Introduction to economics©

RASHAIN PERERA077 059 37 52rashainperera@gmail.com

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Who is the Father of economics?????

Adam Smith

Introduced economics through….

What is economics??? Define economics????

Economics is the social science that aims to describe the factors which determine the production, distribution and consumption of goods and services

What is economics?

Adam Smith is considered to be the father of economics

Is a social science Studies human behavior Teaches how to take rational decisions Society is the laboratory concerned with

any test related to economics Can be basically divided into two branches

as micro and macro economics according to the scope

Micro-economics

Is a study of individual parts

Study how individual parts known as micro economic agents takes decisions in the dynamic environment

Look at one economic agent at once and come up with informational phrases or economic statements

Ex; market demand for SOAP

Macro-economics

Studies the economy in aggregate

Look at the entire economy as a whole and come up with economic statements.

Ex; inflation rate

As you can see, the primary objective of both micro and macro economics is to give or generate economic statements.

Now let us classify economic statements

Economic statements

There are two types of economic statements

They are positive and normative economic statements

Positive economic statements

Deals with facts Can be proved Can be measured Realistic Objective Quantitative Ex; disposable income is the income that is

arrived after deducting taxes from gross earnings

Normative economic statements

Can not be measured

Is only a judgment

Subjective

Qualitative

Words such as aught to and should to are used

Ex; minimum wage should be increased in an effort to increase standards of living

Now try to present your own examples for Positive macro economic statements

Positive micro economic statements

Normative macro economic statements

Normative micro economic statements

Test your understanding

Why do we study economics??? What is the purpose???

What gave birth to the subject economics? Scarcity

What is scarcity?

Amal wants to buy an iphone ..hmm a macbook. .and…an.ipod…ipad..and ……….

What?

But has Amal got enough money to buy them all?

No

Scarcity……….

The gap between unlimited wants and limited resources could be simply known as scarcity

In the previous example Amal had lot of wants but he didn’t have enough money to buy them all

So he should make a choice

This is simply called economizing

What is “Economizing”?

Economizing simply means avoiding wastes or reducing expenditures.

Economics teaches how to economize

To economize, we have to take rational decisions

Rational decisions? What is that?

A method for systematically selecting among possible choices that is based on reasons and facts.

In a rational decision making process, a business manager/individual/decision maker will often employ a series of analytical steps

So u say to make a choice?

We cant have all what we want.

We have to make choice among alternative options available

This is simply known as “choice”.

So what about other options?

As mentioned before we cant have all what we want.

Its due to scarcity.

So we have to make a choice

Choice involves an opportunity cost

Opportunity cost?

The cost of the next best alternative forgone when making a choice can be simply known as opportunity cost

Opportunity cost can be measured by dividing forgone production by increased production.

What is the opportunity cost of holding money?

What is the opportunity cost of economic growth?

What is the opportunity cost of going for a movie cutting the lecture?

What is the opportunity cost of marriage?

Test your understanding

A person is available with following options Option 1; investing 1mn in a business and

getting a salary of 10k per month

Option 2; making a deposit at 10% interest p.a.

Option 3; holding the money in hand

Determine the opportunity cost of selecting option 1

Test your understanding

X and Y are produced in ABC limited using the same machine. To produce 100 more units of X, 250 units of Y should be sacrificed. What is the opportunity cost of producing one unit of X?

Test your understanding

Scarcity, alternative options, choice and opportunity cost??? All inter-related??

Yes it is

Scarcity Alternative options

Choice Opportunity cost

A busy girl finds time to be scarce

She can either marry or not marry (options)

So she decides not to marry (choice)

The opportunity cost is the marriage forgone or the love, family responsibilities she has to give up.

Needs

Essential requirements

Basic

Primary

Taken from birth

Common

Limited

Broader concept

Can be shown in terms of a hierarchy

Self actualization needs

Esteem needs

Social needs

Health and safety needs

Physiological needs

Maslow’s hierarchy of needs

Ways of satisfying needs

Vary

Secondary

Unlimited

Business create

Narrow concept

No theories introduced as yet

Wants

What are the solutions for needs and wants?

Goods and services

In economics the term goods refers to both goods and services

Goods are the final outcome of production process

Hence studying on production process is vital

Production process

What are economic inputs?

Economic inputs are: Factors of production

Factors of productivity

Input Process Output

Factors of production

Property resources Land

Capital

Human resources Labour

Entrepreneurship

Time

Knowledge

Skills

Experiences

Includes all the natural resources

The supply of land is limited

Immobile

Productivity of land can be improved through Cultivation

Fertilizing etc.

Land is used in production and the return given is RENT. (factor payment/factor income)

Land

Live factor

Labor productivity can be improved through Training, education etc

Factor payment is WAGE

Can be moved

P.S. the composition, activity rates and many theories of labor will be covered in unit 10

Labour

Is a man made resource

Improves the productivity of the production

The return is INTEREST

There are various types of capital Human capital

Natural capital

Social capital

Infrastructure

Money capital

Fixed capital

Working capital

Capital

Investment is the way of generating capital

Savings are the sources of investments

Gross investments include depreciation

Net investment excludes depreciation

Capital V Investments

Combines all the other factors of production

Manages the production

Takes decisions

Bears risks

Innovates

Plan the production

Return is PROFIT/LOSS

Entrepreneurship

Factors of productivity

Human capital

Technological developments

Specialization and division of labour

Management and administration

Assigning different tasks to different people in the same production line can be simply known as division of labour

For an example a person might be assigned to cut the clothes only where another person is assigned to sew.

Division of labour

Specialization is the special ability or skill gained by an individual by performing a certain task for a long period of time

DOL results in specialization

Levels of specialization Personal

Institutional

Regional

National

Specialization

Explain how factors of productivity contributes to the improvement of the productivity of the production process? (10 marks) Introduction & conclusion – 2marks

Explanation of each FOP – 2*4=8marks

Test your understanding

Resources? Economic input?

Yes

Factors of production and productivity together stands for “RESOURCES”

Resources are inputs that can be used up in production

Anything that can be used in production is a resource.

Classification of resources

Economic resources Vs non economic resources

Renewable resources Vs non renewable resources

Finite and infinite resources

Economic resources Non economic resources

The resources that are scarce in relation to the demand are simply known as economic resources

Scarcity involves making a choice,therefore consumption or extraction of economic resources involves an opportunity cost

Abundant in supply

No opportunity cost involved

Economic resources V non-economic resources

Renewable resources are the resources that re-generates themselves with their usage. Ex; forests

Non renewable resources are the resources that exhaust with the usage. Ex; minerals, oil etc

Note; since all the resources here in consideration are natural ,this classification is also the classification of LAND

Renewable resources V non-renewable resources

Finite resources are those that are limited in supply

Infinite resources are those that are unlimited in supply

Finite V infinite resources

Now try to give examples for each of the following Finite non renewable resources

Finite renewable resources

Economic resources

Non economic resources

Test your understanding

What are the economic outputs?

Goods and services

Anything that satisfies a want for a need can be known as a good or a service

Classification of goods

Economic goods Vs non economic goods/free goods

Consumer goods Vs producer goods Consumer goods

Durable consumer goods

Non durable consumer goods

Producer goods/industrial goods Investment goods/Capital goods

Intermediate goods

Economic goods Non economic goods

Are scarce in relation to the demandOpportunity cost is involvedAs a result of productionHas an economic valueA price can be charged

Naturally abundant in supplyNo opportunity cost is involvedNaturally availableNo economic valueA price can not be charged

Economic goods V non-economic goods

Explain the relationship between a non economic good and an economic good using a suitable example.

Test your understanding

Consumer goods are the goods that consumers buy for final consumption purposes. Durable consumer goods; the consumer goods

with a relatively higher life span

Non durable consumer goods; shorter life span

Consumer goods

These are the goods that are used to make other goods and services Investment goods/capital goods; the goods

that helps in production. Most of them are non current assets. Ex; Machines

Intermediate goods; is a final good that is a part of the final product. Ex; tire is a final product that is a part of the car

Producer goods/industrial goods

Production = Productivity????

No!!!!!

Productivity is the relationship between output and the input

Productivity= output / input

Production is the conversion of input into outputs.

What is economic efficiency?

“Doing the thing right”

Can be divided in to 2 Allocative efficiency; Allocative efficiency

occurs when MB=MC. In other words if resources are allocated optimally is said that Allocative efficiency exists.

Productive efficiency; productive efficiency can be defined as producing goods and services for the lower cost

Productive efficiency Full employment

Full production

Allocative efficiency MB=MC

MC=P

Measurement criteria

What is effectiveness?

“Doing the right thing”

Inter relationship among effectiveness, efficiency and

productivity.

Productivity = effectiveness / efficiency

productivity = output / input

Basic economic problems

What are basic economic problems? Are also called central/fundamental

economic problems

The economic problems arise due to two main reasons. Human wants are unlimited

But means to satisfy wants are limited

In other words due to scarcity of resources.

What are the basic economic problems? What in what quantity to produce?

How to produce?

For whom to produce?

What in what quantity to produce?

This is a problem of resource allocation

Decide what goods to produce

Determine or estimate the demand of products to be used in production decisions so that resources are not wasted or over used

How to produce?

Deciding the means of production

This is a production problem

Deciding the method or technique of production Either labour intensive method

Or capital intensive method

Land intensive

Technology intensive

For whom to produce?

This is a distribution problem

A product can be targeted at poor people

Or rich people

Or entire community

Static efficiency

Static advantage occurs when an economy is able to solve all 3 basic economic problems in an efficient way at once

Dynamic efficiency

Dynamic advantage occurs when all three basic problems are optimally solved over a long period of time.

If the economy achieves static efficiency over a period of time then it is dynamically efficient

Scarcity

Rational decisions

Economizing

Options

Choice

Opp. cost

Basic economic problems