Chapter 1

INTRODUCTION TO
ECONOMICS
What is Economics?
 Robbins, Definition
• Robbins defined
“Economics is the science which studies
human behavior as relationship between
ends and scare means which have
alternative uses.”
 Robbins' Definition
• Robbins’ definition lays down the following
three fundamental propositions which
constitute basis of the structure of economic
science
- “ Ends” refer to wants. Human beings have wants
which are unlimited in number
- Wants are unlimited but the means to satisfy them
are strictly limited.
- Scare means are capable of alternative uses.
 Modern Definitions
• J.M. Keynes. According to him
- Economics studies how the levels of income
and employment in a community and
determined.
• Thus, in Keynesian terms, Economics is define
as
- The study of the administration of scare
resources and of the determinants of income
and employment.
BUT, there’s a Fundamental
Problem:

SCARCITY: Unlimited wants and needs but

limited resources.
 Scarcity
Scarcity means that society has limited
resources and therefore cannot produce all
the goods and services people wish to have.
Just as a household cannot give every member
everything he or she wants, a society cannot
give every individual the highest standard of
living to which he or she might aspire.
 Fundamental Problems
• What to Produce?
- Quantity and range of goods to produce
- Resources are limited, we must choose between different
alternative collection of goods and services that may be
produced.
• How to produce?
- Techniques of production e.g labor intensive, capital
intensive.
• For whom to produce?
- It means that how the national product is distributed i.e who
should get how much.
 Two Main Streams
• The study of Economics is divided into two
parts on the basis of looking the system as
whole or in terms of its innumerable decision-
making units
- Micro Economics
• It is also called price theory
- Macroeconomics
It is also called Income theory
 Micro Economics
• The word “micro” means a millionth part.
• In “micro economics” we analyze small part or
component of the whole economy.
- e.g individual consumer’s or firm behavior, price of the particular
product or factor of production, employment in firm or industry.

• In simple, microeconomics theory studies the behaviour

of individual decision making units such as consumers,
resource owners and business firms.

• The basic assumption in micro economic analysis is full

employment in the economy as whole.
 Importance of Microeconomics
• It tells us how millions on consumers and producers take decisions
about the allocation of productive resources among millions of
goods and services.

• It explains how through market mechanism goods and services

produced in the community are distributed.

• It also explains the determination of the relative prices of the

various products and productive services.

• It explains the conditions of efficiency both in consumption,

production and departure from the optimum.

• Microeconomics helps in the formation of economic policies

calculated to promote efficiency in production and the welfare of
the masses.
 Limitation of the Microeconomics
• It cannot give an idea of functioning of
economy as a whole.
- An individual industry may be flourishing but
economy as a whole may be suffering.

• It assume full employment which is a rare

phenomenon in the capitalist economy.
- Therefore an unrealistic assumption.
 Difference between Microeconomics
and Macroeconomics
Microeconomics Macroeconomics
1. It studies the small part o 1. It studies the large part of
the economy. the economy.
2. It is a study of individual 2. It study the whole
units of the economy. economy.
3. Partial picture of the
economy. 3. It gives total picture of the
economy.
4. It covers limited areas o
study. 4. It covers a wider scope.
5. It gives worms eye view of 5. It gives us birds eye view of
the economy. the economy.
The Scope Of Economics
 Positive or Normative Science
• Whether Economics is Positive Science or Normative Science?
- Positive science explains WHAT IS
- Normative science explains WHAT OUGHT TO BE i.e right or wrong of the
thing
- In simple words, positive science ‘ describes’ while normative science ‘
evaluate’
• Some early economists, like J. S Mill, Robins, Craines; were of
the view that Economics is just a positive science

• However, Cairness and Macfie taled about normative

character of Economics
 Factors of Production
• LAND – Natural Resources
- Water, Natural gas, Oil, Trees (all the stuff we find on, in,
and under the land).
• LABOR – Physical and Intellectual
- Labor is manpower
• CAPITAL – Tools, Machinery, Factories
- The things we use to make things
- Human Capital is brainpower, ideas, innovation
• ENTREPRENURSHIP – Investment
- Investing time, natural resources, Labor and capital are
all risks associated with production.
 TRADE-OFFS
You can’t have it all
(SCARCITY- remember?) so
you have to choose how to
spend your money, time and
energy. These decisions
involve picking one thing over
all the other possibilities - a
TRADE- OFF!
 Production possibilities and
Opportunity Cost
• The Production possibility frontier (PPF) is the
boundary between these combinations of goods
and services that can be produced and those that
cannot.
• To illustrate the PPF, we focus on two goods at a
time and hold the quantities of all other goods
and services constant.
• That is, we look at a model economy in which
everything remains the same except the two
goods we’re considering.
 Production Possibilities Frontier
The boundary between the combinations of
goods and services that can be produced and
the combinations that cannot be produced,
given the available factors of production and
the state of technology.
The PPF is a valuable tool for illustrating the
effects of scarcity and its consequences.
 PRODUCTION POSSIBILITIES
• The PPF puts three features of production
possibilities in focus:

1. Attainable and unattainable combination.

2. Efficient and inefficient production.
3. Tradeoffs and free lunches.
 PRODUCTION POSSIBILITIES
Attainable and Unattainable combinations
Because the PPF shows the limits to
production, it separates attainable
combinations from unattainable ones.

Figure on the next slide illustrate the attainable

and unattainable combinations.
 PRODUCTION POSSIBILITIES
Efficient and Inefficient Production
Production efficiency is a situation in which
we cannot produce more of one good or
service without producing less of something
else.

Figure on the next slide illustrates the distinction

between efficient and inefficient production.
PRODUCTION POSSIBILITIES
 PRODUCTION POSSIBILITIES
Tradeoffs and Free Lunches
A tradeoff is an exchange- giving up one thing
to get something else.
A free lunch is a gift – getting something
without giving up something else.
Figure on the next slide illustrate the
distinction between a tradeoffs and a free
lunch.
PRODUCTION POSSIBILITIES
 OPPORTUNITY COST
• The Opportunity Cost of a Cell Phone
The opportunity cost of a Cell phone is the
decrease in the quantity of DVDs divided by
the increase in the number of cell phones as
we move along the PPF.

Figure illustrates the calculation of the

opportunity cost of a Cell Phones
OPPORTUNITY COST
OPPORTUNITY COST