Name Position

Samia Ibnat Anika Adjunct Lecturer, Department of Economics

Institution Email
Southeast University [Link]@[Link]

Contact
Phone: 01823913478
Chapter:

Introductory Economics
Economics
Def inition

Economics is the study of satisfying unlimited wants with limited

resources.

Adam Smith ( )

Defines economics as “ an inquiry into the nature and causes of the

wealth of nations.”
J. B. Say ( )

Defines economics as the science of production, distribution, and

consumption of wealth.
Wants
Wants refer to the willingness of possessing something regardless of the

affordability. The inherent nature of human beings is that they want more

and more; their desire never ends. Therefore, it is said that wants are

unlimited.
Resource
Resource is something that is able to produce goods and/or

services. From the definition of resource, it becomes clearer that

resource refers to the factors of production. Anything that is

unable to produce goods or services is not a resource. Resources

are, therefore, alternatively termed as productive factors.

Factors of Production

There are hundreds of factors of production. For the sake of simplicity, it is assumed that there are four factors of

production. They are:

Land Labour

Capital Organisation

Payment for land is rent; payment for labour is wage; for capital is interest; and for organiser is profit.

This suggests:

Factor payment = rent + wage + interest + profit.

Basic Problems of an Economy

Scarcity
Whatever the degree of affluence, every nation faces the problem of a limited amount of resources. This is known as

—
the problem of scarcity one of the central challenges of an economy.
Problem of Choice

Because of the problem of scarcity, another interrelated problem is

evolved, known as the problem of choice. Choice problem refers to the

problem of choosing only a few wants from a vast variety.

Due to the availability of a limited amount of resources, neither the

individual nor the state can produce all goods and services at a time;

—
rather they have to select a limited set of goods and services this

problem is known as the choice problem.

Twin Problem

Since the choice problem emerges from the problem of scarcity, these two

problems are termed as the twin problems of an economy. Three

interrelated problems are generated from these two problems:

What to Produce For Whom to Produce

How to Produce
What to Produce

The first problem directly resembles The society creates demand for

the problem of scarcity. innumerable goods and services.

Because of scarce resources, only a Individuals — —

at the micro level and

few of them can be produced. the state— at the aggregate level —

attempt to solve the problem by

making a list of the goods and

services to be produced on a

priority basis.
How to Produce

C ap i t a l- I nt e n s ive Te ch n ol o g y

A given amount of output can be produced by using either capital-intensive or

labour-intensive technology. The production technology that involves

comparatively higher amounts of capital than labour is called capital-intensive

technology.

L a b ou r- I nt e n s ive Te ch n ol o g y

Conversely, the use of labour is comparatively higher in a labour-intensive

technology.

Re c o m m e n da t i o n s fo r Na t i o n s

Most affluent nations have capital abundance; thereby, capital is relatively

cheaper in these societies. The use of capital-intensive technology is

recommended for such nations because this will bring efficiency in production.

Densely populated nations should use labour-intensive technology because

labour is comparatively cheaper in those countries; hence, the use of labour-

intensive technology is likely to lower the cost of production.

For Whom to Produce

Goods Production Limitations

No matter what production methods are used, the quantity of goods and services

produced will always be [Link] state must carefully distribute them, or some people

may get too much while others get too little. If resources were unlimited, there would be

enough for everyone, and distribution would not be a problem.

Insuff icient Total Output

If resources were unlimited, there would be enough for everyone, and distribution would

not be a problem. In reality, output is not enough for everyone, and ignoring this can

cause chaos.

Distribution Fairness

A fair society must focus on justice and efficiency in distribution, because all economic

problems come from scarcity.

Mankiw ( ) in his Principles of Economics provides The Ten Principles of

Economics that offer an over view of what economics is all about.

T h e Te n Pr i n c ipl e s are b r i efly d i s c u s s e d b el o w:

Pe o p l e f a c e t ra d e - o f f s. The cost of something is Rational people think at Pe o p l e re s p o n d t o

wh a t yo u g i ve u p g e t t i n g i t . t h e m a rg i n a l c o s t a n d i n c e n t i ve s.

m a rg i n a l re ve n u e.

Tra d e c a n m a ke e ve r yo n e Ma rke t s a re u s u a l l y a g o o d G o ve r n m e n t s c a n A c o u n t r y 's s t a n d a rd o f

b e t t e r o f f. wa y t o o rga n i z e e c o n o m i c s o m e t i m e s i mp ro ve m a rke t living depends on its

a c t i v i t y. o u t c o m e s. a b i l i t y t o p ro d u c e g o o d s

a n d s e r v i c e s.

G ro w t h o f m o n e y l e a d s t o S o c i e t y f a c e s a s h o r t- r u n

inflation. t ra d e o f f b e t we e n I n f l a t i o n

a n d u n e mp l o y m e n t .
Economic Activity Cycle

● I n a s i mp l i f i e d f ra m e wo rk , a n

e c o n o my h a s t wo s e c t o r s : Bu s i n e s s

Fi r m s a n d Ho u s eh o l d s.

● Ho u s eh o l d s o w n a l l re s o u rc e s,

wh i ch f i r m s h i re t o p ro d u c e g o o d s

a n d s e r v i c e s.

● Ho u s eh o l d s b uy t h e s e g o o d s a n d

s e r v i c e s, p ay i n g t h e f i r m s. T h e

d i a g ra m b el o w sh o w s t h e c i rc u l a r

f l o w.

● Ho u s eh o l d s s u p p l y l a n d , l a b o u r,

c ap i t a l , a n d e n t re p re n e u r sh i p t o

f i r m s a n d re c e ive re n t , wa g e s,

i n t e re s t , a n d p ro f i t a s

c o mp e n s a t i o n . T h e a m o u n t

h o u s eh o l s e a r n i s u s e d fo r b uy i n g

g o o d s a n d s e r v i c e s.
Microeconomics vs.

Macroeconomics

Microeconomics Macroeconomics

Microeconomics deals with Macroeconomics discusses

the individual behavior of the overall behavior of agents

economic agents or variables. or variables.

Microeconomic Macroeconomic

Concept Concepts

Demand for or supply of a Macroeconomics mainly

good, price of a good, income discusses aggregate demand,

of a consumer or a producer. aggregate supply, price level,

national income, fiscal and

monetary policies,

unemployment,inflation etc
Positive Economics versus Normative

Economics

Positive Economics Normative Economics

Positive economics deals with the issues that occur in Normative economics is value-based economics.

an economy. Positive Economics does not care Normative economics illustrates what should be done

wheather the produced good is good or bad for the in order for the attainment of certain objectives or

society. goals.
Opportunity Cost

Every choices has a cost. Opportunity cost is the next best alternative foregone to perform an activity.

Opportunity cost is what you give up to do something.

For example, if a producer gives up the production of 6 kg of wheat in order to produce 5 kg of rice, the opportunity cost of

producing 5 kg of rice is 6 kg of wheat. Similarly, if an individual rejects some job offers to run a business, then the opportunity

cost of running that business is the amount of money that could have been earned from being employed. Opportunity cost is

sometimes termed as implicit cost or invisible cost.

Production Possibility Curve/Frontier

Production possibility cur ve (PPC)

Production possibility curve (PPC) or production possibility frontier (PPF) shows the combinations of two goods that

can be produced under a given technology by efficiently utilizing all of the resources of an economy.

Economy goods

Suppose the economy produces only two goods — food and cloth. Regular shape of PPC is given below:
Draw PPC

Fo o d Cloth

12, 11, 9, 0 0, 1, 2, 4, 6

● I n t h e a b o ve d i a g ra m p o i n t A sh o w s t h a t t h e e c o n o my

p ro d u c e s u n i t s o f cl o t h b y e mp l o y i n g a l l o f t h e

re s o u rc e s. I n t h i s s i t u a t i o n p ro d u c t i o n o f fo o d i s n i l .

● T h e o p p o s i t e o c c u r s a t p o i n t D wh e re a l l re s o u rc e s

p ro d u c e u n i t s o f fo o d a l o n e.

● Po i n t s B a n d C sh o w p o s i t ive c o m b i n a t i o n s o f b o t h

fo o d a n d cl o t h . B y j o i n i n g A , B, C a n d D p ro d u c t i o n

p o s s i b i l i t y c u r ve ( P P C ) i s d raw n a s a c o n c ave c u r ve.

● C o n c av i t y o f P P C re f l e c t s i n c re a s i n g o p p o r t u n i t y

cost.

● Mo ve m e n t a l o n g t h e P P C sh o w s a n i n c re a s e i n o n e

g o o d a n d d e c re a s e i n a n o t h e r
If technolog y improves, PPC shifts out ward. In f igure . the dashed PPC is the result to

technological improvement
Economic Systems

Economic systems are differentiated on the basis of the nature of factor ownership. Factors of

production may be owned by the private individuals or by the representatives of the society or even

by the state. Three different types of economic systems are discussed below:

Capitalism

Command

Mixed Economy
Capitalism
In capitalism individuals are the owners of factors of production. The

person who can acquire more factors becomes richer and can dominate

the poorer.

Market price is determined through the interaction between demand and

supply.

The distinguishing feature of capitalism is the free competition. People

compete freely without any interruption by the government or any other

agency.

Examples: Canada, South Korea, Singapore, Germany, Great Britain, and

the United States!

Advantages and Disadvantages of Capitalism

Advantages Disadvantages

Individual Freedom for all Lack of government interference

Encourages innovation and creativityIncredible variety Can lead to inequality of wealth

to choose fro

Rewards only productive people May neglect social welfare needs

Provides consumer choice Not enough public goods (Education, health, defense)

Encourages competition, which can lower prices Unemployment

High degree of consumer satisfaction Risk of monopolies or unfair competition

Answer the Big Three

What to produce?

Goods and services that consumers demand.

How to produce?

Businesses and entrepreneurs decide the most efficient

methods to maximize profit.

For whom to produce?

For those who can afford to buy the goods and services.
Command Economy

In communism there is no private ownership of property. All

factors of production are likely to be owned by the government.

Karl Marx, the proponent of communism, thought that capitalism

is the source of deprivation.

Because of private ownership of properties and free competition,

the gap between rich and poor grows day by day. Under

communism, government controls the entire economy in the name

of people. In a typical communist society there will have no class,

no hierarchy, no currency and no personal property.

Command Economy Examples

A command economy is one where the government

controls all major economic decisions — what to produce,

how to produce, and for whom to produce.

Example: The former Soviet Union is a classic example. The

government decided how much food, clothing, and

machinery would be produced and at what prices. Factories

followed state plans instead of responding to market

demand.
Advantages and Disadvantages of Command Economy

Advantages of a Command Economy Disadvantages of a Command Economy

1. Quick decision-making 1. Lack of consumer choice

2. Focus on social welfare 2. Inefficiency

3. Full employment 3. Slow to innovate

4. Resource control 4. Risk of corruption

5. Avoids wasteful competition 5. Mismatch with demand

Does a Command Economy Answer

the Big Three Questions?

What to produce?

The government decides what goods and services will be

produced.

How to produce?

The government plans how production will take place

and tells producers what resources and methods to use.

For whom to produce?

The government decides who will receive the

goods and ser vices, often based on people ’ s

needs or national priorities.

Mixed Economy

A mixed economy combines features of both

capitalism and command economy. It allows private

businesses to operate freely, but the government

also plays a role in regulating and providing

essential ser vices.

Example: Bangladesh or India; where private f irms

produce most goods, but the government controls

key sectors like health, education, and

infrastructure.
SUMMARY

Key concepts covered in this chapter include:

Def inition of Microeconomics Production

Economics and Possibilities

Macroeconomics Frontier.

Oppor tunity Cost Introduction to Capitalism

Various Economic

Systems

Command Mixed economy Fundamental

Economy Economic

Problems
Thank You