Module I: Introduction to Development Economics British economist Alfred Marshall defined

economics as the study of man in the ordinary

Etymology of economics (the study of the history
business of life.
of the word economics)
Marshall argued that the subject was both the
Eco is a derivation of the Greek oikos, meaning an study of wealth and the study of mankind.
extended family unit that consists of the house, members The term "economics" was popularized by
of the family, slaves, farmland, and all property. Alfred Marshall as a concise synonym for "economic
science" and a substitute for the earlier "political
The suffix– nomy is derived from the Greek nomos, economy".
meaning management, law, or principle.
William Walstad and Robert Bingham
Thus oikonomos, the original form of economics, meant
William Walstad and Robert Bingham states that
the management of the hearth and home
economics is a social science concerned with using
Adam Smith scarce resources to obtain the maximum satisfaction
of the unlimited material wants of society
•Adam Smith, an 18th-century Scottish economist,
philosopher, and author, considered as the father of
modern economics, famous for his book written in 1776,
"The Wealth of Nations“ defined economics as “an inquiry
into the nature and causes of the wealth of nations.”

•Smith's ideas–the importance of free markets, assembly-

line production methods, and gross domestic product
(GDP)–formed the basis for theories of classical
economics.

The free market- an economic system based on supply

and demand with little or no government control. It is a
summary description of all voluntary exchanges that take
place in a given economic environment. Free markets are
Paul Anthony Samuelson and William
characterized by a spontaneous and decentralized order
Nordhaus
of arrangements through which individuals make
The study of how societies use scarce resources to
economic decisions.
produce valuable commodities and distribute them
Assembly line- a process in manufacturing for among different people. Lionel Robbins
production of goods where smaller products are “Economics is the science which studies human
assembled at different steps in a sequence to produce the behavior as a relationship between ends and scarce
final product. In assembly line production, the main means which have alternative uses" (Robbins, 1932)
product moves from stage one to the end stage in a Ends simply means human needs, wants or desire.
defined sequence. In most cases, an assembly line is a
partial automated process, and at each stage there might GREGORY MANKIW
be a human intervention. Economics is the study of how society manages its
scarce resources

Ten principles of economics by Mankiw:

1. People Face Tradeoffs
To get one thing, we usually have to give up
something else
Ex. Leisure time vs. work
2. The Cost of Something is What You Give Up
to Get It
Opportunity cost is the second best alternative
foregone.
Ex. The opportunity cost of going to college is the
money you could have earned if you used that time
Alfred Marshall to work.
3. Rational People Think at the Margin Refers to the condition wherein most things that
Marginal changes are small, incremental changes people want are available only in limited supply
to an existing plan of action There are limited resources relative to wants and
Ex. Deciding to produce one more pencil or not needs
People will only take action of the marginal benefit Thus, one should choose
exceed the marginal cost
4. People Respond to Incentives Two major types of Economics:
Incentive is something that causes a person to act. A. Microeconomics
Because people use cost and benefit analysis, they Microeconomics is the study of decisions made by
also respond to incentives people and businesses regarding the allocation of
Ex. Higher taxes on cigarettes to prevent smoking resources and prices of goods and services.
5. Trade Can Make Everyone Better Off Microeconomics focuses on supply and demand
Trade allows countries to specialize according to their and other forces that determine the price levels in the
comparative advantages and to enjoy a greater economy.
variety of goods and services In other words, microeconomics tries to
6. Markets Are Usually a Good Way to Organize understand human choices, decisions, and the
Economic Activity allocation of resources.
Adam Smith made the observation that when
households and firms interact in markets guided by Welfare economics- is the study of how the
the invisible hand, they will produce the most allocation of resources and goods affects social
surpluses for the economy welfare. This relates directly to the study of economic
7. Governments Can Sometimes Improve efficiency and income distribution, as well as how
Economic Outcomes these two factors affect the overall well-being of
Market failures occur when the market fails to allocate people in the economy.
resources efficiently. Governments can step in and
intervene in order to promote efficiency and equity. B. Macroeconomics
8. The Standard of Living Depends on its ability Macroeconomics, on the other hand, studies the
to produce goods and services behavior of a country and how its
The more goods and services produced in a country, policies affect the economy as a whole. It analyzes
the higher the standard of living. As people consume entire industries and economies, rather than
a larger quantity of goods and services, their standard individuals or specific companies.
of living will increase Macroeconomics is the study of the
9. Prices Rise When the Government Prints Too economy as a whole.
Much Money.
When too much money is floating in the economy, ECONOMICS AND SCARCITY
there will be higher demand for goods and services. Resources are the basis for producing the food,
This will cause firms to increase their prices in the shelter, medical care and luxury goods that we want
long run causing inflation. Natural resources (land and timber)
10. Society Faces a Short-Run Tradeoff Capital goods resources (factories and
Between Inflation and Unemployment machineries)
In the short run, when prices increase, suppliers will Human capital (labor)
want to increase their production of goods and Entrepreneurial ability – which is measured by
services. In order to how well the entrepreneur combines resources,
achieve this, they need to hire more workers to makes policy decisions, innovates and how well
produce those goods and services. More hiring means he/she takes risks.
lower unemployment while there is still inflation. Resources are scarce
However, this is not the case in the long-run. There are not enough of them to produce
everything we need and desire
Economics and Scarcity (Dowling, Valenzuela, Scarcity forces as to choose among competing
Brux) uses for society’s resources.
Economics Easiest way to think about the problem
Deals primarily with scarcity of societal choice is by looking at a basic
How should we allocate our limited resources to economic concept and graph called
satisfy seemingly unlimited human wants and needs production possibilities.
Scarcity
Production possibilities curve- a graph showing Economic concepts that is illustrated by
alternate combinations of the production possibilities
maximum amounts of two different goods that can be 1. Opportunity cost
produced during any particular time period if the The best alternative forgone in order to
economy’s resources are efficiently and fully produce or consume something else
employed What you give up to get something else
Explains scarcity and the need for choices Ex. The opportunity cost of producing roses (20) is
the bread (30) we give up when we produce the
In examining production possibilities, we must roses.
make these assumptions about our economy. 2. Unemployment
1. All available resources are used fully (No workers A situation in which resources are not fully
unemployed, no idle equipment, buildings, etc.) used in production (at point U). (not in
2. All available resources are used efficiently production possibilities curve but at some point,
(Efficiency means that we use our knowledge and below it)
technology to produce the maximum amount of
output with these resources) Economic Growth
3. The quantity and quality of available resources are • A country is not restricted to a single production
not changing during our period of analysis, (The same possibilities curve forever. Economies may grow, and
number of workers, no additional trainings, the same the variable that
materials, no discovery or use of new resources) we assumed that are not changing do change over
4. Technology is not changing during our period of time.
analysis (no technological change) Economic growth- A sustained increase in
5. We can produce only two goods with our available production represented by an outward shift of the
resources and technology production possibilities curve
Economic growth may occur if:
Man cannot live by bread alone and that life is •The quality or quantity of society’s resources
richer if we stop and smell the roses. increases
•Or if new technologies are developed so that we can
Table 1-1: Production Possibilities Table (Brux) produce more output with our available resources

Alternatives A to F – possible combinations of bread

and roses that the economy could produce
Note that more of both bread and roses can be
produced when the production possibilities curve
shifts outward as a result of economic growth.

Things can be used in production possibilities

Ex. Staple goods and luxury goods
Agricultural goods and manufactured goods
Consumer goods and capital goods
Military goods and civilian goods
Private goods and public goods
Points A through F show alternative combinations of -If we wish to expand public education, we may have
bread and roses that the economy can produce, to give up some of our national defense.
whereas point U represents unemployed resources -We can’t have more of everything. There are always
(Connecting all points gives us a production opportunity costs to consider
possibilities curve)
Descriptions:
Private goods- Goods provided by businesses
Public goods- Goods provided by government like
police and fire protection
Services- Activities such as haircuts, health care, and
education that are consumed (used) by consumers
Consumer goods- Goods that are consumed (used)
by consumers
Capital goods- Goods such as machinery and
Table 1-2 Peoples willingness to buy tutoring
factories that are used to produce other goods
services where: P =alternative possible prices of
tutoring services Qd (quantity demanded) stands for
Economics and Distribution
the amounts of tutoring that students are willing and
• Production and distribution choices of goods and
able to purchase at these various prices
services are important.
• HUNGER IN THE WORLD OF PLENTY IS NOT A
Law of demand: Price and quantity demanded are
PROBLEM OF PRODUCTION BUT OF DISTRIBUTION
negatively related, all other things equal. (When
• As important as production choices are choices
price goes up, quantity demanded goes down, and
relating to the distribution of goods and services.
vise versa)
• On what basis should distribution choices be
People will be willing and able to buy more of a
made?
good or service at low prices than at high prices.
• Should the decision be based on equality so that
everyone receives the same amount of every good
Demand curve - A graph that shows:
that everyone else does?
Quantities consumers are willing to buy
• Should people receive a share of the goods and
At alternative prices
services that is proportional to their contribution to
During a specified time period
producing these goods and services?
All possible combinations of alternative
• Should the government make the distribution
prices and quantity demanded
decisions, perhaps giving higher rations to those
Assuming that all factors except price
most deserving?
that could affect quantity demanded are
held constant
In a market-based economy
Demand curve – higher price is associated with
• Choices of distribution & production are
lower quantity demanded
based primarily on prices
• Downward sloping
• Prices are determined by demand and
• Reflects the law of demand
Supply
Change in demand
• Caused by changes in factors affecting
Demand and Supply
the demand
Demand schedule – A table that shows quantities
• Not the price
consumers are willing to buy at alternative prices
• New demand schedule
during a specified time period
• New demand curve
Law of Demand - Price and quantity demanded
are negatively related all other things equal
Law of Demand - Price and quantity demanded
are negatively related all other things equal
Increase in demand: Due to difficulty of subject.
Due to increase in income.
Demand curve - shifts forward (to the
right)
For every price: a higher quantity
demanded

Decrease in demand
Demand curve - shifts backward (to the
left)
For every price: a smaller quantity
Demanded Rationing function of price - Price movement rations
“There is no free lunch” away a shortage
Every choice has an opportunity cost
Every activity chosen entails another Surplus
activity given up Quantity supplied > quantity demanded
Occurs only when the price > market level
Supply schedule - A table: Price - pushed down
Quantities that suppliers are willing to Increase in quantity demanded
sell at alternative prices during a specified time Decrease in quantity supplied
period The surplus will disappear
Rationing function of price - Falling price rations
Supply curve - A graph: away a surplus
Quantities that suppliers are willing to sell at
alternative prices during a specified time period An increase in demand - Because of an increase
in income
Law of supply- There is a positive relationship Demand curve shifts forward (to the right)
between price and quantity New equilibrium:
supplied. All other things equal. Increase in price
It is upward sloping. Price and quantity supplied Increase in quantity
increase together. Note: supply curve will not shift
A decrease in demand - Because of a decrease in
Factors affecting supply changed: income
-Baby sitting costs might decrease so that some Demand curve shifts backward (to the left)
tutors would be more willing to provide tutoring New equilibrium:
services. - effect - Increase the supply of Decrease in price
tutoring services. Decrease in quantity
-Changes in cost of producing or supplying a product
– factors that may cause a shift in the supply curve. An increase in supply - Because of a decrease in
babysitting costs, caused
Increase in supply an increase in supply of tutoring.
Supply curve - shifts forward (to the right) Supply curve shifts forward (to the right)
Decrease in supply New equilibrium:
Supply curve - shifts backward (to the left) Decrease in price
Increase in quantity
Equilibrium - A state of balance Note: demand curve will not shift
A point at which quantity demanded A decrease in supply
equals quantity supplied Because of an increase in babysitting costs
Intersection of demand and supply Supply curve shifts backward (to the left)
Market - Naturally tends to move toward the New equilibrium:
equilibrium point. Increase in price
Decrease in quantity
Shortage
Quantity demanded > quantity supplied FACTORS THAT CAUSE REAL-WORLD DEMAND
Shortage occurs when the market price are below CURVES TO SHIFT
the equilibrium price (Ex. 3 dollars) Changes in the number of consumers who wish
Students may bid for tutoring services that are to purchase the product changes
available and in the process price will be bid up. Changes in the taste of the consumers in the
2 things happen as price increase market
(Price - pushed up) Changes in the prices of complements or
Buyers decrease their quantity substitutes
demanded Changes in consumers’ incomes
Sellers increase the quantity supplied Changes in consumers’ expectations about a
The process will come to a screeching product’s future price or availability
halt when the equilibrium is reached Substitute relationships - Occur when the
(shortage will disappear) consumer substitutes one good
for the other good The market place- Is often efficient, but not
E.g., butter and margarine; tea and coffee necessarily equitable
Complements - The opposite of substitutes
If the consumer uses more of one good, he or
she will also use more of the other
E.g., digital cameras and memory cards, pan cakes
and maple syrup

FACTORS THAT CAUSE REAL-WORLD SUPPLY

CURVES TO SHIFT
Changes in the number of sellers
Changes in the prices of resources used to
produce the product
Changes in the technology used to produce the • Equity is a value-laden concept.
product. The market is often efficient, but not necessarily
Changes in the prices of other products that equitable
could be produced with the same resources Efficient - (especially of a system or machine)
Change in government taxes or subsidies. achieving maximum productivity with minimum
Changes in sellers’ expectations about the wasted effort or expense.
products’ future price Equity – in economics is defined as process to be
fair in economy which can range from concept of
Step-by-step procedure for the preparation of taxation to welfare in the economy and it also
graphs –cases 1 -4. means how the income and opportunity among
1. Graph the particular market in equilibrium people is evenly
Label vertical axis (P) distributed.
Label horizontal axis (quantity axis) (Q)
2. Consider the situation A Glimpse of the Future
Determine whether demand or supply curve shifts Public goods and services
Increase or decrease? Have unique characteristics
Shift curve forwards or backwards Unlikely that the market will provide enough of
3. Find the new point of equilibrium them
Label the new equilibrium price and The government often provides them
quantity along their respective axis Examples:
4. Compare the new quantity with the old National defense, police and fire
quantity and the new price with the old protection, public libraries, highway
price construction, crime prevention, public
education
Efficiency and Equity
High prices encourage frugality and careful Economic Spillovers - occur when some costs (or
choices among benefit) related to production or consumption “spills
competing goods. over “onto people not involved in the production or
Goods and services are allocated to those most consumption of the good.
willing to pay, Thus, the market is an effective -Spillovers are costs or benefits of private market
allocative device. activity shifted onto society at large (also called an
High prices also encourage producers to offer externality)
more for sale. Ex. Pollution
Without prices, products might go to people who Education – a spillover benefit
do not strongly desire them and thus be wasted. Beauty of a garden in a company – positive spillover
In the market, prices ration away shortages and Neither economic efficiency nor equity occurs when
surpluses suggesting that the marketplace is very spillovers exits.
efficient (using
resources in such a way as to maximize the desired ISSUES:
output) as a means of allocation and distribution. Inequity`- Marketplace is not necessarily
But the distribution of goods and services may equitable
not be equitable (Fair) Discrimination
 Poverty
Inequality of income distribution

Pure competition - A market in which many

producers sell a standardized (identical) product to
many buyers

Market power - The ability of an individual firm to

influence the market price of its product.

Instability - Production possibilities and

employment are very volatile
Market economy inherently unstable because
prices and employment fluctuate

Inflation- A rise in the average price level in the

economy

Microeconomics - The study of individual areas of

activity within the total economy

Macroeconomics - the study of the total economy

Gross domestic product (GDP) - Total output of

an economy

Private - Individual people and businesses

Public – Government

Economic conservative - Right (Dowling) - A

person who believes in very low levels of
government involvement in the economy.

Economic liberal - Left (Dowling) - A person

who believes in high levels of government
involvement in the economy.

The enormous interest in the economic

development of postwar East Asia has continued into
the new millennium.
The region’s economic history has been marked
by an “economic miracle” that spanned several
decades followed by a severe financial and economic
crisis.
Problems of widespread poverty and economic
inequality remain despite significant economic
progress.
Addressing these issues, as well as the impact of
developments in the world economy is a challenge
the region’s government, international organizations,
and the economics profession face as a whole.
(Dowling)