Principles of Economics BIT116 Introduction to Economics Definition

Principles of Economics BIT-116 Introduction to Economics

Definition Economics is a social science that studies the choices that individuals, businesses, governments and entire societies make as they cope up with scarcity.

Scarcity o Our inability to satisfy our wants is called scarcity.

The subjects divides into two parts: o o Microeconomics Macroeconomics

Microeconomics o Microeconomics is the study of the choices that individuals and business make, the way these choices interact, and the influences the government exerts on them.

Macroeconomics o Macroeconomics is the study of the effects on the national economy and the global economy of the choices that individuals, businesses and governments make.

Three Big Microeconomics Questions o o o What goods and services are produced? How goods and services are produced? For whom goods and services produces?

Goods and Services o The objects that people value and produce to satisfy wants are called goods and services.

What we produce? Services § Real Estate § Retail Trade § Wholesale Trade § Health § Education

What we produce? Goods § Construction § Electronic Equipment § Food § Industrial Equipment § Chemicals

Factors of Production o o o Factors of production are grouped into four categories: Land Labor Capital Entrepreneurship

Factors of Production o o Land: the gift of nature that we use to produce goods and services are called land. Labor: the work time and work effort. Capital: the tools, instruments, machines, buildings and other constructions that businesses now use to produce goods and services are called capital. Entrepreneurship: the human resources that organizes labor, land, and capital is called entrepreneurship.

o o Land earns rent. Labor earns wages. Capital earn interest. Entrepreneurship earns profits.

Three Big Macroeconomics Questions o o o What determines the standard of living? What determines the cost of living? Why does our economy fluctuate?

Inflation and Deflation o o Inflation: a rising cost of living is called inflation. Deflation: a falling cost of living is called deflation. Business Cycle: We call the periodic but irregular up and down movement in production and jobs the business cycle. Tradeoff: is an exchange-giving up one thing to get something else.

Concept of cost of production o o o Nominal cost: is the money cost of production. It is also called expenses of production. Real cost: pains and sacrifices of labor is regarded as real cost. Economic cost: those payments which must be received by the owners in order to ensure that they will continue to supply them in the process of production. Implicit cost: self-owned and self-employed resources such as salary of the proprietor. Explicit cost: are paid out cost. The salaries and wages paid to the employees, prices of raw materials and overheads.

Opportunity cost o The highest-valued alternative that we give up to get something is the opportunity cost of the activity chosen.

Production Possibility Curve o It is a curve which depicts all possible combinations of two goods which can be produced with given resources and technology in an economy.

Law of Demand The law of demand states: Other things remaining the same, the higher the price of a good, the smaller is the quantity demanded.

Law of Supply The law of supply states: Other things remaining the same, the higher the price of a good, the greater is the quantity supplied