Lecture #1 Economic

problem, Economic Agents, Types of economic analysis

2. Contents Definitions of Economics Wealth concept Welfare Concept Scarcity

Concept Economic Problem Economic choice and Opportunity cost Samuelsons
solution of scarcity Economic Analysis Branches of Economics remember you and I are
here to learn from each other

3. Stages & Definitions of Economics Wealth Definition (Adam Smith) Welfare Definition
(Ayred Marshall) Scarcity Definition (L. Robbins)

4. Wealth Concept : Adam Smith, who is generally regarded as father of economics,

defined economics as a science which enquires into the nature and cause of wealth of
nation. He emphasized the production and growth of wealth as the subject matter of
economics.

5. Welfare Concept : According to A. Marshall 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 material requisites of well being.
Thus, it is on one side a study of wealth; and on other; and more important side, a part of
the study of man.

6. Scarcity Concept : According to Lionel Robbins: Economics is the science which

studies human behavior as a relationship between ends and scarce means which have
alternate uses.

7. Economics is a social science concerned with the efficient use of scarce resources to
achieve the maximum satisfaction of economic wants. Scarce resources: There are only
limited number of resources such as workers, machines, factories, raw materials etc. Yet
there are a number of different ways in which they could be used.

8. Similarly people only have limited amount of money. Yet they have lots of needs and
wants to satisfy.

9. Also Government has limited amount of money!!! However, it is unable to satisfy all
its wants.

10. ECONOMIC PROBLEM arises because of. Scarce Resources Unlimited wants

11. Economic choice and Opportunity cost Due to scarce resources available people have
to make economic choices which create sacrifice because alternatives must be given up.
Economic choice is deciding between different uses of scarce resources.

12. Opportunity Cost The amount of other product that must be forgone or sacrificed to
produce a unit of a product. It is the value of the second best alternative forgone. It is the
benefit that is lost in making a choice between two competing uses of scarce resources.

13. Everything has an opportunity cost.

14. Samuelsons solution of scarcity What to produce? How to produce? For whom to
produce? Societies have to decide the best combination of goods and services to meet their
needs. For example, how many resources should be allocated to consumer goods, how
many resources to capital goods, how many resources should go to schools, and so on.
Societies also have to decide the best combination of factors to create the desired output of
goods and services. For example, how much land, labor, and capital should be used
produce consumer goods such as computers and motor cars. Societies need to decide who
will get output from countrys economic activity, and how much they will get. For
example, who will get computers and cars that have been produced? This is often called the
problem of distribution?

15. Economic Agents Economic agents are participants in the economy that engage in
specialization, production, exchange, and consumption. There are two economic agents: 1.
Producers 2. Consumers Government is also consider as economic agent.

16. Economic Analysis Economic analysis is the process of driving economic principles
from relevant economic facts. Types of economic analysis Positive Economic Analysis
Normative Economic Analysis The analysis of facts and data to establish the scientific
generalizations about economic behavior. Statements about how the world actually
operateswhat is. E.g. what is the unemployment rate in an economy, what is countrys
GDP. The part of economics involving value judgments about what the economy should be
like, focused on which economic goals and policies should be implemented. Statements
about how the world should be. E.g. How unemployment rate could be reduced or How
can a country raise its GDP.

17. Branches of Economics Microeconomics: concerned with the behavior of individual

entities such as market, firms and households e.g. How individual prices are set, how prices
of land, labor, capital are set, inquires into the strength and weakness of the market
mechanism. Macroeconomics: concerned with the overall performance of the economy
e.g. Total income, total output, aggregate expenditure, employment, inflation, etc.