Definition of economics
the study of how individuals and societies use limited
resources to satisfy unlimited wants.
Resources are limited but human wants are
• Economics is the social science that analyzes the
production, distribution and consumption of goods
Fundamental economic problem
individuals and societies must choose among
Economic resources/Factors of Production
– natural resources, the “free gifts of nature”
– the contribution of human beings
– plant and equipment
• Entrepreneurial ability/Organization/ Management
Economic Resource Resource payment
entrepreneurial ability profit
Positive and normative analysis
• Positive economics
– attempt to describe how the economy functions
– relies on testable hypotheses
– What is?
• Normative economics
– relies on value judgments to evaluate or recommend
– What can be done?
• scientific method
– observe a phenomenon,
– make simplifying assumptions and formulate a
– generate predictions, and
– test the hypothesis.
Branches of Economics
• Economics has two branches: microeconomics and
• Microeconomics is the branch of economics that
deals with the personal decisions of consumers and
• Its primary concern is to help consumers and investors make
their lives better by increasing their earnings and satisfying
their needs despite limited resources.
• Also included in its study are the consumers' decisions on
what products to buy and how the cost of commodities is
• What Does Microeconomics Mean?
The branch of economics that analyzes the market behavior
of individual consumers and firms in an attempt to
understand the decision-making process of firms and
• It is concerned with the interaction between individual buyers
and sellers and the factors that influence the choices made by
buyers and sellers.
• In particular, microeconomics focuses on patterns of supply
and demand and the determination of price and output in
individual markets (e.g. coffee industry).
• Macroeconomics deals with the larger aspects of a nation's
economy, such as the sectors of agriculture, industry, and service.
• It aims to
• (a) speed up the economy's growth rate and increase total
• (b) increase the rate of employment;
Investopedia explains Macroeconomics:
Macroeconomics is focused on the movement and trends in
the economy as a whole, while in microeconomics the focus
is placed on factors that affect the decisions made by firms
What Does Macroeconomics Mean?
• (c) keep the prices of commodities stable so that
they remain affordable;
• and (d) have sufficient reserves for foreign exchange
for importing goods and paying off loans.
The field of economics that studies the behavior of the aggregate
Macroeconomics examines economy-wide phenomena such
as changes in:
rate of growth,
gross domestic product,