ECN111: Introduction to Economics I PDF - Covenant University

Welcome to Covenant University!!! 1  Course Information College: College of Management & Social Sciences Department: Economics and Development Studies Course Code: ECO111 Course Title: Principles to Economics I (Micro) Credit units: 2 units Lecture...

Welcome to Covenant University!!! 1  Course Information College: College of Management & Social Sciences Department: Economics and Development Studies Course Code: ECO111 Course Title: Principles to Economics I (Micro) Credit units: 2 units Lecture period: Tuesday, 5 – 7 p.m. Lecture Theatre I, Wednesday 5-pm (B301, C301, G201, H301, H401, G301) 2  ECN111 – Course Facilitators Name Office Address Prof. Matthew A. O. CMSS/CLDS Building, Room D205B Dr. Owolabi A.O. CMSS/CLDS Building, Room C302B Dr. Olaifa E.S. CMSS/CLDS Building, Room D206D Dr. Q.E. Oye University Chapel Dr. U.E. Okorie CBSS/CLDS Building, Room G302E Dr. I.S. Agbonjaru CMSS/CLDS Building, Room D205C 3  Ground Rules Punctuality No distractions Class participation Attendance Sense of responsibility Comportment Timely submission of assignments 4 Course information & materials Available at: http://moodle.covenantuniversity.edu.ng Search for Course: ECN111 – Introduction to Economics I (Micro) Enrol as a student to access Course content Enrolment id is: 5  www.covenantuniversity.edu.ng Raising a new Generation of Leaders ECN111: INTRODUCTION TO ECONOMICS I Nature, Scope and Significance of Economics  Learning Objectives At the end of this topic, you should be able to: Differentiate between the type A and type B definitions of Economics. Explain Lord Robbins definition of Economics. Describe basic concepts of Economics. Discuss the scope of microeconomics. Differentiate between microeconomics and macroeconomics. Discuss the significance of Economics. 7  Nature, Scope & Significance of Economics Nature ➔ “essential/inherent qualities or characteristics by which something is recognized” Scope ➔ “extent of the area or subject matter that something deals with or to which it is relevant” Significance ➔ “importance; quality of being worthy of attention” 8  Nature of Economics In order to understand the nature of the subject Economics we need to examine its: ▪ Origin ▪ Definitions ▪ Basic concepts 9  What is the origin of ‘Economics’? () ‘Economics’ originates from Greek word ‘Oeconomicus’ ➔‘the scientific study of efficient household management’. Greek household resources were scarce but their material desires were unlimited. ▪ A need arises as another is satisfied 10  What is the origin of ‘Economics’? (2) The term ‘Oeconomicus’ applied to the art of rationing severely limited resources for the satisfaction of their desires. With the passage of time and continuous application of scientific reasoning to everyday living, the concept of efficient use of limited household resources (oeconomicus) has been transmitted to the entire fabric of the society. Individuals, households, firms and governments at all levels have become participants in the art of economizing. 11 Definitions of Economics (Classification by L. M. Fraser) Type A Type B Definitions are related Definitions are to wealth and associated with material welfare. scarcity of means. Classical view Neo-Classical View Neo-Classical view 12  Who were Classical Economists? Earliest/ first generation economists to document their economic thoughts in books. Adam Smith is chief of the Classical economists Other Classicals include: J. B. Say; F. A. Walker; David Ricardo; J. S. Mill; Thomas Malthus They considered economics as a science of material wealth 13 Adam Smith – Scottish Economist Published a book in 1776: “An Inquiry into the Nature and Causes of the Wealth of Nations.” He presented his views on economics as a ‘science of wealth’ 14 Type A Definitions – Classical Perspective Classical Definition of Economics Adam Smith The study of the nature and causes of the wealth of nations. J. B. Say The study of the laws which govern wealth. F. A. Walker Economics is that body of knowledge which relates to wealth J. S. Mill The practical science of the production and distribution of wealth 15  Criticisms of Type A (Classical) Definitions Smith defined economics only in terms of wealth and not in terms of human welfare. ▪ There is an undue emphasis on wealth-producing activities. Wealth was considered to be an end in itself. By stressing ‘material wealth’, Classical economists narrowed the scope of economics ▪ The definitions excluded all economic activities which are related to the production of non-material goods and services 16  Who were Neo-Classicals? Immediate successors of Classical economists They adopted most of the Classical approaches with little modifications Alfred Marshall was chief of neo-classical economists Other neo-classicals include: A. C. Pigou; E. Cannan; I. Fisher; F. Y. Edgeworth; V. Pareto; W. Beveridge etc. 17 Alfred Marshall – British Economist Published a book ‘Principles of Economics’ in 1890 There he provided a definition of Economics 18  Type A Definitions - Neoclassicals Neo-Classicals Definition of Economics Alfred Marshall “Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well being.” E. Cannan The aim of political economy is the explanation of the general causes on which the material welfare of human being depends” W. Beveridge The study of the general methods by which men cooperate to meet their material needs A. C. Pigou Economic welfare is the subject-matter of economic science 19  Important Features of Marshall’s Definition I. That economics is a study of the economic aspect of human life (…mankind in the ordinary business of life) II. Economics studies both individual and social actions aimed at promoting economic welfare of people. III. Marshall made a distinction between two (2) types of things (material and immaterial things); and he considered only the material things that are capable of promoting welfare of people. 20  Criticisms of Marshall’s Definition I. Marshall considered only material things. However, immaterial things also contribute to welfare. II. He made a distinction between those things that are capable of promoting welfare of people and those things not capable of promoting welfare of people. *** There are things not capable of promoting welfare that command a price; these are within the purview of economics. I. The definition is based on a concept of welfare; however, the meaning of welfare varies with from an individual, a country, a period of time to the other. 21 General Criticisms of Type A-Neoclassical View They limited the scope of economics to material goods ▪ Immaterial goods (services) contribute to human welfare e.g. services offered by medical doctors, teachers, lawyers, financial analysts etc. They opined that all material goods (are capable to) promote human welfare ▪ Examples of material goods which do not promote human welfare: liquor, cigarette etc. 22 Lionel Robbins – British Economist Published a book ‘An Essay on the Nature and Significance of Economic Science’ in 1932 In his view, “Economics brings into view that conflict of choice is one of the permanent characteristics of human existence” 23  Type B Definitions These are definitions associated with scarcity of means. ▪ They are based on postulates as governed by human behaviour. Type B definitions of Economics was led by Lionel Robbins According to Lionel Robbins: ‘Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.’ 24 Features/Implications of Lionel Robbins’ Definition I. Ends or wants are numerous. II. The reason for the non-satisfaction of unlimited wants is the scarcity of means at the disposal of mankind. III. Scarce means are capable of alternative uses. IV. Ends are of varying importance, which necessarily lead to the problem of choice — of selecting the uses to which scarce resources can be put. V. Economics is related to all kinds of behaviour that involve the problem of choice, this clearly distinguishes economics from other disciplines. 25 Superiority of Robbins Definition (1) First, is its emphasis on Economics as a science. ▪ As a science, Economics is a systematized body of knowledge which gives its possessor a framework within which to analyse the problems associated with the study.’ ▪ Like in other pure sciences, economics is neutral between ends. ‒ ends may be noble or ignoble, material or immaterial, economic or non- economic. ▪ Economics deals with ascertainable facts, while Ethics deals with valuation and obligations. ‒ Economics has thus nothing to do with Ethics. 26 Superiority of Robbins Definition (2) Secondly, his definition made economics a valuation process. ▪ When the ends are unlimited and means are scarce, this give rise to an economic problem. ‒ In such an instance, there is little need to define economics as the study of the causes of material welfare. ▪ The problem of production and distribution of wealth is also one of economizing scarce resources in relation to varied ends. 27 Superiority of Robbins Definition (3) There is universality in Robbins’ scarcity definition of economics. ▪ It is as much applicable to a Robinson Crusoe economy as a communist economy and capitalist economy. ▪ As Robbins himself says: “Our Economics holds good under barter as well as under money exchange, under individual as well as social human conduct, under capitalist as well as under socialist society” ▪ Its laws are like the laws of life and are independent of all legal and political framework. 28  1st American to receive Nobel Paul Samuelson Prize in Economic Sciences ▪ He is referred to as the father of modern economics He was considered the foremost academic economist of the 20th century by New York Times His book, ‘Economics: An Introductory Analysis’ has a 19th edition and has been translated into >20 languages 29 Paul Samuelson’s ‘Growth’ Definition of Economics “Economics is the study of how men and society choose, with or without the use of money, to employ scarce productive resources which could have alternative uses, to produce various commodities over time, and distribute them for consumption, now and in the future among various people and groups of society.” 30  Implication of Samuelson’s Definition I. It is dynamic as it includes the element of time. Therefore, the definition covers the theory of economic growth. II. Samuelson stressed the problem of scarcity of means in relation to unlimited ends. Not only are the means scarce, but they could also be put to alternative uses. III. It covers various aspects like production, distribution and consumption. 31  Scope of Economics Economics as a science/social science Broad division of economics Sub-disciplines in economics 32  Economics as a Science/Social Science As a science ▪ A systematized body of knowledge examining cause and effect relationships ▪ Involves systematic collection, classification and analysis of facts, ▪ Amenable to measurement e.g. economic motives of firms and individuals may be measured in money terms As a social science ▪ Studies the economic and social behaviour of human beings 33 Broad Division of Economics Economics Microeconomics Macroeconomics 34  What is Microeconomics all about? It deals with the economic behaviour of individual decision-making units such as consumers and business firms as well as the interaction between individual markets. It concentrates on production and consumption by the individual consumers, the business firm and the industry. 35  Topics in Microeconomics Include: Analysis of consumer behaviour Analysis of producer behaviour Market structures The behaviour of factor markets Income distribution Market failure and welfare 36  What is Macroeconomics all about? It studies the behaviour of economic aggregates ▪ total level of output or gross domestic product; national income; total level of employment; the price level for the whole economy in a given period of time; Etc. Note: Macroeconomic concepts refer to the economy as a whole, and receive more coverage on television and in the newspapers than microeconomic concepts 37  Sub-Disciplines in Economics International economics Monetary economics Labour economics Defence economics Information economics Economic Environmental economics anthropology Urban economics Health economics Demography Petroleum economics Development economics Industrial economics 38  Some Basic Concepts in Economics Resources Scarcity & Choice Opportunity Cost 39  Resources (inputs to the production process) Land Land —(e.g., forest, gold, oil deposits). Labour Labour -- quantity (number of workers) and quality (the skills workers possess, also called the human capital), Capital: Physical plants, machinery and equipment used to physical/ produce other goods and services. Financial financial capital. Entrepreneurship This is a special type of labour that is important in the overt production process. 40 Scarcity & Choice The fundamental economic problem is how to reconcile the infinite wants and desires individual with the finite supply of time, resources Individuals need to make A choice between alternatives. ▪ To make a choice, individuals balance the benefits derived from having more of something against the cost of having less of something else within the limits of what is possible [i.e. optimizing or economizing] Scarcity at the community level ➔ no society has enough resources to produce all commodities necessary to satisfy all human wants. 41 42  Opportunity Cost Is used to highlight the fact that making choices in the face of scarcity implies cost. The principle states that some most highly valued opportunity must be foregone in all economic decisions. Opportunity cost is the want that is left unsatisfied in order to satisfy another more pressing want. It is the alternative forgone. 43 Basic Economic Questions What to produce? How to produce? For whom to produce? Where to produce? 44  Production Possibility Frontier (PPF) Also known as production possibility curve (PPC) It represents the output combinations that can be produced with a given amount of resources in a firm country. Any point on the curve (illustrates an output combination that is produced and all available resources and as efficiently as possible point inside the curve (Points A, B or C in figure below) 45 Figure: Production Possibility Frontier X represents an output combination that is produced with less than the available resources (underemployment) or with all the resources but with the resources used inefficiently (unemployment). Y is currently unattainable because our resources are fixed. 46 Figure: PPF with Technology Improvement In the future if the curve shifts outward, because of technology advances and/or production of resources, it is possible to be at point Y. 47 Significance of Economics (1) I. Economics Affects Everyone Economics is about choice and is at the heart of all decision-making. ▪ Individuals, businesses and governments all need to make choices when resources are scarce. Economics is obviously important to human well- being. Most policy debates are cast in economic terms ▪ One requires an understanding of Economics to understand current issues 48 Significance of Economics (2) II. Economics as an intellectual discipline develops a valuable set of skills Processes economists use in constructing models, analysing arguments and testing empirical predictions against available evidence develops several important skills: ▪ General literacy, communication and numeracy skills ▪ Skills of abstraction (balancing simplification against relevance), ▪ Logical deduction (including precise use of language, for example, in relation to cause and effect, necessity and sufficiency) ▪ Critical thinking. ▪ Skills of discrimination, flexibility and organizational ability It provides insights into the general environment of resource allocation decisions, opportunity costs and project evaluation 49  Significance of Economics (3) III. Economics training instils a wide range of skills, thereby providing a diverse range of career opportunities for Economics majors. It provides a good basis for securing a job IV. Knowledge of Economics is an important foundation for people in or aspiring to managerial/supervisory positions*** in organizations so as to ensure optimal resources allocation. 50  Significance of Economics (4) V. It provides us with an understanding of the workings of an economy. VI. It is applicable in a wide range of subjects, within local and international contexts, including: business, finance, administration, law, everyday life. 51 Significance of Economics (5) Economic analysis is applicable in all spheres of society ▪ Business; Crime; Education; Family; Finance; Government; Health; Law; Politics; Religion; Science; Social institutions; War… 52  In sum… Economics has been defined in different ways Definitions relating to scarcity of means are more acceptable than others Economics is broadly divided into microeconomics and macroeconomics The subject matter of Economics is important to everyone 53  Concepts to note Economics Wealth Oeconomicus Microeconomics Opportunity Cost Macroeconomics Choice Science Welfare Social science Resources Production Possibility Frontier Scarcity Material 54 Discussion Questions Why is Economics referred to as a science and a social science? Of what importance is the subject of Economics to my discipline? What factors can account for an outward or inward shift of the production possibility curve? What is the difference between micro-economics and macroeconomics? Why is Lionel Robbins definition of Economics considered superior to the Type A definitions of Economics? Not all commodities contribute to human wellbeing. Discuss with examples. 55