Economics
Ch – 1
Introduction to economics
1. What is Economics?
Economics is the study of how people manage resources to meet their needs
and wants.
Adam Smith: Economics is the study of wealth.
Professor Alfred Marshall: Economics is the study of human welfare
in relation to wealth.
Professor L. Robbins: Economics is the science of scarcity and
choice.
Summary: Economics is about managing limited resources to meet
unlimited wants.
2. Origin and Development of Economics
Economics began as a subject during ancient times to study wealth. Over
time, it developed into a science to solve problems related to production,
consumption, and distribution of resources. Modern economics addresses
issues like unemployment, poverty, and inflation.
Summary: Economics evolved to address resource management, human
welfare, and real-world challenges.
3. Two Major Economic Problems
1. Scarcity: Resources like land, labor, and capital are limited, which
makes it impossible to fulfill all human wants.
2. Unlimited Wants: Human wants are endless and increase with time,
creating a continuous demand for resources.
Summary: Economics focuses on solving the problems of limited resources
and unlimited wants.
4. Criticism of Prof. L. Robbins’ Definition
Robbins' definition focuses only on scarcity and ignores human welfare.
Critics argue that economics should also include solutions for societal
problems, such as poverty, inequality, and unemployment.
Summary: Robbins' definition is too narrow, as it does not consider human
welfare or practical issues.
5. Concept of Keynesian Economics
Keynesian economics highlights the importance of government intervention
during economic recessions. It emphasizes policies like public spending and
tax cuts to boost demand and create jobs.
Summary: Keynesian economics stresses the role of government in
stabilizing the economy during crises.
6. What is Microeconomics?
Microeconomics studies the behavior of individuals, households, and
businesses. It focuses on decisions related to pricing, production, and
consumption of goods and services.
Summary: Microeconomics focuses on individual parts of the economy.
7. What is Macroeconomics?
Macroeconomics studies the overall economy. It analyzes factors like national
income, inflation, unemployment, and economic growth.
Summary: Macroeconomics deals with the broader aspects of the economy.
8. Difference Between Microeconomics and Macroeconomics
Microeconomi
Aspect Macroeconomics
cs
Individual
Focus Entire economy
behavior
Scope Small scale Large scale
Example Price of a National unemployment
s product rate
Summary: Microeconomics focuses on individuals, while macroeconomics
looks at the entire economy.
9. The Ten Principles of Economics
1. People Face Trade-Offs: Choosing one thing often means giving up
another. For example, spending money on education might mean
sacrificing leisure activities.
2. Opportunity Cost: The true cost of something is what you give up to
get it. For example, the opportunity cost of attending college could be
the salary you forgo by not working during that time.
3. Rational People Think at the Margin: Rational people make
decisions by comparing additional benefits and costs. For instance, a
company may decide to produce one more unit if the benefit
outweighs the cost.
4. People Respond to Incentives: Incentives motivate behavior. For
example, higher wages encourage workers to put in more effort.
5. Trade Can Make Everyone Better Off: Trading allows countries or
individuals to specialize and benefit mutually.
6. Markets Are a Good Way to Organize Economic Activities:
Markets efficiently allocate resources through supply and demand.
7. Governments Can Improve Market Outcomes: Governments can
address market failures, like regulating pollution or providing public
goods.
8. A Country’s Standard of Living Depends on Productivity: Higher
productivity leads to a better standard of living.
9. Prices Rise When the Government Prints Too Much Money:
Printing too much money causes inflation.
10. Society Faces a Short-Term Trade-Off Between Inflation
and Unemployment: Policymakers must balance inflation and
unemployment during economic downturns.
Summary: These principles explain how individuals, markets, and
governments interact to manage resources and make decisions.
10. The Circular Flow of Income (Two Sectors)
The economy has two sectors:
1. Households: Supply factors of production (land, labor, capital) and
consume goods and services.
2. Firms: Produce goods and services and pay wages, rent, and profits to
households.
Summary: The circular flow shows how money and resources move between
households and firms.
11. Different Types of Economic Systems
1. Capitalistic (Market): Privately owned resources.
2. Socialistic (Command): Government-owned resources.
3. Mixed: Both private and government ownership.
Summary: Economic systems differ in how resources are owned and
decisions are made.
12. Capitalistic (Market) Economic System
Resources are privately owned.
Prices are determined by supply and demand.
Characteristics: Freedom of choice, competition, profit motive.
Summary: Capitalism emphasizes private ownership and free markets.
13. Socialistic (Command) Economic System
Resources are owned by the government.
The government plans production and distribution.
Characteristics: Equality, state control, no private property.
Summary: Socialism promotes equality through government control.
14. Mixed Economic System
Combines private and government ownership.
Characteristics: Balances freedom with regulation, ensures welfare.
Summary: Mixed systems combine the features of capitalism and socialism.
15. Differences Among Economic Systems
Capitalis
Features Socialism Mixed
m
Governme
Ownership Private Both
nt
Role of Moderat
Limited High
Government e
Economic Moderat
High Low
Freedom e
Summary: The systems differ in ownership, government role, and freedom.
16. Islamic Economic System
An economic system based on Islamic principles like Zakat (charity),
prohibition of interest, and justice.
Characteristics: Social welfare, ethical trade, interest-free economy.
Summary: Islamic economics promotes fairness and welfare.
