Economic problem, Economic Agents, Types of economic analysis

1. Lecture #1
Economic problem, Economic
Agents, Types of economic analysis

2. Contents
• Definitions of Economics
―Wealth concept
―Welfare Concept
―Scarcity Concept
• Economic Problem
• Economic choice and Opportunity cost
• Samuelson’s solution of scarcity
• Economic Analysis
• Branches of Economics
remember you and I are here
“to learn from each other”

3. Stages & Definitions of Economics
Wealth
Definition
(Adam Smith)
Welfare
Definition
(Ayred
Marshall)
Scarcity
Definition
(L. Robbins)

4. • Wealth Concept : Adam Smith, who is
generally regarded as father of
economics, defined economics as “ a science
which enquires into the nature and cause of
wealth of nation”. He emphasized the
production and growth of wealth as the
subject matter of economics.

5. • Welfare Concept : According to A. Marshall
“Economics is a study of mankind in the ordinary
business of life; it examines that part of individual
and social action which is most closely connected
with the attainment and with the use of material
requisites of well being. Thus, it is on one side a
study of wealth; and on other; and more
important side, a part of the study of man.

6. • Scarcity Concept : According to Lionel
Robbins: “Economics is the science which
studies human behavior as a relationship
between ends and scarce means which have
alternate uses”.

7. • Economics is a social science concerned with the
efficient use of scarce resources to achieve the
maximum satisfaction of economic wants.
• Scarce resources: There are only limited number
of resources such as
workers, machines, factories, raw materials etc.
Yet there are a number of different ways in which
they could be used.

8. • Similarly people only have limited amount
of money. Yet they have lots of needs and
wants to satisfy.

9. • Also Government has limited amount of
money!!! However, it is unable to satisfy all
its wants.

10. ECONOMIC PROBLEM arises because of….
• Scarce Resources
• Unlimited wants

11. Economic choice and Opportunity cost
• Due to scarce resources available people have
to make economic choices which create
sacrifice because alternatives must be given
up.
• Economic choice is deciding between different
uses of scarce resources.

12. Opportunity Cost
• The amount of other product that must be
forgone or sacrificed to produce a unit of a
product.
• It is the value of the second best alternative
forgone.
• It is the benefit that is lost in making a
choice between two competing uses of
scarce resources.

14. • Everything has an opportunity cost.

15. Samuelson’s solution of scarcity
What to produce? How to produce? For whom to produce?
Societies have to decide
the best combination of
goods and services to
meet their needs.
For example, how many
resources should be
allocated to consumer
goods, how many
resources to capital
goods, how many
resources should go to
schools, and so on.
Societies also have to
decide the best
combination of factors
to create the desired
output of goods and
services.
For example, how
much land, labor, and
capital should be used
produce consumer
goods such as
computers and motor
cars.
Societies need to decide who
will get output from
country’s economic activity,
and how much they will get.
For example, who will get
computers and cars that
have been produced? This is
often called the problem of
distribution?

16. Economic Agents
• Economic agents are participants in the
economy that engage in
specialization, production, exchange, and
consumption. There are two economic agents:
1. Producers
2. Consumers
• Government is also consider as economic
agent.

17. Economic Analysis
• Economic analysis is the process of driving economic principles
from relevant economic facts.
Types of economic analysis
Positive Economic Analysis Normative Economic Analysis
The analysis of facts and data to
establish the scientific generalizations
about economic behavior. “Statements
about how the world actually
operates—what is”. E.g. what is the
unemployment rate in an economy,
what is country’s GDP.
The part of economics involving value
judgments about what the economy
should be like, focused on which
economic goals and policies should be
implemented. “Statements about how
the world should be”. E.g. How
unemployment rate could be reduced or
How can a country raise its GDP.

18. Branches of Economics
• Microeconomics: concerned with the behavior
of individual entities such as market, firms
and households e.g. How individual prices are
set, how prices of land, labor, capital are
set, inquires into the strength and weakness of
the market mechanism.
• Macroeconomics: concerned with the overall
performance of the economy e.g. Total
income, total output, aggregate
expenditure, employment, inflation, etc.