Introduction to

Economics
By: Aneela Akhtar Chattha
Economics means:
• Economics word is derived from two Greek words

1. Oikos - a house

2. Nemein - to manage

It means ‘managing a household’ using the limited funds available, in the

most satisfactory manner possible.
Adam Smith(1723 – 1790)
Classical School of Thought
According to Adam Smith (Father of Economics) in his famous book,

An inquiry into nature and causes of wealth of Nations

“Economics is a Science of Wealth.”

It is all about basis of wealth .i.e.
1. Production of wealth

2. Consumption of wealth

3. Exchange of wealth

4. Distribution of wealth in FOP’s

Major Economic Activities
1. Production.
The process of transforming inputs into outputs.
2. Distribution.
The way total output, income, or wealth is distributed among individuals or
among the factors of production
3. Exchange.
The process of trading goods between buyers and sellers in a particular
market.
4. Consumption
The process of how goods and services are utilized that give satisfaction to the
consumers.
Alferred Marshal(1842 – 1924)
Welfare Economist
According to Marshall in his book “Principles of Economics”in 1890

“Economics is a study of mankind in the ordinary business of life. It examines

that part of individual and social action which is most closely connected with
the attainment and with the use of the material requisites of well being”.

1. Focus of definition was on welfare of people by material things

2. Definition created difference between material(Goods)and immaterial

aspects (Services),

3. According to Marshall only material things can promote welfare but later
on criticism by modern economists was that, immaterial things also play
an important role in development of mankind .i.e. doctors, teachers,
lawyers etc.
Lional Robbins
According to Robbins in his book in 1932
“An Essay on the Nature and Significance of Economic Science”
“Economics is a science which studies human behavior as a relationship
between ends and scarce means which have alternative uses”.
Robbins explained economics as the problem of scarcity and choice, his
definition comprises of following contents:
• Economic Problem
• Scarcity
• Trade-off

• (The Value of the Next Best Choice(Ex: Sleeping

Opportunity Cost
is the opportunity cost of studying for a test)
Branches of Economics:
1. Microeconomics:
A branch of economics which is concerned with the behavior of individual entities such as
markets, firms, and households.

Scope of Microeconomics:
Microeconomics studies:
• Buying decisions of the individual
• Consumers’ satisfaction
• Buying and selling decisions of the firm
• The determination of prices and in markets
• The quantity, quality and variety of products
• Profits
 2. Macro-Economics
A branch of economics which is concerned with the overall behavior and
performance of the economy as whole.

Scope of Macro-Economics

Macroeconomics studies:

• Economic growth
• Unemployment and inflation

• Aggregate demand and aggregate supply

• Economic policies – fiscal and monetary

• International trade – exports and imports

• Money supply
Classification of Economic System
• 1. Traditional Economy

• 2. Market Economy

• 3. Command Economy

• 4. Mixed Economy
Traditional Economy:
• Traditional economy is an economic system in which the society produces
what best ensures its survival.

• Resources are allocated according to long-lived practices from the past.

• People make economic decisions based on customs and beliefs that have
been handed down from generation to generation.

• Examples: Bhutan, Haiti

Market Economy:
• Market economy is characterized by the private ownership of resources and
the use of a system of markets and prices to coordinate and direct economic
activity.

• Private individuals own most, the prices of goods and services are
determined in a free price system Demand and Supply

• Market economy or capitalism is sometimes called laissez-faire; translated

from the French, this phrase means “to let do,” or to let people do as they
choose without government intervention.

• Examples: USA, UK, JAPAN

Command Economy:
• An economy characterized by public ownership of virtually all property
resources and the rendering of economic decisions through central economic
planning.

• Government owns most of the businesses and makes all economic decisions.

• There is no free competition because the government is the only seller.

• Countries using mainly the command system include Turkmenistan, Laos,

Belarus, Libya, Myanmar, Iran, North Korea and the former Soviet Union.
Mixed Economy:
• Mixed Economy is a blend of market system and some form of government
regulation and control.

• Private ownership of resources exists side by side with substantial public

ownership of resources and government participation in economic activities.

• This involves a degree of private economic freedom mixed with a degree of

government regulation of markets.

• The major and strategic industries are owned and managed by the state
while the minor industries belong to the private sector.
• Example: CANADA, CUBA
Salient Functions of an Economic
System
• To produce the goods for consumption of the population

• To utilize the resources in efficient method of production

• To employ the labor force in occupations where productivity is at optimum

• To apportion the wealth and income available to everyone in an equitable

manner
• To encourage innovation and technology in order to maximize efficiency,
optimize satisfaction and minimize waste
Economic Goals:
1. Economic efficiency

2. Economic growth and economic development

3. Economic freedom

4. Economic security

5. Equitable distribution of income

6. Full employment
7. Price level stability

8. Reasonable balance of trade

Nature of Economics
• Economics limits its field up to exchangeable goods and these goods are
called economic goods. All other goods are called non-economic goods. These
are also necessary to satisfy Human Wants

• Human Wants: Desires of Human beings living in universe

Goods & Services:
1. Goods
• Economic Goods

Goods attained by exchange of money

• Non-economic Goods

Goods attained without exchange money

In economics we just discuss monetary goods further classification of

economic goods
Economic Goods:
According to Use:
• Consumer Goods: Goods used for final Consumption are called Consumer
Goods E.g. Food, Home, Car these are directly used by customers for satisfaction
of wants
• Producer Goods: Goods used for production of other goods are called Producer
Goods E.g. Plants, Machinery, raw material
• According to Durablity:
• Durable Goods: Goods being used for a continued period of time. Eg.TV,
refrigerator , It either satisfies new demand or replace old set. Consumed by
more than one person. Eg. TV, Radio
• Non- Durable Goods: Goods perishable after use are called non-durable goods,
Later new economics definition came ; non- durable goods are goods perishable
after one use .Eg. Bread, Milk, it is Purchased at regular intervals, Serviceability
not generally required ; Classified into perishable and non perishable goods
Economic goods:
• According to life:
• Perishable goods are lost after a period of time Eg. Teaching Services,
Doctor’s service, Medicines
• Non-perishable goods are not lost after a period of time E.g. Coal,
machinery
• According to Demand & Price Mechanism:
• Normal Goods: Good whose demand increases when income increases and
demand decreases when income decreases, It’s price remains the same
• Inferior goods: These are goods whose demand decreases as income
increases.
• Superior goods: These are goods whose demand increases as income
increases. E.g. the poor people used to consume more potatoes(inferior good)
and less meat using their adjusted daily budget
Economic goods:
According to Demand & Price Mechanism:

• Luxury goods/ Prestigious Goods: These are Demonstrative goods; These are goods for which
demand increases more than proportionally as income rises. No matter what is the prices, its
demand increases. Goods which ascribe high status and value E.g. Antique Collections, expensive
Cars, Diamonds, usually Bought by richest people of society

• Comforts: These are the goods which provide comforts to life but not necassary for survival e.g.
TV, Carpet, Fan

• Necessities: These are the goods necessary to survive in life .i.e. basic food items, houses, clothes

• Complementary Goods: The goods which complements each other. A good's demand is increased
when the price of another good is decreased. Pen and ink, Car and petrol etc (DEMAND ANALYSIS)

• Substitutes: Goods which are alternatives of eachother e.g. COKE & PEPSI/ Lipton & Supreme/
Piano pen and Orient pen
Economic Goods:
According to Ownership and acquisition:

1. Public Goods:

These are the goods in ownership of government, no one can claim for
personal equity, no one is bound to use. E.g. Parks, Govt Institutions, Roads,
Bridges ,Dams

2. Private Goods:

These are the goods in private ownership of people. E.g. Private Car, Home.
One can sale and purchase such goods according to their own wish.
2. Services:
• Service is an intangible commodity.

• More specifically, services are an intangible equivalent of economic goods.

These are tasks that you pay other people to perform for you.

• Services are work that one person performs for another for payment.

• Services include the work of clerks, technical support representatives,

teachers, nurses, doctors, lawyers, etc.
Economic Resources:
• Economic Resources (also called factors of production or productive inputs)
are what people use to produce goods and services.

• These are inputs used by the firm to produce a good or service. These inputs
include the following:

1. Land

2. Labor

3. Capital
4. Entrepreneurship
Why economics?
• Importance can be determined as it helps in managing economic and financial
affairs
• Helps in achieving better living standards by optimum use of resources.
• Helps Govt in price ceiling (maximum price limit) and price flooring (minimum
price limit) and tax system
• Helps entrepreneurs for adopting effective management policies
• Helps consumers to maximize utilities
• Helps producers to maximize production
• Helps firms to maximize profits
• Helps Project managers/ contractors/ engineers to do cost and benefit analysis
• To overcome major economic problem
 END

THANYOU