Positive Economics :

The study of economics

based on objective
analysis. Most
economists today focus
on
positive economic
analysis, which uses
what is and what has
been occurring in an
economy as the basis
for any statements
about the future.
Positive economics does
not

1
involve value judgment.
Positive economics, is
the part of economics
that focuses on
Positive Economics :
The study of economics
based on objective
analysis. Most
economists today focus
on
positive economic
analysis, which uses
what is and what has
been occurring in an
economy as the basis
for any statements
2
about the future.
Positive economics does
not
involve value judgment.
Positive economics, is
the part of economics
that focuses on
Chapter One
Basic Concepts and Ideas
Economics

Economics is the study of how society manages its scarce resources. economics is the social
science that studies the production, distribution, and consumption of goods and services.

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Positive Economics

Normative Economics

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Scarcity

Scarcity means that society has limited resources and therefore cannot produce all the goods
and services people wish to have.

Opportunity Costs

The opportunity cost is whatever must be given up to obtain some item. The true cost of any
good is not just the amount of money it costs to buy, but everything else in addition to money
that must be given up in order to get that good—the opportunity cost. If, for example, Tom
decides to go from point A to point B, he will produce 8 more fish but 6 fewer coconuts. So,
the opportunity cost of those 8 fish is the 6 coconuts not gathered.

Production Possibility Frontier

A production possibility frontier (PPF) is a graph illustrating the maximum combinations of

two goods an economy can produce given its limited resources and technology.

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Great Schools of Economics Thoughts

1. Classical Thoughts
Adam Smith, sometimes called the father of economics, defined economics as ‘a subject
concerned with an enquiry into the nature and causes of wealth of nations.’ He also called
it a ‘science of wealth’. Most classical economist followed and supported Smith’s
definition of economics. Thus, the classical economists limited the scope of economics to
the enquiry of material wealth and prosperity of nations. It may also be argued that the
definition of economics given by Adam Smith and his followers took a very narrow view
of economic science compared to its modern connotation. It delimited the scope of
economic behaviour, the main subject matter of modern economics, relegated economic
studies to a position secondary to the acquisition of material wealth and prosperity.
2. Neo-Classical Thoughts
Alfred Marshall, a pioneer neo-classical economist reoriented economics towards
the ‘study of mankind’ and provided economic science with a more comprehensive
definition. In Marshall’s own words, ‘Political Economy or 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,’ He added that economics “is on the one
side a study of wealth; and on the other and more important side, a part of study
of man.’ As is obvious from his definition, Marshall widened the scope of economics
to include the study of mankind and their activities undertaken to promote their

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 material welfare. He rather emphasized that man and his material welfare are a
more important side of economic studies than the ‘nature and causes of wealth’.
Following Marshall, other economists of the neo-classical tradition defined
economics with similar connotations. For example, A.C. Pigou gave a restrictive
definition of economics. According to him, enquiry of economics is ‘restricted to
that part of social welfare which can be brought directly or indirectly into relationship
with the measuring rod of money.’ In Cannan’s view, ‘The aim of political economy
is the explanation of the general causes on which the material welfare of human
beings depends.”

3. Keynesian Thoughts
Keynesian economics focuses on managing capitalist economies through government
intervention to stabilize demand and achieve full employment.

 Focus:

Demand-side economics , emphasizing aggregate demand (consumer spending,

investment, exports, government expenditure) as the driver of economic activity.

 Origin:

Developed by John Maynard Keynes to explain and address the Great Depression.

 Role of Government:

Argues for government intervention through increased spending and lower taxes
to stimulate demand and combat unemployment.

 Goal:

To achieve full employment and price stability within a capitalist framework.

 View of Capitalism:
Sees capitalism as potentially volatile but manageable with intervention, rather than
inherently flawed.

4. Marxist Economics

Marxist economics analyzes capitalism as inherently exploitative, driven by class struggle,

and destined for crisis due to the extraction of labor value by capitalists

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  Focus:

Analyzing the underlying power structures and exploitation within capitalism,

focusing on the production process and capital's inherent drive for profit.

 Origin:

Developed by Karl Marx to analyze the relationship between economics, class

structure, and social dynamics.

 Labor Theory of Value:

Posits that the value of labor is exploited by capitalists who pay workers less than
the value they create, leading to profit.

 Class Conflict:

Views capitalism as a system of inherent class struggle between the capitalist class
and the working class.

 Goal:
To expose capitalism's flaws, including recurrent crises and exploitation, and to
advocate for a revolutionary social transformation beyond capitalism.

Branches of Economics

1. Microeconomics is the study of how households and firms make decisions and how they
interact in specific markets.
2. Macroeconomics is the study of economywide phenomena, including
inflation, unemployment, and economic growth
Difference between Microeconomics and Macroeconomics

Microeconomics Macroeconomics

Microeconomics studies the Macroeconomics studies the economy as a

particular segment of the whole, that does not talk about a single unit
economy, i.e. an individual, rather it studies aggregate units, such as
household, firm, or industry. It national income, general price level, total
studies the issues of the economy consumption, etc. It deals with broad
at an individual level. economic issues.

Microeconomics focuses on The focus of macroeconomics is on

individual economic units. aggregate economic factors.

Microeconomics is used to solve Macroeconomics, on the other hand, is

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operational or internal problems. concerned with environmental and external
issues.

Demand and supply are the The primary tools of macroeconomics are
fundamental tools of aggregate demand and aggregate supply.
microeconomics.

Microeconomics is concerned with Macroeconomics is concerned with

a single product, business, aggregates such as national income,
household, industry, salaries, production, market price, total consumption,
costs, and so on. total savings, total investment, and so on.

Microeconomics deals with Macroeconomics is concerned with

concerns such as how the price of significant economic concerns such as
an item affects the amount unemployment, monetary/ fiscal policy,
sought and quantity provided, poverty, international commerce, price
among other things. inflation, deficit, and so on.

Microeconomics determines the Macroeconomics aids in the maintenance of

price of a product as well as the the overall price level as well as the
prices of complementary and resolution of important economic concerns
replacement products. such as inflation, deflation, disinflation,
poverty, unemployment, and so on.

Microeconomics examines any In contrast, macroeconomics has a top-down

economy from the ground up. approach.