Chapter 1 Definition of economics

the study of how individuals and societies use limited resources to satisfy unlimited wants.

Resources are limited but human wants are unlimited.

Economics• Economics is the social science that analyzes the

production, distribution and consumption of goods and services.

Fundamental economic problem

scarcity.

individuals and societies must choose among available alternatives.

Economic resources/Factors of Production

• land– natural resources, the “free gifts of nature”

• labor– the contribution of human beings

• capital– plant and equipment

• Entrepreneurial ability/Organization/ Management

Resource payments

Economic Resource Resource payment

land rent

labor wages

capital interest

entrepreneurial ability profit

Positive and normative analysis

• Positive economics– attempt to describe how the economy functions– relies on testable hypotheses– What is?

• Normative economics– relies on value judgments to evaluate or recommend

alternative policies.– What can be done?

Economic Methodology

• scientific method– observe a phenomenon,– make simplifying assumptions and formulate a

hypothesis,– generate predictions, and– test the hypothesis.

Branches of Economics

• Economics has two branches: microeconomics and macroeconomics.

• Microeconomics is the branch of economics that deals with the personal decisions of consumers and entrepreneurs.

Microeconomics

• Its primary concern is to help consumers and investors make their lives better by increasing their earnings and satisfying their needs despite limited resources.

• Also included in its study are the consumers' decisions on what products to buy and how the cost of commodities is determined.

Microeconomics

• What Does Microeconomics Mean?•

The branch of economics that analyzes the market behavior of individual consumers and firms in an attempt to understand the decision-making process of firms and households.

Microeconomics

• It is concerned with the interaction between individual buyers and sellers and the factors that influence the choices made by buyers and sellers.

• In particular, microeconomics focuses on patterns of supply and demand and the determination of price and output in individual markets (e.g. coffee industry).

Macroeconomics

• Macroeconomics deals with the larger aspects of a nation's economy, such as the sectors of agriculture, industry, and service.

• It aims to• (a) speed up the economy's growth rate and increase total

production; • (b) increase the rate of employment;

Investopedia explains Macroeconomics:Macroeconomics is focused on the movement and trends in the economy as a whole, while in microeconomics the focus is placed on factors that affect the decisions made by firms and individuals.

What Does Macroeconomics Mean?

Macroeconomics• (c) keep the prices of commodities stable so that

they remain affordable; • and (d) have sufficient reserves for foreign exchange

for importing goods and paying off loans.The field of economics that studies the behavior of the

aggregate economy

Macroeconomics examines economy-wide phenomena such as changes in: unemployment, national income, rate of growth, gross domestic product, inflation and price levels……..Etc.