economics chapter 1 and chapChapter 1.pptx

WOLAITA SODO UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ECONOMICS.
ECONOMICS COURS
Lecture Note
By:- Thomas D(Msc).
E- mail:-thomdana100@gmail.com

Course Outline
Course objectives
 The main objective of the course is to enable the students
use Economic tool for the microeconomic and
macroeconomics analysis.
 And you may have questions such as: What are resources?
What does efficient allocation mean? What are human
needs? What does demand mean? What is economics?
 This course will answer those questions and introduce you
to the nature of economics, demand and supply theories,
theories of consumer, production, cost, market structure
and fundamental concepts of macroeconomics at large.
By:-Thomas D(Msc) 2

COURSE DESCRIPTION
 Economics is:-
 One of the most important instruments of
economics used to describe the observed
economic phenomenon.
 Starting from neoclassical economic thinking,
mathematics and statistics have been given
important role in explaining economic and
different social problems.
 As far as Economics, the rationales of economics,
Scope and method of analysis in economics, …etc
By:-Thomas D(Msc) 3

CHAPTER ONE
NATURE OF ECONOMICS
 1.1 Definition Of Economics
 1.2 The rationales of economics
 1.3 Scope and method of analysis in economics
1.3.1 Positive and normative analysis
1.3.2 Inductive and deductive reasoning in economics
 1.4 Scarcity, choice, opportunity cost and production possibilities
frontier
 1.5 Basic economic questions
 1.6 Economic systems.
1.6.1 Capitalist economy
1.6.2 Command economy
1.6.3 Mixed economy
 1.7 Decision making units and the circular flow model
By:-Thomas D(Msc) 4

CHAPTER TWO
THEORY OF DEMAND AND SUPPLY
 2.1. Theory of demand
 2.1.1 Demand schedule (table), demand curve and
demand function
2.1.2 Determinants of demand
2.1.3 Elasticity of demand
 2.2 Theory of supply
2.2.1 Supply schedule, supply curve and supply
function
2.2.2 Determinants of supply
2.2.3 Elasticity of supply
 2.3 Market equilibrium
By:-Thomas D(Msc) 5

CHAPTER THREE
THEORY OF CONSUMER BEHAVIOUR
 3.1 Consumer preferences
 3.2 The concept of utility
 3.3 Approaches of measuring utility
3.3.1 The cardinal utility theory
3.3.2 The ordinal utility theory
 3.4 Chapter summary
By:-Thomas D(Msc) 6

CHAPTER FOUR
THE THEORY OF PRODUCTION AND COST
 4.1 Theory Of Production
4.1.1 Definition of production
4.1.2 Production function
4.1.3 Total, average, and marginal product
4.1.4 The law of variable proportions
4.1.5 Stages of production
 4.2 Theory Of Costs
4.2.1 Definition and types of costs
4.2.2 Total, average and marginal costs in the short run
4.2.3 The relationship between short run production and
cost curve
By:-Thomas D(Msc) 7

CHAPTER FIVE
MARKET STRUCTURE
 5.1. The concept of market in physical and digital space
 5.2. Perfectly competitive market
5.2.1 Assumptions of perfectly competitive market
5.2.2 Short run equilibrium of the firm
5.2.3 Short run equilibrium of the industry
 5.3. Monopoly market
5.3.1. Definition and characteristics
5.3.2. Sources of monopoly
 5.4. Monopolistically competitive market
 5.5. Oligopoly market
By:-Thomas D(Msc) 8

CHAPTER SIX
FUNDAMENTAL CONCEPTS OF MACROECONOMICS
 6.1. Goals of macroeconomics
 6.2. The National Income Accounting
6.2.1. Approaches to measure national income (GDP/GNP)
6.2.2. Other income accounts
 6.3. Nominal versus Real GDP
 6.4. The GDP Deflator and the Consumer Price Index(CPI)
 6.5. The Business Cycle
 6.6. Macroeconomic Problems
6.6.1. Unemployment
6.6.2. Inflation
6.6.3. Trade deficit and budget deficit
 6.7. Macroeconomic policy instruments
6.7.1. Monetary policy
6.7.2. Fiscal policy
By:-Thomas D(Msc) 9

10
ECONOMICS
CHAPTER ONE
DEFINITION OF ECONOMICS
Is the study of efficient allocation of scarce resources to
attain the maximum fulfillment of unlimited human wants
or needs.
The branch of both natural and social science
which study about how to allocate scarce
economic recourses in production and
distribution of goods and services so as to
attain the maximum fulfillments of society
material wants.
key phrases in this definition are unlimited human wants,
scarce resources, choices, and efficiency;
4/16/2024 By:- Thomas D(Msc)

11
Unlimited wants and resource scarcity
Human beings;
 want its basic needs like food, clothes,
shelter and other variety of goods and services
for their survival.
 These human wants are unlimited and
increase from time to time;
 however, the availability of economic
resources that include Land, Labor, Capital
and Entrepreneurship are scarce by their
nature.
Thus, economics describes various sets of
tools that enable societies to use their scarce
resources efficiently in order to achieve the
highest possible standard of living.
By:-Thomas D(Msc)

THE RATIONALES OF ECONOMICS
fundamental facts that provide the
foundation for economics;
 Human material wants are
unlimited.
 Economic resources are limited
(scarce).
Thus, economics is the study of how
human beings make choices to use
scarce resources to satisfy their
unlimited wants.
By:-Thomas D(Msc) 12

Opportunity cost and making choice
An opportunity cost:- is the amount or the
values of the next best alternative it must
be sacrificed or forgone in order to
produce one more units.
is the best alternative forgone. It is the
most important concept for making
optimizing choices.
To make economic choices, compare
marginal costs (the additional opportunity
cost that can be incurred) and marginal
benefits (the additional benefit that can be
obtained);

Cont.……………
The reason why opportunity cost increases
when we produce more of one good is that
economic resources are not completely
adaptable to alternative uses (specialization
effect).

SCOPE OF ECONOMICS
Economics can be analyzed at micro and
macro level.
Microeconomics
 deals with the economic behavior of
individual decision making units
such as households and business firms;
Macroeconomics
 deals with the effects of the aggregate
behavior of all decision making units as
a whole;

Microeconomics Macroeconomics
 Studies behavior of individual
economic units in the economy.
 Its main tools are the demand and
supply of particular commodities
and factors.
 It helps to solve the central
problem of what, how and for
whom to produce in an economy so
as to maximize profits
Examples: Individual income,
individual savings, individual
prices, an individual firm‘s output,
individual consumption, etc.
 Studies an economy as a
whole and its aggregates.
 Its main tools are aggregate
demand and aggregate supply
of an economy as a whole.
 Helps to solve the central
problem of full employment of
resources in the economy.
Examples: national income,
national savings, general price
level, national output, aggregate
consumption, etc.

METHOD OF ANALYSIS IN
ECONOMICS
Economics can be analyzed from two perspectives:
positive economics and normative economics.
Positive Economics
 is analysis of facts and attempts to describe the
world as it is.
 tries to answer the questions what was; what is;
or what will be?
Example:
• Poverty and unemployment are the biggest
problems in Ethiopia.
Any disagreement on positive statements can be

Normative Economics
 is loaded with judgments, what is good for
one may not be the case for the other.
 deals with the questions like, what ought to
be? or what the economy should be?
Example:
• The poor should pay no taxes.
• Females must to be given job
opportunities.
 Any disagreement on a normative statement
can be solved by voting

Inductive and deductive Reasoning in
Economics
 A theory is a simplified picture of reality
 Economic theory provides the basis for economic analysis
which uses logical reasoning
 There are two methods of logical reasoning: inductive and
deductive.
a. Inductive Reasoning
 The process of deriving
A principle or theory by moving from
Facts to theories and
From particular to general economic analysis.
 It involves the following steps.
i. Selecting problem for analysis
ii. Collection, classification, and analysis of data
iii. Establishing cause and effect relationship between
economic phenomena.

b. Deductive Reasoning
 It checks the validity of the
From theory to facts
From general to particular.
From Complex to Simple
 Major steps in the deductive approach
include:
i. Problem identification
ii. Specification of the assumptions
iii. Formulating hypotheses
iv. Testing the validity of the
hypotheses

THE PRODUCTION POSSIBILITIES FRONTIER OR
CURVE (PPF/ PPC)
PPF/PPC
 is a curve that shows the various possible
combinations of goods and services that the
society can produce given its resources and
technology.
 To draw the PPF we need the following
assumptions.
 Fixed quantity as well as quality of economic
resource available for use during the year (L, K)
 Two types of output to be produced over the year
 The economy is operating at full employment
and is achieving full production (efficiency).
 Fixed technology during the production period

Table1.1:Alternativeproductionpossibilitiesofacertainnation
Typesofproducts Unit Productionalternatives
A B C D E
Food metrictons 500 420 320 180 0
Computer number 0 500 1000 1500 2000

Food 500 A
420 B
320
All points on the PPF are
attainable and efficient
Point Q is attainable but
inefficient
- Point R is unattainable
180
C .R
D
0
E
500 10001500 2000 Computer
Q
We can also display the above information with a graph.
Figure 1.1: Production Possibilities Frontier

Cont.……………
Example:-Referring to table 1.1 above, if the
economy is initially operating at point B, what is
the opportunity cost of producing one more unit of
computer?
Solution:- Moving from production alternative
B to C we have:

Example
 Solution: Moving from production alternative B to C
we have:


26
1.5 BASIC ECONOMIC QUESTIONS
The scarcity of resources created three major problems
that every society faces.
1. What to produce
 refers;
This problem is also known as the problem of
allocation of resources.
 to types of those goods and services to be
produced;
 the quantity of each goods that the economy
should produce
an economy cannot produce as much of every
good and service as desired;
 b/c resources are scarce (more of one good
means less of others).
 Thus, society must choose exactly which goods
and services to produce and consume
By:-Thomas D(Msc)

27
2. How to produce
It refers to ;
choice of technique.
 choosing efficient production techniques used
(labor intensive, capital intensive)
 the combination of factors and the particular
technique ;
3. For whom to produce
 refers;
distribution of national product.
 about the distribution way of goods &
services among end users;
 choose how to distribute the output among
users. means LDs or Dcs
By:-Thomas D(Msc

1.6 ECONOMIC SYSTEMS
 are established to answer the basic economic
questions
 are three types: capitalism, command and
mixed
a. Capitalist Economy (Capitalism)
 it is also called free market economy or market
system or laissez faire
 here, all means of production are privately
owned,
 minimum government intervention in the
economy

Features of Capitalistic Economy
Full right to own private
property (factors of production)
Profit motive
Minor role of government
High inequalities of income
Existence of negative
externalities

B. COMMAND ECONOMY (SOCIALISTIC ECONOMY)
all means of production are owned
and controlled by the state.
Main Features
 collective ownership
 strong government intervention
 maximum social welfare
 relative equality of income

c. Mixed Economy
incorporates features of capitalistic economy
and the command
allows private and public sectors to co-exist.
Main Features
 co-existence of public and private sectors
 high economic welfare
 high economic equality (through re-
distribution of income in the form of tax,
subsides etc).

32
1.7 Circular Flow of Economic
Activity
It is a model showing the basic economic
relationships within different sectors of market
economy.
It includes
o households
o business firms
o government sectors
The model shows where money goes and what it
is exchanged for
Goods and services flow through the economy in
one direction while money flows in the opposite
By:-Thomas D(Msc)

33
Product or Output market
is the markets in which goods and
services produced by businesses are
sold to households
Flow of money income (revenue) to
business firms from the sell of G & S
to households
By:-Thomas D(Msc)

Input or Factor market
is a market in which households who
own economic resources supply
resources to firms
here, business firms are demanders of
resources, but households are the
suppliers
firms pay for resources(expenditure of
firms) and Hhs earn money payment
(income of hhs)

Cont.……………….
At this point you might ask the
source of government finance to
make the expenditures, payments
and additional supports to the
firms and households.
The main source of revenue to the
government is the tax collected
from households and firms.

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