Introduction to Economics: ENG 4129 - Engineering,

Management and Entrepreneurship

Presented by Mr. Robert Mwale, MSc Financial Services (ZCAS University) MSc
Economics (Copperbelt University), BA Economics (UNZA),

Email [email protected]

Cell +260 973 595 462/+260 974 215 978

…..
 UNIT ONE OUTLINE
By the end of this unit, student must be able to:
• Provide the Definition of Economics
• Explain Why Study Economics
• Explain the Ten Principles of Economics
• Demonstrate an understanding of the basic Economics Concepts
• Demonstrate an understanding of the Central Economic Questions
• Explain the different Branches of Economics
• Be able to differentiate between Positive vs. Normative Economics
• And also be able to differentiate the different Methodology of Economics
 RECOMMENDED READING

• Mankiw Gregory (2005) Principles of

Macroeconomics; 3rd edition,
 THE DEFINITION OF ECONOMICS
• The study of how society (households and firms) manages scarce resources
• The study of the allocation of scarce resources ( labour force, capital stock,
natural resources, technology, entrepreneurship) to meet unlimited human
wants (desired good and services)
• Economists, therefore study how people make decisions: how much they
work, how much they buy, how much they save and invest their savings.
• They also study how the numerous buyers and seller of a good together
determine the price at which the good is sold and the quantity that is sold
• Economists also analyse factors and trends that affect the economy as a whole -
These include but not limited to the growth in average income, proportion of the
population that can not find work, the rate at which prices are increasing
 WHY STUDY ECONOMICS?
• It will help you understand the world we live in
Why for instance an increase in electricity tariffs, may result in prices
of goods and service to go up, why are some countries relatively well
developed than others
• It will make you an astute participant in the economy
Assist in making decision in your self run small businesses or large
corporations where you will be employed (pricing, spending, savings
and investment}
• It will give you a better grasp of the potential and limits of economic
policy
Issues such as subsidies, budget deficits, taxation, monetary policy
and exchange rate policy
TEN PRINCIPLES OF
ECONOMICS
 Ten Principles of Economics
.
The study of Economics is centred around 10 main building blocks or
central ideas; Ten Principles of Economics
Block A: How People Make Decision
Principle 1. People Face Trade-Offs: To get one thing we like we
usually have to give up another thing we also like.
- Clean environment and a high level of income - Govt can impose laws to
reduce pollution (improved health)and this is likely to increase the cost of
production, reducing profits lower wages, high prices
- Efficiency ( society getting the most out of the scarce resources and
Equity (benefits of these resources are distributed fairly among people)
- Govt policies (high income taxes on few individual to support welfare
programmes) may reduce the reward of working hard and ultimately lead
to low productivity
 . Ten Principles of Economics
Principle 2: The Cost of Something Is What You Give Up to Get It:
• Given that people face trade offs marking decisions requires
comparing the costs and benefits of alternative courses of action
• The opportunity Cost of an item is what you give up to get that item.
To get one thing we like we usually have to give up another thing we
also like.

Principle 3. Rational People Think at Margins: Marginal changes

describe small incremental adjustments to an existing plan of action
• People compare additional benefits and additional costs when
making a decision of what course of action to take
 Ten Principles of Economics
.
Principle 4. People Respond to Incentives: Intuitively
because people make decisions by comparing costs and
benefits their behaviour may change when the costs
and benefits change
• A price is a powerful incentive as it affects the
behaviour of buyers and sellers in a market.
• If the policy changes incentives, it will cause people to
alter their behaviour (however policies can have effects
that are not certain in future or produce undesirable
results)
 Ten
.
Principles of Economics
Block B: How People Interact
Principle 5. Trade Can Make Everyone Better Off
• As a person you can not do everything own your own,
grow food, make own cloths and build its own home.
Clearly one would benefit if they trade with others
• Competition results in gains from trading as most
economic gents produce similar products and compete for
the same customers
• Trade thus allows each person to specialise in the things
they know best.
• Similarly countries would benefit if they trade with one
another
Ten Principles of Economics
.
Principle 6: Markets Are Usually a Good Way to Organise Economic Activity
An economy allocates resources through decentralised decisions that of many firms and
households as they interact in markets for goods and services
-Adam Smith notion of the Invisible Hand- Participants in the economy are motivated by
self interest and the ‘invisible hand’ of the marketplace guides this self-interest into
promoting general economic well-being
-Because households and firms look at prices when deciding what to buy and sell, they
unknowingly take into account the social costs of their actions. As a result, prices guide
decision makers to reach outcomes that tend to maximize the welfare of society as a
whole.
-In contrast Communist countries worked on the premise of centralised allocation of
resources- Government
Ten Principles of Economics
. Government Can Sometimes Improve Market Outcomes:
Principle 7:
• If the invisible hand of the market can deliver why then do we need Government
• When the market fails (breaks down) government can intervene to promote efficiency
and equity.
• Markets work only if property rights /contracts are enforced
• Market failure : Market left on its own fails to allocate resources efficiently
Causes of Market Failure:
• An externality: which is the impact of one person or firm’s actions on the well-being
of a bystander (pollution).
• Market Power: Ability of a single economic agent to have substantial influence on
market prices
 Ten Principles of Economics
Block C: How the Economy as a Whole Works
. An Economy’s Standard of Living Depends on its ability to produce
Principle 8.
Goods and Services
Standard of living may be measured in different ways:
• By comparing personal incomes.
• By comparing the total market value of a nation’s production.
• Differences in the living standards among countries overtime is largely attributable to
productive
• Productivity : the amount of goods and services produced from each hour of a worker’s time
• Thus improving the standard of living may entail implementing policies aimed at raising productivity
• Creating an enabling policy and economic environment
• Investment in human capital, technology, infrastructure
 Ten Principles of Economics
Principle 9: Prices Rise When the Government Prints Too Much Money
.
• Inflation: an increase in the overall level of prices in the economy
• When the government creates large quantities of money, the value of the money falls.
• High inflation imposes various cost on society

Principle 10: Society Faces a Short - Run Trade - Off Between Inflation and Unemployment
• Phillips Curve named after an economist who first examined the relationship while
working at the London School of Economics
• Simply put, over a period of a year or two many economic policies push inflation and
unemployment in opposite directions
• Policy makers can thus in the short - run use monetary or fiscal policies to influence
this relationship
 Ten Principles of Economics
Graphical Illustration of the Phillips Curve – Short-term Trade Off Between Inflation and
Unemployment
.
 Ten Principles of Economics
Summary
.
• When individuals make decisions, they face trade-offs among alternative goals.
• The cost of any action is measured in terms of foregone opportunities.
• Rational people make decisions by comparing marginal costs and marginal
benefits.
• People change their behaviour in response to the incentives they face.
• Trade can be mutually beneficial.
• Markets are usually a good way of coordinating trade among people.
• Government can potentially improve market outcomes if there is some market
failure or if the market outcome is inequitable.
BASIC ECONOMIC CONCEPTS
 BASIC ECONOMIC CONCEPT
1. Scarcity: it means that resources (Land, labour, Capital,
.
Enterprenuership) are limited while human wants are unlimited.
• A scarce resource is a resource for which the quantity demanded at a mil
price would exceed the available supply.
• Since resources of production are scarce and there are not enough goods
and services to satisfy the total potential demand, choices must be made.
• Choice is only necessary because resources are scarce.
(a)Consumers must choose what goods and services they will have
(b) Producers must choose how to use their available resources, and what
to produce with them.
 BASIC ECONOMIC CONCEPT
2. Choice:
. Due to Scarcity, choosing one option meaning giving
up another – This leads to Opportunity cost.
3. Opportunity Cost: The value of the next best alternative
foregone when a choice is made
4. Wants vs. Needs: Needs are the basic requirements for
survival (food, water, shelter) whereas wants are desires that
goes beyond basic needs (Luxuries, entertainment)
THE CENTRAL ECONOMIC QUESTIONS
 The Central Economic Questions?
1. What
. to produce? (which goods and services should be
produced and in what quantities)
2. How to Produce? (What methods and resources should be
used – technology- ratio of labour and capital)
3. For whom to produce? (How are the goods and services
distributed)
BRANCHES OF ECONOMICS
 Branches of Economics
1. Microeconomics
.
Focuses on individual units like households, firms, and the markets.
Deals with pricing, demand and supply, production, and consumer
behavior
2. Macroeconomics
Deals with the economy as a whole
Focuses on inflation, unemployment, national income, fiscal and monetary
policy
POSITIVE VS NORMATIVE ECONOMICS
 Positive vs Normative Economics
1. Positive
. Economics
Describes and explains economic phenomena – objective and
fact-based
For instance,An increase in tax reduces consumption
2. Normative Economics
This involves value judgments- what ought to be.
For instance, The government should increase minimum wage
METHODOLOGY USED IN ECONOMICS
 METHODOLOGY USED IN ECONOMICS
a. Scientific Approach
.
• Observations – Hypothesis – data collection – testing - theory
b. Assumptions
• Economic models often simplify reality to focus on key
relationships
c. Models and Theories
• Tools used to explain economic behaviour and predict
outcomes
THE END