This document is about Macroeconomcs, its problems and scope.

1. Course Title:
Principles of Macroeconomics
Muhammad Minhaj Akhtar
Lecture# 1-2

2. Topic
Basic Concepts and Definition of Economics

3. Lecture Contents
The word economics
Definition of the economics
Scope and importance of economics
The Central economic problems
Microeconomics and Macroeconomics
Factors of production

4. The word ‘Economics’
• The English term ‘Economics’
• Which is derived from the Greek word ‘Oikonomia’.
• Its meaning is ‘household management’.
• A household refers to a group of people or individuals living
under the same roof and sharing common living
arrangements.
• A small group of persons who share the same living
accommodation, who share of their income and wealth and
consume certain types of goods and services collectively,
mainly housing and food.

5. Adam Smith view about Economics
•Adam Smith (Scotland- 1723-1790)
•The father of economics
•Introduce first time economics as a subject
•On his book The Wealth of Nation (1776)
•“Economics is the science of wealth”
Production of Wealth
Exchange of Wealth
Distribution of wealth
Consumption of Wealth

6. Alfred Marshall view about Economics
• Alfred Marshall (UK- 1842-1924)
• One of the most influential economist of his time
• Principles of Economics (1890)
• Marshall argued that economics is the study of wealth and mankind
• “Economics is the science of material welfare of human”
• Welfare is defined as the general well-being and happiness of people.

7. Lionel Robbins view about Economics
• Lionel Robbins (UK-1898-1984),
• A well-known economist
• ‘Nature and Significance of Economic Science’ (1932)
• Economics is not a science of wealth nor a science of welfare
• “Economics is the study of human behavior as a relationship between
ends and scarce means which have alternative uses”

8. Modern definition of Economics
o“Economics is the field of study that how societies use scarce resources
to produce valuable commodities and distribute them among different
people”.
o“Economics is the social science that studies how individuals,
organizations, and societies manage the scarce resources under their
control for the satisfaction of their needs and desires”.

9. Three major important points in the
introduction of Economics
• Scarce Resources:
• The goods and resources are scarce/rare/limited relative to unlimited
desires/wants
• Unlimited Wants:
• The desires and wants are unlimited.
• Alternative options/Efficient Use:
• The society must use its resources efficiently through alternative
options.

10. The Central economic problems
• Every economy in the world faces some basic economic problems
• Which are also known as the central economic problems regarding
• ‘‘What to produce, how to produce and for whom to produce’’

11. (i) What to Produce:
• It means that which commodities are to be produced and in what
quantities?
• The commodities which do not command positive prices in the
market would not be produced.
• Therefore only those commodities with positive prices are to be
produced.
• The quantity in which a commodity is to be produced is set at that
level where demand equals supply.
• If quality produced is more or less, then there will be dis equilibrium
in the market and price will fluctuate.
• Hence, to maintain stable equilibrium price it becomes necessary to
make demand and supply equal.

12. (ii) How to Produce:
• Which techniques are to be adopted’?
• Technology means the correct proportion in which the different
factors of production are to be employed.
• Labour-intensive: A labour-intensive technique would employ
relatively more labour and less capital.
• Capital intensive: The capital- intensive technique means more capital
and less labour.
• The choice of technique depends on the prices of the factors of
production.
• If labour is cheap and capital is expensive, a labour-intensive
technique would be considered and vice-versa.
• The prices of labour and capital are determined by the demand for
and supply of labour and capital respectively.

13. (iii) For Whom to Produce:
• Who will consume the goods
• The solution of this problem is very simple commodity can be
consumed only by people who have more purchasing power.
• Price mechanism determines the income of the workers, i.e.
purchasing power.
• The purchasing power of the owner of capital is determined in the
same way.
• Thus, when the price of every commodity and every factor of
production are determined, the third problem will be solved.

14. The scope and importance of modern economics
•To analyze the behavior of financial markets including interest rate and stock prices.
•How people make decisions: how much they work, what they buy, how much they
save, and how they invest their savings.
•The question that why some people are more wealthy or high income
•Why some countries have more income or higher income while others are poor?
•Why unemployment and inflation goes up and down?
•What is international trade and the impact of globalization?
•How to use resources efficiently to reduce poverty
•What type of policy can be adopted?
•To achieved the goal of rapid economic growth, Full employment, Price stability and
fair income distribution

15. Two main branches of Economics
• 1. Microeconomics
• 2. Macroeconomics

16. 1. Microeconomics
 Microeconomics is the branch of economics which study the behavior
of individual entities such as markets, firms and household.
 Microeconomics analyzes individual agents, industries and markets,
their interactions, and the outcomes of their interactions. Individual
agents may include, for example, households, firms, buyers, and
sellers.
 The analysis of a smaller unit of the economy, a single producer, firm
behavior and decision in different circumstances and individual
consumer preferences

17. Macroeconomics
 Macroeconomics is the branch of economics which study the overall
performance of the economy or the study of the economy as a whole.
 Macroeconomics analyzes the entire economy (meaning aggregated
production, consumption, saving, and investment) and issues
affecting it, including unemployment of resources (labor, capital, and
land), inflation, economic growth, and the public policies that address
these issues (monetary, fiscal, and other policies).
 The key macroeconomic variables are
 Unemployment rate, inflation rate, interest rates, exchange rate, GDP,
GDP growth rate, GNP, imports, exports, government Budget, budget
deficit and surplus

18. Factors of production:
Land, Labor, Capital and Entrepreneur
1. Land
This factor is the natural resource.
It includes the surface of the earth, lakes, rivers and forests.
It also includes mineral deposits below the earth and the climate
above.
As well as the small area of land that makes up a farm or factory.
The reward for owning land is the income that is generated.

19. 2. Labor
• This factor is the human resource.
• The basic determinant of which is the nation’s population.
• Not all of the population is available to work, because some are above
or below the working population age and some choose not to work.
• The reward for labour is the wage or salary that is paid.

20. 3. Capital
• This factor is any man-made aid to production.
• In this category we would include a simple spade and a complex car-
assembly plant.
• Capital goods help land and labour to produce more units of output,
• They improve the output from land and labour.
• The reward to capital is the rate of return that is earned.

21. 4. Entrepreneur
• This factor carries out two functions.
• First, the enterprise factor organises the other three factors of
production.
• Second, enterprise involves taking the risk of production, which exists
in a free enterprise economy.
• The functions of enterprise are undertaken by a single individual, the
entrepreneur.
• In larger, more complex firms the functions are divided, with salaried
managers organising the other factors and shareholders taking the
risk.
• The return for enterprise is the profits that are made.