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
- Slides: 20