Economics Definition and Principles PDF

# Chapter 1: The Definition of Economics This chapter is an introduction to the definition and study of economics. It seeks to answer the following questions: ## What is the economic science? Economic science is a social science that studies how people choose to allocate scarce resources to satis...

# Chapter 1: The Definition of Economics This chapter is an introduction to the definition and study of economics. It seeks to answer the following questions: ## What is the economic science? Economic science is a social science that studies how people choose to allocate scarce resources to satisfy their unlimited wants. People have unlimited wants, but they do not have enough resources to purchase everything (goods and services) they need. This forces people to make choices and use their limited resources to select those goods and services they want most while giving up or forgoing the rest. ## What are the major branches of Economics? Economics is usually divided into two major branches: * **Microeconomics:** Deals with the behavior of individual economic units: individual firms, consumers, and workers. Microeconomics uses the technique of partial equilibrium analysis to study the price-output determination of a single commodity or service in any given market situation. * **Macroeconomics:** Focuses on the workings of the economy as a whole, including the determination of national income, interest rates, inflation, and unemployment. ## Factors of Production The factors of production are the resources used to produce other goods. They are classified into five categories: * **Land:** All natural resources such as materials, water, and the land itself. * **Labor:** The physical and intellectual work of people. * **Capital:** Products such as machinery, equipment, and buildings used in production. * **Technology:** Methods and techniques used in production, marketing, and management. Technological change can improve a firm's ability to produce. * **Entrepreneurship:** The firm's manager, who is responsible for the performance of the firm and makes decisions about what to produce, how to produce, and for whom. They also seek to make the production process more efficient and offer better goods and services at lower prices than rivals. ## Positive vs. Normative Analysis * **Positive analysis:** Seeks to explain "what is" and predict how the world might change if certain events occur. It does not impose the value judgments and opinions of one individual on the decisions of others. * **Normative analysis:** Seeks to determine "what ought to be" and suggests alternative policy options. It imposes the value judgments and opinions of one individual on the decisions of others. ## The Economic Problem The economic problem is the fact that the amount of goods and services that people want is greater than the amount that is available. This scarcity arises from two key elements: 1. **Human wants are unlimited.** 2. **Resources are scarce.**