introduction to Economics chapter 1-slide.pdf

This document provides an overview of international political economy (IPE) and discusses several national political economy systems. It defines IPE as the relationship between governments, businesses, and social forces across borders and over time. IPE has both a political dimension concerning power and decision making, as well as an economic dimension regarding resource distribution. The document then examines theoretical perspectives on IPE including mercantilism, liberalism, and Marxism. It also analyzes prominent national systems including the market-oriented capitalism of the US, developmental capitalism of Japan, and social market capitalism of Germany.

1. Denition of Economics
Introduction toEconomics
Chapter1
Tadele Bayu
Department of Economics
Bahir Dar University
August 31, 2022
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2. Denition of Economics
Table of contents
1Denition of Economics
2Rational of Economics
3Scope of Economics
4Method of analysis in Economics
5PPF
6Economic Questions
7Economic System
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3. Economic System Denition of Economics
Denition: What is Economics?
Adam Smith: Wealth
Economics is a science of wealth that enquiries in to
the factors that determine wealth of a country and
its growth.
His denition focuses on:
Production,
Distribution and
Expansion of material wealth resulted from productive
labour as the subject matter of economics.
His denition neglected:
immaterial services such as health, education,
administration, and arts from the denition of wealth and
thus ignored their role for economic growth.
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4. Economic System Denition of Economics
Alfred Marshal:Welfare
Economics is the study of mankind in the ordinary
business of life closely connected with material wel-
fare
It studies man's action in earning and spending
wealth.
Wealth here is studied not as an end but as a means to
the end of promoting human welfare.
It leaves immaterial services and ends out of the
scope of economics.
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5. Economic System Denition of Economics
Lionel Charles Robbins:Scarcity
1
Economics is a science which studies human behav-
ior as a relationship between unlimited ends and
scarce resources with alternative uses.
It studies human action regarding how he satises his
wants (all goods and services) with scarce resources.
This denition
determination of national income and employment,
and the theory of economic growth and development
untouched that are the major concerns of modern macroe-
conomics.
1
Robbins, L. C. (1932). An Essay on the Nature and Signicance of Economic
Science. London: Macmillan.
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6. Economic System Denition of Economics
Generally speaking
These denitions do not indicate the full range of issues studied by economists.
For starters, a good way to understand the scope of economics is to con-
sider the following short list.
(1)How markets work to determine prices and allocate resources.
(2)How governments inuence, for better or for worse, market outcomes through tax
policy, taris, subsidies, patent protection, environmental policy, etc.
(3)How a nations central bank (e.g., the Federal Reserve System of the United States)
may inuence the money supply, interest rates, unemployment, ination, and the
rate of growth of output.
(4)How we measure income inequality, ination, unemployment, and productivity
growth.
This is only a short list. Economic researchers today are interested in a
much longer list of topics.
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7. Economic System Denition of Economics
Conclusion
The denition varies as the nature and scope of the
subject grows over time.But, we can have a common
denition is as follow:
Economics is a social science which studies about
ecient allocation of scarce resources so as to at-
tain the maximum fulllment of unlimited human
needs.
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8. Economic System Denition of Economics
The rationales of economics
Economists say human wants are unlimited due to the
facts that some human wants are recurring and others
are hierarchical
The same needs reappear after being satised and
needs emerge with higher order ones.
For example, the need to eat recurs within a certain interval.
Likewise, once you attain your Bachelor degree, you aspire to get better education like a
master degree and then PhD.
Human wants for goods and services remain ahead of resources and capacity to
produce.
The basic economic problem is about
choice.
Choice is at the heart of all decision making !!
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9. Economic System Denition of Economics
Foundation of Economics
The scarcity of resources and the choices it forces us to make is the source of all of the
problems studied in economics
Households allocate limited income among goods and services
Business rms choices of what to produce and how much are limited by costs of
production
Government agencies work with limited budgets and must carefully choose which
goals to pursue
Economists study about how these choices are made in various set-
tings; evaluate the outcomes in terms of criteria such as eciency,
equity, and stability; and search for alternative forms of economic
organization that might produce higher living standards.
QPPPPPPRExplain how our economic system works
QPPPPPPRForecast the future of our economy
QPPPPPPRSuggest ways to make that future even better
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10. Economic System Denition of Economics
Scope of Economics
The core of modern economics is formed by its two major branches:
croeconomics
QPPPPPPRMicro comes from Greek word
mikros, meaning small
QPPPPPPRStudy the behavior of individual
households, rms, and
governments
Choices they make
Interaction in specic
markets
Focuses on individual parts of
an economy, rather than the
whole
QPPPPPPRtools are DD and SS of a
particular commodity and factor.
QPPPPPPRIt helps to solve the central
problems of what to produce,
how and for whom to produce.
QPPPPPPRDiscusses issues related with
consumer, producer and or
industry equilibrium
Macro comes from Greek word, makros,
meaning large
Study of the economy as a whole
Focuses on big picture and ignores ne
details
Unemployment
General price level
Economic growth
BOP
etc
Determination of level of income and
employment are its central problems.
Its main tools are aggregate demand and
aggregate supply.
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11. Economic System Denition of Economics
Method of analysis in economics
Is economics a positive science or normative science, or both? What is
your justication?
PositiveEconomics
analyzes facts and attempts to describe the world as it is.
It tries to answer the questions what was; what is; or what
will be?
It does not judge a system as good or bad, better or worse.
Statements about how the economy works
Accuracy can be tested by looking at the facts.
QPPPPPPRThe current ination rate in Ethiopia is 12 percent.
QPPPPPPRPoverty and unemployment are the biggest problems in Ethiopia.
QPPPPPPRThe life expectancy at birth in Ethiopia is rising.
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12. Economic System Denition of Economics
NormativeEconomics
Study of what should be, what ought to be.
Used to make value judgments, identify problems, and
prescribe solutions
Statements that suggest what we should do about
economic facts,based on values
Normative statements cannot be proved or disproved by
the facts alone
It evaluates the desirability of alternative outcomes based
on ones value judgments about what is good or what is
bad.
QPPPPPPRThe poor should not pay any taxes
QPPPPPPRFemale students must get better job opportunities than male students.
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13. Economic System Denition of Economics
Inductive and Deductive Reasoning
QPPPPPPRThe fundamental objective of economics, like any
science, is the establishment of
about certain aspects of human behaviour.
QPPPPPPRThose generalizations are known as
QPPPPPPREconomic theory provides the basis for economic
analysis which uses
QPPPPPPRThere are three methods of logical reasoning:
(a)Inductive
(b)Deductive
(c)Abductive
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14. Economic System Denition of Economics
Inductive reasoning
It is a logical method of reaching at a correct general statement or
theory based on several independent and specic correct statements.
In short, it is the process of deriving a principle or theory by mov-
ing from facts to theories and from particular to general economic
analysis.
Inductive method involves the following steps.
QPPPPPPRSelecting problem for analysis
QPPPPPPRCollection, classication, and analysis of data
QPPPPPPREstablishing cause and eect relationship
between economic phenomena.
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15. Economic System Denition of Economics
Deductive reasoning
It is a logical way of arriving at a particular or specic correct statement start-
ing from a correct general statement.
In short, it deals with conclusions about economic phenomenon from certain
fundamental assumptions or truths or axioms through a process of logical ar-
guments.
we should check the validity of the theory to facts by moving from
particular.
Major steps in the deductive approach include:
QPPPPPPRProblem identication
QPPPPPPRSpecication of the assumptions
QPPPPPPRFormulating hypotheses
QPPPPPPRTesting the validity of the hypotheses
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16. Economic System Denition of Economics
Scarcity, choice, opportunity cost and PPF
qScarcity
that a society needs to produce goods and services
are nite or limited in supply.
Free resources:
is greater than the amount people desire at zero price. E.g. sunshine
Scarce (economic) resources:
resource when the amount available to a society is less than what people want
to have at zero price.
Scarce or Economic resources include:
All types of human resources: manual, intellectual, skilled and specialized labor;
Most natural resources like land (especially, fertile land), minerals, clean water, forests
and wild - animals;
All types of capital resources ( like machines, intermediate goods, infrastructure ); and
All types of entrepreneurial resources
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17. Economic System Denition of Economics
Economic resources
qLabour: orts of human
beings in the production and distribution of goods and services.
The reward for labour is called wage.
qLand:
in it.
The reward for land is called rent.
qCapital:
to produce other goods and services. Example: equipment, ma-
chinery, transport and communication facilities (interest).
The reward for capital is called interest.
qEntrepreneurship:
helps to organize and manage other factors of production to
produce goods and services and willing to take risk of making
loses.
The reward for entrepreneurship is called prot.
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18. Economic System Denition of Economics
Entrepreneurs
Entrepreneurs are individuals who:
qOrganize factors of production to produce goods and services.
qMake basic business policy decisions.
qIntroduce new inventions and technologies into business practice.
qLook for new business opportunities.
qTake risks of making losses.
Note: Scarcity does not mean shortage !
We have already said that a good is said to be scarce
than the amount people wish to have at zero price.
But we say that
the amount they want at the prevailing or on going price.
Shortage is a specic and short term problem but scarcity is a universal and
everlasting problem
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19. Economic System Denition of Economics
Choice
qDue to the problem of scarcity, individuals, rms and government are forced to
choose as to what output to produce, in what quantity, and what output not to pro-
duce.
qIn short, scarcity implies choice. Choice, in turn, implies cost.
qThat means whenever choice is made, an alternative opportunity is sacriced.
qThis cost is known as opportunity cost.
Scarcity7!choice7!opportunity cost
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20. Economic System Denition of Economics
Opportunity cost
qIn a world of scarcity, a decision to have more of one thing, at the same time, means
a decision to have less of another thing.
qThe value of the next best alternative that must be sacriced is, therefore, the
opportunity cost of the decision.
Opportunity cost
sacriced (forgone) in order to obtain one more unit of a product.
qWhen we say opportunity cost, we mean that:
It is measured in goods & services but not in money costs
It should be in line with the principle of substitution.
when opportunity cost of an activity increases people substitute other activities in its
place.
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21. Economic System Denition of Economics
Production Possibilities Frontier or Curve
qPPF: a curve that shows the various possible combinations of goods and services that
the society can produce given its resources and technology.
qAssumptions.
Two goods
Fixed resources
Fixed in quantity
Fixed in quality
Full employment & Eciency.
Fixed Technology
Imperfect substitute.
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22. Economic System Denition of Economics
Figure:
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23. Economic System Denition of Economics
The PPF describes three important concepts
qThe concepts of scarcity
if it employs all of its resources and utilizes them in the best possible way.
qThe concept of choice:
choice.
qThe concept of opportunity cost:
production of more of one good requires sacricing some of another product which
is reected by the downward sloping PPF. Related to the opportunity cost we have a
law known as the law of increasing opportunity cost.
It states that as we produce more and more of a product, the opportunity cost per unit of
the additional output increases.
This makes the shape of the PPF concave to the origin.
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24. Economic System Denition of Economics
Inefficiency,Efficiency andUnattainable
(1)Any point along the line shows the economy operating at ciency
(2)Any point below the line is
(3)Any point above the line is presently
(4)Why does the graph curve instead of making a straight line?
Law of Increasing Costs as production increases for one item, more and more
resources are necessary to increase production of the second item!
Every resource is best suited for certain types of goods
Farmland and cows make butter where as Metals and factories make guns
(5)Technical eciency relates to how much output can be obtained from a given input,
such as a worker or a machine, or a specic combination of inputs. Maximum
technical eciency occurs when output is maximised from a given quantity of
inputs.
(6)Think of productive eciency in terms of cost minimisation by adjusting the mix of
inputs, whereas technical eciency is output maximisation from a given mix of
inputs.
qProductive eciency
good is produced, given the output of other goods.
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25. Economic System Denition of Economics
Opportunity Cost=
amount sacriced (forgone)
amount of goods gained
qExample: 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?
Opportunity Cost=
320420
1000500
=0:2
qThe economy gives up 0.2 metric tons of food per computer.
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26. Economic System Denition of Economics
Economic Growth and the PPF
qEconomic growth or an increase in the total output level occurs when one or both of
the following conditions occur.
(1)Increase in the quantity or/and quality of economic resources.
(2)Advances in technology.
qEconomic growth is represented by outward shift of the PPF.
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27. Economic System Denition of Economics
asymmetric growth
qAn economy can grow because of an increase in productivity in one sector of the
economy.
qFor example, an improvement in technology applied to either food or computer
would be illustrated by a shift of the PPF along the Y- axis or X-axis.
Figure:
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28. Economic System Denition of Economics
Three basic economic questions
(1)what to produce
This problem is also known as
society must determine, what kind of goods and services should be produced and how
much in each category
The economy must make choices such as consumption goods versus capital goods, civil
goods versus military goods, and necessity goods versus luxury goods.
(2)How to produce:problem of choice of technique.
Involves the appropriate combination of dierent resources for producing a good.
It refers to the method of production to be adopted
capital intensive Vs. labour intensive
(3)For whom to produce
This is related with the problem of distribution
Determination about the relative size of the slice of the pie that goes to each household
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29. Economic System Denition of Economics
Economic systems
qThe way a society tries to answer the above fundamental questions is summarized by
a concept known as economic system.
qIt is a set of organizational and institutional arrangements established to answer the
basic economic questions.
qThree types of economic system.
qThese are
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30. Economic System Denition of Economics
Capitalist economy
qCapitalism is the oldest formal economic system in the world.
qIt became widespread in the middle of the 19
th
century.
qIn this economic system, all means of production are privately owned, and
production takes place at the initiative of individual private entrepreneurs who work
mainly for private prot.
qGovernment intervention in the economy is minimal. This system is also called free
market economy or market system or laissez faire.
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31. Economic System Denition of Economics
Features of Capitalistic Economy
qprivate property.
Individuals have the right to:
own
controle and
dispose means of production
qFreedom of choice:
Consumers can what they are willing and able to get.
Producers produce goods in accordance with the wishes of the consumers. This is
known as the principle of consumer sovereignty.
qProt motive:
Entrepreneurs, in their productive activity, are guided by the motive of prot-making.
qCompetition:
Among sellers or producers of similar goods to attract customers.
Among buyers to obtain goods.
Among workers to get jobs.
Among employers to get workers and investment funds.
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32. Economic System Denition of Economics
qPrice mechanism:
All basic economic problems are solved through the price.
Producers determine supply and
Buyers determine demand
Interction of DD and SS detetrmine equm price.
qMinor role of government:
Do not interfere in day-to-day economic activities
connes itself to defense and maintenance of law and order.
qSelf-interest:
Each Economic agent attempt to do what is best for it self
Motivated by the desire for economic gain.
Consuers- highest satisfaction
Producers-maximum prot
workers -higher wage
qInequalities of income:
There is a wide economic gap between the rich and the poor.
qExistence of negative externalities:
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33. Economic System Denition of Economics
Advantages of Capitalistic Economy
qFlexibility or adaptability:
qDecentralization of economic power:
force against the concentration of economic power.
qIncrease in per-capita income and standard of living:
duction and income leads to higher per-capita income and standards of living.
qNew types of consumer goods:
large scale.
qGrowth of entrepreneurship:
skills and approaches.
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34. Economic System Denition of Economics
qOptimum utilization of productive resources:
resources is possible due to innovations and technological progress.
qHigh rate of capital formation:
formation.
Disadvantages of Capitalistic Economy
qInequality of income:
social imbalance.
qUnbalanced economic activity:
terms of dierent geographic regions and dierent sections of society.
qExploitation of labour:
qNegative externalities:
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35. Economic System Denition of Economics
Command economy
qCommand economy is also known as
qUnder this economic system, the economic institutions that are engaged in produc-
tion and distribution are
qIn the recent past, socialism has lost its popularity and most of the socialist countries
are trying free market economies.
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36. Economic System Denition of Economics
Main Features of Command Economy
A.
and there is no right to private property.
B.
controlling authority according to given socio-economic goals.
C.
ties.
D.
does not allow the exploitation of labour.
E.
absent.
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37. Economic System Denition of Economics
Advantages of Command Economy
I.
resources through unhealthy competition.
II.
leads to balanced economic development. Dierent regions and dierent sectors of
the economy can develop equally.
III.
major evils of capitalism such as inequality of income and wealth, private
monopolies, and concentration of economic, political and social power.
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38. Economic System Denition of Economics
Disadvantages of Command Economy
A.
controlled by the government, there is no automatic price mechanism.
B. ciency:
a. cient in running
businesses.
b. ciency.
c.
C.
(a)Economic freedom for consumers, producers, investors, and employers is totally absent,
and all economic powers are concentrated in the hands of the government.
D.
because all decisions are made by government ocials.
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39. Economic System Denition of Economics
Mixed economy
qA mixed economy is an attempt to combine the advantages of both the capitalistic
economy and the command economy.
qIt incorporates some of the features of both and allows private and public sectors to
co-exist.
Main Features of Mixed Economy
A.
Industries of national and strategic importance, such as heavy and basic industry, defense
production, power generation, etc. are set up in the public sector, whereas
consumer-goods industry and small-scale industry are developed through the private
sector.
B.
The public sector tries to remove regional imbalances, provides large employment
opportunities and seeks economic welfare through its price policy. Government control
over the private sector leads to economic welfare of society at large.
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40. Economic System Denition of Economics
C. Economic planning:
(a)The government uses instruments of economic planning to achieve co-ordinated rapid
economic development, making use of both the private and the public sector.
D. Price mechanism:
(a)The price mechanism operates for goods produced in the private sector, but not for essential
commodities and goods produced in the public sector.
(b)Those prices are dened and regulated by the government.
E. Economic equality:
Private property is allowed, but rules exist to prevent concentration of wealth.
Limits are xed for owning land and property.
Progressive taxation, concessions and subsides are implemented to achieve economic
equality.
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41. Economic System Denition of Economics
Advantages of Mixed Economy
(1)Private property, prot motive and price mechanism:
All the advantages of a capitalistic economy, such as the right to private property,
motivation through the prot motive, and control of economic activity through the price
mechanism, are available in a mixed economy.
At the same time, government control ensures that they do not lead to exploitation.
(2)Adequate freedom:
Mixed economies allow adequate freedom to dierent economic units such as
consumers, employees, producers, and investors.
(3)Rapid and planned economic development:
Planned economic growth takes place, resources are properly and eciently utilized,
and fast economic development takes place because the private and public sector
complement each other.
(4)Social welfare and fewer economic inequalities:
The governments restricted control over economic activities helps in achieving social
welfare and economic equality.
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42. Economic System Denition of Economics
Disadvantages of Mixed Economy
A. ectiveness and ineciency:
A mixed economy might not actually have the usual advantages of either the public
sector or the private sector.
The public sector might be inecient due to lack of incentive and responsibility, and the
private sector might be made ineective by government regulation and control.
B.
If the private sector is not properly controlled by the government, economic uctuations
and unemployment can occur.
C.
if government policies, rules and directives are not eectively implemented, the
economy can be vulnerable to increased corruption and black market activities.
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43. Economic System Denition of Economics
Decision making units and the circular ow model
(1)There are
rms and the government.
Household:
joint nancial decisions. Households make two decisions.
(a)Selling of their resources, and
(b)Buying of goods and services.
Firm:
services. Firms also make two decisions:
(a)Buying of economic resources
(b)Selling of their products.
Government:
(a)A government is an organization that has legal and political power to control or
inuence households, rms and markets.
(b)Government also provides some types of goods and services known as public
goods and services for the society.
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44. Economic System Denition of Economics
two markets
The three economic agents interact in two markets:
qProduct market:
It is a market where goods and services are transacted/exchanged.
That is, a market where households and governments buy goods and services from
business rms.
qFactor 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 rms and
governments.
qThe
(Birr), economic resources and goods and services ows through markets among
the decision making units.
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45. Economic System Denition of Economics
Circular ow of income with two sector model
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46. Economic System Denition of Economics
qThe clock wise direction
shows the ow of economic resources and nal goods and services.
qThe anti clock wise direction indicates the ow of birr (in the form of revenue,
income and spending on consumption)
qWe have also a three sector model in which the government is involved in the
economic activities.
qThe government to provide public services purchase goods and services from
business rms through the product market with a given amount of expenditure.
qOn the other hand, the government also needs resources required for the provision
of the services.
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47. Economic System Denition of Economics
Three sector circular ow of resources
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