Adama Science and Technology University: Course Title: Principle of Economics Course No. SOS-311

Adama Science and
Technology University
Course Title: Principle of

Economics
Course No. SOS-311
1
Chapter One
Definition and Nature of Economics
1.1. Definition of Economics
Economics is:
O the study of efficient allocation of resources in order to attain the
maximum fulfillment of unlimited human wants or needs.
O a branch of social science which deals with efficient utilization of
scarce or limited resources to fulfill the unlimited human wants .
 Wants are Unlimited because: Wants are:
 multiplicative,
 multiply endlessly and
 recurrent.
 accumulative 2
1.1. Definition of Economics …
O It is about:
O the efficient use of the scarce resources .
How?
O by minimizing loss so as to get the maximum
possible satisfaction.
O If there is no scarcity, no need of economizing
3
1.1. Definition of Economics …
Branches of Economics
Macro economics and Microeconomics

Macroeconomics: is a branch of economics which studies
the economy as a whole
O It is the study of the behavior of the economy as a whole.
Microeconomics: It is a branch of economics which deals

with the decision making behavior of individual economic
agents such as households, business firms, 4
1.2. Scope of Economics …
Economics - Economics as an Art and a Science
a) Economics is a science:
 Science is a systematized body of knowledge that traces the
relationship between cause and effect.
 science is that its phenomena should be amenable to

measurement.
O economics is a branch of knowledge where the various facts
relevant to it have been systematically collected, classified

and analyzed.
5
1.2. Scope of Economics…
O Economics investigates the possibility of deducing
generalizations as regards the economic motives of human
beings.
O The motives of individuals and business firms can be very
easily measured in terms of money.
 Thus, economics is a science

b) Economics - as Social Science: the process of satisfying
wants is not only an individual process, but also a social
process.
O thus, to study social behavior
6
O i.e., behavior of individuals in-groups.
c) Economics as a arts :
O Art means physical & mental ability by which an activity
may be performed in a best way.
O In other way, art is the practical application of knowledge for
achieving particular goals.
O so Economics is an art because formation of economics
policy is a measure function of art.
O Hence, economics is considered as both a science as well as
an art.
7
Fundamental Facts
I. Society's wants for material goods and services are unlimited:
O Our needs for goods and services are insatiable or can
not be satisfied because,
a) Wants are multiplicative:-

O Introduction of a new commodity creates need for
many other commodity.
O For example, purchasing of a car creates needs for
8
parking place, fuel, oil and so on.
O
b) Wants are recurrent
O Even if a specific want is satisfied at a particular time, it
may recurrent.
Example: food consumption.
 Need for food may reoccur several times a day.
 In short people will consume most of the

commodity money times throughout their life
9
c) Wants Multiply Endlessly.
O If one want is satisfied, the need for another arises.
O If we satisfy our need for food in a particular period of
time, need for cloth arise and if we satisfy our need for it,
need for shelter comes. In such manner human wants
multiply continuously.
10
d) Human nature is accumulative
 People accumulate things beyond their present need.
 particular period of time, people would like to keep it
more for the
consumption sometimes in the future.
 In general, people have insatiable desire for goods and
services to raise their standard of living

11
II. Limited Economic Resources
O Economic resources (labor, natural resources, capital and
entrepreneur ability)
O If economic resources are not sufficient to produce all goods and
services needed by a society, then we have to make choice as to
which good to produce first
O Or because of scarcity, economic resources must be allocated
efficiently.
O The need to balance unlimited wants with limited resources call for a
discipline called economics.
O Thus, unlimited wants and limited resources will give us the
problem of scarcity
O Limited resource + Unlimited wants = Scarcity
12
Scarcity: refers to a physical condition where

the quantity desired of a particular resource
exceeds the quantity available.
O Sscarcity leads to the problem of choice
O Scarcity of resources gives rise to various
basic economic problems.

13
Methods of Economics Analysis
 Positive and Normative Economics
Positive economics : deals with specific statements that are capable of
verification by reference to the facts about economic behavior.
O It deals with facts or relationships which can be proven or disproven.
Examples
O When the value of Birr falls, imported products into our country
become more expensive.
O If investment rises, national income will increase.
14
 Normative economics is someone’s opinion or value
judgment about an economic issue.
 Such a statement can never be proven.
 It has a moral or ethical aspect and goes beyond a
science can say.
 For example, if the price of oil goes up, people will buy
less of it, therefore, we should not allow the price to
go up.
 The statements under normative economics are
subjective in nature.
15
 Such statement is a normative economic statement.
1.3. The Goal of Economics
O Economics helps to make decision in various aspects.
O It helps make production decision, exchange of

production and consumption decision.
The goal of economics is to bring about

O Full employment
O Economic growth
O Price Stability
O Balance of International trade and finance
O Equitable distribution of income, etc
O
16
1.4. Basic Economic Problems and …
O There are three basic economic problems
O These economic problems are universal, these
are:
 What and how much
 how and
 for whom to produce?
17
1.4. Basic Economic Problems and Alternative
Economic Systems
O Because of scarcity, there must be a choice in the use of
economic resources.
O The important characteristics of economic resources are
that they can be put into alternative uses.
O Society, therefore, must choose the best ways of using
scarce resources.
O Nations be it rich or poor, developed or under developed,
will all face the problem of choice. 18

What to produce?
O What product in what quantity?,
O It refers to the problem of allocation of scarce resource between
their alternative uses.
O Guns or butter?
How to produce?
O It refers to the methods of production.
O It refers to techniques of production.
O It is about the choice of technology (labor intensive or Capital
intensive )
O It is about combination of factors and the particular technique to
19
use in producing a good or service.
For whom to produce?

O It is about the distribution of output (income) among the
society.
O Once the product is produced who will get it?
O Shall we have society in which few are rich and majority
are poor?
O It seems sharing of cake to among people constitute the
society.
O These basic Economics problems are solved differently in
different Economic Systems.
20
O The answer to these questions depends upon the
ownership of economic resources.
O These three economic problems are common to all
societies but their solution varies from country to country.
O In other words, different economic systems try to solve
these problems differently.
O Economic System is the set of organizational

arrangements and institutions that are established to solve
21
these economic problems
O
O In order to solve the basic economic problems:
 economists devise policies based up on
principles or
theories
O This Economic principles or theories are derived
from facts.
Observation → Theory → Data → Testing
22
O Economic theories/analysis are drawn from facts through
 Induction and Deduction
O Induction: is a movement from particular to general
O On the basis of facts observed from a specific event
we make generalization for the general case
O Deduction: A movement from general to particular
methods
23

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Adama Science and

Course Title: Principle of

O the efficient use of the scarce resources .

O by minimizing loss so as to get the maximum

O If there is no scarcity, no need of economizing

Macro economics and Microeconomics

O It is the study of the behavior of the economy as a whole.

Microeconomics: It is a branch of economics which deals

 science is that its phenomena should be amenable to

O economics is a branch of knowledge where the various facts

relevant to it have been systematically collected, classified

O The motives of individuals and business firms can be very

easily measured in terms of money.

 Thus, economics is a science

I. Society's wants for material goods and services are unlimited:

O Our needs for goods and services are insatiable or can

not be satisfied because,

a) Wants are multiplicative:-

b) Wants are recurrent

O Even if a specific want is satisfied at a particular time, it

Example: food consumption.

 Need for food may reoccur several times a day.

 In short people will consume most of the

O If one want is satisfied, the need for another arises.

O If we satisfy our need for food in a particular period of

d) Human nature is accumulative

 People accumulate things beyond their present need.

 particular period of time, people would like to keep it

more for the

consumption sometimes in the future.

 In general, people have insatiable desire for goods and

services to raise their standard of living

Scarcity: refers to a physical condition where

O Scarcity of resources gives rise to various

basic economic problems.

O It helps make production decision, exchange of

The goal of economics is to bring about

O There are three basic economic problems

O These economic problems are universal, these

 for whom to produce?

O Because of scarcity, there must be a choice in the use of

O The important characteristics of economic resources are

that they can be put into alternative uses.

O Society, therefore, must choose the best ways of using

O Nations be it rich or poor, developed or under developed,

will all face the problem of choice. 18

For whom to produce?

ownership of economic resources.

O These three economic problems are common to all

societies but their solution varies from country to country.

O In other words, different economic systems try to solve

these problems differently.

O Economic System is the set of organizational

 economists devise policies based up on

O Economic theories/analysis are drawn from facts through

 Induction and Deduction

O Induction: is a movement from particular to general

O On the basis of facts observed from a specific event

we make generalization for the general case

O Deduction: A movement from general to particular

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