Introduction to Economics

Inroduction to Economics

Economics is the social science that studies the production, distribution, and consumption of goods and services. The term economics comes from the Greek for oikos (house) and nomos (custom or law); hence "rules of the house (hold)."
Lionel Robbins in 1932 defined economics as "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses." That is, economics is the study of the trade-offs involved when choosing between alternate sets of decisions. Scarcity is defined as a condition of limited resources and unlimited wants and needs. In other words, society does not have sufficient resources to produce enough to fulfill subjective wants. Alternatively, scarcity implies that not all of society's goals can be attained at the same time. There is only a limited amount of resources available to produce the unlimited amount of goods and services we desire. Society has to decide which commodities to make. For example, do we make missiles or hospitals? We have to decide how to make those commodities. Do we employ robot arms or workers? Who is going to use the goods that are eventually made? The subject thus defined involves the study of choices as they are affected by incentives and resources. Hence, economics is the study of making choices.
Scarcity is a relative term i.e. one commodity is scarce in relation to other, e.g. Petrol is scarce commodity in comparison of water.
The role of a manager is making decision of choosing alternatives to solve the economic problem (scarcity).
Evaluate alternatives against criteria
Make Decision
Develop ranking system/criteria
Identify possible alternatives
Define the problemThe process of economic decision-making involves following steps:




Fig 1 Showing Process of Economic Decision Making

Definitions of Economics

Wealth definitions

Adam Smith defined the subject as simply the "Science of wealth."

Smith offered another definition, "the Science relating to the laws of production, distribution and exchange." Wealth was defined as the specialization of labour, which allowed a nation to produce more with its supply of labour and resources.

Welfare definitions

"Political Economy or Economics is a study of mankind in the ordinary business of Life; it examines that part of the individual and social action which is most closely connected with the attainment and with the use of material requisites of well-being."
- Alfred Marshall

Micro Economics

Microeconomics, the study of the economic behaviour of small economic groups such as firms and families, is one of the largest subfields in economics.

Macro Economics
Macroeconomics is a branch of economics that deals with the performance, structure, and behavior of a national economy as a whole. Macroeconomists seek to understand the determinants of aggregate trends in an economy with particular focus on national income, unemployment, inflation, investment, and international trade. In contrast, microeconomics is primarily focuses on the determination of prices and the role of prices in allocating scarce resources.
Economics as a positive/normative science
Positive economics is the branch of economics that concerns the description and explanation of economic phenomena. It focuses on facts and cause-and-effect relationships and includes the development and testing of economics theories.
Normative economics is the branch of economics that incorporates value judgments about what economy should be like or what particular policy actions ought to recommended for achieving a desirable goal. Normative economics looks at the desirability of certain aspects of the economy. It underlies expressions of support for particular economic policies.
It is common to distinguish normative economics ("what ought to be" [in economic matters]) from positive economics ("what is"). However, many normative (value) judgments are hold conditionally, to give up if facts or knowledge of facts changes, so that a change of values may be purely scientific.

Rational Economic Man

Rational economic man is one who allocates the scarce resource available to him efficiently among competing uses. But a simple thought experiment suggests that by ignoring the ends that economic actors seek, this narrow conception of rationality leaves mainstream economics unable to deal satisfactorily with important social problems, because doing so nearly always entails ethical, as well as efficiency, evaluations.

Opportunity Cost
In economics, opportunity cost, or economic cost, is the cost of something in terms of an opportunity forgone (and the benefits which could be received from that opportunity), or the most valuable forgone alternative (or highest-valued option forgone), i.e. the second best alternative. An early representation of the concept of opportunity cost is the broken window fallacy illustrated by Frédéric Bastiat in 1850.