Fundamentals of

Economics
Bharat Raj Adhikari
Asst. Professor, Economics
Gandaki University, Pokhara
 Economics (BCT303)
Program: Bachelor of Information Technology
Semester: 5
Credit Hour: 3 CR.

Course Objectives:
The aim of this course is to enhance understanding of economic theories and its application to develop student's skills in
personal and professional decision making in the areas of management, IT, and business.
Course Description
This course of Economics consists of the introduction to economic theories and application. It consists of theory of demand
and supply, theory of consumer behavior, theory of production, cost and revenue curves, theory of product pricing and
contemporary macroeconomics like national income accounting, money banking and international trades with reference to
Nepal.
Course Outcomes:
After successful completion of the course the students shall be able to;
 understand the basic concept of microeconomics and macroeconomics.
 analyze the behavior of consumer, producer, market and firms and their decision-making process in practical sense.
 aquire knowledge about cost, revenue, market structure and market equilibrium.
 acquaint with concept of national income and its various concepts and their determinants.
 apprehend the role and importance of money, banking and international trade in the national economy.
 Unit 1.
Introduction to Economics
 Introduction to economics with various definition and ten
basic principles.
 Concept of microeconomics, macroeconomics.
 Distinction between microeconomics and macroeconomics
and their mutual interdependence.
 Learning Objectives

 With aim to get information about introduction of Economics.

 With aim to know about micro economics and macro economics.

 With aim to know about various concept, principles & theories

of economics and their application.
• Man lives in a society and performs certain activities. Based on these
activities, certain relations among human beings exist.

• These relations become the subject matter of different social

sciences. For example, political activities and relations are studied in
political science, social activities and relations are studied in
sociology. Similarly, economic activities and relations are studied
under Economics.
• Economic activities are those activities, which are concerned with the
earnings and living.
• Human ends are unlimited but resources are limited and scarce.
• Only efficient use of scarce resources, which can satisfy unlimited
human wants.
• The term economics has been derived from Greek word ‘Oeconomicus’ which
is also made of two different words Oeco and nomicus, where oeco means
household and nomicus denoted for science. Therefore in earlier times
economics was only the study of household affairs.
• In ancient times, economics wasn’t a distinct subject and it was
integrated part of other social sciences like politics, logics, ethics, state affairs
etc. Therefore it was called Political Economy.
• According to Great philosopher Aristotle, ‘Economics is the science of
household management and an art of wealth-getting and wealth-
spending’.
• But after the publication of historical book ‘An Enquiry
into the Nature and Causes of Wealth of Nation’, in 1776 AD. by Scottish
Scholar, Adam Smith (Also known as Father of Economics) and then
economics became a separate social science.
 Definition of Economics
Classical Era; Wealth definition (1776-1890)
Economics is the science of wealth
Neo-classical Era; Welfare definition (1890-1932)
Economics is the science of material welfare
Modern Era; Scarcity and choice definition (1932
onwards)
Economics is the science of administration of
scarce means and unlimited wants.
 Definition of Economics

• Adam Smith; defined economics as a ‘science of wealth’. That

studies about the nature and causes of wealth of nation.
• Alfred Marshall; defined ‘Economics as a subject t h a t
concerned with those activities which increase the material welfare of
mankind’. It concerns with the human welfare and betterment.
• Lionel Robbins; gave a more exact and precise definition of
Economics and said, “Economics is the science that studies
human behavior as a relationship between unlimited ends and
limited/scarce means which have alternative uses”.
 Importance of Economics
• Economics deals with a shortage/scarce of resources.
• It concerns with how to distribute resources in
economy.
• In some extent government should intervene in
economy.
• Knowledge about the principle of opportunity cost.
• Helpful in knowledge and understanding.
• Helps in economic forecasting.
• Helpful for decision making.
• Allocation and efficient use of resources.
 Basic Principles of
Economics
• According to N.G. Mankiw, there are ten basic principles of
economics.
These principles are classified into three groups, on how
people make decisions, how people interact and how
economy w o r k s as a whole.
• How people make decision
Principle 1: People face trade off.
Principle 2: The cost of something is what you give up to get it.
Principle 3: Rational people think at margin.
Principle 4: People respond to incentives.
• How people interact
Principle 5: Trade can make everyone better off.
Principle 6: Markets are usually good way to organize economic
activity.
Principle 7: Government can sometimes improve market
outcomes.
• How economy works as a whole
Principle 8: A country ’s standard of living depends on its ability to
produce goods and services.
Principle 9: Price rise when government prints too much money.
Principle 10: Society faces a short run trade off between inflation
and unemployment.
Scope of Economics
 Microeconomics
The term micro has been derived from the Greek word Mikros, that
means small or single.

• Microeconomics is a branch of economics that deals with

the study of economic behavior of an unit of economy.
An unit might be an individual or a firm. i.e, a consumer, a
producer, income of a firm or a industry etc.

• It analyses the way in which the decisions are taken by the

economic agents, concerning the allocation of the resources
that are limited in nature for individual well beings..
 Macro Economics
The term macro has been derived from the Greek word Makros, that means
big or aggregates.
Macroeconomics is a branch of economics that deals with the study of economic
behavior as whole of economy. i.e, general equilibrium, money demand & supply,
aggregate demand & supply, international trade, inflation etc.
 It is the branch of economics which studies the entire economy, instead of
individual units.
 Basically, it is the study of aggregates and average.
 It analyses the economic environment as a whole, wherein the firms,
consumers, households and government make decisions.
 National income, general price level, the balance of trade and balance of
payment, level of employment, level of saving and investment, inflation,
deflation etc. are the key areas of macroeconomics.
 Difference between Microeconomics and
Macroeconomics
is of differences Microeconomics Macroeconomics

Microeconomics is a study of individual units of economy. Macroeconomics is a study of economy as a whole.

1. Nature

Microeconomics studies individual economic units such as Macroeconomics is a study of national aggregates
2. Area of study a consumer, a household, a firm, an industry, a commodity such as national income, national output, general
price level etc.

3. Problems The central problem of microeconomics is price The central problem of macroeconomics is
determination of individual commodities and factors of determination of national income, employment
and output of a particular country.
production.
4. Equilibrium It is based on partial equilibrium analysis i.e. other things It is based on general equilibrium.
remaining the same.

5. Mortality The subject matter of macro economics is

The subject matter of micro economics is mortal. immortal.
It is suitable to study the problems of individual economic It is suitable to solve the large/national problems.
6. Suitability
problems.

It is also called price theory or value theory. It is also called theory of income and employment
7. Alternative name
or Keynesian theory.
Interdependence between Micro and
Macroeconomics
Macroeconomics is the study of the economy as a whole, whereas
microeconomics is the study of specific economic components. It
will be wrong and incomplete to understand that the two
approaches are distinct, independent, and unrelated to one
another. Although economists may prioritize one analysis over the
other based on convenience, neither method is complete without
the other. Rather of competing with one another, the two branch
of knowledge strengthen one another. As Edward Shapiro puts it,
Strictly speaking, there is only one economics. Macroeconomic
theory has a foundation in microeconomic theory and
micro economic theory has a foundation in macroeconomic theory”.
The next section illustrates how micro and macroeconomics are
interdependent.
1. Dependence of microeconomics on macroeconomics:

Every microeconomic problem involves i n macroeconomic

analysis. How much should a firm pay for the services of a
labor? Since, the questions relate to a particular firm, it
comes under microeconomics. But the wages of one firm are
related to and depend upon wages of other firms in the locality.
Thus, every price, every wage, every income is dependent in some
way or the other, directly or indirectly upon the prices, wages and
means of all other products, of all workers and of all individuals in
the economy.
2. Dependence of macroeconomics on microeconomics:

Macroeconomic analysis necessarily requires knowledge

of microeconomic analysis. Society as such doesn’t exist, it is the
sum of individuals. Individuals collectively make up a community,
many firms constitute an industry, and many industries
collectively make up an economy. We can’t get a proper idea
of the working of the entire economic system except through
individuals, households, firms and industries. The sum of all
individual firms’ production constitutes the output of the entire
economy. The sum of individual incomes is known as national
income. In fact, we can’t understand the working of an
economy unless we study the principles and the motives which
govern the behavior of individuals, households and firms.
• Prof. Samuelson has rightly remarked, that
“ There is really no opposition between micro and macroeconomics.
Both are absolutely vital and you are only half educated if you
understand the one being ignorant of the other ”.
• Microeconomics and macroeconomics are complementary to
each other, as they both aimed at maximizing the welfare of the
economy as a whole.
• The fundamental difference between micro and macro
economics lies in the scale of study. Microeconomics, gives more
importance to the determination of price, whereas
macroeconomics is concerned with the determination of income of
the economy as a whole.
• The objective of microeconomics can be achieved through
the best possible allocation of scarce resources. Conversely,
the objective of macroeconomics can be achieved through the
effective use of all the available resources of the economy.
Read this and do Accordingly

Past is waste paper.

Present is a newspaper.

Future is a question paper.

So, read & write carefully otherwise
your life will be a tissue paper.
The End

Thank you