Chapter 1

Economy and economics

Economics
Economics is a subject matter that deals with the rational management of limited resources (in relation to
unlimited wants) in a manner such that,
At the micro level:- an individual consumer is able to maximise his satisfaction, and an individual
producer is able to maximise his profit; and
At the macro level:- a country is able to achieve highest possible GDP growth and highest possible social
welfare.

Scarcity
Scarcity refers to a situation when the available resources are less than required resources in relation to our
wants.
available resources < required resources.

 Scarcity of resources is a hard fact of life.

 It is a universal problem. It exists both at the individual level as well as at the level of the country as a
whole
 It is an unavoidable problem. It can never be solved; it can only be managed.
 Resources are not only scarce, but have alternative uses as well.

Economic problem: Economic problem is the problem of rational management of resources or the problem
of optimum utilization of resources. It is also called the problem of allocation of resources or simply the
'problem of choice'.
It arises because
 resources are scarce, and
 resources have alternative uses.
 Human wants are unlimited

Economics is broadly divided into two parts:

 Microeconomics, and
 Macroeconomics.

Microeconomics
Micro means small. Microeconomics deals with economic issues related to small economic units:
 an individual consumer,
 an individual producer
 an individual firm,

Macroeconomics
Macro means large. In economics, 'large' means the economy as a whole. Macroeconomics deals with economic
issues related to the economy as a whole.
The basic issues of macroeconomics include:
 Equilibrium in the economy.
 Disequilibrium in the economy:
 Correction of disequilibrium
 BASIS FOR
MICROECONOMICS MACROECONOMICS
COMPARISON

Meaning Microeconomics deals with economic Macroeconomics deals with economic

issues related to small economic units: issues related to the economy as a whole.

Deals with Individual economic variables Aggregate economic variables

Business Applied to operational or internal issues Environment and external issues

Application

Scope Covers various issues like demand, supply, Covers various issues like, national
product pricing, factor pricing, production, income, general price level, distribution,
consumption, etc. employment, money etc.

Principle a. Theory of consumer behavior a. Theory related to equilibrium in the

components b. Theory of producer behaviour economy
b. Theory related to inflationary and
deflationary.

Limitations Study of microeconomics assumes that Study of macroeconomics assumes that micro
macro variables remain constant variables remain constant.

Positive Economics
Positive economics deals with economic issues (or economic behavior) related to past, present or future. It deals with
such economic situations which can be studied by using facts and figures.
Characteristics of Positive Statements
 These statements highlight the nature and extent of economic problems or analyse the economic behaviour of
the people related to past, present or future.
 These statements are based on facts and figures related to past, present or future.
 These statements are verifiable for truth (facts and figures can be verified), and
 These statements do not reflect any value judgement or opinion of the economists (which could be a matter of
debate).
Normative Economics
Normative economics is the economics of 'what ought to be'. It deals with 'opinions' of the economists related to
economic issues or economic problems. Different economists may offer different opinions on the solution to an
economic problem. Opinions involve value judgements.
Characteristics of Normative Statements
 These statements involve value judgement.
 These statements lead to controversies and debates.
 These statements indicate opinions and are therefore, not verifiable for truth.
 These statements reflect 'what ought to be', as a solution to economic problems.
 Basic of difference Positive economics Normative economics
1. Meaning Positive economics deals with economic Normative economics deals with
issues (or economic behaviour) related to opinions of the economists related to
past, present and future. economic issues or economic problems.
2. Related to Statements of positive economics relate Statements of normative economics
to 'what was', 'what is' and `what would relate to 'what ought to be'.
be'.
3. Economic It clearly describes economic issue. It provides solution for the economic
issues issue, based on value.

4. Verifiable Facts and figures (as elements of positive Normative statements are not verifiable
economics) are verifiable for truth. at all.

5. Value Positive economics does not involve value Normative economics involves value
judgement judgement. judgement.

6. Testing Statements can be tested using Statements cannot be tested.

scientific methods.

Economy
Definition:- Economy is a system by which people of an area earn their living.
There are three basic economic systems, namely;
1. Free market economy
2. Command economy
3. Mixed Economy

FREE MARKET ECONOMIC SYSTEM

In this economic system resources are allowed to be owned and controlled by private property owners,
private firms and individuals, these entities have the right to compete for economical gain. It is also called
capitalist/free enterprise/laissez-faire economy.

Features of free market economy include:

 These are the economics where the economic activities are controlled by the market forces
 Economic decisions are driven by the motive of profit maximization
 Most resources are controlled by the people
 Prices are determined by the market of goods and services
 Private sector dominates the economic activities
 The consumer is sovereign
 A good example of a country that employs free market economy system is the United States of
America.

COMMAND ECONOMIC SYSTEM

Command economy is the opposite to a free market economy, In this economic system resources are owned
and controlled by the state/government as no-one (individuals, private firms etc) is allowed to own resources
which results in the non-existence of competition for economical gain in such an economy. It is also called
planned economy and controlled economy.
This economic system is characterized by the following:
 These are the economics where the economic activities are controlled by the government or some
central authority.
 Economic decisions are driven by the motive of social welfare
 Most resources are controlled by the government
 Price are determined by the government of goods and services
 Public sector dominates the economic activities
 The consumer is not sovereign
 Examples of countries that employ the command economic system include The USSR (now dissolved),
Cuba and North Korea

MIXED ECONOMIC SYSTEM

The mixed economic system is a system that combines free market and command economy policies in a
certain ratio. This means the laissez-faire is employed but the government still has significant control over
resources. This is the most realistic example of an economic system because no economy is purely capitalist or
command.
This economic system is characterized by the following:
 These are the economics where the economic activities are governed by free play of market forces but
regulated by the government .
 Economic decisions are driven by the motive of both social welfare and profit maximisation.
 Resources are controlled by the both government and people
 Prices are determined by the market but regulated by the government
 Both public and private sector dominates economic activities
 The consumer is sovereign
 examples of mixed economy (high degree of government control and consumer freedom) are England
and Nigeria.

Basis Centrally planned Market Mixed

1. Economic These are the economics
Activity where the economic
activities are controlled by
the government or some
central authority.
2. Motive Economic decisions are
driven by the motive of
social welfare
3. Resources Most resources are
controlled by the
government
4. Price Price are determined by
determination the government of goods
and services
5. Dominate Public sector dominates
the economic activities
6. Sovereign The consumer is not
sovereign
These are the These are the economics
economics where the where the economic activities
economic activities are are governed by free play of
controlled by the market forces but regulated
market forces by the government .
Economic decisions are Economic decisions are driven
driven by the motive of by the motive of both social
profit maximization welfare and profit
maximisation.
Most resources are Resources are controlled by
controlled by the the both government and
people people
Prices are determined Prices are determined by the
by the market of goods market but regulated by the
and services government
Private sector Both public and private sector
dominates the dominates economic activities
economic activities
The consumer is The consumer is sovereign
sovereign