Lecture Notes 1-2

Introduction to Economics
The word "economics" is derived from a Greek word "oikonomia" which means "household
management" or "management of house affairs" i.e., how people earn income and resources and
how they spend them on their necessities, comforts and luxuries.
Defining Economics
Definition provided By Adam Smith
Economics is a subject which deals with production, consumption, exchange and distribution of
wealth.
Book Name: “An Inquiry into the Nature and Causes of the Wealth of Nations” in 1776
Definition provided By Alfred Marshall
Dr. Alfred Marshal defined economics as a “study of mankind in the ordinary business of life; it
examines that part of individual and social actions which is closely connected with the attainment
and with the use of material requisites of well-being.
Book Name: Principles of Economics (1890)
Definition provided By Robbins
Robbins defined economics as a “Science which studies human behavior as a relationship between
ends and scarce means which have alternative uses.
Book Name: Nature and Significance of Economic Science (1932)
Economy refers to a geographical area’s or country’s economic condition, status, and activities
the economy is defined as the sum of all arrangements for the production, distribution, purchase,
consumption, and exchange of goods and services, as well as employment, in a society or nation.
Economics on the other hand, is a subject concerned with the efficient utilization of available
resources Economics is an organized body of knowledge that studies the behavior and activities of
an individual, firm, or nation that are related to maximizing the satisfaction of wants or advancing
welfare and economic growth through optimum production, distribution, consumption, and
exchange of scarce resources that have alternative uses
Types of Economy
Capitalist Economy: In a capitalist economy (or free market economy), all the factors of
productions are under the ownership and control of private individuals for profit Basically, private
property is the foundation and profit motive is the driver of the capitalist economy
Socialist Economy: In a socialist economy, the factors of production are collectively owned and
controlled by the community, indicated by the State In this economy, there is a central planning
authority which decides the allocation of resources among the members of the community
Mixed Economy: Mixed Economy is a combination of a capitalist and socialist economy, where
in both markets and government decide the allocation of resources in a mixed economy, a system
is found that contains the features of both a controlled economy and market economy, and so there
is a co-existence of the public and private sectors in this type of economy
Why Economics
• The first reason to study economics is that it will help you understand the world
• The second reason to study economics is that it will make you a more astute participant in
the economy
• The third reason to study economics is that it will give you a better understanding of both
the potential and the limits of economic policy
• The principles of economics can be applied in many of life’s situations
Nature of Economics
(i) Economics is a science or an art?
Economics is both a science and an art. It is considered as science because it is a systematic
knowledge drived from observation, study and experimentation. Since Science teaches us to
know a phenomena and art teaches us to do a thing. Pakistan is facing inflation is derived
knowledge but then the use of fiscal and monetary policy to deal with inflation is an art.
(ii) Is it a Positive science or a normative science?
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
behavior, and deals with what the economy is actually like. Such scientific-based analysis is
critical to good policy analysis.
Economic policy, 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 (policy economics). Normative economics looks at
the desirability of certain aspects of the economy. It underlies expressions of support for
particular economic policies.
Economics has both theoretical and practical side. Therefore, it is both positive and a normative
science.
Branches of Economics
Microeconomics: The branch of economics that studies the behavior and actions of individual
economic agents, such as a person, households, businesses and industries It analyses specific
aspects of the economy
Macroeconomics: The branch of economics that studies broad economic issues such as economic
growth, unemployment, trade balance, poverty, the standard of living, inflation, and so on It
analyses the entire economy
Studying Choice in a World of Scarcity
• Wants of individuals (and society) are unlimited
• Resources are limited
• So, unlimited wants cannot be satisfied with limited resources
• Therefore, having more of one thing usually means having less of another
• Economics is study of how people make choices under conditions of scarcity, and of the
results of those choices for society
Opportunity Cost and trade off
Opportunity Cost: Economists use the term opportunity cost to indicate what one must give up
to obtain what he or she desires the idea behind opportunity cost is that the cost of one item is the
lost opportunity to do or consume something else. In short, opportunity cost is the value of the
next best alternative
Trade Off: Economics is all about tradeoffs A tradeoff is defined as any situation where making
one choice means losing something else, usually forgoing a benefit or opportunity
Goods and services
Goods and services are the output of an economic system Goods are tangible items sold to
customers, while services are tasks performed for the benefit of the recipients
Goods refer to tangible items that can be used, stored, evaluated, taken home, or consumed
Durable Goods are products that last for three years or more They include mobile homes, large
and small appliances, furniture and furnishings, carpets and rugs, automobiles
Perishable goods deteriorate over time and under extreme temperatures and humidity, and must
thus be handled with particular care
Necessity goods something needed for basic human existence, e g food, water, housing,
electricity
Comfort goods a good which isn’t a necessity, but gives enjoyment/ utility or comfort, e g Fan,
Bike etc.
luxury goods are a good for which demand increases more than proportionally as income rises
Luxury goods are said to have high income elasticity of demand in other words, as people
become wealthier, they will buy more and more of the luxury good
Complementary Goods are Goods which are used together, e g TV and DVD player
Substitute goods: Goods which are alternatives, e g Pepsi and Coca cola
Public goods refer to those goods that are available to all members of society Usually it is
owned by government
Private Goods are those goods which are owned by individuals