Economics is defined as the study of how society manages scarce resources. The document provides an introduction to key economic concepts including factors of production, different types of economic systems, and the circular flow model. It summarizes that economics involves decision making by households, firms, and government in markets for goods/services and factors of production. Different economic systems allocate resources differently between private ownership and central planning.

1. Introduction to Economics
Chapter One
Fundamentals of Economics
Lect; Saadiq F. Hassan (MSc)

2. Fundamental Of
Economics

3. Have you ever heard before what …..is?
Economics,
Unlimited human wants,
Scarcity,
Choice, Tradeoff, Opportunity cost,
Production,
Factors of Production
Market,

4. Cont.….
Economics is one of the most exciting disciplines in social
sciences.
As a body of knowledge, the effective birth of economics as a
separate discipline may be traced back to 18th century.
There was, of course, economics before, the Greeks, Islamic
Scholars, Chinese Writers, Middle Ages in Europe all have
their contributions to the economics. But existed as
unorganized and philosophical.

5. Cont.….
The word economy comes from the Greek word “oikonomos”
which means ‘one who manages a household.”
In fact, household and society have much in common.
Economics deals with many socioeconomic issues, most of which
are of immediate concern to us.

6. Several economists have defined economics taking different
aspects into account.
Adam smith defined economics as the as the science of wealth
Alfred Marshall defined economics as the study of mankind in the
ordinary business of life
Lionel Robbins defined economics as the science which studies
human behavior as a relationship between ends and scarce

7. Cont.….
Prof. Paul Samuelson defined economics as “the study of how
men and society choose, 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 the society.

8. Cont.….
Conclusively, economics can be defined;
Economics can be defined as; the study of how society manages its scarce
resources
Economics is the study of the use of scarce resources to satisfy unlimited
human wants
Two major factors are responsible for the emergence of economics.
the existence of unlimited human wants
the scarcity of available resources

9.  Unlimited Human Wants
Human wants are unlimited. This means that they are never
ending and can never be fully satisfied
 Resource are scarce
This means resources (such as time, money, land, labor,
capital and natural resources) are limited according to the
unlimited human wants.
 Choices
This means selecting one from number of alternatives.
Choices become necessary as a result of scarcity. Making a
choice implies giving up something in order to get
something else.

10. Cont.….
Opportunity Cost
The value of the alternative forgone in order to get the other
alternative
Rationality
This is an economics assumption of that individuals will pick up
the alternative which he gains optimum benefit.
Production
Is the process in which various inputs both Material and
Immaterial are used to produce the outputs in the form of products
or services.

11. Cont.….
Factors of production
Are the resources used in the production process. They can be;
land, labor, capital, and entrepreneurship.
Market
Is a set up where buyer and sellers meet to exchange goods or
service for profit.

12. Economics covers central issues faced by any society.
The central questions that economics response are;
What to produce
How to produce
For whom to Produce

13. In general, economics can de branched in to two main divisions;
i) Microeconomics
ii) Macroeconomics.
However, In the recent past, many new branches of the subject
have developed, including Development Economics, Industrial
Economics, Environmental Economics, Agricultural Economics,
Labor Economics, Behavioral Economics, and so on.

14. The word micro is derived from the Greek word mikros meaning
small.
Microeconomics is a branch of economics that is concerned with
the behavior of individual consumers, firms, industries,
commodities and prices.
It deals with the consumers, producers, firms or industry, individual
income, the determination of product price, factor price etc.

15. The word macro is derived from the Greek word makros meaning
large.
Microeconomics is a branch of economics that is concerned with how
an overall economy—the markets, businesses, consumers, and
governments—behave
It deals with the overall aggregate/national of microeconomics
It analyses with the national output, total employment, national
income, aggregate savings and investment etc.

16. Economics adopts the usual methods of scientific analysis for the
discovery of its laws and principles.
Deductive Method or Inductive Method
Deductive Method Means reasoning or inference from the general
to the particular or from the universal to the individual.
Inductive Method is the process of reasoning from a part to the
whole, from particulars to generals or from the individual to the
universal

17. Here, we descend from the general to particular
The deductive method derives new conclusions from fundamental
assumptions or from truth.
For example any supply and demand analysis you do is the
application of generally accepted principles about demand and
about supply; therefore, you are engaging in deductive logic.

18. This method mounts up from particular to general
The inductive method develops economic theories on the basis of
observations and experiments
For example data on consumption of poor, middle and rich income
groups of people are collected, classified, analyzed
and important conclusions are drawn out from the results

19. Economic concepts can be stated in two different approaches
Normative Economic Statement or Positive Economic Statement
Positive statement;
it is concerned with the question of what is?
It is based on data and facts
Normative Statement; It is concerned with the question of what ought to
be?.
It is based on values, opinions and judgments

20. Examples of Positive Statement
 scarcity
 rational self-interest
 profit maximization
Example of Normative Economic Statement
 Democracy for development
 Wealth tax for wealth distribution
 Individual inheritance limit

21. The way a society tries to answer the fundamental economic
questions is summarized by a concept known as economic
system.
economic system is the means by which societies or
governments organize and distribute available resources,
services, and goods across the country.
Economic systems regulate the factors of production,
including land, capital, labor, and physical resources.

22. Factors of production are the inputs used in the production of
goods or services to make an economic profit.
In economics, the factors of production are
 land,
 labor,
 capital, and
 entrepreneurship.

23. Land refers to the “gifts of nature”, or natural resources
not created by humans.
Land includes deserts, fertile fields, forests, mineral
deposits, livestock, sunshine, and the climate necessary
to grow crops.
Cont.….

24. Capital is the tools, equipment, machinery, and
factories used in the production of goods and services.
Capital includes building, machines, tools, tractors and
motors etc.
Capital is unique for being a good produced before the
production of another good
Cont.….

25. Labor refers to the people with all their efforts, abilities,
and skills.
This category includes all people except for a unique
group of individuals called entrepreneurs, which we
single out because of their special role in the economy
* Cont.….

26. Entrepreneurs are those who organizes the other
resources of production and undertakes the risks and
uncertainties involved in production.
Entrepreneurs often are thought of as being the driving
force in an economy because they exhibit the ability to
start new businesses or bring new products to market.
* Cont.….

27. There are three decision making units in any economy
“closed”. These are households, firms and the government.
Household: A household can be one person or more who live
under one roof and make joint financial decisions.
Households make two decisions;
Selling of their resources, and
Buying of goods and services
*

28. Firm: A firm is a production unit that uses economic
resources to produce goods and services.
Firms also make two decisions;
Buying of economic resources
Selling of their products
* Cont.….

29. Government: A government is an organization that has
legal and political power to control or influence
households, firms and markets.
Government also provides some types of goods and
services known as public goods and services for the
society
* Cont.….

30. The three economic agents interact in two markets
Product market: it is a market where goods and services
are transacted/ exchanged. That is, a market where Firms
and governments buy goods and services from business
firms.
Factor market (input market): it is a market where
economic units transact/exchange factors of production
(inputs). In this market, owners of resources (households)
sell their resources to business firms and governments
*

31. The circular-flow diagram is a visual model of the economy
that shows how money, economic resources and goods and
services flows through markets among the decision making
units.
For simplicity, let‘s first see a two sector model where we
have only households and business firms.
In this case, therefore, we see the flow of goods and services
from producers to households and a flow of resources from
households to business firms.
*

33. In the above diagram, a two sector model containing households and
firms is shown.
the clock – wise direction shows the flow of economic resources and
final goods and services.
Business firms sell goods and services to households in product
markets (upper part of the diagram).
On the other hand, the lower part shows, where households sell
factors of production to business firms through factor market.
*

34. The anti – clock wise direction indicates the flow of money (in the
form of revenue, income and spending on consumption).
Firms, by selling goods and services to households, receive money
in the form of revenue which is consumption expenditure for
households in the product market.
On the other hand, households by supplying their resources to
firms receive income.
This represents expenditure by firms to purchase factors of
production which is used as an input to produce goods and
services.
* Cont.….

35. Let’s see a three sector model in which the government is involved
in the economic activities.
the only difference of the three sector model from the two sector
model is that it involves government participation in the market.
The government to provide public services purchase goods and
services from business firms through the product market with a
given amount of expenditure.
On the other hand, the government also needs resources required
for the provision of the services. This resource is purchased from
the factor market by making payments to the resource owners
(households).
*

37. Customarily, economic systems can be identified in to
three types.
Capitalist Economy
Command Economy
Mixed Economy
*

38. This system is also called free market economy or market system
or laissez faire.
Is an economic system in which the factors of production can be
privately owned.
production and consumption of goods and services takes place
through mechanism of free market.
The most important feature of capitalism is the existence of private
property and the minimum government intervention in the market
*

39. The right to private property
Freedom of Enterprise
Freedom of Choice by Consumers
Profit Motive and Competition
Minor role of government
Self-Interest
Inequalities of income
Existence of negative externalities
*

40. Flexibility or Adaptability
Decentralization of Economic Power
Increase in Per-Capita Income and Standard of Living
New Types of Consumer Goods
Growth of Entrepreneurship
Optimum Utilization of Productive Resources
High Rate of Capital Formation
Reward According to Ability
*

41. Inequality of Income
Unbalanced economic activity
Exploitation of labor
Negative externalities
Too Much Waste
*

42. also known as socialistic economy or planned economy
Is an economic system in which the government plans
and organizes the production and distribution of goods
and service
Under this economic system, the economic institutions
that are engaged in production and distribution are
owned and controlled by the state
*

43. Collective ownership
Central economic planning
Strong government role
Maximum social welfare
Relative equality of incomes
*

44. Absence of wasteful competition
Balanced economic growth
Elimination of private monopolies and inequalities
*

45. Absence of automatic price determination
Absence of incentives for hard work and efficiency
Lack of economic freedom
*

46. Also known as Hybrid economy
It is neither pure capitalism nor pure command
Economy but a mixture of the two.
It incorporates some of the features of both and allows
private and public sectors to co-exist.
*

47. Co-existence of public and private sectors
Economic welfare
Economic planning
Price mechanism
Economic equality
*

48. Private Property, Profit Motive and Price Mechanism
Adequate Freedom
Rapid and Planned Economic Development
Social Welfare and Fewer Economic Inequalities
*

49. Ineffectiveness and inefficiency
Economic fluctuations
Corruption and black markets
*

50. END