1. INTRODUCTION TO ECONOMICS

LEARNING OBJECTIVES
At the end of the lesson the student should be able to:
 
Distinguish between economics and other social sciences like sociology, ethics etc
Understand the meaning of scarcity as used in economics
See how scarcity is at the centre of all economic problems
Enumerate economic goals and problems
Know that it is difficult to arrive at "Pure" economic decisions since the economic
problems are closely bound up with political, sociological and other problems
Understand the reasons for specialization and Exchange
CONTENTS
Meaning and scope of Economics
The Methodology of economics and its basic concepts
Economic description and analysis
Economic goals and problems
Scarcity, choice, opportunity cost and production possibility frontiers and curves
Economic systems
Specialization and Exchange
ASSIGNED READINGS:
MODERN ECONOMICS by Robert Mudida
Chapter 1Introduction to Economics
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1. THE MEANING AND SCOPE OF ECONOMICS
(i) What is Economics?
The modern word "Economics" has its origin in the Greek word "Oikonomos" meaning
a steward. The two parts of this word "Oikos", a house and "nomos", a manager sum up
what economics is all about. How do we manage our house, what account of stewardship can we
render to our families, to the nation, to all our descendants?
There is an economic aspect to almost any topic we care to mention – education, employment,
housing, transport, defence etc. Economics is a comprehensive theory of how the society works.
But as such, it is difficult to define. The great classical economist Alfred Marshal defined
economics as the "Study of man in the ordinary business of life".
This, however, is rather too vague a definition. This is because any definition should take account
of the guiding idea in economics which is scarcity. The great American economist Paul Samuelson
thus defined it as: "The study of how people and society choose to employ scarce resources that could have
alternative uses in order to produce various commodities and to distribute them for consumption, now or in future
amongst various persons and groups in society.
Virtually everything is scarce; not just diamonds and oil but also bread and water. The word
scarcity as used in economics means that; All resources are scarce in the sense that there are not enough to fill
everyone's wants to the point of satiety.
We therefore have limited resources, both in rich countries and in poor countries. The
economist‟s job is to evaluate the choices that exist for the use of these resources. Thus we have
another characteristic of economics; it is concerned with choice.
Another aspect of the problem is people themselves; they do not just want more food or more
clothing they want particular types of food, specific items of clothing and so on. By want we
mean;
"A materialistic desire for an activity or an item. Human wants are infinite.
We have now assembled the three vital ingredients in our definition, People (human wants),
Scarcity and choice. Thus for our purpose we could define economics as:
"The social science which is concerned with the allocation of scarce resources to provide goods
and services which meet the needs and wants of the consumers"
(ii) The Scope of Economics?
The study of economics begins with understanding of human “wants”. Scarcity forces us to
economise. We weigh up the various alternatives and select that particular assortment of goods
which yields the highest return from our limited resources. Modern economists use this idea to
define the scope of their studies.
Although economics is closely connected with such social sciences as ethics, politics, sociology,
psychology and anthropology, it is distinguished from them by its concentration on one
particular aspect of human behaviour – choosing between alternatives in order to obtain the
maximum satisfaction from limited resources.Lesson One
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In effect, the economist limits the study by selecting four fundamental characteristics of human
existence and investigating what happens when they are all found together, as they usually are.
First, the ends of human beings are without limit. Second, those ends are of varying importance.
Third, the means available for achieving those ends – human time and energy and material
resources – are limited. Fourth, the means can be used in many different ways: that is, they can
produce many different goods.
But no single characteristic by itself is necessarily of interest to the economist. Only when all four
characteristics are found together does an economic problem arise.
Resources: The ingredients that are combined together by economists and termed economic
goods i.e. goods that are scarce in relation to the demand for them.
(i) Economic Goods: All things which people want are lumped together by economists and
termed economic goods i.e. goods that are scarce in relation to the demand for them.
(ii) Free Goods: These are goods which people can have as much as they want, e.g. air.
2. THE METHODOLOGY OF ECONOMICS AND ITS BASIC CONCEPT
Economics proceeds as an evolutionary discipline, looking at data, developing hypotheses, testing
them and reaching sometimes uneasy consensus on how the economy works. This is called the
scientific method which begins with the formulation of a theory about behaviour. For example,
we may put forward the idea that the demand for a good is determined by its price. On the basis
of this we may reason that as the price is increased, demand goes down, while if the prices are
decreased the demand will go up. This then gives us a hypothesis which can be tested on observed
behaviour. This testing of ideas on the evidence is known as empiricism.Introduction to Economics
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The scientific method is illustrated in the diagram that follows:
SCIENTIFIC METHOD
Having made our observation we may then;
Confirm our theory
Reject it
Amend it in the light of the evidence
3. ECONOMIC DESCRIPTION AND ANALYSIS
Economics is used in two important ways today. The first is to describe, explain and predict the
behaviour of production, inflation, incomes etc. But for many, the fruit of such labours is found
in a second task – to improve economic performance.
Theories about human
behaviour
Process of logical deduction
Formation of hypotheses
Hypotheses checked by
observation
Theory does
or does not
agree with
facts
Theory passes
the test of
observation and
passes into our
body of
knowledge
Theory amended in the
light of observation
Theory discarded
Formulate new theoryLesson One
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Thus, we first attempt to describe the hardships of poverty. We then might present programmes
that could reduce the extent of poverty. Or we might start with an analysis of how higher energy
taxes would lead to lower energy consumption. We might then conclude that the country should
raise its gasoline taxes.
In each case, we first engage in positive economics, and then in normative economics.
Positive and Normative Economics
You may already have strong personal views about what sort of economic society we should have
e.g. whether a free market “capitalist” economy is desirable, or whether a “communist” command
economy is preferable. In our study of economics, one of the central distinctions is between a
value judgement and a factual statement.
Positive Economics is concerned with the objective statements about what does happen or what
will happen. It limits itself to statements that can be verified by reference to facts e.g. How does a
higher level of unemployment affect inflation or how will a gasoline tax affect gasoline usage? A
positive approach is more objective, and more scientific and it is the approach we shall try to take
in our study of economics here.
Normative Economics, on the other hand, appreciates that in practice many economic decisions
involve subjective judgements; that its, they cannot be made solely by an objective appraisal of the
facts but depend to some extent on personal views in interpreting facts – ethics and value
judgements. They can be argued about but they can never be settled by science or by appeal to
facts, e.g. should taxation soak the rich to help the poor? Or should the defence spending grow at
3 or 5 or 10 per cent per year? They involve what ought to be and are settled by political choice.
4. ECONOMIC GOALS AND PROBLEMS
Whatever political party is in power, four main economic goals are:
 control of inflation
 reduction of unemployment
 promotion of economic growth
 attainment of a favourable balance of payments.
In addition to these generally agreed objectives, more “political” economic policies might be
pursued, such as the redistribution of income.
5. SCARCITY, CHOICE, OPPORTUNITY COST AND PRODUCTION
POSSIBILITY FRONTIERS AND CURVES
(i) Scarcity
To the economists all things are said to be scarce, since by “scarce” they mean simply “that
there are not enough to fill everyone‟s wants to the point of satiety”. Most people would
probably like to have more of many things or goods of better quality than they possess at
present: larger houses perhaps in which to live, better furnished with the latest labour-saving
devices, such as electric washers, cookers, refrigeration; more visits to theatre or the concert
hall; more travel; the latest models in motor cars; radios and television sets; and most women
exhibit an apparently insatiable desire for clothes. People‟s wants are many, but the resources Introduction to Economics
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for making the things they want – labour, land, raw materials, factory buildings, machinery – are
themselves limited in supply. There are insufficient productive resources in the world,
therefore, to produce the amount of goods and services that would be required to satisfy
everyone‟s wants fully. Consequently, to the economist all things are at all times said to be
“scarce”.
(ii) CHOICE AND OPPORTUNITY COST
 
Because there are not enough resources to produce everything we want, a choice must be made
about which of the wants to satisfy. In economics, it is assumed that people always choose the
alternative that will yield them the greatest satisfaction. We therefore talk of Economic Man.
Choice involves sacrifice. If there is a choice between having guns and having butter, and a country
chooses to have guns, it will be giving up butter to the guns. The cost of having guns can
therefore be regarded as the sacrifice of not being able to have butter. The cost of an item
measured in terms of the alternative forgone is called its opportunity cost.
(iii) PRODUCTION POSSIBILITIES AND OPPORTUNITY COSTS
Limitations of the total resources capable of producing different commodities forces society to
choose between relatively scarce commodities. This can be illustrated quantitatively by simple
arithmetic examples and geometrical diagrams.
Suppose, to take an example, that a society can spend money on two products, guns and butter.
The society's resources are limited; therefore there are restrictions on the amount of guns and
butter that can be made, which can be shown by a "production possibility" or "transformation
curve".
 
The concave (to the origin) shape of the curve stems from an assumption that resources are
not perfectly occupationally mobile.
Points outside the P.P frontier (to the North East) are unattainable under the present technical
know-how. Points inside it say, H, would be inefficient since resources are not being fully
employed, resources are not being properly used, or outdated production techniques are
utilized.
If production is on the frontier the resources are being fully utilized. Points on the production
possibility curve such as B,C and E show the maximum possible output of the two
commodities.
Output G will only become a production possibility if the country's ability to produce increases
and the production possibility curve moves outwards. This can happen when there are changes
such as increase in the labour force, increase in the stock of capital goods (factories power
stations, transport networks, machinery) and/or an increase in technical knowledge.
(iv) SOME USES OF THE P-P FRONTIER
The production-possibility Frontier represented as a single curve can help introduce many of the
most basic concepts of Economics.
a) For example Figure 1:1 can well illustrate the basic definition of economics we gave earlier in
the chapter. There we defined economics as the science of choosing what goods to produce. Should
we live in a fortress economy bristling with guns but with austere living habits as at point B
in figure 1:1?, or should we reduce the military to a pittance and enjoy an economy of butter
and chocolates, as in point E?. It thus means if the economy is operating at a point on the
production possibility curve, then we can say that resources are being fully employed and Introduction to Economics
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that more of one good (guns) cannot be produced unless there is a reduction of the other good
(butter). For additional resources to be devoted to gun production, they have to be diverted away
from butter production. This illustrates the basic concept in economics – that of an opportunity
cost.
b) The production possibility frontier provides a rigorous definition of scarcity;
Points A, B and C are feasible points, given the current state of technical knowledge and
the available resources. Points to the right of and above the frontier (such as G) are
infeasible; they cannot be attained without technical change or an increase in resource
availability. The P-P frontier shows the outer limit of the combination of producible
goods.
Scarcity is a reflection of the fact that the P-P frontier constrains our living standards.
c) The production-possibility schedule can also help make clear the three basic problems of
economic life; What, How, and For whom to produce.
What goods are produced and consumed can be depicted by the point that ends up getting
chosen on the P.P frontier?
How goods are to be produced involves an efficient choice of methods and proper
assignments of different amounts and kinds of limited resources to the various industries.
For whom goods are to be produced cannot be discerned from the P.P diagram alone.
Sometimes, though you can make a guess from it. If you find a society on its P.P frontier
with many yachts and furs, but few potatoes and compact cars, you might suspect that it
enjoys considerable inequality of income and wealth among its people.
d) As a final use, we might apply the reasoning of the P-P frontier to student life. Let's say
you have only 40 hours a week available to study Economics and Financial Accounting I.
What might the P-P frontier look like for knowledge (or grades) in Economics and
Financial Accounting I.
OR if the two commodities were grades and enjoyment what might the P-P frontier look
like? Where are you? Where are your lazier friends positioned on the frontier?
6. THE CENTRAL ECONOMIC PROBLEM
 
There are many economic problems which we encounter everyday – poverty, inflation,
unemployment etc. However if we use the term The Economic Problem we are referring to the
overall problem of the scarcity of resources. Each society has to make the best use of scarce
resources. The great American economist Paul A. Samuelson said that every economic society has
to answer three fundamental questions;
What commodities shall be produced, clothes, food, cars, submarines etc. and in what quantities?
How shall goods be produced? That is given that we have scarcity of resources of land, labour etc,
how should we combine them to produce goods and services which we want?
For whom shall goods be produced? Who is to enjoy and get the benefit of the nation's goods and
services? Or to put it in another way, how is national product to be divided among different
individuals and families?