Economics
Definition Of Economics
“Economics is the science of decision making“
• Economics is the study of how society manages
its Scarce resources.
• Economics is the social science that studies
production,
distribution,
exchange
and
consumption of goods and services, and the
private and public choices concerning the
allocation of scarce means and resources.
Economy. . .
• . . . The word economy comes from a Greek
word for “one who manages a household.”
PRINCIPLES OF ECONOMICS
• A household and an economy
face many decisions:
• Who will work?
• What goods and how many of them should be
produced?
• What resources should be used in production?
• At what price should the goods be sold?
PRINCIPLES OF ECONOMICS
Society and Scarce Resources:
• The management of society’s resources is
important because resources are Scarce.
• Scarcity. . . means that society has limited
resources and therefore cannot produce all the
goods and services people wish to have.
The Main Division Of Economics
• Microeconomics
• Microeconomics is the study of how individual
households and firms make decisions and how they
interact with one another in markets.
• Macroeconomics
• Macroeconomics is the study of the economy as a
whole.
• Its goal is to explain the economic changes that affect
many households, firms, and markets at once.
Fundamental Economic
Problems
• Every Economic society – whether it is an advanced
industrial nations , a certainly planned economy, or an
isolated tribal nation – must confront and resolve three
Fundamental Economic Problems .
• 1. What Commodities are Produced and in what amount ?
• 2. How are goods Produced ?
• 3. For whom are goods produced ?
The Production Possibilities
Frontier
• Now we want to produce something (Goods)
with available factors of production.
• Factors of Production
• Land,
• Labor,
• Capital and
• Technology.
The Production Possibilities
Frontier
• The production possibilities frontier is a graph
that shows the combinations of output that the
economy can possibly produce given the
available factors of production and the available
production technology.
Figure : The Production Possibilities Frontier
Quantity of
Food
Produced
Infeasible point
3,000
D
C Efficient point
A Efficient point
2,200
2,000
Production
possibilities
frontier
Inefficient point
B
1,000
0
300
600 700
1,000
Quantity of
Cloth Produced
The Production Possibilities
Frontier
• Infeasible point: A Points where goods can’t
produce with the available resources. Beyond
production limit .
• Inefficient Point: A points where all resources
are not utilize. Below production limit.
• Efficient Point: The points where all resources
are fully utilized. And production are in full limit.
The Production Possibilities
Frontier
• Concepts Illustrated by the Production Possibilities
Frontier
• Efficiency
• Tradeoffs
• Opportunity Cost
• Economic Growth
Figure : A Shift in the Production Possibilities Frontier
The Production Possibilities
Frontier
Quantity of
Food
Produced
4,000
3,000
2,100
2,000
0
E
A
700 750
1,000
Quantity of
Cloth Produced
Figure 3 A Shift in the Production Possibilities Frontier
The Production Possibilities
Frontier
Quantity of
Food
Produced
3,000
E
2,400
2,000
0
A
700
800
1,000
Quantity of
Cloth Produced
Opportunity Cost
• The cost of forgone alternative.
Or
• The Cost of second best.
Figure : The Production Possibilities Frontier
Quantity of
Food
Produced
3,000
C
2,200
Decrease 200 unit
of food
Increase 100 unit
A of Cloth
2,000
Production
possibilities
frontier
0
600
700
1,000
Quantity of
Cloth Produced
Opportunity Cost
• Here the opportunity cost of 100 units of cloth is
200 units of food.
Reference
• Principles Of Economics
• By Gregory Mankiw
• Economics
• By Paul A Samuelson and William D. Nordhaus
• Macroeconomics
• By M.A Taslim