An Introduction to Economics
By Khoy Rada (MSc.; BSc.; B.Ed.)
Tel: 015 900601
Email: radakhoy@gmail.com
An introduction to economics
 Definition
of economics
 Division of economics
 Economic systems
 Government intervention
2
Definition of economics
Economics is popularly known as the “Queen of
Social Sciences”. It studies economic activities of
a man living in a society.
 Economics is a social science of analyzing the use
of scarce resources to achieve desired needs.
 So economic activities are those activities, which
are concerned with the efficient use of scarce
means that can satisfy the wants of man.

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Definition of economics
After the basic needs have been satisfied, the
priorities shift towards other wants.
 Human wants are unlimited, in the sense, that as
soon as one want is satisfied another crops up.
 Resources being scarce in nature ought to be
utilized productively within the available means to
derive maximum satisfaction.

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Definition of economics
The knowledge of economics guides us in making
effective decisions.
 The tools of economics help us, individually and
collectively, to decide what, when, where, for
whom, how and how much to produce.
 As with most disciplines, considerable skill is
required in applying economic principles to solve
practical problems.

Wealth Definition of Economics
 Adam
smith defined Economics as
“ An enquiry into the nature and causes of
wealth of nations” in his book “Wealth of
Nations”. He is regarded as the “Father of
Economics”.
Welfare Definition of Economics
Alfred Marshall in his book “Principles of
Economics” defined “Political Economy or
Economics as a study of mankind in the ordinary
business of life, it examines that part of individual
and social action which is most closely connected
with the achieve and with the use of the material
requisites of well-being.
 Thus it is on the one side a study of wealth, and on
the other, and more important side, a part of the
study of man.

Scarcity Definition of Economics
his publication “Nature and Significance
of Economic Science” Lionel Robbins
formulated his conception of Economics
based on the scarcity concept. “Economics
is the science which studies human behavior
as a relationship between ends and scarce
means which have alternative uses.”
 In
Growth Definition of Economics
 John
Maynard Keynes is known as the
Father of Modern Economics. He defined
economics as “the study of the
administration of scarce resources and of
the determinants of employment and
income”.
Economics?
 Economics
is the study of the allocation of
scarce resources to satisfy unlimited human
wants.
Economics?
Three key words in our definition and
discussion?
1. Scarcity
2. Choice
3. Time
Law of Scarcity
Economic resources are scarce!
 There are never enough at any given time to
produce all the things that people want at a
price = 0.
Choice
 Scarcity
forces every economic system,
every business, every individual to make
choices.
 A decision to produce one commodity
frequently implies a decision to produce
less of another commodity.
Choice
 Often,
the decision to produce a particular
commodity may lead to the decision to
completely stop production of another.
 In other words, some tradeoffs must be
made since we do not have the resources to
produce the variety and quantity of
commodities we would like to produce.
Choice
PRICES assist us in determining which
choices to make concerning:
 What
to produce ?
 How
much to produce ?
Time
 Production
requires time, consumption
requires time, choice requires time,
adjustments to price changes or resource
limitations requires time.
 Nothing about economics is instantaneous.
 Time itself is scarce. Do we ever have
enough time?
Definition of economics, cont.
 The
•
•
•
•
•
study of economics is about
use scarcity of resources
making choices and trade offs
investment in assets
costs of production and marketing
benefits of efficiency and making a profit.
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Divisions of Economics
 Economics
can be explained under two
approaches:
• Traditional approach and
• Modern approach
Divisions of Economics, cont.
 Traditional
Approach
• It considered economics as a science of wealth
and divided it into four divisions
1. consumption,
2. production,
3. exchange
4. and distribution
Consumption: It means the use of wealth to satisfy
human wants.
Production: It is defined as the creation of utility. It
involves the processes and methods employed in
transformation of tangible inputs (raw materials, semifinished goods, or subassemblies) and intangible inputs
(ideas, information, know-how) into goods or services.
Exchange: It implies the transfer of goods from one
person to the other. It may occur among individuals or
countries.
Distribution: Distribution refers to sharing of wealth
that is produced among the different factors of
production.
Divisions of Economics, cont.
 Modern
Approach :
• This approach divides subject matter of
economics into two divisions
1. Micro-economics
2. and macro-economics.
• Theses terms were first coined and used by
Ragnar Frisch in 1933.
Micro-economics
 Microeconomics
is concerned with the
study of production decisions by individual
firms and farmers, and how these decisions
can be made more efficient and more
profitable.
Importance of Micro-Economics




Functioning of free enterprise economy: It tells us how
millions of consumers and producers in an economy take
decisions about the allocation of productive resources
among millions of goods and services.
Distribution of goods and services: It also explains how
goods and services produced in the economy are
distributed.
Determination of prices: It tells us the relative prices of
various products and productive services.
Efficiency in consumption and production: It explains the
conditions of efficiency both in consumption and
production.
Limitations of Micro-Economics
 It
does not give an idea of the functioning of
the economy as a whole.
Macro-economics
 Macroeconomics
studies the economic
management of the country. It is about the
monetary & fiscal policy, taxation, trade,
tariffs, how to control inflation & reduce
unemployment, national income, gross
domestic product, total employment, total
output, total consumption, aggregate
demand, aggregate supply, etc.
Importance of Macro-Economics



It is helpful in understanding the functioning of a
complicated economic system. It also studies the
functioning of global economy. With growth of
globalization and WTO regime, the study of macroeconomics has become more important.
It is very important in the formulation of useful economic
policies for the nation to remove the problems of
unemployment, inflation, rising prices and poverty.
Through macro-economics, the national income can be
estimated and regulated. The per capita income and the
people’s living standard are also estimated through
macroeconomic study.
Limitations of Macro-Economics
 Individual
is ignored altogether. For example, in
macro-economics national saving is increased
through increasing tax on consumption, which
directly affects the consumer welfare.
 The macro-economic analysis overlooks
individual differences. For instance, the general
price level may be stable, but the prices of food
grains may have gone up which ruin the poor, but
the agriculturists will be happy.
Economic systems
There are three different economic systems:
 Free market economy/ pure capitalistic system:
•
•
•
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The institution of private property
Free enterprise and free choice
Self interest
Competition and unrestricted markets
The market system
The limited role of government
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The Institution of Private Property
 Ownership
of most property is held by
individuals or groups of individuals
(corporations, partnerships, etc.).
 The
state is not the owner of productive
resources that are important forms of
property.
The Institution of Private Property
 Private
property is controlled and enforced
through the legal framework of laws, police,
and courts.
 Therefore
one function of government is the
protection of private property rights.
The Institution of Private Property
 Individuals
are usually free to use their
private property as they choose, so long as
they do not infringe on the legal property
rights of others.
 Individuals
are usually allowed to enter into
private contractual agreements that are
mutually satisfying.
Free Enterprise and Free Choice (An
Extension of Property Rights)
 Exists
when private individuals are allowed
to obtain resources, to organize those
resources, and to sell the resulting product
in any way the individual chooses.
 As long as their actions do not infringe on
the property rights of others
Free Enterprise and Free Choice (An
Extension of Property Rights)
 Workers
are free to enter any line of work
for which they are qualified, and consumers
can buy the desired basket of goods and
services that they feel is best for them.
Free Enterprise and Free Choice (An
Extension of Property Rights)
The
ultimate voter is the consumer,
he/she votes with dollars, and decides
which product will survive
• This reasoning is known as consumer
sovereignty, where the ultimate purchaser
of goods and services determines what is
produced.
Self Interest
Normally implies the maximization of profits
or the minimization of losses.
 Consumers:
strive to maximize the amount
of satisfaction possible from spending a
given amount of money income. (as little as
possible!)
Self Interest
 Producers
: strive to maximize the amount
of net income possible from selling
commodities at the highest possible price
(get as much as possible!)
Self Interest
 Employees
(Workers): strive to obtain the
highest level of income possible for least
amount of work.
 Employers
: strive to obtain the most
amount of work from employees for the
least cost.
Competition and Unrestricted
Markets
Competition
is Rivalry among sellers
who wish to attract customers and
rivalry among buyers to obtain desired
goods and services.
Competition and Unrestricted
Markets
 Competition
requires a minimum of two
conditions:
• A relatively large number of independently
acting sellers and buyers.
• Freedom of sellers and buyers to enter or exit a
particular industry without restrictions
(unrestricted markets).
Competition and Unrestricted
Markets
 Economic
competition imposes limits on
the self interest of buyers and sellers.
Competition is a regulating force in
capitalist systems.
• i.e. Raise prices
Consumers go to another
one of many sellers.
• Economic profit earned
New firms will
enter the industry.
The Market System
An
•
•
•
•
institution that develops from the
Private Property Rights
Free Choice and Free Enterprise
Self-Interest
Competition and Unrestricted Markets
 Also
referred to as the “Price System”
The Market System
Capitalism
is a market economy. That
is, buyers and sellers relate their
opinions by expressing how much they
are willing to pay for, or how much
they demand of goods and services.
The Market System
Prices are used to signal the value of individual
resources and commodities. Therefore, prices
provide valuable information to consumers and
producers.
 Prices are the "guiding light" to which resource
owners, businesses, and consumers follow when
economic choices must be made.
 Therefore, we can say that the market system
(price system) IS the organizing force in capitalist
systems.

The Limited Role of Government
 Someone
or some entity has to define and
enforce private property rights.
• The government protects the rights of
individuals and business persons to keep
private property private, and keep the
control of that property vested with the
owners.
The Limited Role of Government
Reconcile
Negative Externalities
through Legislative Action or Civil
Process to Settle Disputes
Judicially
The Limited Role of Government
Eliminate
monopolies that would
restrain trade,
Issue money,
Prescribe a standard of weights
measures,
The Limited Role of Government
 Raise
funds through taxation and other
means (BORROW) for public goods such
as national defense.
 Therefore,
government is essential to the
existence of a pure capitalist economic
system.
Economic systems, cont.

Controlled market economy
•
•
•
•
•
•
•
•
central government planning & control production
consumption & prices regulated
cooperation with government direction
producers required to respond as directed
resources directed into socially useful investments
collective incentives & rewards
social benefit & political motives
extensive regulation & control (North Korea, Cuba)
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Economic systems, cont.

Mixed market economy
• perhaps government ownership and control of key resources
and investment
• but the price of goods and services determined by supply and
demand in free markets (eg. Vietnam)
• or private ownership of resources and controlled or strongly
regulated markets (eg. Japan and South Korea)
• or mixed ownership of resources and decentralized planning
and regulation (eg. Malaysia and Indonesia)
49
Mixed Economic System
 In
reality, most economic systems are a
combination of market and political
systems.
Economic Systems
Free Market
Mixed Market
Controlled Market
Socialism
Pure Marxist
Communism
Pure Capitalism
Hong Kong
Singapore
United States
Canada
Japan
W. Germany
Economic Systems
Free Market
Pure Capitalism
Mixed Market
Socialism
Great Britain
France
Sweden
Controlled Market
Pure Marxist
Communism
Cuba
North Korea
China
Former USSR
 How
about Cambodia?
Government Intervention
 Why?
Support/protect an infant industry
 Curb market powers of imperfect
competitors to promote social good
 Provide for food security
 Provide for consumer health and safety
 Provide for environmental quality

Forms of Government Intervention in
Agriculture
 Adjusting
production to market demand
 Price and income support payments
 Foreign trade enhancements
 Crop insurance
 Subsidized credit
 Other forms