What is Economics?

…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 wellbeing. Thus it is on one side a
study of wealth; and on the other, and more
important side, a part of the study of man

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 The study of the production, distribution and
consumption of wealth in human society
Study of exchange and production
Economics is a science which studies human
behavior as a relationship between ends and scarce
means which have alternative uses

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 Economics is a social science
that examines how people
choose to use limited or
scarce resources in
attempting to satisfy their
unlimited wants
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 PURPOSE OF ECONOMIC ACTIVITY

production of goods and

services to satisfy consumer’s
needs and wants

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 BASIC ECONOMIC PROBLEMS
SCARCITY AND CHOICE:
 What goods and services to produce
How best to produce goods and
services
Who is to receive goods and services

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 Scarcity means that people want more than is
available.
Scarcity requires choice. People must choose which of
their desires they will satisfy and which they will leave
unsatisfied.
The cost of any choice is the option or options that a
person gives up.

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 TOOLS
Models and Theories
Graphs
Real and Nominal Variables
Scatter Diagrams
Index Numbers
 Index Averages
Time Series Data
Cross-Section data
Marginal Values

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 MODELS AND THEORIES

Economists observe real life economic phenomena

over a period of time and develop a theory or model to
grasp or understand the essence of the issue.

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 USING GRAPHS TO ILLUSTRATE RELATIONSHIPS
A graph is a visual representation of the relationship
between two or more variables—these are
things/quantities that can change. The curves may be
complex, exhibiting both positive and negative
relationship between the variables

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 SLOPE OF A LINEAR CURVE

The slope of a line is defined as the

change in the value of the Y variable
shown on the vertical axis divided
by the corresponding change in the
value of the X variable represented
on the horizontal axis
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 REAL AND NOMINAL VARIABLES

The real value is the variable’s value after we adjust for

changes in prices compared to a base year (sometimes
referred by economists as “constant prices”).

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 SCATTER DIAGRAMS
The real-world data
that economists collect
to test their theories
(hypotheses) typically
produce graphs and
diagrams that are
“scattered all over the
place,” rather than the
neat ones
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 INDEX NUMBERS

An Index number expresses data relative to a given

base value

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 TIME SERIES DATA

A time series is a sequence of measurements of a

variable at different points in time. It shows how a
variable changes over time

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 CROSS-SECTION DATA

Cross-section data record at a point in time the way

an economic variable differs across different
individuals or groups of individuals. The example of
such data is the table of thousands of people
unemployed in different age groups in the same
time period.
This type of data disaggregates the national data by
some characteristics (like age, region, industry,
gender, religion, etc.) They tend to be used to
investigate detailed questions in microeconomics.
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 MARGINAL VALUES

Marginal value shows the change of total, if one unit is

added.

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 FINITE RESOURCES

Factors of production are the resources of LAND,

LABOUR, CAPITAL and ENTERPRISE used to produce
goods and services.

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 LAND
Land is the natural resources on the planet. It
includes space on the ground, hills, seas, oceans, air
etc
Land includes all of the natural physical
resources – for example the ability to exploit fertile
farm land, the benefits from a temperate climate or
the ability to harness wind and solar power and
other forms of renewable energy.

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 LABOUR

Labour is the human input (workers, managers etc)

into the production process.  Each individual has a
different level of skills, qualities and qualifications.
This is known as there HUMAN CAPITAL.

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 CAPITAL

Capital is man-made physical goods used to produce

other goods and services. Examples include machines,
computers, tools, factories, roads etc. Increases in the
level of capital are called INVESTMENT.

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 TYPES OF CAPITAL
Fixed capital includes machinery, plant and
equipment, new technology, factories and other
buildings.
Working capital refers to stocks of finished and
semi-finished goods (or components) that will be
either consumed in the near future or will be made
into finished consumer goods.

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 TYPES OF CAPITAL
Capital inputs and productivity New items of
capital machinery, buildings or technology are
generally used to enhance the productivity of
labour. For example, improved technology in
farming has vastly increased the productivity of our
agricultural sector and allowed people to move out
of working on the land into more valuable jobs in
other parts of the economy. And investment in
information and communication technology can
increase the efficiency of workers across many
industries.

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 TYPES OF CAPITAL
Infrastructure Infrastructure is the stock of
capital used to support the entire economic system.
Examples of infrastructure include road and rail
networks; airports and docks; telecommunications
e.g. cables and satellites to enable web access.
Infrastructure is an essential pillar for economic
growth in developing countries, and the part of
economic prosperity in developed countries.

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 ENTREPRENEURSHIP
An entrepreneur is an individual who seeks to
supply products to a market for a rate of return
(i.e. to make a profit).
Entrepreneurs will usually invest their own
financial capital in a business (for example their
savings) and take on the risks associated with a
business investment. The reward to this risk-taking
is the profit made from running the business.

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 RENEWABLE RESOURCES

Renewable resources are commodities such as solar

energy, oxygen, biomass, fish stocks or forestry that is
inexhaustible or replaceable by new growth providing
that the rate of extraction of the resource is less than
the natural rate at which the resource renews itself.

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 GOODS AND SERVICES
In economics we classify goods as “tangible”
products, example might include food and drink,
cars, and so on. Services are sometimes known as
“intangibles”, education and health-care are two
important services and tourism, business
consultancy, cleaning and home insurance are all
examples of services

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 PRODUCTION POSSIBILITY FRONTIER
A production
possibility frontier
(PPF) is a curve or a
boundary which
shows the
combinations of two
or more goods and
services that can be
produced whilst using
all of the available
factor resources
efficiently.
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 PRODUCTION POSSIBILITY FRONTIER
Show the different combinations of goods and
services that can be produced with a given amount
of resources
No ‘ideal’ point on the curve
Any point inside the curve – suggests resources are
not being utilised efficiently
Any point outside the curve – not attainable with
the current level of resources
Useful to demonstrate economic growth and
opportunity cost

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 SHIFTS IN THE PPF
There are improvements in productivity and
efficiency perhaps because of the introduction of
new technology or advances in the techniques of
production)
More factor resources are exploited perhaps due to
an increase in the size of the workforce or a rise in
the amount of capital equipment available for
businesses

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 SHIFTS IN THE PPF

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 POSITIVE AND NORMATIVE STATEMENTS

Positive statements are objective statements that can

be tested or rejected by referring to the available
evidence. Positive economics deals with objective
explanation and the testing and rejection of theories.

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 POSITIVE AND NORMATIVE STATEMENTS

Normative statements express an opinion about what

ought to be. They are subjective statements rather than
objective statements – i.e. they carry value judgments.

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