MODULE A-INTRODUCTION OF ECONOMICS

1.What is Economics? Compare the definition offered by Adam Smith, Lionel Robbins and Alfred Marshel.
Which one is the best definition, write by your own interpretation.

Answer:

Economics: The word ‘Economics’ originates from a Greek word ‘Oikonomikos’ • This Greek word has two
parts: – ‘Oikos’ meaning ‘Home’ – ‘Nomos’ meaning ‘Management’ Hence, Economics means ‘Home
Management’

Economics is the study of unlimited scarcity and its implications for the use of limited resources, production of
goods and services, growth of production and welfare over time, and a great variety of other complex issues of
vital concern to society.

Adam Smith definition: Adam Smith, who is regarded as Father of Economics. He defined economics as “a
science which inquiries into the nature and cause of wealth of nations”. • He emphasized the production and
growth of wealth as the subject matter of economics.

Characteristics:

It takes into account only material goods Exaggerated the emphasis on wealth. It inquires the caused behind
creation of wealth.

• Criticisms:

It considered economics as a dismal or selfish science. It defined wealth in a very narrow and restricted sense.
It considered only material and tangible goods. It gave emphasis only to wealth and reduced man to secondary
place.

Alfred Marshall definition: Alfred Marshall stated that “Economics is a study of mankind in the ordinary
business of life;

Feature:

It is primarily the study of mankind. It is on one side a study of wealth; and on other side the study of man. It
takes into account ordinary business of life – It is not concerned with social, religious and political aspects of
man’s life. It emphasises on material welfare i.e., human welfare which is related to wealth. It limits the scope
to activities amenable to measurement in terms of money.

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Criticisms:

It considers economics as a social science rather than a human science. It restricts the scope of economics to
the study of persons living in organized communities only. Welfare in itself has a wide meaning which is not
made clear in definition.

Lionel Robbins Definition: According to Lionel Robbins: “Economics is the science which studies human
behavior as a relationship between ends and scarce means which have alternative uses.” • He emphasized on
‘choice under scarcity’. In his own words, “Economics, is concerned with that aspect of behavior which arises
from the scarcity of means to achieve given ends.”

Characteristics:

Economics is a positive science. New concepts: Unlimited ends, scarce means, and alternate uses of means. It
emphases on Choice – A study of human behavior It tried to bring the economic problem which forms the
foundation of economics as a social science. It takes into account all human activities.

• Criticisms:

It does not focus on unemployment, income determination and economic growth and development.

Which one is the best: Lionel Robbins Definition

2.Write the difference between Micro Economics and Macro Economics. Write the importance of Macro
Economics and Macro Economics.

Answer:

Microeconomics is the study of decisions made by people and businesses regarding the allocation of resources
and prices of goods and services. It uses the bottom-up strategy to analyses the economy. In other words,
microeconomics tries to understand human’s choices and allocation of resources. The key role of
microeconomics is to examine how a company could maximize its production and capacity, so that it could
lower the prices and compete in its industry. A lot of microeconomics information can be obtained from the
financial statements.

Examples: Individual demand, and price of a product.

Macroeconomics is a branch of economics that depicts a substantial picture. It scrutinizes itself with the
economy at a massive scale, and several issues of an economy are considered. In macroeconomics, we normally
survey the association of the nation’s total manufacture and the degree of employment with certain features
like cost prices, wage rates, rates of interest, profits, etc., by concentrating on a single imaginary good and what
happens to it.

Examples: Aggregate demand, and national income.

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Macro Economics Vs Micro Economics

1.Meaning:

Microeconomics is the branch of Economics that is related to the study of individual, household and firm’s
behavior in decision making and allocation of the resources. It comprises markets of goods and services and
deals with economic issues.

Macroeconomics is the branch of Economics that deals with the study of the behavior and performance of the
economy in total. The most important factors studied in macroeconomics involve gross domestic product
(GDP), unemployment, inflation and growth rate etc.

2.Area of Study:

Microeconomics studies the particular market segment of the economy

Macroeconomics studies the whole economy, that covers several market segments

3.Dealings:

Microeconomics deals with various issues like demand, supply, factor pricing, product pricing, economic
welfare, production, consumption, and more.

Macroeconomics deals with various issues like national income, distribution, employment, general price level,
money, and more.

4.Business Application:

Micro economics is applied to internal issues. Macroeconomics is applied to environmental and external issues.

5.Significance

It is useful in regulating the prices of a product alongside the prices of factors of production (labour, land,
entrepreneur, capital, and more) within the economy.

It perpetuates firmness in the broad price level, and solves the major issues of the economy like deflation,
inflation, rising prices (reflation), unemployment, and poverty as a whole.

6.Limitation

It is based on impractical presuppositions, i.e., in microeconomics, it is presumed that there is full employment
in the community, which is not at all feasible.

It has been scrutinized that the misconception of composition’ incorporates, which sometimes fails to prove
accurate because it is feasible that what is true for aggregate (comprehensive) may not be true for individuals
as well.

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3.Make the differentiate between Positive and Normative Economics

Answer:

Positive Economics:

Positive economics is a stream of economics that focuses on the description, quantification, and explanation
of economic developments, expectations, and associated phenomena.

Example of a positive economic statement: "Government of Bangladesh -provided healthcare increases public
expenditures." This statement is fact-based and has no value judgment attached to it.

Normative Economics:

Normative economics is an economics which focuses on value-based judgments aimed at improving economic
development, investment projects, and the distribution of wealth.

Example of a normative economic statement is: "The government of Bangladesh should provide basic
healthcare to all citizens. “It is value-based, rooted in personal perspective, and satisfies the requirement of
what "should" be.

** Difference between Positive and Normative Economics:

1.Base: Positive Economics refers to a science which is based on data and facts.

Normative economics is described as a science based on opinions, values, and judgment.

2.Nature: Positive economics is descriptive, but normative economics is prescriptive.

3.Activity: Positive economics explains cause and effect relationship between variables. On the other hand,
normative economics pass value judgments.

4.Perspective:

The perspective of positive economics is objective while normative economics have a subjective perspective.

5.Explanation: Positive economics explains ‘what is’ whereas normative economics explains ‘what should be’.

6.Test Activity: The statements of positive economics can be scientifically tested, proved or disproved, which
cannot be done with statements of normative economics.

7.Economics Issues: Positive economics clearly define economic issues. Unlike normative economics, in which
the remedies are provided for the economic issues, on the basis of value judgment.

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4.What is scarcity? What are the choice problem of economy? How those should be solved?

Answer:

Scarcity:

means that the demand for a good or service is greater than the availability of the good or service. Therefore,
scarcity can limit the choices available to the consumers who ultimately make up the economy.

Example:

Suppose you have 1 lac taka and you need 1.A air-conditioner price 1Lac 2. a Laptop price 60000.Result If you
buy air-conditioner than scarcity should be live for laptop.

Feature:

1.Demand is greater than supply’

2.Choice is greater than resources.

Cause of Scarcity:

Demand scarcity: When there is a high demand for a resource or product, due to increasing populations or
changes in preferences

Supply scarcity: When the supply or resource is low or out, due to weather, disasters or resource depletion

Structural scarcity: When there is mismanagement or inequality of access to populations, often because of
politics or location

Other causes of scarcity include when there is no alternative resource or when the damage to a resource cannot
be fixed.

Choice problem:

What should be produced? Using the economy’s scarce resources to produce one thing requiresgiving up
another. Producing better education, for example, may require cutting back on other services, such as health
care. A decision to preserve a wilderness area requires giving up other usesof the land. Every society must
decide what it will produce with its scarce resources.

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How should goods and services be produced? There are all sorts of choices to be made in determining how
goods and services should be produced. Should a firm employ a few skilled or alot of unskilled workers?
Should it produce in its own country or should it use foreign plants? Should manufacturing firms use new or
recycled raw materials to make their products?

For whom should goods and services be produced? If a good or service is produced, a decisionmust be made
about who will get it. A decision to have one person or group receive a good or service usually means it will not
be available to someone else. For example, representatives of thepoorest nations on earth often complain that
energy consumption per person in the United States is many times greater than energy consumption per
person in the world’s scores of poorest countries. Critics argue that the world’s energy should be more evenly
allocated. Should it? That is a “for whom” question

How choice problem should be solved:

Solution:

1.Assertain Demand
2.Utilization of resources
3.Government Plan
4.Policy adaptation
5.Technology utilization
6.Production Plan
8.International relationship
9.Social welfare

5.What are the economic resources in Bangladesh.

Answer:
Economic resources are the inputs we use to produce goods and services. Economic resources canbe divided
into four categories: labour, land or natural resources, capital, and entrepreneurship (entrepreneurial ability)

Natural Resources: Natural resources include land, water, metal etc. Sometimes all the natural
resources and environment as a whole are classified under ‘land’. Natural resources are sourced from
nature and used for the production of goods and services. Natural resources are classified further into
non-renewable resources and renewable resources. They primarily consist of resources like solar or
wind energy; gases such as oxygen and nitrogen; physical resources such as coal, natural gas, and
freshwater.

Human Resources: Human resources are also termed as labour. Human resources not only
contribute to the production of goods but also play an essential role in offering services. Human
resources generally possess some form of education and skills. They can increase their productivity
to contribute more to the efficiency of production. In terms of educationor training, businesses can
source labour from a specific educational background to reduce the training time. When hiring for
different departments of banks, a bank looks for candidates with an educational background in

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banking, finance or business other similar subjects.

Capital: Capital resources are resources that contribute to the production process of othergoods.
Hence, economic capital is different from financial capital. There are various types of economic
capital. Machinery and tools are classified as fixed capital. Partly-produced goods (work-in-progress)
and inventory are considered working capital. Financial capital refers to moneyin a broad sense, which
doesn’t contribute to the production process, though it is essential for businesses and entrepreneurs
to carry on their economic activities.

Entrepreneurship: Entrepreneurship is a special human resource that refers to the ability to comeup
with ideas that would be potentially turned into economic goods, risk-taking, decision-making,and
running the business, which requires the incorporation of the other three factors of production.An
entrepreneur would need to take the risks of borrowing, renting land, and sourcing appropriate
employees. The risk, in this case, involves the chances of not being able to pay the loan due to a
failure in the production of goods or sourcing the factors of production.

6.What is circular flow model? write the two, three, four and five sector circular model with illustration.

Answer:

Circular flow model: The circular flow model demonstrates how money moves through society. Money flows
from producers to workers as wages and flows back to producers as payment for products. In short, an
economy is an endless circular flow of money.

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Two Sector model: Two-factor circular flow model, money flows from households to businesses
as consumer expenditures in exchange for goods and services produced by the businesses, then
flowsback from businesses to households for the labor that individuals provide.

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Three-Sector Model: In the three-sector model, the government is added to the two-sector model.In this model,
money flows from households and businesses to the government in the form of taxes. The government pays
back in the form of government expenditures through subsidies, benefit programs, public services, etc.

Four-Sector Model: The four-sector model contains the foreign sector, which is also known as the
overseas sector or external sector. The overseas sector turns a closed economy into an open economy.
It is connected to the other sectors through two flows of money: foreign trade (imports and exports)
and foreign exchange (inflow and outflow of capital). Like the other sectors, each flow of money is
paired with a flow of a factor of production or goods and services.

Five-Sector Model: The fifth sector – the financial sector – is added to complete the circular flow
model. It includes banks and other institutions that provide borrowing and lending services to the
other sectors. Savings and investments are assumed in the five-sector model, which flow from other
sectors with residual cash into the financial institutions, then out to the sectors that need money. As
long as lending (injection) is equal to borrowing (leakage), the circular flow reaches anequilibrium
and can continue forever.

7.Elastrate the different economic systems.

Answer:

Economic system:
An economic system is a way how a society produces and distributes goods and services. It involves
how things are made, who gets to make them, how they are distributed, and how people get access
to them. An economic system serves as a regulatory system for controlling different aspects of
production and distribution, including capital, labor, land and other physical resources.

Different Economic System:

Market Economic System: Market economy also referred to as capitalism or in its extreme form
laissez-faire economy. Market economies are economic systems wherein market decisions are
governed by price fluctuations that occur when sellers and consumers interact to set the sale of
products. Governmentsin market systems typically have little intervention in how businesses operate
and generate income. Decision-making in a market economy is dictated by price fluctuations that
happen between producers and consumers. Main characteristics of the market economy are private
ownership, competition, and minimum to no government intervention.

Command Economic System: A command economy, also called planned economy, is an economic
system in which the government makes all the economic decisions regarding the production,
distribution, and consumption of goods and services. In command economic systems,governments
and centralized powers control much of the economic processes, including allocating and distributing
resources, goods and services. Many command economies consist of governments that have total
control over the distribution and use of valuable resources, like oil and gas.

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The advantages of a command economy or planned economy are that central planning allows
theelimination of market failures, and in theory, better allocation of resources, prioritizing social
needs over profits.
Disadvantages, on the other hand, include limited consumer choice and a lack of incentives for
innovation.

Mixed Economic System: A mixed economy combines elements of command and market
economies. All of the societies present-day have features of both systems and are frequently
calledmixed economies. A mixed economy aims to reduce the drawbacks of both systems while
implementing the advantages. In a mixed economy, government can intervene in key sectors
likeeducation, or healthcare while leaving other, less important from the perspective of a well-
being of the society, sectors to private companies. The increasing government involvement also
ensuresthat less competitive individuals are looked after. This eliminates one of the
drawbacks ofa market economy, which favors only the most successful or inventive.

Traditional Economic System: Traditional economic systems are often found in rural or
remote areas where access to modern technology and infrastructure is limited. These systems
tend to be self-sufficient and sustainable, but they may also be susceptibleto external shocks and
disruptions. A traditional economy is an economy where historical norms and habits govern
what and how things are created, distributed, and spent. While money can be used in traditional
economies, but it is often limited to certain transactions and may not be the primary medium of
exchange. In many traditional economies, bartering is more common than using money.

Short Note

(1) Economic Model

Economic Model: A model isa formalization of theory that facilitates scientific inquiry. An
economic model is a simplified version of reality that allows us to observe, understand, and
make predictions about economic behavior.
Purpose of Economic Model: The purpose of a model is to take a complex, real-world situation
and pare it down to the essentials. Economists analyze issues and problems with economic
theories that are based on particular assumptions about human behavior than the assumptions
an anthropologist or psychologist might use. capture the key features of the object or situation
being studied.

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Advantage: Economic models offer a way to get a complete view or picture of an economic
situation and understand how economic factors fit together. A good model to start with in
economics is the circular flow diagram. Such a diagram indicates that the economy consists of
two groups, households and firms, which interact in two markets: the goods-and-services market
(also called the product market), in which firms sell and households buy, and the labor market,
in which households sell labor to business firms or other employees.

(2) Opportunity Cost

Opportunity Cost:

Graphical presentation:

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Graph shown, you can use Goods A 80 unit and Goods B 50 unit together. On the other hand, you can
also have consumed Goods A 40 unit with Goods B 60 unit. If you consumed Goods B 60 than you have to
sacrifice (80-40) =40 unit of A which is called opportunity cost of B in terms of A.

(3) Production possibility Curve

Production possibility Curve: The production possibilities curve (PPC) is a graph that shows all
combinations of two goods or categories of goods an economy can produce with fixed resources.

Advantage:

The Production Possibilities Curve (PPC) can be used toillustrate the concepts of scarcity, opportunity cost,
efficiency, inefficiency, economic growth, and contractions. The production possibilities curve (sometimes
called the production possibilitiesfrontier) illustrates the trade-offs and opportunity costs of production
choices. The production possibilities curve is important to both microeconomics and macroeconomics.

Graphical presentation:

This chart shows all the production possibilities for an economy that produces just two goods;

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robots and corn. The chart shows the different combinations of robots and tons of corn the
economy could produce. If all resources were devoted to the production of robots, the economy
would produce 100 robots, but zero tons of corn. On the other end of the chart, we see the other
extreme where all resources were devoted to the production of corn. 50 tons of corn could
be produced, but then zero robots would be produce

Special Question

Question: Micro economies are the economics of resource allocation and price determination. Explain.

Answer:

Resource allocation

Micro economics analyses how the scare resources are allocated efficiently to the production of goods
and services. It helps in resolving the central economic problems of the economy at an individual level.
Allocation of resource involves what to produce, how to produce and how much to produce.

Microeconomics examines the principles of supply and demand, market equilibrium, consumer
behavior, production theory, cost analysis, and the behavior of firms in various market structures. It
seeks to understand how individuals and firms allocate their scarce resources to maximize their utility
or profits, and how these decisions collectively shape the overall allocation of resources in the
economy.

Price determination.

The theory of price in microeconomics states that the price of a particular good or service is
determined by the relationship between producer supply and consumer demand at any given
point. Prices should rise if demand exceeds supply and fall if supply exceeds demand
Microeconomics examines the principles of supply and demand, market equilibrium, consumer
behavior, production theory, cost analysis, and the behavior of firms in various market structures. It
seeks to understand how individuals and firms allocate their scarce resources to maximize their utility
or profits, and how these decisions collectively shape the overall allocation of resources in the
economy.

One of the central concerns of microeconomics is the determination of prices in individual markets.
It studies how the interaction between buyers and sellers, driven by their preferences and
constraints, leads to the establishment of equilibrium prices. Additionally, microeconomics also
explores the efficiency and equity implications of resource allocation and analyzes various market
failures and the potential role of government intervention to address them.

While microeconomics primarily focuses on the individual level of price determination and resource
allocation but it is often integrated with macroeconomics, which deals with the aggregate behavior
of the entire economy, to provide a comprehensive understanding of economic systems and policies.

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Module A (Introduction)
Indicative Part (Q & A)

1.What is economics? How Microeconomics and Macroeconomics are different?

2 ‘Scarcity brings in the problem of choice’- Explain.
3.What is the relevance of Opportunity Cost in economics?
4.What are the three basic questions an economy confronts?
5.Give examples of positive and normative statements.
6.Interpret ‘Capital’ as a factor of production
7.Explain ‘Human Resources’ and ‘Entrepreneurship’ as factors of production.
8.Draw and explain a production possibilities curve for an economy that produces milk
andcookies. What happens to this frontier if disease kills half of the economy’s cows?

9.Use a production possibilities frontier to describe the idea of “efficiency.”

10.What are the two subfields into which economics is divided? Explain what each
subfieldstudies.
11.What is the difference between a positive and a normative statement? Give an example of
each.
12.Why do economists sometimes offer conflicting advice to policymakers?
13.The circular-flow diagram illustrates that, in markets for the factors of production,
wherehouseholds are sellers, and firms are buyers.’- Do you agree? Explain.

14.A point inside the production possibilities frontier is efficient, but not feasible’- Do you
agree?Explain.
15.A point on the production possibilities curve is feasible and efficient.’- Explain.

16 Explain major economic systems following a historical perspective.

17.Explain the difference between Market and Command Economy based on their
characteristics.
18.You win BDT100 in a basketball pool. You have a choice between spending the money
now and putting it away for a year in a bank account that pays 5 percent interest. What is the
opportunitycost of spending the BDT100 now?

19.Identify positive and normative statements from the following: a. the new law will
reduce national income; b. New Bank Companies Act is a good piece of legislation; c.
Parliament ought to pass law X; d. President should veto the new law.

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20.Classify the following topics as relating to microeconomics or macroeconomics: a. a

family’sdecision about how much income to save; b. the effect of government regulations
on auto emissions; c. the impact of higher national saving on economic growth; d. a firm’s
decision abouthow many workers to hire; e. the relationship between the inflation rate and
changes in the quantityof money

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