Introduction to

Economics
 Learning Objectives

• At the end of this topic students are expected to understand the following:

 The importance of studying economics

 The various definitions of Economics.

 The fundamental Economic problem

 To know the meaning of opportunity cost, scarcity, choice and scale of

preference.
 What is meant by “Thinking like an Economist”.
Learning Objectives

 Why Economics is a science

 The Levels of Economics

 The Economist as a scientist or policy Advisor

 Economic Models

 Economic systems
Why study Economics?

• Understand the national economy.

• Economics involves all aspect of our lives.

• Understand world economies.

• To be an informed voter.

• Production management and development of organizations.

• Understand the market.

• Financial strategic planning and decision making.

 Introduction

• Economics is a subject that everyone confronts in his/her daily lives.

• Human beings are faced with many decisions:

- basic life needs like, food, clothing, shelter, how to use non-
work time for leisure and domestic tasks.

• Making decisions involve interactions with people,

government and business organisations.
 The Economy

• The economy refers to households and firms in a particular

geographic region.

• Households – individuals such as mothers, fathers, sons,

daughters, carers, employers, employees, savers, taxpayers.

• Individuals purchase final goods and services for final

consumption and provide inputs into production- land,
labour and capital.

• Economic activity – how much buying and selling goes on in

Economic Agents

• Household

• Firms/ Businesses

• Governments

• All the economic agents are faced with the problem of

scarcity.
Meaning of Economics

• Economics originates from the Greek word ‘oikonomiko’

• Oikos means Home

• Nomos means Management

• Economics means Home Management

Some areas of economics Study?

• Interactions between households and firms in relations to

an exchange.

• Production of an output without the receipt of income

• How people make a living

• How resources are allocated to different use

• How human activities influence our wellbeing and the

environment.
 Definitions of Economics?

1. Economics is the study of the nature and the causes of a

nations’ wealth or the study of wealth – Adam Smith

2. Economics is the study of how society manages its scarce

resources –Mankiw (2004)
- how people make decisions regarding their resources.
Economic Resources (Factors of Production)

• Land – a factor of production, a free gift of nature used in the

production of goods and services. Eg. Gold, diamond, the
climate, sea,etc.

• Labour – human effort, it may be mental or physical, skilled

and unskilled used in the production of goods and services.

• Capital – Man made factor of production that are produced

not for it own sake but for the production of goods and
services.

• Entrepreneurship - acceptance or ability to take the risk of

combining the three factors of production despite the
Scarcity

• It is assumed that individuals in every economy have

unlimited wants/needs yet the resources available
to satisfy these needs/wants are limited.

• Scarcity means that society has limited resources and

cannot produce all the goods and services that
people wish to have.

• Scarcity explains the limited nature of society’s

resources.
Choice

• Since individuals and society are faced with limited

resources a choice needs to be made.

• Choice: making a selection out of our needs/wants

• Making a choice involves a trade off. ie. Trading one

thing for something you equally like.
 Scale of Preference

• In economics, one of the assumptions is that human

beings are rational ( Systematically and purposefully
doing the best to achieve your objectives.)

• To make a good decision, one has to draw a scale of

preference- that is a list of an individual’s,
government’s, firm’s wants/needs in order of
importance.
Importance of the scale of preference

• The scale of preference helps individuals, firms and

governments to make good decisions with regards to
their limited resources. – ie make rational Choices

• It helps society to rank their wants/needs in order of

importance.
Opportunity Cost

• Making a choice/decision involves some cost.

• Note that this does not mean the money cost

• Example: Coming to lectures today involves a cost. You

could have been working .

• Opportunity Cost: Whatever must be given up to obtain

something else.

• From our example above, we say the opportunity cost of

coming for lectures is the work you did not go to.
Importance of opportunity cost

• Making every decision involves Opportunity cost.

This helps society to make rational decisions –
knowing that choosing one thing involves forgoing
the other.

• All the economic units (government, individuals

and firms) face opportunity cost.
 Question

• Nancy goes to Accra mall because she needs to buy a shoe,

face powder and a bag. She discovers that the shoe cost 150
GHC, the face powder cost 50 GHC, and the Bag cost 200
GHC. Nancy has only 200 GHC. She would like to buy the bag
and if possible the shoe and then the face powder.

• What are Nancy’s wants/needs?

• What is Nancy’s available resource?
• Draw a scale of preference for Nancy.
• What will Nancy choose?
• What is the opportunity cost of choosing the shoe and the
face powder?
The Economic Problem

Due to scarcity of resources, every economy is faced with

three questions

• What to goods and services to produce?

• How goods and services should be produced

• Who receives the goods and services produced.

To satisfy these questions economies use scarce resources

that they possess namely: Land, Labour, Capital, entrepreneur,
money etc.
Economic Systems

• It refers to the way in which resources are organized

and allocated to provide the needs of citizens in an
economy.
Economic Systems

1. The Planned/Socialist/Command Economy

2. The Market/Capitalist Economy

3. The Mixed Economy

Planned /Socialist/Command Economy

An economy in which allocation of resources are

made through a central decision.

- Economic decisions are made by a central planner.

- Economic activities are also decided by a central

planner , prices, quantities, etc.

This economic system was practiced by the former

soviet union and Eastern Europe - Communism
Planned/ Socialist/Command Economy

• Economic activities are guided by central planners

• Central planners answer the key question of the economic

problem

• Government organizes economic activity in a way that

promotes economic wellbeing for the country and lead to a
more equitable distribution of resources.
 Main features of Planned Economy

• Market forces are not allowed to work.

- No interactions between firms and individuals.

• The system breeds inefficiency.- Laziness

• This system of planning an economy barely exist.

 2. The Market/capitalist Economy

• Resources are allocated through a decentralized decisions of

many firms and households as they interact in the markets
for goods and services.

• Private ownership of factors of production to produce goods

and services which are exchanged through price mechanism,
and production is operated for profit.

• Market prices are reflected through both the value of the

product to consumers and the cost of production ( the cost
of the resource used to produce the good)
Main features of Market/Capitalist
Economy

• Market forces are allowed to work to allocate resources in

the economy.

• There is efficient allocation of Resources.

- Capable of raising the standard of living of people

• However, Market failure can occur.

Market failure – a situation in which scarce resources are not
allocated to their most efficient use.
 Example of Market failure

Externality

• The cost/benefit of one person’s decision on the well being

of a third party which the decision maker does not take into
account in making the decision
The Market/capitalist Economy

• Capable of making some people and countries very rich and

others remain poor.

• The existence of profit motive provides and incentive for

entrepreneurs to take risks to organize factors of production

• Leads to development in technology and capital efficiency

which help generate profit for individuals and firms.

• Actors are interested in their own wellbeing.

• Market economies have proved very successful.

3. Mixed Economy

• A system which combines the planned and market economic

system to allocate resources in an economy.

• History has shown that any country which practices one

particular economic system is bound to face problems. Most
countries practice the mixed economic system.

• Example USA the world most capitalist economy has a little

bit of socialist policies in its economy. Eg. Medicaid, food
stamps etc.
Thinking like an Economist

• Every field of study has its own terms, language and way of
thinking.

• For eg. Mathematicians talk about integrals, vector spaces etc.

, Lawyers talk about torts, venue etc. , Psychologist may also
talk about ego, cognitive dissonance etc.

• In the same way Economist also use terms like supply,

demand, elasticity, comparative advantage etc.

• Note : In studying economics, it is important to know the

economists’ approach to the world, and the methodologies in
Economics as a science

• Economist use scientific methods in their research

- Observations to develop theories
- Data collection
- Use of data to evaluate theories.

• Like all scientists, they make appropriate

assumptions and build simplified models in order to
understand the world around them.
The role of Assumptions

• Assumptions make the world easier to understand.

• Assumptions may by unrealistic

Example , to study the effect of international trade
economists assume that:
-There are only two countries in the world and each
country produces two goods

• Though the assumption may be unrealistic, it helps

us to understand international trade in theory and
practice.
 The Levels of Economics

Economics is studied at two levels namely;

• Microeconomics - The study how households and

firms make decisions and interact in specific
markets.

• Macroeconomics - Study of the economy wide

phenomena such as inflation, unemployment,
economic growth etc.
The Economist as a Policy advisers
• Economists can serve as scientists as well as policy
advisers.

• Economist can explain the world (economic events)

– they act as scientists.

• When they try to make suggestions or help improve

the world – they are acting as policy advisers

• The use of language clarifies these two roles of

economist.
• Positive Economics - (descriptive) It seeks to
describe/explain economic conditions “as it is”. Using
scientific explanations to analyze different
transactions in the economy conditions.

• Normative Economics (prescriptive, represent

views)- economic analysis that judges economic
conditions as “what should be”. It is referred to as
policy economics because it deals with formulating
policies to regulate economic activity.
Economic Models

• Economic models are used to explain economic

issues in the world.

• Economic models are usually in the form of

mathematical equations and graphs.
Eg. The production possibility Frontier
• Definition – a graph that shows the combinations of
output that the economy can possibly produce given
the available factors of production and the available
production technology.

• The production possibility curve is a model used to

explain the concept of opportunity cost, scarcity,
efficiency and economic growth in a society.
 PRODUCTION POSSIBILITY FRONTIER
Mobile phones

2000

.C
A
1000

500
B

300 500 800 Televisions

• Assumptions:

• Available resources do not change and can be transferred

from one use to another.

• Technology is constant.ie there is no technological

advancement.

• Resources are efficiently and fully used.

• Resources are equally efficient in the production of all

products.

• Only two goods can be produced with the available resource.

• Let us imagine a country which produces only two
goods – televisions and mobile phones. The
television and mobile phone industry together use
the economy’s factors of production and available
technology.

• The production possibility frontier shows the

different combinations of output – television and
mobile phones that the economy can produce, given
the available factors of production and technology.
• Note that the graph will be drawn and illustrated on
the board.

• If all resources were used in the mobile phone

industry, 2000 mobile phones will be produced with
no televisions.

• And if all resources were used in the television

industry, 800 televisions will be produced with no
mobile phones.
• If the economy divides its resources between the
two industries, it will produce 1000 mobile phones
and 500 televisions. ( Point A on the graph on the
board).

• Producing at point D is not possible because

resources are scarce – the economy does not have
enough factors of production and technology to
produce at that level of output.
• The economy can produce at any point on or inside
the production possibility frontier but not outside it,
since the available resource will not allow for that
level of output. - Scarcity

• All points on the production possibility curve show

efficient levels of production. – the economy is
producing all it can from the available resources.
• Point B represents an inefficient level of output –
The economy is producing less than it could from the
available resources - 500 mobile phones and 200
televisions.

• If the economy decides to increase the production

of mobile phones to 1200 it will have to reduce the
production of televisions to 400. – Opportunity Cost
• In this case the opportunity cost of producing 200
more mobile phones is the 100 televisions that was
not produced.

• The ppf curve can shift. For example if as a result of

technological advancement in the mobile phone
industry workers are able to produce more mobile
phones, the ppf curve will shift outwards
representing point E on the graph.
• This will indicate Economic Growth

• Society gets to enjoy more mobile phones and more

televisions.
Plot the following PPF and demonstrate: scarcity,
opportunity cost, efficiency and economic growth

Laptops (millions) Mobile phones (millions)

75 0

60 12

45 22

30 30

15 36

0 40