ECONOMICS: MEANING, NATURE AND IMPORTANCE

WHAT IS ECONOMICS AND WHY IS IT IMPORTANT?

• Economics is the study of how humans make decisions in the face of scarcity.

• These can be individual decisions, family decisions, business decisions or societal decisions.

• Economics is that branch of social science which is concerned with the study of how individuals,
households, firms, industries and government take decision relating to the allocation of limited resources
to productive uses, so as to derive maximum gain or satisfaction.

• Simply put, it is all about the choices we make concerning the use of scarce resources that have
alternative uses, with the aim of satisfying our most pressing infinite wants and distribute it among
ourselves.

• Adam Smith (1723 – 1790) – a philosopher and economist who introduced division of labor in his book
entitled The Wealth of Nations.

• Division of Labor - which means that the way one produces a good or service
is divided into a number of tasks that different workers perform, instead of all the tasks being done by the
same person.

NATURE OF ECONOMICS

• Economics is the scientific study of the ownership, use, and exchange of scarce
resources – often shortened to the science of scarcity.

• Economics is regarded as a social science because it uses scientific methods to build theories that can
help explain the behavior of individuals, groups and
Organizations.

• Economics attempts to explain economic behavior, which arises when scarce resources are
exchanged.
NATURE OF ECONOMICS

• In terms of methodology, economists, like other social scientists, are not able to undertake controlled
experiments in the way that chemists and biologists are.

• Hence, economists have to employ different methods, based primarily on observation and deduction
and the construction of abstract models.
• As the social sciences have evolved over the last 100 years, they have become increasingly
specialized.

• This is true for economics, as witnessed by the development of many different strands of investigation
including micro and macro economics, pure and applied economics, and industrial and financial
economics.

• What links them all is the attempt to understand how and why exchange takes place, and how exchange
creates benefits and costs for the participants.

• economics is a science: science is an organized branch of knowledge, that analyses cause and effect
relationship between economic agents. further, economics helps in integrating various sciences such as
mathematics, statistics, etc. to identify the relationship between price, demand, supply and other
economic factors.

• positive economics: a positive science is one that studies the relationship between two variables but
does not give any value judgment, i.e. it states ‘what is’. it deals with facts about the entire economy.

• normative economics: as a normative science, economics passes value judgement, i.e. ‘what ought to
be’. it is concerned with economic goals and policies to attain these goals.
• economics is an art: art is a discipline that expresses the way things are to be done, so as to achieve the
desired end.

• economics has various branches like production, distribution, consumption and economics, that provide
general rules and laws that are capable of solving different problems of society.

• therefore, economics is considered as science as well as art, i.e. science in terms of its methodology
and arts as in application.

• hence, economics is concerned with both theoretical and practical aspects of the economic problems
which we encounter in our day to day life.

SOME TERMINOLOGIES USE IN ECONOMICS

• Scarcity means that human wants for goods, services and resources exceed what is available.

• Resources, such as labor, tools, land, and raw materials are necessary to produce the goods and
services we want but they exist in limited supply.

• Data is very important in economics because it describes and measures the issues and problems that
economics seek to understand.

• Ceteris Paribus – a Latin phrase for other things being equal or all things held constant. This assumption
use by all economist that no other economically relevant factors change.

WHY THE DIVISION OF LABOR INCREASE OUTPUT?

• First, specialization in a particular small job allows workers to focus on the parts of the production
process where they have an advantage.

• Second, workers who specialize in certain tasks often learn to produce more
quickly and with higher quality.

• Third, specialization allows businesses to take advantage of economies of scale, which means that for
many goods, as the level of production increases, the average cost of producing each individual unit
declines.

TRADE AND MARKETS

•Instead of trying to acquire all the knowledge and skills involved in producing all of the goods and
services that you wish to consume, the market allows you to learn a specialized set of skills and then use
the pay you receive to buy the goods and services you need or want. This is how our modern society has
evolved into a strong economy.

WHY STUDY ECONOMICS?

• Helps us understand the problem and be part of the solution.

• Aids in solving issues of the world in relations to budgets, regulations, and laws in general.
• It makes us a well-rounded thinker.

MICROECONOMICS, AND MACROECONOMIC

• Microeconomics focuses on the actions of individual agents within the economy, like households,
workers, and businesses.

• Macroeconomics looks at the economy as a whole. It focuses on broad issues such as growth of
production, the number of unemployed people, the inflationary increase in prices, government deficits,
and levels of exports and imports.

• Microeconomics and macroeconomics are not separate subjects, but rather complementary
perspectives on the overall subject of the economy.
HOW ECONOMISTS USE THEORIES AND MODELS TO UNDERSTAND ECONOMIC ISSUES ?

• John Maynard Keynes (1883–1946), one of the greatest economists of the twentieth century, pointed
out that economics is not just a subject area but also a way of thinking. Keynes famously wrote in the
introduction to a fellow economist’s book: “[Economics] is a method rather than a doctrine, an apparatus
of the mind, a technique of thinking, which helps its possessor to draw correct conclusions.” In other
words, economics teaches you how to think, not what to think.

• He is considered as the Father of Modern Economics.

• They analyze issues and problems using economic theories that are based on particular assumptions
about human behavior.

• A theory is a simplified representation of how two or more variables interact with each other. Sometimes
economists use the term model instead of theory.

HOW ECONOMISTS USE THEORIES AND MODELS TO UNDERSTAND ECONOMIC ISSUES?

•A good model to start with in economics is the circular flow diagram

HOW TO ORGANIZE ECONOMIES: AN OVERVIEW OF ECONOMIC SYSTEMS

• Traditional economy, which is the oldest economic system and is used in parts of Asia, Africa, and
South America. Traditional economies organize their economic affairs the way they have always done
(i.e., tradition). Occupations stay in the family. Most families are farmers who grow the crops using
traditional methods. What you produce is what you consume. Because tradition drivesthe way of life,
there is little economic progress or development.

• In a command economy, economic effortis devoted to goals passed down from a ruler or ruling class.

• A market is an institution that brings together buyers and sellers of goods or services, who may be either
individuals or
businesses.

• In a market economy, decision-making is decentralized. Market economies are based on private

enterprise: the private
individuals or groups of private individuals own and operate the means of production (resources and
businesses). Businesses supply goods and services based on demand.

• Most economies in the real world are mixed. They combine elements of command and market (and
even traditional) systems.
REGULATIONS: THE RULES OF THE GAME

• Markets and government regulations are always entangled. There is no such thing as an absolutely free
market.

• Regulations always define the “rules of the game” in the economy. Economies that are primarily
market-oriented have fewer regulations—ideally just enough to maintain an even playing field for
participants. At a minimum, these laws govern matters like safeguarding private property against theft,
protecting people from violence, enforcing legal contracts,
preventing fraud, and collecting taxes. Conversely, even the most command-oriented economies operate
using markets.

• The government heavily regulates decisions of what to produce and prices to charge. Heavily regulated
economies often have underground economies (or black markets), which are markets where the buyers
and sellers make transactions
without the government’s approval.

• Ex. DTI will regulate prices among basic commodities via putting a price ceiling.

• The question of how to organize economic institutions is typically not a black-or-white choice between all
market or all government, but instead involves a balancing act over the appropriate combination of market
freedom and government rules.

MICROECONOMICS

• The study of modern economics is all started at the economic activity of individual level, either person or
firms.
in which it is called microeconomics.

• It is introduced through the study of scarcity, money prices, and the supply and demand of goods and
services.

• It also deals on the demand and supply of labor and financial markets
• Price Elasticity

• Consumer Choices or Behavior

• Introduction to Production, Cost and Industry Structure

• Different types of competition (perfect competition, monopolistic competition, oligopoly, and monopoly)

• Externalities

CHOICE IN A WORLD OF SCARCITY

• Budget Constraints - all possible consumption combinations of goods that someone can afford, given
the prices of goods, when all income is spent; the boundary of the opportunity set
• Opportunity Cost - measures cost by what we give up/forfeit in exchange; opportunity cost measures the
value of the forgone alternative. It is the value of the next best alternative.
• Trade-offs – an economic activity in which they have to give up things they desire to other things they
desire more.

MATHEMATICS OF BUDGET CONSTRAINTS

• Budget equation – B = PX + PY
• y = mx + b
• y is the quantity of first good
• x is the quantity of the second good
• m is the slope
• b is the y-intercept

MARGINAL DECISION-MAKING AND DIMINISHING MARGINAL UTILITY

• Marginal analysis - which means examining the benefits and costs of choosing a little more or a little
less of a good.

• Utility - satisfaction, usefulness, or value one obtains from consuming goods and
Services

• Law of diminishing marginal utility - which means that as a person receives more of a good, the
additional (or marginal) utility from each additional unit of the good declines.
• The law of diminishing marginal utility explains why people and societies rarely
make all-or-nothing choices.

• Sunk costs - which are costs that were incurred in the past and cannot be
recovered, should not affect the current decision.

• The budget constraint diagram containing just two goods is not realistic.

• After all, in a modern economy people choose from thousands of goods.

THE PRODUCTION POSSIBILITIES FRONTIER AND SOCIAL CHOICES

• Production Possibilities Frontier (PPF) - a diagram that shows the productively efficient combinations of
two products that an economy can produce given the resources it has available.

DIFFERENCE BETWEEN A BUDGET CONSTRAINT AND PRODUCTION POSSIBILITIES FRONTIER

• The first is the fact that the budget constraint is a straight line.
• This is because its slope is given by the relative prices of the two goods, which from the point of view of
an individual consumer, are fixed, so the slope doesn’t change.
• In contrast, the PPF has a curved shape because of the law of the diminishing returns. Thus, the slope
is different at various points on the PPF.

• There are no specific numbers because we do not know the exact amount of
resources this imaginary economy has, nor do we know how many resources it takes to produce
healthcare and how many resources it takes to produce education. If this were a real world example, that
data would be available.

LAW OF DIMINISHING RETURNS IN PRODUCTION POSSIBILITIES FRONTIER

• Law of diminishing returns - which holds that as additional increments of resources are added to a
certain purpose, the marginal benefit from those additional increments will decline.

• The law of diminishing marginal utility that we introduced in the last section is a more specific case of the
law of diminishing returns.

PRODUCTIVE EFFICIENCY AND ALLOCATIVE EFFICIENCY

• Productive efficiency means - given the available inputs and technology, it i impossible to produce more
of one good without decreasing the quantity that is produced of another good.
• Allocative efficiency means that the particular combination of goods and services on the production
possibility curve that a society produces represents
the combination that society most desires.

COMPARATIVE ADVANTAGE

• When a country can produce a good at a lower cost in terms of other goods; or,
when a country has a lower opportunity cost of production.

BUDGET CONSTRAINTS AND PPF DIAGRAM

• These two diagrams speaks about trade-off

• Basic themes of these 2 diagrams:
• Scarcity
• Trade-offs
• Economic Efficiency

CONCEPT OF DEVELOPMENT AND ECONOMIC PLANNING

WHAT IS DEVELOPMENT?

• Development is a process that creates growth, progress, positive change or the addition of physical,
economic, environmental, social and demographic components.

• The purpose of development is a rise in the level and quality of life of the population, and the creation or
expansion of local regional income and employment opportunities, without damaging the resources of the
environment.

• Development is visible and useful, not necessarily immediately, and includes an aspect of quality
change and the creation of conditions for a continuation of that change.

ECONOMIC DEVELOPMENT

• Economic Development is all about programs, policies or activities that seek to

improve the economic well-being and quality of life for a community.
• What “economic development” means to you will depend on the community you live in.

• Each community has its own opportunities, challenges, and priorities.

• Your economic development planning must include the people who live and work in the community.

ECONOMIC DEVELOPMENT STRATEGIES

Though economic development priorities vary, economic development strategies often aim for common,
positive results, such as:
• Creating more jobs and more job variety
• Keeping businesses and getting new ones
• A better quality of life
• More people and businesses paying taxes
• More productive use of property
• Promoting your community’s assets
• Making and selling more local products
• Getting more skilled workers living in your community

WHAT IS AN ECONOMIC DEVELOPMENT

PRACTITIONER?

Just like economic development is different for communities, so are the economic development
practitioners that support them. Generally, an economic development practitioner is the one who:

• Plans, designs, and delivers economic development strategies.

• Acts as an important connection between public and private sectors and the community.
• Takes part in economic development planning and sometimes leads or gives input into the
policy-making process.
• Administers policy, programs, and projects.

WHO IS RESPONSIBLE FOR ECONOMIC DEVELOPMENT WORK?

Many people doing economic development work are economic development practitioners or Economic
Development Officers or “EDOs” for short. Some people don’t hold the official title in their job, but are
doing economic development work all the time.
Lots of different groups can work in economic development, including:

WHO IS RESPONSIBLE FOR ECONOMIC DEVELOPMENT WORK?

Lots of different groups can work in economic development, including Local Indigenous and
non-Indigenous governments:
• Chambers of commerce
• Technology or business incubators
• Regional development agencies
• Community colleges, universities and research institutions
• Provincial and Federal governments
• Special authorities (like airports, ports, etc.)
• Not-for-profits & humanitarian organizations
• Business and industry associations
• Workforce development organizations
• Neighborhood groups
• Utilities providers (help with business attraction and growth)

WHO IS RESPONSIBLE FOR ECONOMIC DEVELOPMENT WORK?

Their role in a community can include:

• Leading economic development planning
• Working toward the community’s mandate or vision for economic development
• Supporting sector relationships
• Communicating and responding to economic development concerns and opportunities
• Leading projects to enhance economic development
• Providing accountability, ensuring economic development isn’t an afterthought

WHAT IS AN ECONOMIC DEVELOPMENT ORGANIZATION?

•Economic development organizations deliver programs, policies, and activities to improve the economic
well-being of their communities.

FOUNDATION FOR SUCCESSFUL ECONOMIC DEVELOPMENT

Economic development work needs a strong community foundation. Three principals for your economic
development
activities to succeed are:
• Community Support
• It is important to have the support of your community for everything from project plans and budgets, to
marketing and promotion – your community members are very important.
• Partnerships
• Strong partnerships are essential to the success of your economic development activities. Partnerships
will help to leverage resources, build capacity and encourage collaboration.
• Preparedness
• Start with an economic development plan and get feedback and approval. Once community support and
partnerships are in place you are ready to get started.
• We know communities aren’t one-size-fits-all. Our aim is for these economic development resources to
support your community’s goals, whether you’re urban or rural, large or small, Indigenous or
non-Indigenous.

ECONOMICS OF DEVELOPMENT

• Many developing countries suffer from endemic poverty, slow economic growth, unequal distribution of
income and wealth, low levels of agricultural and industrial investment, and ineffective government
services. Compounding, and partly giving rise to, these problems are shocks emanating from the world
economy.
• The Economics of Development (ECD) major provides students with the theoretical knowledge, policy
awareness, and analytical techniques to tackle many of the key issues facing their countries in respect of
economic development and economic policy analysis.
• The major integrates macroeconomic issues with the underlying microeconomic processes,
emphasizing the importance of, on the one hand, the global economic environment and, on the other
hand, domestic
institutions, regulatory frameworks and socio-economic groups.

• It pays particular attention to the impact of international and domestic economic policies on growth,
poverty and income distribution in developing countries, and seeks to bring out the fundamental linkages
between economic growth and human development.

• There is no agreement among economists with regard to the meaning of the term ‘economic planning’.
The term has been used very loosely in economic literature.
• It is often confused with communism, socialism or economic development.
• Any type of state intervention in economic affairs has also be entreated as planning.
• But the state can intervene even without making any plan.
• What then is planning? Planning is a technique, a means to an end being the realization of certain
pre-determined and well-defined aims and objectives laid down by a central planning authority.
• The end may be to achieve economic, social, political or military objectives.
• Therefore, “the issue is not between a plan and no plan, it is between different kinds of plans.”
• One of the most popular definitions is by Dickinson who defines planning as “the
making of major economic decisions what and how much is to be produced, how when and where it is to
be produced, to whom it is to be allocated, by the conscious decision of a determinate authority, on the
basis of comprehensive survey of the economic system as a whole.”
• Economic planning as understood by the majority of economists implies deliberate
control and direction of the economy by a central authority for the purpose of achieving definite targets
and objectives within a specified period of time.
NATIONAL ECONOMIC AND DEVELOPMENT AUTHORITY

• The National Economic and Development Authority is the country’s premier socioeconomic planning
body, highly regarded as the authority in macroeconomic forecasting and policy
analysis and research. It provides high-level advice to policymakers in Congress and the Executive
Branch. Its key responsibilities include:

• Coordination of activities such as the formulation of policies, plans, and programs to efficiently set the
broad parameters for national and sub-national (area-wide, regional, and local development);
• Review, evaluation, and monitoring of infrastructure projects identified under the Comprehensive and
Integrated Infrastructure Program consistent with the government’s thrust of increasing investment
spending for the growing demand on quality infrastructure facilities; and
• Undertaking of short-term policy reviews to provide critical analyses of development issues and policy
alternatives to decision-makers.