LESSO

N
INTRODUCTION TO ECONOMICS
1
This topic introduces the study of economics and its major concerns. You will find out what is the study
of economics is concerned with. You will also find out the different branches of economics and why
economics is a social science subject.

LEARNING COMPETENCIES:

Define basic terms in applied economics

LEARNING OBJECTIVES:

After the discussion the student must be able to:

1. Identify the meaning of economics and how it relates to social science

2. Explain key terms like scarcity, choice and decision making

3. explain, with examples, why the study of Economics is considered a social science subject.

4. identify and explain the different branches of economics and their specific fields in the study of
economics
The word economy comes from the Greek word for “one who manages the household.” At first the
origin might seem peculiar. But, in fact, households and economies have much in common. A household
faces many decisions such as: Who cooks dinner? Who gets the extra rice at dinner? Who washes the
dishes after? In short, the household must allocate its scarce resources among its various members
considering each member’s abilities, efforts and desires. Like a household, a society must decide what
jobs will be done and who will do them. It needs some people to grow food, other people to make
clothing, and still others to design a computer software.

THE NATURE AND SCOPE OF ECONOMICS

WHAT IS ECONOMICS?
1.1 What is Economics?

Economics is a very interesting subject because it analyses how human beings make choices in
an effort to maximize utility. It also analyses how a society seeks to allocate their limited
resources in other to achieve growth. The term economics is derived from two words economy
and science meaning the science of the economy or the science of proper utilization of
resources.

Economists have tried to simplify the definition of economics for their students and readers to
understand. Economics can be simply defined as ’the study of how societies are organized in using the
scarce/limited resources available to satisfy their unlimited needs and wants’. (Lionel Robins 1938)
1.1 What is Economics?
Economics is a very interesting
subject because it analyses how
human beings make choices in
an
effort to maximize utility. It also
analyses how a society seeks to
allocate their limited resources
in
other to achieve growth.
The term economics is derived
from two words economy
and science
meaning the science of the
economy or the science of
proper utilization of resources.
This chapter
focuses on the nature and
scope of economics. To
understand the subject matter
of economics, we
tried to look at its different
definitions by different
scholars. The basic concepts of
economics are
discussed in other to give
a better understanding of
the definitions. There is
also the need to
understand the basic economic
problems of any society
because other problems
revolve around these
problems. The various
definitions of economics is
grouped under different
headings as discussed
below
1.1.1 The Classical View of Economics

The Classical economists viewed economics as a science of wealth. Adam Smith, the father of
economics, in his book titled: ‘An Enquiry into the Nature and Causes of Wealth of Nations’,
defined economics as the science of wealth. According to Adam Smith, economics makes
inquiries into the factors that determine the wealth and growth of a nation. So to Adam Smith
what forms the subject matter of economics is the production and expansion of wealth.
However, Ricardo shifted emphasis from wealth production to wealth distribution.

That is, it analyses how households, firms, and society as a whole try to maximize their gains
from their limited resources and opportunities now and in the future. A better understanding of
the subject matter of economics needs a probe into the scope.

Article #1:

These examples give us a clear picture of the problem of scarcity. Societies, organizations, countries and
individuals all face the problem of scarcity. Article 1 shows us a real economic situation of scarcity
between PNG and Singapore. PNG has a large supply of natural resources but is faced with a problem of
scarcity of financial capital (money), skills and technology to develop some of its basic wants and needs
like schools, roads, hospitals, sanitation and water supply. As a result it has chosen to trade with other
countries such as Singapore. Singapore on the other hand has a lot of skilled workers; possess advanced
technologies and is a wealthy country. But it also faces a problem of having scarce natural resources to
fulfill some of its basic needs and wants mainly in manufacturing and production. Therefore, it has
chosen to trade with other countries like Papua New Guinea. Now you have learnt that the problem of
scarcity causes societies, organizations and countries to make choices. Newspaper Clip source: The
National Newspaper. 2014 (1) ECONOMIC RELATIONS BETWEEN PNG AND SINGAPORE CHOICE IS TO
CHOOSE BETWEEN ALTERNATIVES GIVEN.

Economics is about making such choices. Individuals, societies, organisations and countries all make
choices about what is best for their economic benefit. Economics helps them to make choices about the
challenges and opportunities they face. What are some of the basic choice societies make? In order for
societies to make good choices they must try to answer these important questions.

• What should we produce?

• How do we produce?

• How much should we produce?

• Who gets what we produce?

Making choices also comes with decision making. Economics is also about how to make good informed
decisions whether as an individual or as a citizen of a community, state or country. Again you might ask
“How can making a choice be accompanied by decision making?” Let us look at some examples. From
article 1, PNG has made a choice to trade with other countries. But it must decide on which country to
trade with in order to have a good opportunity so that the choices made are effectively beneficial to
PNG. Therefore, PNG has made a decision to trade with Singapore. It is also the same with Singapore.
On the same example, we can see that if the government has chosen to trade with Singapore, it must
decide whether it is going to be a free trade or taxes will also apply.

So now you see that making an economic choice also involves economics decision making

Terminology: Words which you have learnt in this topic.

1.2 The Scope of Economics

Economics as a subject is experiencing continuous growth. The frontier of the subject has been
widened after Alfred Marshall separated it from the term Political Economy. A discussion on the
scope of economics includes the definition of economics, whether economics is an art or a
science and whether it is a positive or a normative science.

1.2.1 Economics as a Social Science

Economics is seen as one of the group of subjects known as Social Science. Other social science subjects
include anthropology, social psychology, sociology and political science. These subjects, including
economics study how people behave in the society.

Why is Economics a Social Science? It is true that the subject of economics uses scientific methods in
trying to study the behavior of people in the society. Economics uses systematic and logical models
controlled by factual evidence; it is seen as a scientific approach of studying. However, apart from
science subjects like physics, economics studies human actions and tries to explain the reasons and
motives of human agents as the cause of things and changes. It is therefore regarded as a Social Science.
Positive and Normative Economics Apart from having economic models supported by facts and
evidence, there is also a part of economics that accepts value judgments and statements.

1. Normative Economics This is mainly about forming views, ideas and beliefs on economic choices or
decisions (policies) and make recommendations (Agreement) about these policies. It is not supported by
facts and evidence but it is accepted because of the value of its statement that contains your judgments
of what should happen in the economy.

2. Positive Economics It is mainly economic analysis that explains what happens in the economy by
using economic models supported by facts and evidence. GR 11 ECONOMICS U1 UNIT INTRODUCTION
15 The newspaper articles 2, 3 and 4 are real ex.

The newspaper articles 2, 3 and 4 are real examples of Normative and Positive statements in economics.
Article #2: REPORT: CHINA EXPORTING TORTURE TOOLS

Article #3: Fig4. Works eye new building QUICK SALES A POLITICAL PLOY: POLY

Newspaper 2014 : WORKS EYE NEW

BUILDING
From the examples on the newspaper clips given, which one do you think is a positive statement and
which one is a negative statement? Articles 2 and 4 are examples of a positive statement in economics
because the statements are supported by data which have been collected and calculated to support
these statements as facts. Figure 3 is an example of a normative statement in economics because it is a
claim made by an MP which is not supported by facts but contains value judgement because of the
position of the MP and the knowledge the MP possesses in government policies. Newspaper article: The
National Newspaper 2014 : WORKS EYE NEW BUILDING.

Economics is a science because it is a systematized body of knowledge in which economic facts

are studied and analyzed. Economics just like science have laws and theories which trace out a
causal relationship between two or more phenomena. For instance the law of demand tells us
that, all things. being equal, a fall in price leads to an increase in demand and vice versa. A rise
or fall in price is the cause while the decrease or increase in demand is its effect.

Economics is also a science because its laws possess universal validity such as the law of
demand, law of diminishing marginal utility, etc. Some people do not regard economics as a
science because there is no scope for experimentation. Science involves collections of facts and
testing them by experimentation. Economic phenomena are complex because they relate to man
who acts irrationally as a result of tastes, habits, social and legal institutions in the society.
Although economics deal with statistical, mathematical and econometric methods for testing, but
they are not so accurate to judge the true validity of economic laws and theories. As a result,
exact quantitative prediction becomes impossible. For instance, a rise in price may not lead to a
reduction in demand rather may increase demand because people are scared of shortages in
future.

But this does not mean that economics is not a science. It is rather classified as a social science
because it deals with human beings whose actions are so filled with uncertainty
 In summary, economics covers all kinds of topics, but at the core, it is devoted to understanding
how society allocates its resources under the condition of scarcity. Scarcity is defined as the limited
nature of society’s resources. Since resources are generally scarce and human wants and needs tend to be
unlimited, we need to study how society choose from the menu of possible goods and services, how
different commodities are produced, priced and who gets to consume the goods that society produce.

ECONOMICS- is a social science

that deals with how individuals
organize themselves in order to
distribute scarce resources to
create products and services that
meet man's infinite and
multiplying desires and
needs ECONOMICS- is a social science that deals with how individuals organize themselves
in order to distribute scarce resources to create products and services that meet man's infinite and
multiplying desires and needs.

Economics as a Science
 It is a science because, in
relation to those general laws
and principles, it is
an organized body of
facts, orchestrated,
structured and systematized.
(Observation, hypothesis
formulation, knowledge
set, experimentation,
inference, generalization)
Using some kind of logic
based on a collection of
systematic relations,
economic analysis attempts to
describe economic events.
 It is social science since
individuals or societies and
their actions,
unpredictable in nature, are the
subject of economics
1.3 Microeconomics and Macroeconomics

Economics is divided into two major areas – Microeconomics and Macroeconomics

Microeconomics:

Micro means small, therefore micro- economics looks at smaller economic activities between consumers
and producers. Micro-economics is the study of consumer behavior. Consumers are individual economic
decision makers such as firms and households. Microeconomics studies how individual consumers
interact (relate) in the markets, industries and different sectors of the economy. It is the study of
demand and supply of the households and firms and how they interact in the market.

For example, as the price of rice increases, consumers may turn to another alternative therefore causing
the demand for rice to fall. The supplier will than react by putting the price of rice down to bring back
the consumers to the market. Micro-economics studies these specific areas;

• How consumers maximize satisfaction, given their income when selecting goods

• How firms choose production methods to minimize cost for a given level of output.

• How firms decide how much to produce to maximize profit.

• How the price of goods and services are determined.

• How resources are allocated.

• How the prices of factors of production are determined.

Macroeconomics: - Macro-economic on the other hand looks at bigger economic activities.
Macroeconomics is the study of behavior of broader economic aggregates (total) demand and supply in
the economy. That means that it studies economic factors like,

∙ Total National Output (GDP)

∙ Income

∙ Employment and Unemployment which affect the society as a whole.

For example, during the construction phase of the LNG project, the total demand for workers increased
dramatically. As a result, employment increases causing the National income to increase as more people
in the population are working and earning an income.

Microeconomics differs from macroeconomics in that while microeconomics maps up close

how individuals make decisions and how these decisions affect the price and output of various
goods and services, macroeconomics analyses not individuals but aggregates of the economy.
While microeconomics studies how an individual firm employs its labours, macroeconomics
studies the total employment in a given economy. While microeconomics is particularly
concerned with the relative prices of goods and service; macroeconomics studies total prices of
all goods and services in the economy.

The division between microeconomics and macroeconomics is not rigid, they are interrelated.
What affects the part affects the whole while the whole is made up of the parts. For instance,
national income is the sum of the incomes of individuals, households, firms and industries. Also
aggregates that are studied in macroeconomics are nothing but individual quantities which are
studied in microeconomics. Moreover, modern macroeconomics is based upon the study of
microeconomics. Therefore, microeconomics and macroeconomics cannot be isolated from
each other.

DIVISIONS OF ECONOMICS
Economics has five (5) major divisions. These divisions are as follows:

(1) Production – This refers to the process of producing or creating goods needed by the households to
satisfy their needs and wants. The factors of production are called inputs and the goods and services
that have been created are called outputs of production.

(2) Distribution – This refers to the marketing of goods and services to different economic outlets for
allocation to individual consumers. In monetary terms, this is the allocation of income among persons or
household.

(3) Exchange – This is a process of transferring goods and services to a person or persons in return for
something. At present, the medium of exchange used in the market is money.

(4) Consumption – This refers to the proper utilization of economic goods. Since goods and services
could not be consumed unless paid for, then we can also say that consumption is spending money for
goods and services for direct satisfaction.

(5) Public Finance – This pertains to the activities of the government regarding taxation, borrowings, and
expenditures. It deals with the efficient use and fair distribution of public resources in order to achieve
maximum social benefits.