DEFINITION OF

ECONOMICS
 ECONOMIC
• The term economic refers to anything related to the
production, distribution, and consumption of goods
and services, as well as the management of resources
within a society or an individual. It deals with how
people, businesses, and governments make decisions
about how to use their limited resources (like time,
money, and labor) to fulfill their needs and desires.
In a broader sense, "economic" can describe:

1.Economic systems: The way a society organizes and allocates resources

(e.g., capitalism, socialism).
2.Economic behavior: The actions and decisions made by individuals or groups
in response to economic incentives and constraints.
3.Economic policies: Strategies and decisions made by governments or
organizations to influence the economy (e.g., monetary or fiscal policies).
4.Economic efficiency: The optimal allocation and use of resources to maximize
welfare or profit.

So, essentially, anything labeled as "economic" has to do with how wealth and
resources are managed and distributed in various contexts.
The three basic economic problems, which
form the foundation of economics, are:

1.What to produce?
2.How to produce?
3.For whom to produce?
• What to Produce?
Allocation of resources: Resources such as land, labor, capital, and
entrepreneurship are limited, so societies must choose the combination of
goods and services that will be most beneficial to meet the needs of the
people.
• Types of goods: Choices need to be made between producing consumer
goods (e.g., food, clothing, entertainment) and capital goods (e.g.,
factories, machinery, technology). For example, in a developing economy,
there may be a greater focus on producing capital goods for long-term
growth, while in a developed economy, more attention might go toward
consumer goods and services.
• Opportunity cost: When resources are used to produce one good or
service, those same resources cannot be used to produce something else.
This trade-off is known as opportunity cost, and it plays a key role in
determining what a society should produce.
 How to Produce?

• Once a society has decided what to produce, the next step is

determining the method or process of production. This question
focuses on the best way to use the available resources to produce
goods and services.
• Technology and techniques: Different methods of production vary
in terms of efficiency, cost, and the type of labor required. For
instance, should an economy produce goods through labor-intensive
methods (using more workers) or capital-intensive methods (using
machines and technology)?
Resource allocation: The decision on how to produce
involves choosing how to allocate the factors of production—
land, labor, and capital. For example, a factory might choose
to invest in automation or hire more workers based on the
relative costs of labor and technology.
Sustainability and ethics: This question also touches on
the long-term sustainability of production methods, including
the environmental impact, social costs, and ethical
considerations. For instance, should resources be used in a
way that harms the environment, or should sustainable, eco-
friendly methods be prioritized?
 For Whom to Produce?

• Distribution of wealth: The wealth or income distribution is a

critical aspect of this question. In societies with high levels of
inequality, wealth is often concentrated in the hands of a few, while
many others may lack access to essential goods and services.
Conversely, more egalitarian societies may focus on ensuring that
everyone has access to basic needs.
• Market-based systems: In capitalist economies, goods and
services are typically distributed according to the ability of
individuals to pay. People with higher incomes can afford more
goods, while those with lower incomes may struggle to meet basic
needs
•Government intervention: In some economies, governments intervene
to ensure that goods and services are distributed more equitably, either by
redistributing wealth through taxation and welfare programs or by
providing essential services (like healthcare, education, or housing)
directly.
•Social choice: This issue also raises questions about how societies
choose to prioritize the well-being of certain groups (e.g., should priority
be given to the elderly, children, or the unemployed?) and whether
governments should play a role in ensuring access to essential goods and
services for all citizens.
 are interconnected:

A society’s decision about what to produce influences

how it produces those goods (e.g., should they use
labor or capital?).

The method of production influences who can afford

the goods being produced—for whom they are
produced.
Economic systems—whether capitalist, socialist, or
mixed—impact how these questions are answered. For
instance, a market economy relies on individual
choices to answer these questions, while a command
economy has centralized planning to determine these
factors.
 SCOPE OF ECONOMICS

• Microeconomics
- Microeconomics focuses on the behavior of individual units within
the economy, such as households, firms, and industries. It deals
with the decisions made by individuals and firms in allocating
resources and the consequences of these decisions on prices,
production, and consumption.
•National income and output: The measurement of a
country’s total production (GDP) and income.
•Economic growth: The long-term increase in a country’s
output, standard of living, and productive capacity.
•Unemployment: The study of the causes and
consequences of unemployment, as well as policies to
reduce it.
•Inflation: The rise in general price levels, and its causes
and effects on purchasing power and the economy.
•Monetary and fiscal policy: The use of government
spending, taxation, and central bank policies to stabilize
the economy and achieve macroeconomic objectives.
 International Economics

This area deals with the economic relations between countries. It

includes:
• International trade: The exchange of goods and services between
countries, including theories of trade and trade policies.
• Balance of payments: A record of all economic transactions
between a country and the rest of the world.
• Exchange rates: The value of one currency in relation to another
and how exchange rates affect trade and investment.
 Development Economics
• Development economics focuses on improving the
economic and social well-being of people in
developing countries. It examines issues such as
poverty, inequality, economic growth, education,
health, and infrastructure.
 Public Economics
• This area deals with the role of government in the
economy, particularly concerning taxation, public
expenditure, and the provision of public goods. It
studies the effects of government policies on the
economy and examines the role of the state in
regulating markets.
 Behavioral Economics
• Behavioral economics blends psychology and
economics, looking at how people make economic
decisions. It examines why individuals sometimes
make irrational choices and how their behavior
deviates from traditional economic theory.
 Nature of Economics
• The nature of economics describes the fundamental
characteristics and methods of the subject,
explaining how economics studies human behavior
and societal trends. It defines how economics
analyzes choices and decisions made in the face of
scarcity.
 Economics as a Social Science
• Economics is considered a social science because it
deals with the behavior and interactions of individuals,
businesses, and governments within society. It’s not
purely about numbers and graphs but about
understanding human choices, incentives, and actions.
Economists seek to understand how people and societies
make decisions about allocating limited resources to
satisfy their wants and needs.
 Positive and Normative
Economics
- Economics is often divided into positive and normative economics:
• Positive economics: This branch deals with objective analysis and
descriptions of economic phenomena. It focuses on "what is" —
explaining how the economy works based on facts, data, and
observable phenomena. Positive economics tries to be value-free and
does not prescribe what should be done, but rather describes what is
happening.
Example: "An increase in the minimum wage will lead to higher
unemployment among low-skilled workers.
• Normative economics: This branch is concerned
with value judgments about what ought to be. It
involves making recommendations about economic
policies or actions, often based on ethical
considerations, and is subjective in nature.
Example: "The government should increase the
minimum wage to reduce poverty and inequality."
 Economics as a Science of
Scarcity
• The core issue in economics is scarcity—the
condition that resources (such as time, money, labor,
and natural resources) are limited, while human
wants and needs are virtually unlimited. Economics
is, therefore, the study of how to allocate scarce
resources efficiently to meet these unlimited desires.
 Economics as a Study of Choices
and Trade-offs
• Since resources are limited, individuals, businesses,
and governments must make choices about how to
use them. Every choice involves trade-offs, meaning
that choosing one option often requires forgoing
another. Economics focuses on analyzing these
trade-offs and understanding opportunity costs—the
value of the next best alternative that is sacrificed.
Economics as a Study of Optimization
• Economics is often concerned with optimization,
meaning making the best or most efficient use of
available resources. This includes maximizing utility
(satisfaction) for consumers, maximizing profit for
firms, or achieving economic welfare for society.
 Economics as a Study of
Incentives
• Economics also looks at incentives—how individuals
and firms respond to changes in prices, policies, or
other external factors. For instance, higher prices for
a good might incentivize producers to increase
supply or encourage consumers to reduce their
demand. Similarly, government policies, such as
subsidies or taxes, can incentivize certain behaviors.