Economics for Managers
Learning unit 1: Getting started; Some basic concepts and tools
Learning unit 1 of this module is an introductory aspect of the module, which is entitled
getting started. But, the question now is: How do we get started?
Simply put, we get started by looking at some basic concepts in economics as well as
understanding the tools use in economics towards understanding these concepts.
In this learning unit, the followings are our areas of interest:

What economics is all about

Microeconomics and macroeconomics

The economic systems

Total production, income and spending in the mixed economy

The relationships between households, firms, government and the foreign
sector in the mixed economy
1. What economics is all about
The field of economics can be viewed from many fronts and also can be defined in
many ways. But, there are important elements that every definition of economics must
capture. Consider a few definitions of economics below:
Economics is the study of how humans make decisions in the face of scarcity. These
can be individual decisions, family decisions, business decisions or societal decisions.
Scarcity means that human wants for goods, and services exceed resources that are
available to meet them.
Economics is the social science that studies how people interact with value; in
particular, the production, distribution, and consumption of goods and services.
Economics focuses on the behaviour and interactions of economic agents and how
economies work.
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Economics is a social science concerned with the production, distribution, and
consumption of goods and services. It studies how individuals, businesses,
governments, and nations make choices about how to allocate resources.
From the few definitions above, one could deduce that economics is concerned with
virtually every aspect of human existence, indicating that it is a wide-ranging discipline.
Economics is a generic subject and it is applicable in every human endeavour. On
daily basis, we make economic decisions knowingly and unknowingly. Such decisions
involve the concepts of scarcity, choice and opportunity cost.
From every definition of economics, one could easily realise that the subject,
economics, assesses how people (society) tend to relate with the resources available
to them in order to satisfy their wants. Thus, these resources are limited and human
wants are numerous. The study of economics helps the society in seeking ways in
using the scarce (limited) resources to satisfy the society’s unlimited wants.
Due to the limited resources available to the society, the society has to make a choice
among the numerous needs and numerous wants to satisfy. As a result, some of these
wants would be forgone as all would be satisfied with the limited resources available
to the society. This, therefore, introduces the concepts of “scarcity, choice and
opportunity cost”. Thus, scarcity creates the need for choice, and choice leads to
opportunity cost.
These three concepts are fundamental to the study of economics. Economics, in
summary, is concerned with scarcity. If resources available to the society are
unlimited, there wouldn’t be any need for the study of economics. The relationship
between the concepts of scarcity, choice and opportunity cost can be illustrated with
the help of the production possibilities curve (PPC).
*(Please, expand your understanding of these concepts using the production
possibilities curve (PPC)).
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2. Microeconomics and macroeconomics
The study of economics is divided into two parts: microeconomics and
macroeconomics.
Microeconomics:
This part of economics focusses on individual aspects of the economy, e.g, the price
of fish in the market, the quantity of petrol consumes by Mr Khoza etc.
Macroeconomics:
This part of economics is concerned with the economy as a whole. It looks at the
economy as one picture. Thus, it looks at the aggregate figure, e.g, the rate of inflation
in the economy, rate of unemployment in the economy, total production, income and
expenditure etc.
Comparing the microeconomics and macroeconomics is like comparing a tree and a
forest.
3. The economic systems
Given that resources are scarce; the society cannot produce all that its citizens want.
Hence, the society has to provide answers to the three central economic questions of:
1. What to produce; referred to as output questions
2. How to produce; also known as input questions
3. For whom to produce: referred to distribution questions.
The way a society answers these questions would determine the type of economic
system in place within that society. An economic system is a pattern of organization,
which is aimed at solving the three central economic questions of what to produce,
how to produce and for whom to produce. There are three distinct economic systems:
 Traditional
 Command
 Market,
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The fourth system has a combination of features of these three distinct systems and it
is referred to as:
 mixed economic system.
*(Please, expand on the features of these four economic systems)
However, there are two basic criteria for classifying an economic system, which are
property rights and coordinating mechanisms.
Property rights: these refer to the right to possess, use or dispose of tangible assets
and intangible assets. These rights define the ownership of factors of production in the
society.
Coordinating mechanisms: these refer to the means of providing and transmitting
information as to coordinate the economic activities in an economy.
4. Total production, income and spending in the mixed economy
Production, income and spending are the three major flows in the economy and
production is not undertaken for its own sake. The ultimate aim is to use or consume
the products to satisfy human wants. Thus, as production is undertaken, it generates
income to the owners of factors of production. This income (part or all) is used by the
owner of factors of production in buying available goods and services. The three major
flows are happening simultaneously and they keep the wheels of the economy going
on smoothly.
It is worth noting that the various sectors in the economy are linked by an important
activity called “exchange”. Thus, this exchange usually takes place in markets in a
mixed economy, and there are various types of markets in the economy. Goods,
services as well as factors of production are all exchanged in markets. Goods and
services are exchanged in the goods and services markets, simply referred to as
“goods markets”. While the markets various factors of production are called the factor
markets or resources markets. These two markets provide meeting places for both
households and firms.
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Refer to your textbook on the Figure depicting “the circular flow of goods and services”,
which illustrates the interdependence between households and firms. Households
(owners of factors of production) sell their factors of production to firms in the
factor/resource market. Firms transform these factors into goods and services, which
are sold to households in the goods market.
5. The relationships between households, firms, government and the
foreign sector in the mixed economy
The basic flow is between households and firms and these two sectors interact in both
the goods market and factor market. With the inclusion of government sector into the
model, economic activity increases as government interacts in both the good and
factors markets. Government rises from revenues from households and firms in the
form of taxes. The monetary rewards that households realise from the factor market
can either be spent or some proportion of the income are saved. That fraction of the
income that is not spent becomes a leakage from the circular flow. Likewise, the taxes
that households and firms pay to the government form part of the leakages.
With the introduction of the foreign sector into the circular flow, the economic activity
increases and such economy is referred to as an open economy and it is made up of
four components. These components are households (C), Firms (I), the Government
(G) and foreign sector (X and Z). households, firms and the government sectors
consume imported goods. The spending on imported goods is a form of leakage from
the domestic economic as such only add value to the country of origin of the imported
goods. On the other hand, firms export goods to foreign countries, which are injections
to the economy and form a source of foreign revenue to the country
Thus, savings (S), taxes (T) and imports (Z) are all leakages from the circular flow,
whereas, investment spending by firms (I), government spending (G) and exports (X)
are all injections into the circular flow.
*(Please refer to your textbook for graphs on all the circular flows)
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