Course Title:

Macroeconomics
Class BSAF, 4th Semester
Instructure
Dr. Haidar Farooqe
[email protected]
Lecture# 1
Faculty of Management Sciences,
National University of Modern Languages, Islamabad
 Topic

Basic Concepts and Definition of Economics

 Lecture Contents

What is economics

The word economics

Definition of the economics

Scope and importance of economics

The Central economic problems

Microeconomics and Macroeconomics

 What is economics or what we think about economics
• When you start to study about economics
• We have many questions that, why economics, what is economics
• A study of money or to make money, wealth, currency, gold, banks, stock
exchange
• Some people also think that economics is, A study of that how to save
money, how to use less amount of money or miserliness
• All these reasons make good sense or provide background for a creative
thinking
 The word ‘Economics’
• The English term ‘Economics’
• Which is derived from the Greek word ‘Oikonomia’.
• Its meaning is ‘household management’.
 Adam Smith view about Economics
•Adam Smith (Scotland- 1723-1790)
•The father of economics
•Introduce first time economics as a subject
•On his book The Wealth of Nation (1776)
•“Economics is the science of wealth”
 Alfred Marshall view about Economics
• Alfred Marshall (UK- 1842-1924)
• One of the most influential economist of his time
• Principals of Economics (1890)
• Marshall argued that economics is the study of wealth and mankind
• “Economics is the science of material welfare of human”
 Lionel Robbins view about Economics
• Lionel Robbins (UK-1898-1984),
• A well-known economist
• ‘Nature and Significance of Economic Science’ (1932)
• Economics is not a science of wealth nor a science of welfare
• “Economics is the study of human behavior as a relationship between
ends and scarce means which have alternative uses”
 Modern definition of Economics
• Economics is the field of study that how societies use scarce resources
to produce valuable commodities and distribute them among different
people.
• Economics is the social science that studies how individuals,
organizations, and societies manage the scarce resources under their
control for the satisfaction of their needs and desires.
• Two things are very important behind the introduction of Economics/
behind the philosophy
• The goods and resources are scarce/rare/limited relative to unlimited
desires/wants
• The society must use its resources efficiently through alternative
options
Example
1. In 1920s people used radio and tape recorder for news and
entertainment
•Then Black and white TV -- Color TV –LCD--LED
2. You have a 3000 PKR (resource)
•Problems or Unlimited wants/needs
•College fee, Doctor Fee, Food (which problem is more important to
solve first a rational behavior or decision/preference is known is
economics)
 The scope and importance of modern economics

•To analyze the behavior of financial markets including interest rate and stock prices
•The question that why some people are more wealthy or high income
•While others are poor
•Why some countries have more income or higher income?
•Why unemployment and inflation goes up and down?
•What is international trade and the impact of globalization?
•How to use resources efficiently to reduce poverty
•What type of policy can be adopted?
•To achieved the goal of rapid economic growth, Full employment, Price stability and fair
income distribution
Continue
• How people make decisions: how much they work, what they buy,
how much they save, and how they invest their savings.
• Economists also study how people interact with one another.
• How the group of buyers and sellers of a good together determine the
price.
• It also analyze the forces and trends that affect the economy as a
whole,
• The growth in average income,
• The portion of the population that cannot find work
• The rate at which prices are rising.
 The Central economic problems

• Every economy in the world faces some basic economic problems

• Which are also known as the central economic problems regarding

• ‘What to produce, how to produce and for whom to produce’

 (i) What to Produce:
• It means that which commodities are to be produced and in what
quantities? The commodities which do not command positive prices
in the market would not be produced. Therefore only those
commodities with positive prices are to be produced.
• The quantity in which a commodity is to be produced is set at that
level where demand equals supply. If quality produced is more or less,
then there will be dis equilibrium in the market and price will
fluctuate. Hence, to maintain stable equilibrium price it becomes
necessary to make demand and supply equal.
 (ii) How to Produce:
• Which techniques are to be adopted’?
• Technology means the correct proportion in which the different factors of
production are to be employed.
• There are two types of techniques. A labour-intensive technique would
employ relatively more labour and less capital. On the other hand, capital-
intensive technique means more capital and less labour.
• The choice of technique depends on the prices of the factors of production.
• If labour is cheap and capital is expensive, a labour-intensive technique
would be considered and vice-versa.
• The prices of labour and capital are determined by the demand for and
supply of labour and capital respectively .In this way, the second problem
will be solved
 (iii) For Whom to Produce:
• Who will consume the goods
• The solution of this problem is very simple commodity can be
consumed only by people who have more purchasing power.
• Price mechanism determines the income of the workers, i.e.
purchasing power. The purchasing power of the owner of capital is
determined in the same way. Thus, when the price of every
commodity and every factor of production are determined, the third
problem will be solved.
 Microeconomics and Macroeconomics
• Microeconomics
• Microeconomics is the branch of economics which study the behavior
of individual entities such as markets, firms and household.
• Microeconomics analyzes individual agents, industries and markets,
their interactions, and the outcomes of their interactions. Individual
agents may include, for example, households, firms, buyers, and
sellers.
• The analysis of a smaller unit of the economy, a single producer, firm
behavior and decision in different circumstances and individual
consumer preferences
 Macroeconomics
• Macroeconomics is the branch of economics which study the overall
performance of the economy or the study of the economy as a hole.
• Macroeconomics analyzes the entire economy (meaning aggregated
production, consumption, saving, and investment) and issues
affecting it, including unemployment of resources (labor, capital, and
land), inflation, economic growth, and the public policies that address
these issues (monetary, fiscal, and other policies).
• The key macroeconomic variables are
• Unemployment rate, inflation rate, interest rates, exchange rate, GDP,
GDP growth rate, GNP, imports, exports, government Budget, budget
deficit and surplus
 Factors of production: (Land, Labor, Capital
and Entrepreneur)
1. Land
• This factor is the natural resource. It includes the surface of the earth,
lakes, rivers and forests. It also includes mineral deposits below the
earth and the climate above, as well as the small area of land that
makes up a farm or factory. The reward for owning land is the income
that is generated.
 2. Labor
• This factor is the human resource, the basic determinant of which is
the nation’s population. Not all of the population is available to work,
because some are above or below the working population age and
some choose not to work. The reward for labour is the wage or salary
that is paid.
 3. Capital
• This factor is any man-made aid to production. In this category we
would include a simple spade and a complex car-assembly plant.
• Capital goods help land and labour to produce more units of output,
they improve the output from land and labour. The reward to capital
is the rate of return that is earned. These three factors are organised
into units of production by firms.
 4. Entrepreneur
• This factor carries out two functions. First, the enterprise factor
organises the other three factors of production. Second, enterprise
involves taking the risk of production, which exists in a free enterprise
economy.
• The functions of enterprise are undertaken by a single individual, the
entrepreneur. In larger, more complex firms the functions are divided,
with salaried managers organising the other factors and shareholders
taking the risk. The return for enterprise is the profits that are made.