ECONOMICS
LESSON 1
INTRODUCTION TO ECONOMICS
What is Economics?
1. Economics is the study of how society allocates limited resources to the production of
goods and services to satisfy unlimited human wants.
2. Economics is essentially a study of the usage of resources under specific constraints, all
bound with an audacious hope that the subject under scrutiny is a rational entity which
seeks to improve its overall well-being.
3. Economics is that branch of social science which is concerned with the study of how
individuals, households, firms, industries and government take decision relating to the
allocation of limited resources to productive uses, so as to derive maximum gain or
satisfaction.
Simply put, it is all about the choices we make concerning the use of scarce resources that
have alternative uses, with the aim of satisfying our most pressing infinite wants and
distribute it among ourselves.
Scope of Economics
The scope of economics means the area of the economics study. It includes:
I. The subject matter of economics: Economics studies man’s life and work, not the whole, but
only one aspect of it e.g it tells us how a man utilizes his limited resources (money & time, labor,
raw material) in order to fulfill his unlimited wants.
·Economic Activity: a farmer tilling his field, a worker is working in a factory, a doctor
attending the patients & so on, these activities are called Economic Activities.
II. Economics is a Social Science: In society, a man produces what he does not consume &
consumes what he does not produce. So he has to buy a product which is not produced by him &
sell his excess production. This process is called an Exchange.
Things produced in factories with the help of labor, land, capital, & entrepreneur. They all get a
reward in the form of income (e.g. wages, rent, interest, & profit). Economics studies how these
incomes are determined. This process is called Distribution:
 Micro Economics – The part of economics whose subject matter of study is individual
units, i.e. a consumer, a household, a firm, an industry, etc. It analyses the way in which
the decisions are taken by the economic agents, concerning the allocation of the
resources that are limited in nature.
It studies consumer behaviour, product pricing, firm’s behaviour. Factor pricing, etc.
 Macro Economics – It is that branch of economics which studies the entire economy,
instead of individual units, i.e. level of output, total investment, total savings, total
consumption, etc. Basically, it is the study of aggregates and averages. It analyses the
economic environment as a whole, wherein the firms, consumers, households, and
governments make decisions.
It covers areas like national income, general price level, the balance of trade and balance of
payment, level of employment, level of savings and investment.
NB: The branches of economics are: microeconomics and macroeconomics
III. Economics, a Science or an Art? A science is a systematized body of knowledge.
Economics also many laws and principles have been discovered & hence it is treated as a
science. Economics also guides the people to achieve aims, e.g. Removal poverty, so it is an art.
IV. Economics whether positive or normative science:
 Positive Economics: A positive science is one that studies the relationship between
two variables but does not give any value judgment, i.e. it states ‘what is’. It deals
with facts about the entire economy.
 Normative Economics: As a normative science, economics passes value judgement,
i.e. ‘what ought to be’. It is concerned with economic goals and policies to attain
these goals.
LESSON 2
Human Wants
For us to lead our lives well, we require certain commodities and services. These goods and
services satisfy our wants. Human wants can be referred to as the desires that human beings
strive to satisfy by using goods and services. The satisfaction of these wants refers to the
process of acquiring and using the required goods and services.
Characteristics of human wants
1. Insatiable – human wants are endless (each cannot be satisfied once and for all) and they
are also unlimited in number (satisfying one requires the other.)
2. Competitive – the unlimited human wants are to be satisfied using limited human wants.
This necessitates choice of the wants to satisfy and those to forego;
3. They are recurrent – Satisfaction levels vary in time such that a need that has been fully
satisfied in one point of time requires satisfaction in another point. Several hours after
eating to the full, one feels hunger again.
4. Varied intensity and urgency – the intensity of need is different for different people and
also in different time, gender, age, season, location and culture.
5. Require resources – it takes resources to satisfy human wants. Resources are always
much less than the wants they need to satisfy;
6. Complimentary – Satisfying some wants may create a need for another related want. For
instance, acquiring a shoe may create a need for polish and socks, buying a car may
require fuel.
7. Universal – most human wants are common to all human wants, though in varying
quantities and qualities;
8. Habitual – Many consumers tend to develop a taste of commodities they use more
frequently, especially certain brands and also certain addictive commodities.
Types of Human Wants
There are two main types – basic wants and secondary wants
a. Basic wants
These are the essential needs in life such that one cannot do without them. They include food,
shelter and clothing. They are satisfied before the secondary wants. They have the following
characteristics;

One cannot do without them;

They’re felt needs;

Cannot be postponed;

They are satisfied before secondary wants.
b. Secondary wants
Secondary wants are requirements for comfortable and luxuriant live. Comforts provide good
life, beyond mere survival. It includes such needs like Medicare, education and security.
Luxuries include even much more flamboyant needs like a sleek car, a mansion, study abroad
and such kinds of needs.
At times some secondary want may be meant to save lives, for instance Medicare. In such
circumstances, the needs become a basic want.
Economic Resources
Economic resources are the factors used in producing goods or providing services. In other
words, they are the inputs that are used to create things or help you provide services.
Types of Economic Resources
The three types of economic resources are commonly known as human resources, natural
resources and capital resources. Economists often refer to these three resources as the factors
of production.
They include:
i.
Natural resources refer to things found in nature; including sun, air, water, minerals,
wood and oil. Anything not created by a human being is a natural resource.
ii.
Human resources refer to the output of labor applied to natural resources for conversion
into goods and/ or performance of services. There are further two types of human
resources; Labor and Management. Labor include production labor and service labor. An
example of production labor is the classic factory worker. Service labor includes people
involved in providing a service, such as doctors, lawyers, accountants, sales people,
mechanics, and plumbers. Whereas, Management is a resource that is used to facilitate
efficient and effective production or operations of a business so that it can accomplish its
goals. Rather than being directly involved in production or services, managers coordinate,
monitor and direct employees engaged in the production or service. Examples of
management include a direct supervisor all the way up to the president of a large
multinational company.
iii.
Capital resource includes all man-made resources that can be used in the production of
goods or in providing services including; machinery and equipment.
NB: All economic resources, nature, human and capital, are in limited supply.
LESSON 3
Concepts of Scarcity and Choice
Scarcity
Scarcity refers to the condition of insufficiency where human beings are incapable to fulfill their
wants in a sufficient manner. In other words, it is a situation of fewer resources in comparison to
unlimited human wants. Human wants are unlimited. We may satisfy some of our wants but soon
new wants arise. It is impossible to produce goods and services so as to satisfy all the wants of
people. Thus scarcity explains this relationship between limited resources and unlimited wants
and the problem therein.
Economic problems arise due to scare goods. These scare goods have many alternative uses. For
example, land can be used to construct a factory building or to make a beautiful park or to raise
agricultural crops. So, it is very essential to think about how limited resources can be used
alternatively to satisfy some wants of people to get maximum satisfaction as possible.
The problem of scarcity is present not only in developing countries like Kenya and Ethiopia but
also in highly developed countries such as Japan, Canada, etc. Thus, scarcity is the heart of all
economic problems.
Choice
The choice is the process of selecting a few goods or wants from the bundles of goods or wants.
Human wants are unlimited. So, they are unable to fulfill all their wants at once.
They can satisfy only some of their wants. Some wants should be sacrificed to get some other
wants. Hence, people postponed less urgent wants to satisfy more urgent wants. For example, a
boy desiring to buy a book does not visit the cinema hall.
Thus, the problem of choice deals with the utilization of scarce resources in such a way that it
satisfies human wants in the best possible way.
If human wants were limited or resources were unlimited, then, there would be no scarcity and
there would be no problem of choice. Because of scarcity, we are forced to choose. Unlimited
wants and limited resources lead to economic problem and the problem of choice.
Opportunity Cost
Opportunity cost is the value of something when a particular course of action is chosen. Simply
put, the opportunity cost is what you must forgo in order to get something.
The benefit or value that was given up can refer to decisions in your personal life, in a company,
in the economy, in the environment, or on a governmental level
Examples of opportunity costs

Someone gives up going to see a movie to study for a test in order to get a good grade. The
opportunity cost is the cost of the movie and the enjoyment of seeing it.

At the ice cream parlor, you have to choose between rocky road and strawberry. When you
choose rocky road, the opportunity cost is the enjoyment of the strawberry.

A player attends baseball training to be a better player instead of taking a vacation. The
opportunity cost was the vacation.

If you decide not to go to work, the opportunity cost is the lost wages.

For a farmer choosing to plant corn, the opportunity cost would be any other crop he may have
planted, like wheat or sorghum.

Moraa buys a pizza and with that same amount of money he could have bought a soda and
mandazi. The opportunity cost is the soda and mandazi.

Sharon decides to quit working and got to school to get further training. The opportunity cost of
this decision is the lost wages for a year.

Yvonne really wants to eat at a new restaurant and can only afford it if he does not order a
dessert. The opportunity cost is the dessert.

A business owns its building. If the company moves, the building could be rented to someone
else. The opportunity cost of staying there is the amount of rent the company would get.
Resource allocation/ allocation of resources
Allocation of resource means scientific management of resources in the production, distribution,
and exchange. It deals with how much resource is necessary for what sector. It is the basic
problem of every economy. We can satisfy only limited wants because we have limited
resources. So, these limited resources are used in such a manner that the satisfaction derived
from it is maximum.
Basic Economic Problems

The fundamental economic problem is the issue of scarcity and how best to produce and
distribute these scare resources.

Scarcity means there is a finite supply of goods and raw materials.

Finite resources mean they are limited and can run out.

Unlimited wants mean that there is no end to the quantity of goods and services people
would like to consume.

Because of unlimited wants – People would like to consume more than it is possible to
produce (scarcity)
Therefore because of scarcity, economics is concerned with:

What to produce?

How to produce?

For whom?
i.
What to produce: This means what amount of goods to be produced. Every demand of
every individual can’t be satisfied. So, before producing anything, a decision should be
made what goods are to be produced and to what extent.
ii.
How to produce: This means which techniques of production (labour intensive or
capital intensive technique to be selected). After the decision of what to produce, we
must next determine what techniques should be adopted to produce goods.
iii.
For whom to produce: This means how the produced goods and services are to be
distributed among different income groups of people that is who should get how much.
This is the problem of sharing of the national product.
NB: The proper allocation of resources deals with the following fundamental problems of an
economy.
LESSON 4
Economic Systems
As discussed previously, all economies face the problem of scarcity and hence are required to
make the three fundamental economic decisions of what and how much to produce, how to
produce and for whom to produce. However, economies vary in the way they make these three
fundamental economic decisions in terms of the degree of government intervention. An
economic system is a way of making the three fundamental economic decisions of what and how
much to produce, how to produce and for whom to produce.
There are three types of economic systems: the market system, the command system and the
mixed system.
 The market system
The market system is an economic system in which the three fundamental economic decisions of
what and how much to produce, how to produce and for whom to produce are made by private
individuals with no government intervention. The market system is also known as the free
market system, the free enterprise system and the laissez-faire system.
In the market system, all the factors of production in the economy are owned by private individuals.
All economic decisions are made by private individuals. Private individuals can engage in
productive activities, choose what to buy, where to work, etc. There is total economic freedom and
the role of the government is confined to the provision of national defence, maintaining law and
order, issuing currency, etc. Private individuals pursue self-interest. Firms seek to maximise profit,
consumers seek to maximise satisfaction and owners of factors of production seek to maximise
factor income. Competition exists in all economic activities. Firms compete for resources and
sales, consumers compete for goods and services and owners of factors of production compete for
employment of their resources.
In the market system, the three fundamental economic decisions of what and how much to produce,
how to produce and for whom to produce are made by private individuals with no government
intervention.
What and How Much to Produce?
The types and amounts of goods to produce are jointly determined by consumers and firms through
the price mechanism. The price mechanism refers to the system in a market economy whereby
changes in price due to shortages and surpluses equate quantity demanded and quantity supplied.
Consumers indicate to firms the types and amounts of goods that they want by the prices that they
are able and willing to pay for them. Firms that seek to maximise profit will only produce the types
and amounts of goods that consumers are able and willing to pay for. Therefore, prices signal the
types and amounts of goods that are in demand and hence, the profitability of producing these
goods. This signalling role of prices is the essence of the price mechanism.
How to Produce?
The profit motive of firms implies that they will choose the least-cost method to produce any
amount of output and this is determined by relative factor prices. If labour is cheaper than capital,
firms will use more labour and less capital in production. However, if capital is cheaper than
labour, firms will use more capital and less labour in production. Therefore, relative factor prices
determine the ways in which goods are produced.
For Whom to Produce?
The market system distributes goods to consumers with the ability and the willingness to pay for
the goods and this is determined by their preferences and income levels
Advantages of market system
 Market system automatically responds and adjusts to the people’s wants
As we know, in a market system, the price of goods and services are determined by the
forces of demand and supply. If consumers want a particular good or a service, they simply
demand for it and the prices go up, which gives signal for the producers to produce more
of that good. If producers can produce the required amount of that particular good, the price
automatically comes down to normal. Likewise, if people no longer want a particular good,
they simply stop demanding for it, so that it is no longer profitable for producers to produce
that good, so producers stop producing that good.
 Wider variety of goods and services
In a market system, producers compete with each other by offering wider variety of goods,
therefore consumers have more choice, and this may even lead to lower prices.
 Competition pushes businesses to be efficient: keeping costs down and production high.
The aim of firms in a market economy is to make as much profits as possible. In order to
do this, the firms need to be more efficient. Therefore they often use new and better
methods for production; this leads to lower costs and higher output.
 Government does not have to take decisions on basic economic questions
The market system relies on producers and consumers to decide on what, how and for
whom to produce? Therefore it does not require the government to employ a group of
people to take these decisions.
The disadvantages of market system
 Factors of Production is not employed if it is not profitable
In a market system, producers do not produce a good or a service if it is not
profitable. But sometimes it may be necessary to produce some goods even if it is
not profitable. Therefore Market system will fail in this aspect.
 Market system may not produce certain goods and services
Private firms in a market system will not be willing to provide certain public goods
like street lights because it is almost impossible to charge any payment from the
consumers.
 Free market may encourage harmful goods
If there are people in the market who wish to buy dangerous goods like narcotic
drugs, the market will be ready to buy it since private firms will be willing to
provide anything that is profitable
 Production may lead to negative externalities
When firms are always trying to maximize their profits, they may ignore external
costs like damages to the environment.
 Free market economy may increase the gap between the rich and the poor
When firms and individuals are able to produce and consume freely, it may make
the rich even richer because they have more decision making power, and the poor
may become poorer because they have less decision making power in the market.
The market system allocates more goods and services to those consumers who have
more money than others.
 The command system
The command system is an economic system in which the three fundamental economic decisions
of what and how much to produce, how to produce and for whom to produce are made by the
government with no involvement of private individuals. The command system is also known as
the centrally planned system.
In the command system, all the factors of production in the economy are owned by the government.
All economic decisions are made by the government. Private individuals cannot engage in
productive activities, choose what to buy and where to work, etc. There is no economic freedom.
Private individuals cannot pursue self-interest and competition does not exist.
In the command system, the three fundamental economic decisions of what and how much to
produce, how to produce and for whom to produce are made by the government with no
involvement of private individuals. In other words, economic decision-making is centralised. To
do this, the government must choose the combination of goods that it thinks will maximise the
welfare of society, direct resources to produce the goods by planning the output level of each
industry, decide on the method of production and how the goods are to be distributed. The
government can distribute goods directly which is usually done through the issue of rationing
coupons, or it can decide on the distribution of income, in which case, it will decide who should
be paid what.
The Advantages of a Command Economy
 Operations are consistent within a command economy.
Within the structure of a command economy, the businesses which do function are
operating under the control of the government. Their structures are dictated by the
government, so there is consistency within the operational structures of each business.
 It creates a flexible industrial sector.
Industries are directly operated or controlled by the government in a command economy,
so their resources can be applied to whatever project needs to be completed. This creates
a flexibility within the industrial sector that other economy formats cannot match.
 The exact demands of a society can be met.
Within the structure of a command economy, the government seeks to maximize its
efficiency. To do this, it will attempt to meet the exact demands that people have. By
limiting over-production of items, there is less waste that occurs within the society. This
creates more resources for the government to use in other areas. This may limit personal
choice, but it also reduces the chances of a shortage occurring when production rates are
based on accurate resources.
 Any resource can work with any other resource.
Can you imagine Safaricom and Airtel working together to provide network services? In
a free market economy, businesses compete with one other to produce better products. In
a command economy, any resource can be dictated to work with any other resource. This
makes it easier to produce products on a larger scale because all resources, not just
individualized business resources, are actively working to benefit society.
 It offers socioeconomic equality for much of the population.
In a command economy, this level of inequality does not exist, though the individuals
within the government do typically have more wealth availability than the rest of the
population.
 Acute demands can be quickly met.
Within a command economy, the full resources of the government can become active at
any given time. If an emergency occurs, such as a natural disaster, then it becomes
possible to meet the general needs of the population with a greater speed than in other
economy structures. This makes it possible for households to recover from an emergency
quicker.
The Disadvantages of a Command Economy
 It is a governmental structure which reduces personal freedoms.
Because all economic structures are at the beck and call of the government, personal
freedoms are limited within a command economy. People are forced to pursue the greater
good of the government instead of their own greater good.
 It limits innovation.
There is no need for production to seek out research and development within a command
economy because the government dictates everything. People must accept what the
government gives them. This means there is no need to make products better tomorrow
than they are today. Businesses are in the same position because the government often
dictates who gets to work for them. The result is lower motivation to create a high-quality
product or offer a helpful service.
 It encourages illegal activities.
Within a command economy, people cannot always get what they need to meet the basic
needs of living. To get these items, an underground (black) market flourishes so that
goods or services that are needed can be received outside of government control. This is
the only way that outside goods, which may be better than domestic goods, can be
received by a population in this type of economy.
 It eliminates the competition.
Within a command economy, the government owns and controls everything hence no
competition.
 It reduces communication.
Rationing occurs within a command economy on a frequent basis because the structures
of this type of economy limit communication. The government doesn’t know what the
population needs, so they mass-produce products based on what they believe is necessary
for survival. The goal is to support the government first, so the products produced are
based on what benefits the government the most. This results in an unbalanced set of
goods that is virtually worthless.
 It reduces exports.
The lack of communication doesn’t stop at the local population level. Governments
operating a command economy struggle to speak with neighboring nations as well. This
limits the export opportunities because there is no knowledge about what those other
nations need.
 It creates incentives that people don’t see as an incentive.
The incentive in a command economy is that a household gets to survive. Put in a hard
day of work for the government in some way and you’ll get enough to help you make it
to another day. There is no incentive for people to better themselves because any
improvements or recognition go directly to the government.
 The mixed system
The mixed system is an economic system in which the three fundamental economic decisions of
what and how much to produce, how to produce and for whom to produce are partly made by
private individuals and partly made by the government. Therefore, a mixed economy is comprised
of the private sector and the public sector. In reality, every economy is a mixed economy. Due to
the flaws of both the market system and the command system, all economies in the world are a
mixture of both economic systems. Even command-oriented economies such as North Korea and
Cuba rely on the market system to some extent and market-oriented economies such as Singapore
and Hong Kong have some degree of government intervention.
In the mixed system, some of the factors of production in the economy are owned by private
individuals and some are owned by the government. Economic decisions are partly made by
private individuals and partly made by the government. Although private individuals can engage
in productive activities, choose what to buy and where to work, they are restricted by the
government. Although there is economic freedom, it is restricted by the government. Although
private individuals can pursue self-interest, they are restricted by the government. Although
competition exists, it does not happen in all forms of economic activities.
In the mixed system, the three fundamental economic decisions of what and how much to produce,
how to produce and for whom to produce are partly made by private individuals and partly made
by the government.
The Advantages of a Mixed Economy
 It provides capital through the promotion of innovation.
Mixed economies promote the value of organizations which are the most efficient. The
only way to reach this status is to invest in research and development. Innovation is
highly prized in this economy type because its consumers demand the best at all times.
When an organization solves pain points for their customer, the additional capital they
receive gets reinvested into the overall society to solve more issues.
 It permits spending in systems that a pure capitalist economy would neglect.
Mixed economies allow for private ownership because the view is that the state is less
capable of creating profits than the individual. At the same time, however, the
government also recognizes that there is a duty to the infrastructure, social needs, and
financial safety nets required for a society to survive. Pure capitalism would not offer
food stuffs, unemployment, or even highway building because each person or company
would serve their needs first at all times.
 It provides goods or services whenever they’re required.
The advantages of a free-market economy are found in the mixed economy from the
perspective of distribution. When goods or services become necessary in specific regions,
this structure ensures that people and organizations get what they require.
 It protects the general wellbeing of the general population.
The mixed economy approach doesn’t support the concept that anyone can do anything at
any time. It won’t support the concept that the bare minimum is the only requirement to
meet either. Governments interfere with unsafe products hit the market, when pricing
mechanisms are unfair, or when monopolies seek to create an unfair advantage in the
corporate/consumer relationship. This structure allows the government to inform
consumers that products are unsafe to use without calling for specific restrictions on
corporate entities unless illegal actions occur.
 It provides an equal level of economic control within society.
Consumers, corporations, and governments all offer checks and balances to each other
within the confines of the mixed economy. The private sector receives responsibility for
the production of goods and services, while the average is given the task of being a
consumer. Governments provide the service of protection, safety, and oversight of the
overall market, along with the infrastructure necessary that permits economic activities in
the first place.
 It improves production levels and overall efficiency rates.
Mixed economies encourage competition at all levels. They encourage disruptors of any
size to enter their industry because that inspires more innovation. Consumers will always
shop for the best possible product to meet their needs, even if that means being disloyal
to brands they’ve used for years.
 It provides more opportunities for companies to grow.
Companies earn to their full potential when an innovative and ethical approach to
business opportunities are taken. When organizations grow through success, their
employees enjoy in it as well. The mixed economy allows everyone to pursue legal
business ventures without highly-restrictive government oversights. This structure makes
it possible for workers to find jobs they want, businesses to find opportunities they want,
and then both contribute to the government to provide for the greater wellbeing of
everyone involved.
 It still defines the role of government within the society.
A mixed economy doesn’t permit the government to take full control of private
enterprise. It also provides a specific role for state-backed enterprises to function while
maintaining private elements to it.
 It helps to create more jobs.
The structure of the mixed economy allows for private corporations to build revenue
streams that support direct employment opportunities. Individuals can form their own
businesses in this economy too, working as an independent contractor, freelancer, or
owner. When the economy grows, the size of government increases too, creating publicsector jobs which contribute spending at the local level.
 It creates a layer of protection for the most vulnerable.
Without a mixed economy in place, societies would focus on productivity instead of
need. Individuals with disabilities would be cast aside unless they could offer
contributions to the general good. If you lost your job, then too bad – you’re on your own
until you can find another one. The role of the government in this structure creates a
safety net which protects the most vulnerable. People don’t get rich off of government
benefits. They get the basics of what they must have to survive.
The Disadvantages of a Mixed Economy
 It creates private businesses which could disrupt the economy.
The free market system works toward a monopoly whenever it can. That process occurs
because the role of an organization is to maintain its power however it can once it’s
achieved. That is why government intervention stops monopolizing efforts. A monopoly
creates new pricing structures due to the guaranteed requirement that customers use their
goods or services. A mixed economy still allows companies to become too big.
 It triggers poverty if managed incorrectly.
The mixed economy works when all three entities provide checks and balances for one
another. If one element receives a greater share of the pie, then someone else receives
less of it. The imbalance continues unless specific corrections are made to restore its
balance.
 It offers higher tax rates than other economy types.
The mixed economy offers numerous benefits, but it also offers high tax rates.
Governments are funded through taxation and the revenues (if any) earned from their
private or chartered companies. Individuals and corporations are taxed at various, often
progressive levels based on the amount of income received.
 It creates higher levels of debt.
 It does not guarantee that the state will avoid interference.
END OF TOPIC ONE
Prepared by:
MR. PK GAYA
Email: gayapeter100@gmail.com
Phone No: 0758887759