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INTRODUCTION TO ECONOMICS

AIMS & OBJECTIVES


After studying this lesson you should be able to understand

What is economics? Concepts like scarcity & efficiency microeconomics Vs macroeconomics

Basic problems of an economic organization


Economic systems Societys technological possibilities Economics & managerial decision making

WHAT IS ECONOMICS?

It is the study of how societies use scarce resources to produce valuable goods and services and distributes them among different individuals

SCARCITY & EFFICIENCY


Two key ideas that run through all of economics: that goods are scarce & that society must use its resources efficiently.

Scarcity of goods refer to a situation in which goods are limited relative to desires Efficiency denotes the most effective use of a societys resources in satisfying peoples wants & needs. Economic efficiency requires that an economy produce the highest combination of quantity & quality of goods & services given its technology & scarce resources

MICROECONOMICS & MACROECONOMICS


Economics is divided into two major subfields

Microeconomics concerned with the behaviour of individual entities such as households, firms & markets. Adam Smith (The Wealth of Nations, 1776) is considered the founder Macroeconomics concerned with the overall performance of the economy. John Maynard Keynes (General Theory of Employment, Interest and Money, 1936) is considered the founder of modern macroeconomics.

Note: the present course discusses microeconomics with focus on Firms, Markets & their behaviour

THE THREE PROBLEMS OF ECONOMIC


ORGANIZATION
Three fundamental economic problems of an economy are:

What commodities are produced and in what quantities? How are goods produced? For whom goods are produced? The answers to these questions vary according to the type of economic system that is in place in a given country.

ECONOMIC SYSTEMS

Economic systems: Different societies are organized through different economic systems and that organization determines the ways the three fundamentals questions are answered. The two fundamentally different economic systems are: Market economy one in which individuals & private firms make the major decisions about production and consumption. A system of prices, of markets, of profits and losses, of incentives & rewards determine the answer to the 3 fundamental questions Command economy one in which the government makes all important decisions about production & distribution

Note:

Extreme form of market economy is laissez-faire economy Most economics of the world are mixed economies
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SOCIETYS TECHNOLOGICAL POSSIBILITIES

Problem facing a society is: given a stock of limited resources (labour, technical knowledge, tools & machinery, land etc), the society has to decide how to allocate these limited resources among thousands of different possible commodities & services To summarize: given resources are scarce relative to wants, an economy must choose among different potential bundle of goods (the what), select from different techniques of production (the how) and decide in the end who will consume the goods ( the for whom) Given this problem facing the economy two concepts are very important: Inputs commodities or services used to produce goods & services. Also called factors of production Outputs various useful goods or services that result from the production process & are either consumed or used for further production

THE PRODUCTION POSSIBILITY FRONTIER (PPF)


PPF shows the maximum quantity of goods that can be efficiently produced by an economy, given its technological knowledge and quantity of available inputs. Economic growth shifts the PPF outward

PPF & OPPORTUNITY COST

In a world of scarcity, choosing one thing means giving up something else. The opportunity cost of a decision is the value of the good or service foregone. This is a very important concept in economics As we move up the PPF, good X is given up to have additional quantities of Y. The opportunity cost of producing additional Y is the amount of X foregone.

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HOW IS ECONOMICS USEFUL IN MANAGERIAL DECISION MAKING?

Evaluating Choice Alternatives Identify ways to efficiently achieve goals. Specify pricing and production strategies. Provide production and marketing rules to help maximize net profits.

Making the Best Decision

Economics, in particular managerial economics, can be used to efficiently meet management objectives. Economics, in particular managerial economics, can be used to understand logic of company, consumer, and government decisions.

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