Is economics a science?

1 st lesson
Economics is generally regarded as a social science. Because it studies human
behavior it has all the features to be known as a social science. Economists use
the experiments in this subject focusing on human behavior. Therefore, the
conclusions of economics are more uncertain.
The importance of learning economics can be given below.
Important in ruling a country.
Malith Bandara Important as a successful citizen.
BBA (Acc.Sp), Masters in Economics
Important inefficient decision-making as investors, consumers, and producers.
0174131585 Important to vote for a party
Important to make logical decisions for students
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Important
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in selecting a better job
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Microeconomics is concerned with the study of the behavior of consumers and Macroeconomics is the branch of economics concerned with the study of
firms and the determination of market prices and quantities transacted of factor aggregate economic activity. The macroeconomic analysis investigates how the
inputs and goods and services. economy as a whole
Following this analysis, the economic behavior of units that make decisions of an Aggregate functioning of an economy takes place by the sum of the small units of
economy such as consumers, laborers, production firms, and the government is each sector, institution, and persons of an economy.
done by microeconomics. Some examples for the units studied in macroeconomics are given below.
Some examples for the units that studied under microeconomics are given below Aggregate output level Economic Growth
Scarcity Market operation of each good Aggregate income level Economic recession
Marginal cost Consumer behavior at the market Inflation Balance of payments
A choice made from alternatives Market operation of a production firm Employment level Exchange rate
The production function of a firm Studying demand and supply Money supply
Unemployment level
The production cost of a firm Exports / Imports
Investment

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 Statements that answer the questions of what, what happened, what will happen Normative statements are the statements presented about what should exist
and the statements that can be verified are called positive statements. and what should happen in a society. Normative statements are subjective
It can be seen as a scientific and theoretical nature in most positive statements. statements rather than objective statements i.e. they carry value judgments.
Most economic theories also explain positive statements. Positive statements are As normative statements are based on personal views, beliefs and traditions they
objective statements that can be tested or rejected by referring to the available are mostly subjective. It is difficult to test the correctness of normative
evidence or theories. statements objectively using real-world data.

Some examples of positive statements are given below Some examples for normative statements are given below
A positive relationship exists between money supply and the price level. It should increase the monthly salary of every government worker by Rs.5000
A negative relationship exists between price and quantity demand. Sri Lanka should obtain foreign aids for the development
Every citizen should be given free medical facilities
The population growth rate in Sri Lanka 2020 is 0.5% Every person should earn equal income
Higher interest rates will reduce house prices Unemployment is more harmful than inflation
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The difference between economic goods and non-economic goods with examples. The way of converting noneconomic goods to economic goods.
Goods with scarce supply are called economic goods. There is no room to convert economic goods to non-economic goods there are
Example :-Pens, books, rice, wheat flour. situations where non-economic goods can become economic goods.
There is a resource cost and opportunity cost involved with economic goods. Example:- Oxygen used by a diver when diving,
Economic goods are produced with the intervention of man and with the Oxygen given to patients,
combination of resources. Solar panels produced with solar power.
As economic goods are produced with scarce resources it involves a price and Bottled water.
also there is a problem of choice. Oxygen, solar power, water used in the above situations are converted into
Goods with unlimited supply at zero price are called non-economic goods. economic goods and this has happened because it involves resource cost and an
Examples :- Air, water and sun light gifted from nature. opportunity cost
There is no resource cost and opportunity cost with non-economic goods.

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Economic resources and non-economic resources. Natural resources as renewable resources and non-renewable resources
Resources with a limited supply against unlimited wants of a society or resources
with examples?
which are scarce in nature are called economic resources. Resources gifted from nature used in the production process are called natural
As scarcity is considered the main characteristic of economic resources when resources. Example :- sun light, air, rain water
consuming opportunity costs arise with these resources. Example:- A used land, The resources which do not used up with consumption are called renewable
fuel resources. These resources are generated again.
The non scarce resources gifted by nature and which do not involve an Example:- forestry, fisheries
opportunity cost are called non economic resources. The resources which are used up with consumption and the resources which do
not generated again are called nonrenewable resources.
Example:- Diamonds, gas, gold, coal

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The things or resources which are used to produce goods and services to satisfy Land
human wants are called as production resources or factors of production. The
resources which are limited in supply from the production resources are called as Natural resources gifted from nature which can be used productivity in production
economic resources. are called land. All resources such as forests, minerals, ocean, rivers, wild animals
and air located above or below the earth are included under land.
Since economic resources are scarce they have a price. The resources which are
unlimited in supply are free resources. Their supply is unlimited even at a zero
price. The Following are the characteristics of land
1. Being a gift of nature
Factors Payments/ Earnings
2. Supply being inelastic
Land Rent
Labor Wage 3. Immobility
Capital Interest 4. Possibility to improve productivity
Entrepreneurship Profits 5. Non uniformity (Location, climate, minerals, aquatic resources)
6. Payment for land being rent
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Labour Capital
Man made aids used in the process of the production of goods and services are
Mental and physical efforts used to produce goods and services are called labor. called capital.
Characteristics of capital are
Characteristics of labor. 1. Being a man made factor 4. Consists of productivity
1. Being a live factor 5. Possibility to use in production again and again
2. Being a real factor
2. Mobility 6. Possibility to depreciate
3. Being a stock factor 7. Benefit of capital being interest
3. Heterogeneity
Economic overhead capital
4. Possibility to improve productivity through education and training Capital goods which facilitate production of goods and services and the
5. Possibility of decision making and organization distribution process of an economy are called economic overhead capital. Also
6. Payment for labor being wages called as economic infrastructure. Examples: Ports, air ports, high ways
Economic infrastructure affects encourage domestic and foreign private
investments. Due to this, today. The governments of most countries provide this
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type of capital.
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Entrepreneurship Factors productivity

Combining all factors of production within an economy, organizing of production
activities, operation and policy making while bearing risks is called entrepreneurship Average output obtained by a unit of an input is called productivity.
Functions performed by an entrepreneur are as follows.
1. Mobilizing factors of production engaged in policy decision making.
2. Organization of production activities Factor productivity =
3. Introduction of innovations
4. Risk bearing
5. Receive profit as the reward Labor Productivity =

Characteristics of an entrepreneur are,

Determinants of factor productivity are
1. Being a human factor Technology
2. Creativity Human capital
3. Successfully facing challenges Management
4. Identifying of opportunities
5. Positive thinking Division of labour and specialization
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Scarcity Opportunity cost?
When selecting one alternative from all other alternatives available, the value of
Wants is called scarcity. This is a universal concept. Because, this is a common the next best alternative forgone is called opportunity cost.
problem for every economy, which is in a poor or rich state. Important points relating to the opportunity cost
The scarcity is always considered as a relative concept based on human needs 1. The concept of opportunity cost is not a financial concept. It is a real concept.
and wants. Scarcity of resources is the foundation of Economics. This scarcity 2. Opportunity cost is a subjective concept.
makes choices unavoidable. 3. There is an external cost which occurs with opportunity cost
Choice
Since scarce resources have alternative uses, instead of selecting many, people Opportunity Cost can be zero as follows.
have to choose one alternative. Eg :
The problem of choice arises in an economic system due to 1. Using unemployed resources to produce a good or a service
1. Scarcity of resources 2. When there are no alternative uses of resources.
2. Based on alternative uses of resources 3. When there are free goods/ unlimited resources/ non-economic goods.
(Sunlight, Air)
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Basic economic questions / Problems Economic systems

What is produced in what quantity? Problem on resource allocation Mechanism or the institutional framework made by people who live within a
How the scarce resources should be used among the alternative uses to the society to solve basic economic problems is called an economic system.
needs and wants of people. Elements (Institutional features) of an economic system are as follows.
Households Non-governmental organizations
Markets
How to produce? - Problem on technology use Government
Incentives
Which technique should be used to produce goods and services. It means whether Business firms Legal structure
to use capital intensive technique or labour-intensive technique. Labour organizations Values, traditions and culture

For whom to produce? Problem on how to distribute production Types of economics systems
The distribution of national income among the owners of factors. Here, those who
earn a high income will acquire more from the production and those who earn a 1. Traditional economics system
low income will be responsible for less from the production. 2. Command economic system or Centrally planned economic system
1/16/2023 Seminar in Economics by Malith Bandara 2022 A/l Batch 19 3. Market economics system
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The criteria for the classification of economic systems? (Following The characteristics market economic system
are some features of an institutional arrangement) 1) Private ownership of property
Based on decision co ordination mechanism economic system can be classified as 2) Freedom of choice or free entrepreneur
follows.
3) Competitive market situation
Market economic system
Command economic system 4) Incentives based on self interest
Based on ownership of resources and property rights economic systems can be 5) Operation of price mechanism
classified as follows. 6) Consumer sovereignty
Capitalist economic system 7) Limited role for the government
Socialist economic system 8) Price mechanism act as the co ordination mechanism of solving basic economic
Based on Nature of incentives problems.
Material incentives
Moral incentives
Coercive incentives
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There are some disadvantages also in the market economy such as, Price system
Inefficient allocation of resources. The market economy sometimes regarded as the price system as well. The
coordinating mechanism of the market system is the price system. Adam smith
Failure to provide public goods and merit goods. introduces the price as an invisible hand, because the basic economic problems of
Negative Externalities. what and how much to produce, how to produce and for whom to produce are
solved by the guidance of price system.
Occurrence of economic disparities.
The three functions of the price in the market economy
In a market economy, consumer is the most powerful agent, because which goods
1) Signaling /Information Function
and services, from which quantity to be produced are decided by producers
Price changes convey contrasting messages to consumers and producers
which firms to be in the market. This characteristic is known as the concept of (suppliers) about whether to enter or leave a market
consumer sovereignty. 2) Incentive Function
The fundamental force in a market economy which determines the behaviour of All incentive is something that motivates a producer (supplier) or consumer to
economic units is the self-interest. Consumers, producers, factor providers take follow a course of action or to change behaviour.
decisions for their self- interest. The self-interest of a producer is maximizing 3) Rationing/ Distribution Function.
The greater the scarcity, the higher the price and the more the resource is
his limited
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income. Seminar in Economics by Malith Bandara 2022 A/l Batch 23
rationed. This can be seen in the
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market for fuel.
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Resolving Basic Economic Questions in a Market Economic System The economic system which solve basic economic problems by the commands
1. What and What Quantities to Produce - This basic economic question is provided by a central planned authority is known as command economic system.
resolved by the price mechanism in the market economy. The decisions will be Characteristics of a central planned economic system are as follows
made on the basis of price signals coming from the goods markets and factor Public ownership of property except labor.
markets. Thus the consumer ensures through the price signals that s/he gets
the best value from the money spent on goods and services. Use of planned mechanism to solve basic economic problems.
2. How to Produce - In a market system producers will employ the most efficient Act based on social welfare.
techniques of production based on the available technology with the lowest Act to achieve public well-being.
cost of production and resources. Thus the question is resolved by the prices in Weaknesses of command economic system are as follows.
the factor market.
Problem related to coordination and organization.
3. For Whom to Produce - Individual incomes are determined by the quantity of
resources owned by individuals and the prices of the resources. Thus the factor Collapse of quality control
owners' income also depends on the factor prices. The market economic Insufficiency of incentives
system will produce goods for those who can afford to buy them based on the Environmental degradation
signals gained from the factor market.
Greater scope for corruption
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Resolving Basic Economic Questions in a Command Economic system

The economic system where resources are distributed using both price mechanism
1. What and What Quantities to Produce
A central planning bureau makes decisions on what and what quantities to produce. and planned mechanism is known as a mixed economic system.
Allocation of resources is done by an announcement issued by the Central Planning
Agency (CPA) based on information on required goods and services. After deciding the
field of production with amounts, the CPA informs the production unit and business firms
Why we consider Sri Lanka as a mixed economy?
about their decisions. The CPA then sets the prices of goods and leave individuals to buy
what they wish at the State controlled prices. Both private and public sector own recourses.
2. How to Produce
Decisions related to resources allocation is done through planned mechanism
Methods of production are selected by the CPA. After deciding what and what quantities and competition operates through private sector.
to produce, the CPA decides on a suitable technology and what inputs to be used for the
production process by the various industries and CPA commands the industries to follow Self-interest is the motivational factor of the private sector and social welfare is
the technology they suggest. Production units are State owned enterprises and they
follow CPA directives. the motivational factor of the public sector.
3. For Whom to Produce Consumer, producer, owners of factors of production and government are the
Since the resources belong to the State, factor prices are not determined by the market active agents of the economy.
process but by the CPA. The distribution of products and income are largely set by the
CPA. The government decides wage rates and prices of goods and services. There are no
large disparities in income distribution, and social needs and requirements are the
priorities of the CPA when addressing this issue.
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Social market economy List criteria in the assessment of the performance of an economic system?
Market economic system where government intervenes to promote social justice is
known as a social market economy. This economic system highly emphasizes on 1) Full employment
social justice. Attempts to combine the principle of a free market with social 2) Economic efficiency
concerns. Strong focus on free and fair competition with social adjustments. 3) Economic growth
Norway, Germany, Sweden and Finland are the examples. 4) Economic freedom
Socialist market economy 5) Price stability
A socialist market economy is totally different from a social market economy. In 6) External stability
this economic system government owns resources. However, decisions related to
resource usage are taken by the private sector. Production firms have the right to 7) Fair distribution of income
determine price of goods and the quantity. 8) Quality of environment
China, Hungarian, Bulgaria are some examples for socialist market economies.

The term transition Economics is used to describe countries that are in the process
of moving
1/16/2023 from Central plan economy to
Seminar in Economics a mixed
by Malith Bandara 2022or free market economic system.
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Production Possibility Frontier Increasing opportunity cost

possibility curve shows the various possible combinations of two When moving along the production possibility curve by increasing the fixed
goods which can be produced when all the resources in the economy are fully and amount of a certain good the situation of increasing the amount of foregone
efficiently used for the production process at a given period of time under the good is identified as increasing opportunity cost.
constant .
The shape of the Production Possibility Curve with this type of opportunity cost is
The assumptions that are used to construct Production Possibility frontier concave to the origin.
1) Producing only two goods Marginal Opportunity cost increases
2) This situation represents a given period of time. The reasons for increase opportunity cost
3) Resource stock remains constant Resources are non-homogeneous
4) Technology remains constant during the concerned period The resources efficient for one industry are not efficient for the other Industry in
5) Fully utilization of resources with maximum efficiency (Full employment + Full the same way.
production= Productive efficiency ) The production techniques vary in the production of different goods and services
6) Resources can be transferred from one production to another production. The production process behave according to the law of diminishing Returns
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 Constant opportunity cost.
When moving along a production possibility curve with increasing the fixed
amount of a certain goods the situation of remaining the forgone amount of the
other good unchanged is identified as constant opportunity cost.
The marginal opportunity cost be fixed.
The reasons for opportunity cost becoming constant
1. Homogeneous Resources
2. Resources efficient for one industry and is the same
for the other industry also
3. The production process exhibits constant returns to
scale

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Explain allocation of resources between present consumption and

future consumption through PPC and how is it effect economic
growth?

An future resource stock is determined by the way of utilizing scarce

resources. If more resources are utilized for current consumption, production of
capital goods will be decreased in future.
In this way decrease in the production of capital goods will reduce future
production possibility and it will be a barrier for economic growth.
On the other hand if the economy allocate more resources for capital formation According to first graph as the economy allocated more resources towards the
without allocating more resources for current consumption at present future consumption economic growth rate was lower.
production capacity of the economy will be increase due to increase of current According to second graph, as the economy allocated more resource for the
investment level. production of capital goods than consumer goods, economic growth rate was
higher.
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 Economic Efficiency
Economic efficiency is utilization of limited resources of the economy efficiently
to produce the maximum amount of goods and services most wanted by the
society.
Production efficiency means achieving of maximum output from all resources of
an economy. This can be shown by any point on the PPC. Two main conditions
are necessary for the production efficiency. They are,
i. Full employment and
ii. Full production.
Allocative efficiency (optimum product mix) means distribution of limited
resources of an economy based on preference. The choice of the
production combination that indicates allocative efficiency should be chosen
after comparing the marginal cost and marginal benefit and product
combination for which MC= MB.
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Negative output gap

Zero Output gap Economic Boom
This occurs when the actual output is below the potential output.
This arises when actual output equals the This occurs when the actual National output
potential output. There is a natural rate of is increasing at a faster rate than the general Positive output gap
unemployment at the zero output gap. growth Trend. Point movement A to B. This occurs when the actual output is above the potential output.

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