CHAPTER ONE

INTRODUCTION TO ECONOMICS
 1.1 Definition

• Robbins – economics is a social science which studies

the behavior of mankind as a relationship between ends
and scarce means which have alternative users.

• Bade and Parkin – economics is the social science that

studies the choices that individuals, businesses,
governments, and entire societies make as they cope
with scarcity.
• Begg – economics is the study of how society decides
what, how, and for whom to produce.

• Economics is therefore a study of how men make use of

limited resources to fulfill their unlimited material or
worldly needs.

• As such every nation, firm, or individual has to decide on

what to produce, how to produce and for whom to
produce.
 1.2 Microeconomics versus Macroeconomics

• The study of economics is divided into two parts; microeconomics

and macroeconomics.

• Macroeconomics; is the study of aggregate economic behavior, of

the economy as a whole.

• Focuses on the behavior of an entire economy; national goals.

• Essential concern; to improve the performance of the economy as a

whole.

• Primary concern; to determine the impact of aggregate consumer

spending on total output, employment, and prices.
• Microeconomics; is the study of individual behavior in the economy;
components of the larger economy.

• Focuses; on the individuals, firms, and government agencies.

• Interest; the behavior of individual economic agents.

• What are their goals? How can they best achieve these goals with
their limited resources? How will they respond to various incentives
and opportunities?

• Focuses; specific expenditure decisions of individual consumers and

the forces (tastes, prices, and incomes) that influence those
decisions.
• Utility, profit, and rewards maximization become main focus of study
in microeconomics.

• Macroeconomic outcomes depend on micro behavior; and micro

behavior is affected by macro outcomes.

Question:
Define economics. Using examples differentiate between
microeconomics and macroeconomics.
 1.3 Basic Economic Concepts
Scarcity
is due to the unlimited wants compare to the limited resources
or is the condition that arises because the available resources are
insufficient to satisfy wants.

Four types of resources:

• land
is the “gifts of nature,” or natural resources, that we use to produce goods and
services.

• labor
is the work time and work effort that people devote to producing goods and
services.

• capital
consists of tools, instruments, machines, buildings, and other constructions that
have been produced in the past and that businesses now use to produce goods
and services.

• entrepreneur
is the human resource that organizes labor, land, and capital. Entrepreneurs
come up with new ideas about what and how to produce, make business
decisions, and bear the risks that arise from these decisions.
• Choice
is to choose among alternatives due to scarcity of resources.

• Opportunity cost
is define as second best alternative that has to forgo (give up or
sacrifice) for another choice which give more satisfaction.

Question:
Using appropriate examples, explain the concept
of scarcity, choice and opportunity cost.
 1.4 Three fundamental economic problems

(i) WHAT to produce

• all economies must make a choice.
• they may use different decision making rules and mechanism on
deciding on what goods to be produced.
• type and amount of product.
• based on the scale of preference, urgency, importance and needs.

(ii) HOW to produce

• the economic system must determine how output is to be produced.
• which resources should be used, and how they should be combined
to produce each product.
• method of production.
• to minimize the use of scarce resources.
(iii) FOR WHOM to produce
• who will consume the goods and services produced?
• what is the basis of the distribution.
• this is also known as a distribution question.

Question:
Using appropriate examples, explain the three (3)
basic economic problem due to scarcity of
resources.

End of Chapter