International Diploma in Business (IDB) Graduate School

Gateway College

01 - NATURE & SCOPE OF ECONOIMICS

1.1 INTRODUCTION
Economics is all around us and affects almost every thing we do, not merelry at workor at the shops but also at home and the voting booth.It influences how well we loook after our palnet, the future we leave for our children, the extent to which we caqn care for the poor and the less privilledged, most of all the amount of resources available for our use. These issues are discussed daily in different forms in bars and buses as well as in cabinet meetings and at board rooms of business giants. Therefore methodical study of Economics sounds interesting as it sheds light on daily living by providing a better understanding of the problems we face. Understanding Economics involves mastering theory and understanding its application. Economics helps us to make sense of our changing world and evaluate choices that we currently face. We cant have evrything we want with what we earn and therefore we have to make choices in spending our money. Economics is all about how the society makes choices in deals with the problem of scarcity

SESSION CONTENT

1.2

DEFINITIONS OF ECONOMICS
No one has ever succeeded in exactly defining the scope of economics. Economics is a study of an inquiry into the nature and causes of wealth of nations - Adam Smith According to richard Lipsey Modern Economics concern about the allocation of a societys resources among alternative uses and the distribution of the sociatys output among individuals and groups; the ways in which production and distribution changes over time and the efficient and inefficiencies of economic systems.

What is Economics? Definitions Branches of Economics ( Micro & Macro) The Basic Economic Problems Concept Of Oppurtunity Cost Production Possibility Curve (PPC) Globalization and the role of Information are two recent developments which have largely affected on Economics. A resource is scarce when there is not enough of it to satisfy peoples wants and if the demand at a zero price would exceed the available supply. ACTIVITY 01 Identify the differences between goods and services? ACTIVITY 02 Identify the difference between needs and wants? ACTIVITY 3 Find 5 other definitions of Economics. 102

GENERAL DEFINITION Economics is a study of how people choose to allocate their limited resources to provide for ( satisfy) their unlimited wants.

1.3

BRANCHES OF ECONOMICS

We can identify a number of different branches of economics. Ex: Labour Economics, Urban Economics

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International Diploma in Business (IDB) Graduate School

Gateway College

But here we focus on the classification of economics based on its approach and that involves classifying Economics as Micro Economics and Macroeconomics. MICRO ECONOMICS Microeconomics studies the economic descision making/economic behaviour of economic actors ( individuals and households,firms,government) in a market setting. Areas that are studied under Microeconomic analysis are: Consumer Behaviour How consumers behave Theory of Production - How business firms make choices Demand ,supply and determination of prices at the equilibrium Government interventions in the market How the structure of markets affects economic performance How the payments are determined for factors pf production Income distribution MACRO ECONOMICS Macroeconomics studies the pereformance of the economy as a whole economy. It enables us to see the big picture. Areas that are studied under Macroeconomic analysis are: National Income Money Supply and Money Demand Value of Money Aggregate price levels / Inflation and its determinants Macroeconomic objectives Government Policies ( Ex: Monetory Policy, Fiscal Policy) Public Finance

Resources are called factors of production in Economics and are categorized broadly into 4 categories as land (all natural resources), labor (human effort), capital, and entrepreneurial ability. Macro Economic Objectives: Price Stability Full employment Balance of Payments Economic Growth

1.4

BASIC ECONOMIC PROBLEMS

The key economic problem in every society is how to reconcile the problem of limitless wants and desire for goods amidst the scarcity of resources (Factors of Production).So we can not satisfy all our desires or wants with available resources and are forced to make a chioce in our daily living. Daily living invlolves the performing of the Main three Economic Activities , namely Production,exchange and consumption of goods and services.Therefore the scarcity and choice sum up the basic economic problem.In this situation the choiceamongdiffernt alternatives is determined by the scale of preference and the amount of oppurtunity cost involved.Whenever an individual makes a decision of choice he has to forgo satisfying some other wants.

ACTIVITY 4 Identify the payments for each resource.

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International Diploma in Business (IDB) Graduate School

Gateway College

So the problem of scarcity makes individuals to make three important economic decisions which involves findinh solutions to three main questions.In most economies of the world is determined by the operation of the market mechanism. ( Free market System) What goods ( physical commodities) and services to produce and in what quantitiy? ( This concerns the allocation ofscarce resources among the alternative uses) How/ by what method to produce them? This concerns choosing the mosdt efficient method of production. For whom to produce them? ( This concerns the distribution of such goods and services.) Ex: Oil price shock example

1.5

CONCEPT OF OPPURTUNITY COST

When we make a choice among different alternatives the value of the next best alternative that you sacrificed in order to select the best alternative in satisfying a want is called the oppurtunity Cost. That is the oppuurtunity cost is identified not in terms of ruppes but in terms of the the value of the alternative sacrificed.In other words the Oppurtunity Cost of the chosen alternative is the benefit expected from the best alternative that is forgone. Ex: If one has $ 10 and has the needs of eating a buger, buying a dress for the fiancee and watching a movie with the family since he want be able to fulfill all the needs he will have top make a choice depending on the degree of prefernce and the opputunity cost. The oppurtunityu cost of buying a dress for the fiancee is the entertainment forgone of not watching a movie with the family.

1.6

PRODUCTION POSSIBILITY CURVE (PPC)

The PPC is the curve that shows the greatest possible quantitites of goods that can be produced with the maximum utilization of available resources at a given level of technology. This is also refferd to as the Production Possibility Frontier.It curves around the points given by zero output of both goods. The economy will produce goods and services by combining the available resources in different ways.All these combinations are within the economies production possibility. By moving resources from one industry to another only that economy can increase the output of one industry when the economic is operating at its full capacity.A trade off has to be made between either of the industries.Along the points of the frontier the society is producing efficiently. All combinations on or inside the PPC are attainable while those combinations outside the PPC are unattainable with thje given amount of resources and technology. Scarce resources limt the societyto a choice of points inside or on the PPF. The combinations inside the PPC are not fully utilised or employed.At a point inside inside the frontier the society is underutilizing its

Module Economics

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International Diploma in Business (IDB) Graduate School

Gateway College

resources and it is considerd as an econom icv inefficiency with a wastage of resources. There would not be any oppurtunity cost of expanding the output of either of the good at this stage.

There are some underlying assumptions in drawing the PPC to identify the total number of production possibilitioes of an economy. The amount of productive resources are given and they are fixed. The resources can be shifted 100% from production of one good to another. All resources are employed in full capacity. Economy produces only two commodities. The PPC can be used to explain basic economic concepts such as scarcity, choice, alternative uses and oppurtunity cost.The slope of the PPF tells us the oppurtunity cost of a good. THE LAW OF DIMINISHING RETURNS This explains that each extra resource adds less to the total output than the previous unit of resource added aftera particular point.

1.7

FURTHER READING
1. 1.3 -The role of the market (pg8- 10)

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