A_Basics 1.

1 Economics Definition 1: Economics is the social science that studies the methods by which individuals and societies organize production activities and allocate scarce resources to meet material wants and needs. Definition 2: Economics is the study of how the goods and services we want get produced, and how they are distributed among us. This part we call economic analysis. Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses. Economics is the study of how society allocates scarce resources and goods. 1.2 Macro and Microeconomics These are two branches or methods of exposition of the science of economics. a) Microeconomics b) Macroeconomics Macro and microeconomics are the two vantage points from which the economy is observed. Macroeconomics looks at the total output of a nation and the way the nation allocates its limited resources of land, labor and capital in an attempt to maximize production levels and promote trade and growth for future generations. Microeconomics looks into similar issues, but on the level of the individual people and firms within the economy. Analyzing certain aspects of human behavior, microeconomics shows us how individuals and firms respond to changes in price and why they demand what they do at particular price levels. a) Microeconomics Microeconomics is one of the main fields of the social science of economics. It considers the behavior of individual consumers, firms and industries. Microeconomics is a branch of economics that studies how individuals, households, and firms make decisions to allocate limited resources, typically in markets where goods or services are being bought and sold. Microeconomics examines how these decisions and behaviors affect the supply and demand for goods and services, which determines prices, and how prices, in turn, determine the supply and demand of goods and services. Microeconomics has been called the bottom-up view of the economy, or how people deal with money, time, and resources. One of the goals of microeconomics is to analyze market mechanisms that establish relative prices amongst goods and services and allocation of limited resources amongst many alternative uses. Microeconomics analyzes market failure, where markets fail to produce efficient results, as well as describing the theoretical conditions needed for perfect competition. b) Macroeconomics The branch of economics that deals with human behavior and choices as they relate to either highly aggregated markets or the entire economy. 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. Macroeconomic variables GDP (Gross Domestic Product)/ GNP (Gross National Product), NI (National Income), Economic Growth, Employment level/ Unemployment rate, Price level (CPI: Consumer Price Index, WPI: Wholesale Price Index; RPI: Retailer Price Index), Aggregate demand/ Aggregate supply, Inflation / Deflation, Interest rate, Economic slowdown, Recession, Depression, Business cycle, Monetary policy

(money supply and money demand), Fiscal policy (tax rate, government budget), International Trade: Export and Import, Balance of payments Fundamental Economic problem The economic problem, sometimes called the fundamental economic problem asserts that there is scarcity, or that the finite resources available are insufficient to satisfy all human wants. The problem then becomes how to determine what is to be produced and how the factors of production (such as capital and labor) are to be allocated. Economics revolves around methods and possibilities of solving the economic problem. In short, the economic problem is the choice one must make, arising out of limited means and unlimited wants. There are three main questions any economy has to answer: What is to be produced? This refers to the food, clothing, shelter, water and so on, which the friends identified. How is it going to be produced? This is exemplified by the group discussions about their relative skills and what each person could contribute. Who gets what is produced? This is characterized by the discussions about how much each group should get in exchange for what they bring to the island. These three fundamental questions have to be answered by any economy, whether it is a highly developed economy, the poorest of countries, or a small group of people stranded on a desert island. To answer these questions, different economic systems have developed.

Wants and needs A want is something that is desired. It is said that every person has unlimited wants, but limited resources. Thus, people cannot have everything they want and must look for the most affordable alternatives. A want is something that we would like to have but which is not essential to survival - a car, the latest version of the PlayStation, that new top you have seen in Top Shop, the mobile phone with all the latest gadgets on etc. A need is something that is necessary for survival (such as food and shelter), whereas a want is simply something that a person would like to have. A need is something that can be seen as being essential to survival, such as food, water, shelter and warmth.

Scarcity When unlimited wants meet limited resources, it is known as Scarcity. The condition where our wants outstrip the limited resources available to satisfy those wants. So, because of scarcity, people and economies must make decisions over how to allocate their resources. Economics, in turn, aims to study why we make these decisions and how we allocate our resources most efficiently. Choice The act of selecting among restricted alternatives. Because of scarcity, because our wants hit up against limited resources, some wants must go unsatisfied. We must therefore choose which wants we will satisfy and which we will not.

Scarcity & choice It states that society has insufficient productive resources to fulfill all human wants and needs. Scarcity means that people want more than is available. Scarcity limits us both as individuals and as a society. Scarcity requires choice. People must choose which of their desires they will satisfy and which they will leave unsatisfied. When we, either as individuals or as a society, choose more of something, scarcity forces us to take less of something else. Economics is sometimes called the study of scarcity because economic activity would not exist if scarcity did not force people to make choices.

Good & bad Good: Anything from which individuals receive utility or happiness. Example: food, TV, personal computer, clothing, education, leisure time. Bad: Anything from which individuals receive disutility. Example: Pollution, garbage Utility: The satisfaction or happiness one receives from the consumption of a good. Good and services A good is physical product that can be used to satisfy some desire or need. It can be contrasted with a service which is intangible, whereas a good is a tangible physical product, capable of being delivered to a purchaser and involves the transfer of ownership from seller to customer. For example, an apple is a tangible good, as opposed to a haircut, which is an (intangible) service Free goods Free goods are what is needed by the society and is available without limits. The free good is a term used in economics to describe a good that is not scarce. A free good is available in as great a quantity as desired with zero opportunity cost to society. Economic good Good which are scarce because their use has an opportunity cost Resources Resources are a specific term used a great deal in economics. It describes all the things available at our disposal that can be used to satisfy our needs. Resources therefore might be the food we buy at shops, clothing, houses, cars, entertainment, metal, minerals, oil, timber, gas, plastics and so on. In economics, these resources are normally classified into four categories. These are: Land - Not only the land, but all of the natural resources of the earth. That includes the fish in the sea, all the minerals found in the earth, gold, oil, fish, wheat, metals, sand, stones, rocks, timber, and food from the soil and so on. There are two types of land: Non-renewable resources: A non-renewable resource is a natural resource which cannot be produced, grown, generated, or used on a scale which can sustain its consumption rate. These resources often exist in a fixed amount, or are consumed much faster than nature can create them. Examples of Nonrenewable Resources are:, Fossil fuels like coal, oil and gas, Minerals like copper , gold and diamond. Renewable resources: Renewable can be defined as: capable of being renewed, or "capable of being replaced by natural ecological cycles or sound management practices". In other words resources that can be continually reproduced over a relatively short period of time. Examples of Renewable Resources are: Water, Oxygen, Timber, Fruit and vegetables, Meat from animals, fish, forests and corn. Perpetual resources are not affected by human use of them. Examples are sunlight and wind Sustainable: If a resource is sustainable it can keep going and will not run out. An example of this is a forest. When some trees die, others will be starting to grow and so the forest will stay alive. Non sustainable resources are resources which are diminishing over time due to economic exploitation. Oil, gold, coal is non sustainable resources because they cannot be replaced. Labor - all the human mental and physical effort that goes into production. This will include people who work as street cleaners, people who are interior designers, teachers, the police, doctors, bricklayers, architects and so on. The reward for labor is referred to as wages. Capital - all the equipment, machinery and buildings that is not used for its own sake but for the contribution it makes to production. This includes things like office desks and chairs, computers, lorries, cranes,

specialist machinery in a factory, the humble office coffee machine and so on. The 'price' of acquiring capital is referred to as interest. Enterprise - the skills needed to organize other resources into some form of production. Some people would put enterprise as a specialist skill within labor but enterprise does have some distinctive characteristics that merit its own category. The return for enterprise is called profit. Opportunity Cost The opportunity cost of a decision or choice that one makes is the value of the highest valued alternative that could have been chosen but was instead forgone. For example, suppose that one is faced with several ways of spending an evening at home. The choice made is to study economics (perhaps because there is an economics test tomorrow). The opportunity cost of this choice is the value of the highest valued alternative to the time spent studying economics. While there may be many alternatives to studying economicswatching television, reading a novel, talking on the telephonethere is only one alternative that has highest value. The value of the highest valued alternativesay, for example, reading a novelwould be considered the opportunity cost of studying economics. Exchange The process where one thing is traded for another. Efficiency In terms of production, efficiency refers to the condition where the maximum output is produced with given resources and technology.

Production Possibility Curves Production Possibility curve (PPC) shows the maximum combinations of goods and services that can be produced by an economy in a given time period with its limited resources. The PPF measures the quantity of two goods that an economy is capable of producing with its currently available resources and technology. The PPF illustrates the concepts of choice and opportunity cost. If we assume that a country only produces food and clothing. If that country wishes to produce more food, then it would have to sacrifice the production of some food. Therefore we can say the opportunity cost of producing more food is clothing.

If the economy is producing at point V is can be seen that it is not producing efficiently, as it could increase production of clothing and food with the resources it already has.

We can also demonstrate the concept of increasing opportunity costs. In other words that as a country produces more and more of one good it has to sacrifice increasing amounts of the other. This occurs because different factors of production have different properties, people have different skills, land differs in different parts of the country etc.. Therefore as a nation concentrates more on the production of one good, it has to start using resources that are less and less suitable. The production of more and more clothing involves a growing marginal cost - ever increasing amounts of food have to be sacrificed for each additional unit of clothing produced. Why the PPF is concave to the origin It is because of increasing opportunity costs that the PPF is bowed outwards, rather than being a

straight line. In the diagram below we can see that as production increases from x to y to z, so the amount of food sacrificed rises for each additional unit of clothing produced. The opportunity cost of the fifth million units of clothing is 1 million units of food. The opportunity cost of the sixth million units of clothing is 2 million units of food. The bowed-out, concave shape of the PPF is due to the presumption that the economy's resources are not equally well suited to the production of both goods .

Shifts of the PPF As you know, a nation is unable to produce outside of the PPF. A nation is able to shift its PPF to the right (so that it can produce a greater amount of goods) many ways: * Increasing the number of resources available for production, e.g., increase in the number of workers or factories. * Increasing the quality of resources available for production, e.g., education and training makes workers more productive, technological progress allows machines to produce more with the same amount of resources. * Economic growth A shift of the PPF can be shown below:

Any point outside the curve is unattainable unless there is an outward shift of the PPC. This can only be possible if there is an improvement in the quantity and/or quality of factors of production. This is known as economic growth. It is a process of increasing the economys ability to produce goods and services. Inward shift Decreasing productive potential of an economy War, flood, natural calamity, rapid fall in the number of workers or population, global warming, financial crisis. Points along the PPF are efficient points and indicating maximum amount of production. Points inside the PPF are inefficient point. Points outside the PPF are unattainable point.

Specialisation

Specialization is occurs when an economic agent chooses to concentrate on producing a particular good or service and then trade with others in order to survive. Specialization by individuals is called the division of Labor. Adam Smith described the effects of the

division of labor on pin workers in 1776. He stated that one worker might be able to make 20 pins a day, but if division of labor occurred and 10 workers each specialized in a different task he estimated they could make 48,000 pins. Advantages of specialization This increase in labor productivity occurs for a number of reasons (advantages of specialization): * Specialization allows workers to gain skills in a narrow range of tasks. This means workers are far more productive then if they were a jack of all trades. * It makes it cost effective to provide workers with specialist tools, e.g., it wouldn't make sense to give every farm worker a tractor, but it's possible to provide a group of workers a tractor they can share. * Time is saved as workers don't constantly have to change tasks, e.g. moving from one workstation to another. * Workers are able to specialize in tasks they are best suited to.

The division of labor does have limitations. Jobs that are very narrow can become tedious and boring. Workers will do everything possible to avoid work, e.g. calling in sick, long break, frequent visits to the toilet. This will result in a drop in productivity as output per worker falls. The size of the market might limit the degree of specialization. A chemist or post office might open in a small village, but finds that he has to sell other products in order to survive. Over specialization has disadvantages. African countries are often dependant on only one crop. If the price falls or crop fails, it can be a disaster for the economy and workforce. The north of England has suffered greatly due its dependence on heavy manufacturing. Shipyard, steel and textile workers paid a heavy price for specialization when demand for their skills fell.

Economic system An economy consists of the economic system of a country or other area, the labor, capital and land resources, and the economic agents that socially participate in the production, exchange, distribution, and consumption of goods and services of that area. A given economy is the end result of a process that involves its technological evolution, history and social organization, as well as its geography, natural resource endowment, and ecology, as main factors. A nations economy can be divided into various sectors to define the proportion of the population engaged in the activity sector. Primary Sector The primary sector of the economy extracts or harvests products from the earth. The primary sector includes the production of raw material and basic foods. Activities associated with the primary sector include agriculture (both subsistence and commercial), mining, forestry, farming, grazing, hunting and gathering, fishing, and quarrying. In developed and developing countries, a decreasing proportion of workers are involved in the primary sector. About 3% of the U.S. labor force is engaged in primary sector activity today, while more than two-thirds of the labor forces were primary sector workers in the mid-nineteenth century.

Secondary Sector The secondary sector of the economy manufactures finished goods. All of manufacturing, processing, and construction lies within the secondary sector. Activities associated with the secondary sector include metal working and smelting, automobile production, textile production, chemical and engineering industries, aerospace manufacturing, energy utilities, engineering, breweries and bottlers, construction, and shipbuilding. Tertiary Sector The tertiary sector of the economy is the service industry. This sector provides services to the general population and to businesses. Activities associated with this sector include retail and wholesale sales, transportation and distribution, entertainment (movies, television, radio, music, theater, etc.), restaurants, clerical services, media, tourism, insurance, banking, healthcare, and law. In most developed and developing countries, a growing proportion of workers are devoted to the tertiary sector. In the U.S., more than 80% of the labor force are tertiary workers. Quaternary Sector The quaternary sector of the economy consists of intellectual activities. Activities associated with this sector include government, culture, libraries, scientific research, education, and information technology. Quinary Sector Some consider there to be a branch of the quaternary sector called the quinary sector, which includes the highest levels of decision making in a society or economy. This sector would include the top executives or officials in such fields as government, science, universities, nonprofit, healthcare, culture, and the media.

Positive and Normative Economics

Positive economics deals with scientific or objective explanations and statements about the economy. A positive statement is a statement about what is and that contains no indication of approval or disapproval. Example : The income tax rate is 34 % in the UK. The ICT sector will grow by 50 % in size over the next 5 years. The minimum wage in Bangladesh is tk. 3000. Notice that a positive statement can be wrong. "The moon is made of green cheese" is incorrect, but it is a positive statement because it is a statement about what exists. Normative economics attempt to describe the economy through value judgments. A normative statement expresses a judgment about whether a situation is desirable or undesirable. For example "the rich should be taxed at a far higher rate than the poor" contains value judgment about the role of the government; therefore it is a normative statement. The minimum wage should be tk 3000. ICT companies should invest more in ICT sector. Economists have found the positive-normative distinction useful because it helps people with very

different views about what is desirable to communicate with each other. Both positive and normative statements must be combined to make a policy statement.