problems of economic organization.
o When society rise, three questions comes first, they are called the “fundamentals of Economic Organization”.
o The mechanics of decision making in a larger economy are more complex, but the type of decisions that must be made are nearly identical.
o All societies must decide:
o What to produce and in what quantities: All societies must decide how much of each of the many possible goods and services it will make and when they will be produced.
Ø Rice or pulse?
Ø How much goods or inputs will be used to make the outputs and when?
Ø What quality it is ensuring? (High, medium or low)
o How to produce: A society must determine who will do the production, with what resources and what production techniques they will use that is to produce at lowest costs
Ø Who will do the entire process of production?
Ø With what kinds of resources?
Ø With what production techniques? (Labor-intensive or Capital-intensive technique)
Ø Who sells, who serves and who teaches?
Ø How the resources will be used with the minimum possible costs like-coal, oil,gas etc.
o For whom to produce: A society also decide for whom are goods be produced that means who gets to at the fruit of the economic activity to distribute properly for whom they are produced.
Ø How the ‘ national products” divided among different households?
Ø How income will be divided?
o Positive economics: Describes the facts of an economy that is, it studies what it is.
o Normative economies: It involves value judgments that is, it studies what it should be.
Different Forms economic System:
o Market economy: An economic system where economic decisions are made by individuals and firms.
o Command economy: Government makes the decision of production and distribution.
o Mixed economy: Combinations of market and command economy. That is, economy with element of market and command economy.
o Inputs: Commodities or services used to produce goods and services. An economy uses its existing technology to combine inputs to produce outputs.
o Another term for inputs is “Factors of Production”. These can be classified into three broad categories.
Ø Land
Ø Labor
Ø Capital Resources
Ø Outputs: Goods and services result from the production process. Outputs are the various useful goods or services that result from the production process either consumed or employed in further production.
Society’s technological possibilities:
o Opportunity costs: The cost of forgoing the alternatives.
In a world of scarcity, choosing one thing means giving up something else
o Efficiency: efficiency ensures scarce resources are being used as effectively as possible to satisfy people’s needs and desires
o Productive efficiency: occurs when an economy cannot produce more of one goods without producing less of another goods
o Technological progress: Development of new and better production technology to make a given, improved or an entirely new product
THE PRODUCTION-POSSIBILITY
FRONTIER
The production-possibility frontier (or PPF )
shows the maximum amounts of production that
can be obtained by an economy, given its technological
knowledge and quantity of inputs available.
Societies cannot have everything they want. They are
limited by the resources and the technology available
to them. Take defense spending as an example.
Countries must decide how much of their limited resources
goes to their military and how much goes
into other activities (such as new factories or education).
Some countries, like Japan, allocate only 1 percent
of their national output to their military. The
United States spends 4 percent of its national output
on defense, while a fortress economy like North Korea
spends up to 20 percent of its national output on
the military. The more output that goes for defense,
the less there is available for consumption and investment.
Let us dramatize this choice by considering an
economy which produces only two economic goods,
guns and butter. The guns, of course, represent military
spending, and the butter stands for civilian
spending. Suppose that our economy decides to
throw all its energy into producing the civilian good,
butter. There is a maximum amount of butter that
can be produced per year. The maximal amount of
butter depends on the quantity and quality of the
economy’s resources and the productive efficiency
Alternative Production Possibilities
Butter Guns
Possibilities (millions of pounds) (thousands)
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0