TOPIC 1

INTRODUCTION
DEFINITION OF ECONOMICS
Different economists and different textbooks have defined economics
in different ways:
Economics is the study of the wealth of Nations by Adam Smith.
Economics is the science which studies human behaviour as a
relationship between ends and scarce means which have alternative
uses by Lionel Robinson.

Economics is the study of how we choose to use scarce productive

resources with alternative uses by Alfred Marshall

Among many definitions, the leading one today defines economics as a

science concerned with those aspects of social behaviour and those
institutions, which are involved in the use of scarce resources to
produce and distribute goods and service in the satisfaction of human
wants. It should be noted that Economics is a social science concerned
with the manner in which human beings and societies attempt to
satisfy their unlimited and often conflicting wants by means of
resources which are not only limited but also have alternative uses.
The study of economics is usually approached from two levels i.e
MICROECONOMICS and MACROECONOMICS theory and analyses.

In all the definitions, the basic meaning is the same, that is, the study
of “Constrained maximization”

The Scarcity and Choice

The study of Economics is all about man and its society with the aim
of studying how certain decisions are made. This arises due to human’s
(man’s) unlimited wants and limited resources. The inability of
resources to meet Human’s (man’s) wants is the cause of scarcity. If
the means and want’s truly meet or equal then there will be no
scarcity, no choice to make, no economic problems and therefore no
economic systems.

But this is not the case, when human’s wants are numerous and could
not meet or (unmatched) by the limited resources. Therefore, there is
need for choice making.

The choice making is the crucial aspect of decision making in decision

making process in economics. All the economic units (households,
firms and the government) do make choices, just as the households
decide on which of its wants to satisfy with the limited available
resources, the firm also allocate resources to produce goods and
services while the government equally faces the problem of choice
making.

The Scale of Preference and Opportunity Cost

The choice making is not all easy and to avoid making wrong choice,
the numerous wants are ranked in their order of preference. This is
based on the importance attached to the goods and services. If such
rankings of priorities in the order of importance is in descending order,
then the problem of scale of preference in economic arises. The scale
of preference which indicates the priorities attached to each wants
which enhance the choosing of wants that gives (yields) highest
satisfaction to the consumer and highest return to producer. Since,
not all wants can be satisfied, then, some will be left behind. This
brings about the Concept of Opportunity Cost in Economics.

Opportunity Cost is the forgone alternative, that is, the choice not
made. In economics, the real cost of not doing something is not the
monetary cost or value but rather the cost of forgoing the alternative
to the one chosen. This is the basic fact of economic life that every
economic unit must face whenever a decision is to be made on
consumption and production.
The Fundamental Economic Problems

Economics is conventionally defined as the study of scarcity which is

the root of economic problems. In the world, resources are limited
while human’s wants are unlimited (numerous). The satisfaction of
human’s wants, means the non-satisfaction of the other. Therefore, the
society whether capitalist, socialist or mixed economy are faced with
the problem of making the basic economic decisions.

The decision ae as follows:

(a) What good to produce and in what quantity? This question arises
as a result of scarcity of resources. It is the allocation of scarce
resources among the alternative uses. This problem is better
explained in the theory of price system through demand and
supply analyses.
(b)How are the goods to be produced so as to make the least use of
resources? Here, there are more than one technically possible
ways in which goods and services can be produced. This
question emphasized more on the technically feasible ways by
which a particular resource can be used.
(c) How is society’s output of goods and services divided among its
members?
(d)What must be done to increase the economic capacity in order to
improve goods and services from year to year? Problems of this
type are topics in the theory of economic growth.
(e) How can the economy achieve full utilization of its resource and
How efficient is the production and distribution of the society’s
resources?
(f) Are the country’s resources not sufficient to satisfy the most
pressing need of all the individual consumers, then, there can be
no question of leaving idle any of the resources that are
available.
It should be noted that human’s wants are many numerous but the
means (resources) required for making them available are limited in
supply. It is therefore, impossible to satisfy all these human’s wants of
everybody, if goods are not scarce it would not be necessary to
consider how they are to be produced.

METHODOLOGY OF ECONOMIC ANALYSES

Buy methodology of economics, it refers to the systematic procedures

and philosophy for studying a particular discipline. The economic
methodology can be described using the deductive and inductive
approach.

Deductive Approach: It is the use of mathematics to simplify the

economic formulation. This makes it to be precise and interesting, it
involves three, steps,

(i) Formulation of assumptions concerning the subject matter,

(ii) Articulation of the logical inferences and implication of
assumptions, which will formulate into and hypothesis, and,
(iii) Verification of the conclusion or hypotheses reached.

Inductive approach: This involves the use of historical data to

explain scientific generalizations. In using the method of induction, we
perform statistical measurements based on economic data and
establish statistical significance of the variables involved. This methods
relies on statistics and econometrics model and it involves three steps_

i. Observation of real world problems (phenomena).

ii. Formulation of testable hypotheses from the observed real
world events, and ,
iii. Empirical testing of the formulated hypotheses against the
real world. Problem

Tools of Economics Analyses

Certain graphical and mathematical concepts are frequently
encountered in economics analysis. This includes the following:

i. The functional Rule: this specifies a relationship situation, that

is, if X and Y are related to each other, then we say that they
are functions of each other.
ii. Stocks and Flows Variables: stocks are variables that are
defined at a point in time, while flows are variables define
over a period of time.
iii. Graphing functions: A graph shows how the quantity of one
variable changes when another variable changes.
iv. Necessary and Sufficient Conditions: In general, a necessary
condition is something which must be present but by itself
guarantee the result while a sufficient condition is something
that, if present, does guarantee the result but it need not to
be there for the result to occur.
v. Exogenous and Endogenous variables: Endogenous variables
are ones that are explained within a theory while on
Exogenous variables are the ones that influence the variables
but are themselves determined by factors outside the theory.
Exogenous variables are sometimes referred to as
autonomous variables (Y = a + bY).

Macroeconomics and Microeconomics

Economists derive apply principles about economic behavior at two

levels.

Macroeconomics
Macroeconomics examines either the economy as a whole or its
basic subdivisions or aggregates, such as the government,
household, and business sectors. An aggregate is a collection of
specific economic units treated as if they were one unit. Therefore,
we might lump together the millions of consumers in the Nigerian
economy and treat them as if they were one huge unit called
“consumers”.

In using aggregates, macroeconomics seeks to obtain an overview,

general outline, of the structure of the economy and the
relationships of its major aggregate. Macroeconomics speaks of
such economic measures as total output employment, total income,
aggregate expenditures and the general level of prices in analyzing
various economic problems. No or vary little attention is given to
specific units making up the various aggregates. Macroeconomics
examines the beach, not the sand rocks, and shells.

Microeconomics

Microeconomics looks at specific economic units. At this level of

analysis, the economist observes the details of an economic unit or
very small segment of the economy, under a figurative microscope.
In microeconomics, we talk of an individual industry firm or
household. We measure the price of a specific product, the number
of workers employed by a single firm, the revenue or income of a
particular firm or household or the expenditures of a specific firm,
government entity, or family. In microeconomics we examine the
sand rocks and shells not the beach.

The macro-micro distinction does not mean that economics is so

highly compartmentalized that every topic can be readily labeled as
either macro or micro many topics and subdivision of economics are
rooted in both Example: While the problem of unemployment is
usually treated as a macroeconomic topic (because unemployment
relates to aggregate spending) economists recognize that the
decisions made by individual workers in searching for jobs and the
way specific product and labor markets operate are also critical in
determining the unemployment rate.

Positive and Normative Economics

Both macroeconomics and microeconomics involved facts, theories

and policies. Each contains elements of positive economics and
normative economics. Positive economics focuses on facts and
cause-and-effect relationships. It includes description, theory
development, and theory testing (theoretical economics). Positive
economics avoids value judgments, tries to establish scientific
statements about economic behaviour, and deals with what the
economy is actually like. Such scientific-based analysis is critical to
good policy analysis.

Policy economics, on the other hand, involves normative economics,

which incorporates value judgments about what the economy
should be like or what particular policy actions should be
recommended to achieve a desirable goal. Normative economics
looks at the desirability of certain aspects of the economy. It
underlies expressions of support for particular economic policies.

Positive economic concerns that is while normative economics

embodies subjective feelings about what ought to be. Examples:
Positive statement “The unemployment rate in several European
Nations is higher than that in the United States”. Normative
statement: “European Nations ought to undertake policies to reduce
their unemployment rates”. A second positive statement: “other
things being equal, if tuition is substantially increased, college
enrollment will fall. “ College tuition be should be lowered so that
more students can obtain an education.” Whenever words such as
“ought” or “should” appear in a sentence. There is a strong chance
you are encountering a normative statement.

Most of the disagreement among economists involves normative

value-based on policy questions. Of course, there is often some
disagreement about which theories or models best represent the
economy and its parts. But economists agree on a full range of
economic principles. Most economic controversy thus reflects
differing opinions or value judgments about what society should be
like.