Introduction and basic economic concepts

Economics is about the satisfaction of human wants. Wants can be satisfied by the consumption of goods and
services. The satisfaction derived from the consumption of goods and services is called utility.

Goods can be classified into free goods and economic goods. Free goods are those goods which are provided
at zero prices. They are available for consumption without human effort, example; air, sunlight. On the other
hand, economic goods are produced by man using available resources. It involves an opportunity cost and a
price, example; car desks etc…

Human wants are unlimited and resources available to satisfy these wants are limited in supply. Therefore
the problem of scarcity arises. Scarcity means inefficiency of resources to satisfy all human wants. Therefore
we have to make a choice between the alternative resources. Making choices between alternative resources
involve sacrificing something to obtain the best alternative. So, the next best alternative forgone when
making choice is called opportunity cost. Therefore to allocate these available resources in the best way, all
the economies need to answer three basic questions. They are;

 How to produce
 What to produce
 For whom to produce

POSITIVE AND NORMATIVE ECONOMICS:

Positive statements: are statements about economics that can be proven to be true or false by using evidence.

Example: Inflation rate in Maldives in January 2019 is CPI 5 %

Normative statements: these are value judgments. It cannot be proved or disproved using facts.

It usually includes the words like “should”, “fair”, “unfair”.

Example: inflation rate in Maldives should be reduced.

SCARCITY:

It means that economic agents such as individuals, firms, governments and international agencies, can only
obtain a limited amount of resources at any moment in time.

FREE GOODS AND ECONOMIC GOODS:

 Free goods are those goods which are not scarce. These are goods that are unlimited in supply and
therefore have no opportunity cost. Example: air, river water.
 Economic goods are those goods that are scarce because their use has an opportunity cost. Example:
mineral water, oil.

NEEDS AND WANTS:

Needs: the minimum that is necessary for a person to survive as a human being. These are basic necessities in
life. Example: food, shelter, water.

Wants: desires for the consumption of goods and services. They are unlimited. Example: laptop, wifi.