Ch1: Nature of Economics
CHAPTER
1
Lectured By: Mr. Phorn Much, MBA
NATURE OF
ECONOMICS
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Ch1: Nature of Economics
CHAPTER OBJECTIVES
After studying this chapter, you should be able:
• To give the definition of economics
• To know economics perspective and its goals
• To identify the three major questions for proper
use
• To understand macro- and micro-economic
• To explain the economic system
• To define the Circular Flow of economic Activity
Lectured By: Mr. Phorn Much, MBA
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Ch1: Nature of Economics
Nature and importance of Economics
The word economy comes from the
Greek word for “one who manages a
household”
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The management of society’s resources is
important because resources are scarce.
Understanding economics helps us make
sense of the world we live in.
Economics studies how people make
decisions.
Lectured By: Mr. Phorn Much, MBA
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Ch1: Nature of Economics
Definition
• The social science concerned with the efficient
use of limited or scarce resources to achieve
maximum satisfaction of human materials
wants.
• Human wants are unlimited, but the means to
satisfy the wants are limited.
• Economics is the study of how society
manages its scarce resources.
Lectured By: Mr. Phorn Much, MBA
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Ch1: Nature of Economics
The Economics Perspective
Economists view things through a
unique perspective.
• Scarcity and choice.
– Resources can only be used for one purpose at a
time.
– Scarcity requires that choices be made.
– The cost of any good, service, or activity is the
value of what must be given up to obtain it.
Lectured By: Mr. Phorn Much, MBA
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Ch1: Nature of Economics
The Economics Perspective
• Rational Behavior.
– Rational self-interest entails making decisions to
achieve maximum utility.
– Different preferences and circumstances lead to
different choices.
• Marginalism: benefits and costs
– Most decisions concern a change in current
conditions
– Weighs the marginal benefit against the marginal cost
– The marginal cost of an action should not exceed its
marginal benefits
Lectured By: Mr. Phorn Much, MBA
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Ch1: Nature of Economics
Economic Goals
Economic policies are designed to achieve
certain economic goals.
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–
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Economic growth
Full employment
Economic Efficiency
Price-level Stability
Economic freedom
Equitable Distribution of Income
Economic Security
Balance of Trade
Lectured By: Mr. Phorn Much, MBA
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Ch1: Nature of Economics
Fundamental of Economic Problem
Societies do not have enough productive
resources to satisfy everyone’s wants and needs.
• If each of us were to make a list of all the
things we want, it would most likely include
more things than we could ever hope to
obtain.
– Scarcity : the fundamental economic problem facing
all societies.
– Needs and Wants: needs for survival, but wants is
more much broader than the term of needs.
Lectured By: Mr. Phorn Much, MBA
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Ch1: Nature of Economics
Three Basic questions
Limited
resource
s
Unlimite
d wants
Scarcity
Choices
What to
produce
How to
produce
Lectured By: Mr. Phorn Much, MBA
For Whom
to produce
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Ch1: Nature of Economics
Macroeconomics and Microeconomics
Macroeconomics examines the economy as a
whole
– It includes measures of total output, total
employment, total income, aggregate
expenditures, and the general price level.
– It is a general overview examining the forest, not
the trees
Lectured By: Mr. Phorn Much, MBA
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Ch1: Nature of Economics
Macroeconomics and Microeconomics
Microeconomics looks at specific economic
units.
– It is concerned with the individual industry, firm
or household and the price of specific products
and resources.
– It is an examination of trees, and not the forest.
Lectured By: Mr. Phorn Much, MBA
1-11
Ch1: Nature of Economics
Positive versus Normative Analysis
• Positive economics describes the economy
as it actually is, avoiding value judgments and
trying to establish scientific statements about
economic behavior (Absolute Facts)
• Normative economics involves value
judgments about what the economy should
be like and the desirability of the policy
options available (What Ought to be)
Lectured By: Mr. Phorn Much, MBA
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Ch1: Nature of Economics
The factors of Production
The four factors of production must be
presented to produce goods and services.
– land: includes gifts of nature, or natural resources
not man- made.
– Capital: includes the tools, equipment, and
factories used in production
– Labor: includes people with all their efforts and
abilities.
– Entrepreneurs: individuals who starts a new
Business or bring a product market.
Lectured By: Mr. Phorn Much, MBA
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Ch1: Nature of Economics
Economic System
When companies want to do business in other
countries, they need to adjust their business
plans to meet local customs.
– Economic System_ an organized way of providing
for the wants and needs of their people
• There are three major kinds of economics
systems
• Traditional
• Command
• Market economies
Lectured By: Mr. Phorn Much, MBA
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Ch1: Nature of Economics
Economic System
• Traditional Economies
Many of our actions spring from habit and custom.
– Characteristics:
• ritual, habit, or custom
– Advantages:
• everyone knows which role to play. Only little uncertainty exists
over “What to produce, How to produce, For Whom to produce”
– Disadvantages:
• tends to discourage new ideas and new ways of doing things,
• The lack of progress leads to economic stagnation (stop working)
and low standard of living than in other economic systems.
Lectured By: Mr. Phorn Much, MBA
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Ch1: Nature of Economics
Economic System
• Command Economies
A central authority makes the major decisions about “What,
How, for Whom to produce”
– Characteristics:
• The government makes the major economic decisions.
– Advantages:
• It can change direction drastically
• Many health and public services are available to everyone
at little or no cost (represented by the former Soviet Union)
– Disadvantages:
• One is that they ignore the basic wants and needs of
consumers.
Lectured By: Mr. Phorn Much, MBA
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Ch1: Nature of Economics
Economic System
• Command Economies
A central authority makes the major decisions about “What,
How, for Whom to produce”
– Disadvantages:
• The system gives people the incentive to fill quotas instead
of producing a good product
• A command economy requires a large decision making
bureaucracy.
• The planning bureaucracy lacks the flexibility to deal with
minor day-to-day problems.
• Rewards for individual initiative are rare.
Lectured By: Mr. Phorn Much, MBA
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Ch1: Nature of Economics
Economic System
• Market Economies
People make decisions in their own best interest,
– Characteristics:
• Characterized by a great deal of freedom
• Feature the private ownership of resources, based on Capitalism.
– Advantages:
• High degree of individual freedom.
• Adjusts gradually to change over time.
• The relatively small degree of government interference
• Decision making is decentralized
• The variety of goods and services
• High degree of consumer satisfaction
Lectured By: Mr. Phorn Much, MBA
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Ch1: Nature of Economics
Economic System
• Market Economies
People make decisions in their own best interest,
– Disadvantages:
• Does not provide for everyone, some people may be too
young, too old, or sick to earn a living or to care for
themselves.
• May not provide enough of some basic goods and services.
• High degree of uncertainty
Lectured By: Mr. Phorn Much, MBA
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Ch1: Nature of Economics
Economic System
• Mixed Economies
Systems that combine elements of all three types,
traditional, command, and Market economies.
– Characteristics:
• Tradition as well as market, answer some of the questions
of “What, How, for Whom to produce”
• Some governments intervene only in certain key sectors or
industries and leave the rest to markets
– Advantages:
• Provides assistance for some people who might otherwise
be left out.
• Still share certain benefits to people who are not fortunate.
Lectured By: Mr. Phorn Much, MBA
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Ch1: Nature of Economics
Economic System
• Mixed Economies
Systems that combine elements of all three types,
traditional, command, and Market economies.
– Disadvantages:
• Tend to provide more services, the costs for these benefits
can mean higher costs for overall citizens.
• the availability of services may be limited or the quality
may deteriorate (miserable) over time.
• Because socialism has proved to be inefficient, many
socialistic countries today allow more capitalist
development.
Lectured By: Mr. Phorn Much, MBA
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Ch1: Nature of Economics
Circular Flow of Economic Activity
• The economic activity in markets connects
individuals and businesses.
• The wealth that an economy generates is
made possible by circular flow of economic
activity.
– Factor Markets
Individuals earn their incomes in factor markets,
where the factor of production are bought and
sold.
Lectured By: Mr. Phorn Much, MBA
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Ch1: Nature of Economics
Circular Flow of Economic Activity
– Product Markets
After individuals receive their income from the
resources they sell in a factor market, they spend it
in Product Markets.
These are the markets where producers sell their
goods and services.
Lectured By: Mr. Phorn Much, MBA
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Ch1: Nature of Economics
Circular Flow of Economic Activity
Lectured By: Mr. Phorn Much, MBA
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