Introduction
Economics lacks a universally accepted definition due to differing perspectives among
economists, including wealth, welfare, scarcity, and growth definitions .
A commonly accepted definition states that economics is a social science studying the efficient
allocation of scarce resources to achieve maximum satisfaction of human wants .
Definitions of Economics
Resources are anything used to produce goods (tangible outputs like cement or wheat) or
services (intangible outputs like haircuts or teaching) .
Resources are classified into four categories: labor, land, capital, and entrepreneurs .
Resources: Labor, Land, Capital and Entrepreneurs
Labor refers to the mental and physical human effort of employed people, compensated by
wages or salaries .
Land encompasses all natural resources, both marketable (minerals, timber) and non-marketable
(air, sunlight), with rent being the reward for land .
Capital, produced from land by labor, includes machinery, equipment, buildings, and financial
capital, with rent as the reward for physical capital and interest for financial capital .
Entrepreneurs use managerial skills to organize land, labor, and capital, understanding
production processes, and their reward is profit .
The Rationales of Economic
Human wants are unlimited because they are multiplicative, recurrent, cumulative, and increase
endlessly .
Economic resources are limited, including land, capital, labor, and entrepreneurship, adhering to
the law of conservation of mass .
Scope of Economics
Economics studies both individual economic agents and the economy as a whole, divided into
microeconomics and macroeconomics .
Microeconomics focuses on individual economic units like utility maximization, income,
employment, profit maximization of firms, and markets for single products .
Macroeconomics studies the economy as a whole, including societal welfare, national income,
unemployment rates, and general price levels .
Positive Economics Vs Normative Economics
Positive economics describes economic data objectively, based on facts about what was, is, and
will be, such as inflation rates .
Normative economics prescribes how the economy should be, focusing on what ought to be, and
is subjective and opinion-based, like suggesting inflation targets .
Inductive and Deductive Reasoning
Inductive reasoning derives theories from facts, moving from the particular to the general,
involving problem selection, data analysis, and establishing cause-and-effect relationships .
Deductive reasoning deals with conclusions about economic phenomena, checking theory
validity by moving from the general to the particular, including problem identification,
assumption specification, hypothesis formulation, and validity testing .
The Basic Goals Economics
The main goals include achieving full employment, increasing yearly output (economic growth),
improving society's life (economic development), and maintaining balance of payments .
Additional goals are ensuring equitable income distribution for fairness and economic efficiency
to maximize product from limited resources at minimum cost .
Fundamental Problems of Economics
Scarcity is the central problem, with resources having alternative uses, leading to choices, such
as using land for wheat production, housing, a stadium, or a factory .
Choice leads to opportunity cost, which is the value of the second-best alternative forgone, for
example, constructing a stadium .
To use scarce resources effectively, three questions must be answered: what to produce, how to
produce, and for whom to produce, which concerns product type, input combination, and output
distribution .
Alternative Economic Systems
The answers to the three economic questions depend on the economic system .
Four main economic systems exist: pure capitalism (free market), command economy
(socialism), mixed economy (hybrid), and traditional economy (customary) .
Free Market (Capitalist) Economic System
In a free market, resources are privately owned, and market forces answer the three economic
questions through an invisible hand, where self-interest achieves public interest .
Command Economic System (Socialism)
In a command economy, resources are state-owned, and the government makes decisions to
improve social welfare, answering the three economic questions, eliminating market
competition .
Mixed Economy System
In a mixed economy, resources are owned privately and by the government, with both answering
the three economic questions .
Traditional Economy
In a traditional economy, households own resources, and custom rules answer the three basic
questions .
Scarcity, Production Possibility curve and opportunity cost
Economic resources are scarce and have alternative uses, leading to choices and opportunity
costs, which is the value of the second-best alternative forgone, as explained by the production
possibility curve (PPC) .
Production Possibility Curve (PPC)
The PPC is based on assumptions: the economy produces two goods, resources are fixed in
quality and quantity, there's full employment, technology is constant, and some resources are
more productive in one good .
Production Possibility Schedule
A hypothetical production possibility schedule illustrates trade-offs between steel and wheat
production .
Production Possibility Curve
The production possibility schedule can be shown by the production possibility curve .
Points on the PPF
All points on the PPF are efficient and attainable; points outside are unattainable with current
resources and technology; points inside are inefficient but attainable .
Trade Off
Trade-off involves shifting resources from one product to another, causing a decrease in the
production of the latter .
The trade-off represents the opportunity cost .
Opportunity Cost
The opportunity cost increases as more of one product is produced because some resources are
more productive in one product .
Change in Production Possibility Curve
Changes in PPC assumptions cause shifts in the PPF .
Improvements in resource quality or quantity shift the PPF to the right, indicating increased
production .
Decrease in Production
Deterioration in the quality or decrease in the quantity of resources shifts the PPF to the left,
indicating decreased production .
Change in Technology
If the technology for both goods improves, the PPF shifts outward, increasing production .
Technological Progress
If technological progress occurs in the production of only one good, the PPF rotates outwards
only for that good .
Decision Making Units and Circular flow of economic activities
Decision-making units include households, business firms, and the government .
The circular flow of economic activities describes the flow in a free market economy with
resource and product markets .
Households own economic resources such as labor and land .
Circular Flow Diagram
Households provide resources to the input market, which firms use to produce goods and
services for the output market, where households spend income, creating revenue for firms and
generating income for households .
Government Intervention
The government intervenes by buying resources and goods/services, collecting taxes (income
and business), and providing subsidies .