Central Concepts of Economics

Unit A
CENTRAL CONCEPTS OF
ECONOMICS
BY
NEHA CHAWLA
ECONOMICS LECTURER
What is Economics
 The study of how individuals and societies choose to

allocate and use scarce resources to satisfy unlimited wants.
 Embedded in the definition are four key words:

 Choice
 Resource Allocation
 Scarcity
 Unlimited Wants
What is Economics
Economics involves
 Examining how individuals, businesses, governments,

and societies choose to use scarce resources to satisfy
their wants.
 Organizing, analyzing, and interpreting data about

those economic behaviors.
 Developing theories and economic laws that explain

how the economy works and to predict what might
happen in the future.
Why we study Economics
A good understanding of this subject will not only help us

learn economics as an academic discipline but would also help
us understand the world and the reality that we are in.
Specifically, a study of this course will help us:
1. Appreciate events in economic history and understand how
the present-day system of economics came to be.
2. Learn the ways in which economics explain the activities of
man through its tools, models, principles and standards.
3. Make use of production and consumption concepts in
business endeavors or simply in understanding people’s
economic behavior.
Why we study Economics
4. Manage economic and financial affairs; thereby,

achieving a good standard of living for ourselves,
our families and our nation.
5. Understand government’s functions in economics
and choose leaders who are economically sensible.
6. Understand what is happening in the economy of
the Philippines and the world and know how
nationwide and worldwide economic policies and
events affect us all.
Goods
Good is something that is intended to satisfy some wants

or needs of a consumer and thus has economic utility. It is
normally used to denote tangible commodities such as
products and materials that can be purchased and
consumed.
Goods can be categorized as:
 Economic Good and Free Good
 Durable Good and Nondurable Good
 Intermediate Good and Final Good
 Consumer Good and Capital Goods
Services
Service is an intangible commodity. More

specifically, services are an intangible equivalent of
economic goods. These are tasks that you pay other
people to perform for you.
Services are work that one person performs for
another for payment. Services include the work of
sales clerks, technical support representatives,
teachers, nurses, doctors, lawyers, etc.
Economic Resources
Economic Resources (also called factors of

production or productive inputs) are what people use
to produce goods and services. These are inputs used
by the firm to produce a good or service. These inputs
include the following:
 Land
 Labor
 Capital
 Entrepreneurship
Scarcity
 Scarcity exists because individuals want more than

can be produced. It implies that there are not enough
resources to satisfy human wants.
 The condition in which our wants are greater than

the resources available to satisfy them.
 Scarcity means making choices. Wants are unlimited

and resources are limited. Therefore, scarcity exists,
and people must make choices.
Introduction to Micro and Macro Economics
The whole economic theory is broadly divided into

two parts – Micro economics and Macro economics.
Micro economics deals with the analysis of an
individual unit and Macro economics with economy
as a whole.
Micro Economics
Micro economics studies the decisions made by

individual and business concerning the distribution
of resources and prices of goods and services.
•It deals with a specific industry or a sector, the
connections of firms and households in the market.
•For example, microeconomics would study how a
company could lower its prices to increase its
product demand in the market.
Scope of Micro Economics
Microeconomics studies
 Buying decisions of the individual
 Consumers’ satisfaction
 Buying and selling decisions of the firm
 The determination of prices and in markets
 The quantity, quality and variety of products
 Profits
Macroeconomics
Macroeconomics, studies the behavior of not only

particular company or industries but whole
economy.
•It includes understanding how unemployment,
price levels, growth rate affects the economy wide
aspects such as the Gross National Product (GNP).
•For example, macroeconomics would look at how
an increase/decrease in net imports would affect a
nation's capital account.
Scope of Macro Economics
Macroeconomics studies
 Economic growth
 Unemployment and inflation
 Aggregate demand and aggregate supply
 Economic policies – fiscal and monetary
 International trade – exports and imports
 Money supply
Central Problem of economy
Society decides what goods to produce, how to produce them,

and for whom goods will be produced. Whether rich or poor,
every nation must answer the same three fundamental
economic questions:
1. What to produce?
2. How to produce?
3. For whom to produce?

What to produce
To answer the first fundamental economic question, a society

must decide the mix of goods and services it will produce. Will it
produce mainly food, or will it also produce automobiles,
televisions, computers, furniture, and shoes? The goods and
services a society chooses to produce depend, in part, on the
natural resources it possesses.
Because of scarcity, no country can produce every good it wants in

the quantity it would like. More of one good (say, television sets)
leaves fewer resources to produce other goods (such as cars). No
matter what nation we are talking about—the United States,
China, Japan, India, Russia, Cuba, or Brazil—each must decide
what goods will be produced.
How to produce
The next question every society has to answer deals with the
ways in which people produce the goods. Will farmers using
modern tractors produce food, or will farmers using primitive
tools produce it? Will the food be produced on private farms,
where production decisions are made by individual farmers,
or will it be produced on collective farms, where production
decisions are made by people in the government?
Answering this second question involves using scarce

resources in the most efficient way to satisfy society’s wants.
Again, decisions on methods of production are influenced, in
part, by the natural resources society possesses
For whom to produce
This answers how goods and services are distributed among

people in society. This actually involves two questions. Exactly
how much should people get and how should their share be
delivered to them? Should everyone get an equal share of the
goods and services? Or should a person’s share be determined
by how much he or she is willing to pay? Once the question of
how much has been decided, societies must then decide exactly
how they are going to get these goods to people. To do this,
societies develop distribution systems, which include road and
rail systems, seaports, airports, trains, ships, airplanes,
computer networks—anything that helps move goods and
services from producers to consumers in an efficient manner.
Problem of economic efficiency:
 Economic efficiency is the process of utilizing the resources in
such a way that the satisfaction or utility can be maximized.
 The choice is needed to determine how the limited resources
should be used in efficient sector among different areas of its use.
Problem of full utilization of resources:

 The availability of the factors of production is limited and its
alternative use is possible. Thus, choice is necessary to determine
how and in which sector these scarce resources must be used so
that they are fully employed.
Problem of economic growth:
 In developing countries, the level of economic development is
very low. The necessity of these countries is to reach in high
level by increasing the level of development.
 But due to the scarcity of resources for development works,
the economic problem arises.
 To employ these limited resources in more return providing
sector, the choice is needed.
 In this way, the problem of scarcity of resources for every
sector of economic activities and to choose them for optimum
utilization is the basic economic problem.
Positive and Normative Economics
Positive Economics
 It is concerned with “what is”.
 A statement that can be proved or disproved by reference to facts
 A way of describing and explaining economics as it is, not as it
should be.
Normative Economics
 It is concerned with what should be.
 A statement that reflects an opinion, which cannot be proved or
disproved by reference to the facts.
 a way of describing and explaining what economic behavior ought
to be, not what it actually is. It does involve value judgments
because it seeks to make recommendations for actions

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Unit A

 The study of how individuals and societies choose to

 Embedded in the definition are four key words:

 Examining how individuals, businesses, governments,

 Organizing, analyzing, and interpreting data about

 Developing theories and economic laws that explain

A good understanding of this subject will not only help us

4. Manage economic and financial affairs; thereby,

Good is something that is intended to satisfy some wants

Service is an intangible commodity. More

Economic Resources (also called factors of

 Scarcity exists because individuals want more than

 The condition in which our wants are greater than

 Scarcity means making choices. Wants are unlimited

The whole economic theory is broadly divided into

Micro economics studies the decisions made by

Macroeconomics, studies the behavior of not only

Society decides what goods to produce, how to produce them,

3. For whom to produce?

To answer the first fundamental economic question, a society

Because of scarcity, no country can produce every good it wants in

Answering this second question involves using scarce

This answers how goods and services are distributed among

Problem of full utilization of resources:

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