Chapter 1 Summary PDF

Consumer: When you buy goods (you may want to satisfy your own personal needs or those of your family or those of any other person to whom you want to make a gift). Seller: When you sell goods to make a profit for yourself (you may be a shopkeeper). Producer: When you produce goods (you may be a f...

Consumer: When you buy goods (you may want to satisfy your own personal needs or those of your family or those of any other person to whom you want to make a gift). Seller: When you sell goods to make a profit for yourself (you may be a shopkeeper). Producer: When you produce goods (you may be a farmer or a manufacturing company), or provide services (you may be a doctor, porter, taxi driver, or transporter of goods). Employee: When you are in a job, working for some other person, and you get paid for it (you may be employed by somebody who pays you wages or a salary). Employer: When you employ somebody, give them a wage. Resources (factors of production): (1) Land, (2) Labor, (3) Capital, (4) Entrepreneurship. 'Scarcity of resources' means limited resources in relation to unlimited wants. It refers to the situation when the wants of an individual or an economy exceed the available resources. Every individual has unlimited wants. He may want better food, clothing, housing, schooling, entertainment, etc. But resources are not enough to meet all of his wants. Economy: It is a system of institutions that facilitate the production and distribution of goods and services in a society. Or Economy refers to the collection of production units in an area by which people get their living. The science of economics was born with the publication of Adam Smith’s An Inquiry into the Nature and Causes of Wealth of Nations in the year 1776. The word ‘Economics’ was derived from two Greek words oikou (a house) and nomos (to manage). Lionel Robbins defines economics as a science of scarcity. Prof. Robbins in his book Nature and Significance of Economic Science states, “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses”. Paul A. Samuelson defines economics as “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 future among various people and groups of society.” In microeconomics, we study the economic behavior of individual economic agents in the markets for different goods and services. For example, demand by a consumer, supply by a producer, etc. In microeconomics, we try to figure out how prices and quantities of goods and services are determined through the interaction of individuals in these markets. In macroeconomics, we study the economic behavior of the economy as a whole. For example, aggregate demand, aggregate supply (i.e. total output), employment and price level. In MICRO, the alphabet ‘I’ stands for Individuals. The term ‘micro’ has been derived from Greek word ‘mikros’ which means ‘small’. In MACRO, the alphabet ‘A’ stands for Aggregates. The term ‘macro’ has been derived from Greek word ‘makros’ which means ’large’. 1 Microeconomics Macroeconomics Microeconomics studies the behavior of individual Macroeconomics studies the behavior of the economy economic units e.g. demand and supply. as a whole e.g. Aggregate Demand and Aggregate Supply. Examples of microeconomics studies: Example of macroeconomics studies: (i) Demand by a consumer (i) Income and employment in the economy (ii) Price determination of a commodity (ii) Total investment in the economy (iii) Determination of cost of a product (iii) Total output in the economy (aggregate supply) (iv) Consumer’s equilibrium (iv) Total demand for final goods and services in the (v) Producer’s equilibrium economy (aggregate demand) (vi) Production of wheat, rice or sugar (v) Rate of inflation or general price level (vii) Salary of a computer engineer (vi) Money supply in the economy (viii) Study of cotton textile industry or car industry (vii) Balance of payments (viii) Foreign exchange rate Its main tools are Demand and Supply. Its main tools are Aggregate Demand and Aggregate Supply. It is also called ‘Price Theory’. It is also called ‘Income and Employment Theory’. It aims to determine price of a commodity or prices of It aims to determine income and employment and price factors of production. level in the economy. ‘Economic problem’ means the problem of making a choice among alternative uses of resources since resources are scarce in relation to unlimited wants. The economic problem arises because (a) wants are unlimited, (b) resources are limited and (c) resources have alternative uses. The central problems of an economy are categorized under three heads: 1. What to produce? The economy has to decide which goods and services should be produced with given resources, which are scarce, and have alternative uses. 2. How to produce? the choice is between the two types of techniques – (1) labor-intensive technique and (2) capital-intensive technique as shown in the table. 3. For Whom to produce? Distribution of goods and services among people, i.e. Who gets how much? Who gets more and who gets less? Needs: a limited number of needs that must be satisfied if you are to survive as a human being. - Material needs (examples: water, oxygen, house, food, clothes, medicine). - Psychological needs - Emotional needs. Wants: wants are unlimited, they are backed by money and desire to buy. 3 conditions are there is a demand: 1- Desire / wish for a good or service. 2- Money to purchase and willingness to purchase. 3- Want for good or service 2 Characteristics of Wants: 1. Unlimited Nature: Human wants are endless and diverse, with new desires arising as old ones are fulfilled. 2. Satiability: Each individual's wants can be satisfied up to a limit. For instance, thirst can be quenched by a few glasses of water. 3. Recurrence: Many wants resurface over time even after being satisfied once, like the recurring feeling of hunger. 4. Variability: Wants change based on factors like time, place, person, income, customs, and trends. For instance, seasonal needs like ice in summer or fashion-driven desires for luxury goods. 5. Present Importance: Present wants to take priority due to their urgency and certainty, while future wants are often given less attention. 6. Evolution with Development: Wants to evolve with progress. For example, the shift from landlines to mobile phones with advanced features illustrates changing desires driven by development. Wants are 2 types: - Economic wants: The wants that can be satisfied by such goods and services. - Non-economic wants: not purchased from the market by paying a price. (ex: air to breathe, rain water for agriculture). Distinction between goods and services Distinction Goods Services Nature Tangible (can be seen and Non-tangible (cannot be seen touched) or touched) Time Gap Time gap between production Produced and consumed and consumption simultaneously Storage Can be stored and used when Cannot be stored required Transfer Can be transferred from one Transfer not possible place to another Example Chair Doctor's medical examination and treatment Classification of Goods and Services: 1. Free Goods and Economic Goods: Free Goods: These are naturally abundant and do not have a price. They are not scarce and have no opportunity cost. Example: Air, sunlight. Economic Goods: These are limited in supply, requiring effort to obtain. They have a price due to their scarcity. Example: Food, electronics. 3 2. Free Services and Economic Services: Free Services: Services that are readily available without a charge, often due to their abundance. Example: Breeze, natural scenery. Economic Services: Services that are in demand and involve a cost due to their scarcity. Examples: Medical services, education. 3. Consumer Goods and Producer Goods: Consumer Goods: Goods directly consumed for personal satisfaction. Examples: Clothing, electronics. Producer Goods: Goods used in the production process to create other goods or services. Example: Machinery, raw materials. 4. Consumer Services and Producer Services: Consumer Services: Services aimed at enhancing individual well-being. Examples: Entertainment services, health services. Producer Services: Services that facilitate production processes. Examples: Transportation services, financial services. 5. Single Use Goods and Durable Use Goods: Single Use Goods: Goods meant for one-time use or consumption. Example: Food, toiletries. Durable Use Goods: Goods that can be used repeatedly over an extended period. Examples: Cars, appliances. 6. Private Goods and Public Goods: Private Goods: Goods that are both excludable (people can be prevented from using them) and rivalrous (one person's use reduces availability for others). Example: Clothing, food. Public Goods: Goods that are non-excludable and non-rivalrous, often provided by the government. Example: Street lighting, and national defense. 4. Consumer Services and Producer Services: Consumer Services: Services aimed at enhancing individual well-being. Examples: Entertainment services, health services. Producer Services: Services that facilitate production processes. Examples: Transportation services, financial services. 5. Single Use Goods and Durable Use Goods: Single Use Goods: Goods meant for one-time use or consumption. Example: Food, toiletries. Durable Use Goods: Goods that can be used repeatedly over an extended period. Examples: Cars, appliances. 6. Private Goods and Public Goods: Private Goods: Goods that are both excludable (people can be prevented from using them) and rivalrous (one person's use reduces availability for others). Example: Clothing, food. Public Goods: Goods that are non-excludable and non-rivalrous, often provided by the government. Example: Street lighting, and national defense. INTRODUCTION TO ECONOMICS 4 Three types of economy: (1) Capitalist economy: - In this type of Economy the factors of production are owned and operated by individuals or groups of individuals. The main objective is profit maximization. (2) Socialistic economy: - Factors of production are owned and operated by the government. The main objective is social welfare. (3) Mixed Economy: - The Economy in which factors of production are owned and operated by both government and the private sector. The main objective is profit maximization (private sector) and social welfare (Government sector). Basic Economic Activities: (1) Production (making goods) (2) Consumption (buying goods) (3) Distribution Economic Participants: (1) Business (firms) (2) Government (3) Family (household) (4) Other countries Circular flow of economic Activities: The circular flow of economic activity is a cycle that shows how people, businesses, governments, and other countries interact in an economy. It shows how everyone works together to make, buy, and use things, and how money and resources keep moving in an economy. 5