Basic concept of economics explains

fundamental economic problems of man.

These economic problems are:

 Scarcity : It means all commodities are

relatively less than people desires for them.
This is because resources are not enough to
produce all commodities that people want to
consume.
 Choice : It refers to the talking of the right
decision. It arises because of scarcity which
requires one to find answers to issues like: What
goods shall be produced? For whom shall they be
produced? ? How much shall be produced? etc. If
human beings are rational, they would rank their
wants in their order of preference or priorities
such that they would first satisfy the most
processing wants and with the least pressing
wants. Such are least of wants organized
according to priorities is called the scale of
preference.
 Opportunity cost is the cost of any activity
measured in terms of the value of the next best
alternative forgone (that is not chosen). It is the
sacrifice related to the second best choice
available to someone, or group, who has picked
among several choices.
 Production possibility frontier (PPF), sometimes
called a production–possibility curve or product
transformation curve, is a graph that compares
the production rates of two commodities that use
the same fixed total of the factors of production.
The PPF curve shows a possible specified
production level of one commodity that results
given the production level of the other.
 Economic Questions:
 Economic questions arise because of scarcity of
resources. They must be answered so as to take the
right decision (make choice). These questions are
faced by all economics through they are answered
different economic systems. Some of these questions
are :
 What to produce : This is about decision on choice of
products. There is need to decide on whether to
produce capital goods or consumer goods, goods for
exports or goods for domestic consumption etc.
 How to produce : This is about the choice of
technology. There is needed to make decision on
whether to use capital-intensive or labor-intensive
technology.
 For whom to produce : This is about the distribution of the
national product and the decision about who should take
what is produced.
 When to produce : This is about the decision on whether to
produce now or to produce in future i.e. the decision to
invest. Note that much investment today means less
consumption today and more commodities for consumption
in future.
 Where to produce : This is decision on location of enterprise.
For example, should production take place near the source of
raw materials or where there is enough market?
 In addition to answering these economic questions an
economic system must ensure: efficiency in production and
distribution of commodities, full employment of resources,
and a check on inflation, economic growth and economic
development.
 Wants : These are the desires or needs of man.
They are categorized into material wants.
Material wants are those that can be satisfied by
consumption of goods eg. Food, clothes, etc.
Immaterial wants are satisfied by service eg.
Security, entertainment etc. Wants can also be
classified as private and public wants. Private
wants are the desires of individual persons.
Public wants are collective desires of society
which are satisfied by public goods like roads,
defense etc. The basic needs of man are shelter,
food, clothes, water, security and medical care.
 Resources : These are also called factors of
production or inputs or means of production.
These include natural resources land, man-
made resources (capital) and human
resources labor and entrepreneurship.
 Commodities : This refers to things that are
produced by factors production and are
consumed by man to satisfy his wants. The
process of making these commodities is
called production and is carried out by
producers
 Goods: These are the tangible things which
satisfy human wants. Economic bads are things
which generate dissatisfaction to man eg.
Pollution. Goods are categories in the following
ways:
 Free goods and economic goods : Free goods
exist in abundant amounts such that one’s desire
can be satisfied at zero price eg. Air in LDCs.
Economic goods arise out of scarcity and choice.
An economic good must: provide satisfaction be
relatively scarce and have value.
 Private goods, public goods and merit goods:
Private goods are enjoyed exclusively by an
individual eg. Private cars.
 Merit goods : Like education and health, are of
social advantage through excludability is
possible they can be in private hands by they are
controlled by the government because of their
social benefits.
 Intermediate goods and final goods: Intermediate
goods are used in the process of production eg.
raw materials. Final goods are ready for use by
consumers.
 Services : These are intangible things which are
helpful in production and in making life
comfortable and meaningful they include:
 Personal service: Theses are provided personally by
doctors, teachers, musicians, etc.
 Commercial services: These are related to trade and
aids to trade. They are provided by institutions like
advertising agencies, insurance agencies, banks etc.
 Wealth : Wealth includes physical goods and assets
and personal skills (human capital or intangible
wealth) which can generate an income.
 In economics wealth refers to all goods which
possess the following qualities:
 They provide satisfaction
 They are scarce
 They have money value
 They are capable of being transferred
 Wealth is of 3 kinds
 Business wealth: This includes assets eg.
buildings that are used in business.
 Personal wealth : includes personal items
which are owned and enjoyed by individuals
eg. television, clothes etc.
 Social wealth : This is publicly owned eg.
roads, government schools etc.
 Economic Agents : These are decision-taking units in an
economy. They are generally classified as:
 Households: This refers to people who live under one roof
and who take , or are subject to others taking for them,
joint financial decisions e.g. a family. They are the owners
of factors of production and users (consumers) of goods
and services.
 Firms(Business) : A firm is a unit that employs factors of
production to produce goods and service to sell to
households, other firms and central authorities.
 Central authorities (government): This includes public
agencies, bodies and organizations belongings to or owing
their existences to the government. They have legal or
political power to control firms and households eg. the
police, the central bank, the civil services etc. They
stabilize, regulated and control firms and households.
 Exogenous and Endogenous factors : Exogenous
factors are variables which are not explained
within a theory eg. weather in the theory of
determinants of quantity demanded. Exogenous
forces are also refers to economic forces which
originate from outside the economic system and
cannot be controlled by economic agents to
substantial extent, eg. weather, foreign demand
for exports etc.
 A company may fail because of a recession even
if it does everything right. In this case, the
recession is an exogenous factor.
 Endogenous factors : An endogenous factor in economics
is something that is explained or calculated from within
the model being studied. They are depended variable.
generated within a model and, therefore, a variable whose
value is changed (determined) by one of the functional
relationships in that model.

 For example, the equilibrium price of a good in a supply

and demand model is endogenous because it is set by a
producer in response to consumer demand.

consumption expenditure and income is considered

endogenous to a model of income determination.
 Static analysis and Dynamic analysis : These
techniques are important in the study of
economics. In static analysis the effect of
change in one variable in a stationary
structure. Dynamic analysis the effects of
change in one variable in a changing society
and it is important in the study of economic
growth, economic and social development.
 Economic flows and Stocks: Economic flows
are variables which have a time dimension eg.
ouput produced in a country per year
(National income), man-hours supplied per
month etc. Economic stocks on the other
hand do not have a time dimension eg.
wealth in a country measured at any point of
time.
 Economic theory : This involves presentations and analysis of
economic models to explain relationship between or among
economic variables. It is divided into
 Microeconomics: This involves that analysis of small
economic groups or groups of individuals eg price of one
commodity, supply and demand of one commodity, study of
one firm etc.

 Macroeconomics: This deals with total or aggregate behavior

of all individuals in the economy. It looks at the economy as
one functioning unit eg. Aggregate income, aggregate
demand and supply, inflation, unemployment etc.

 Development theory : This involves the analysis of the whole

society. It looks at the past trend, analysis the present and
predicts what will happen in the future. For example, it looks
at change in national income in a changing society.
 Applied Economics : This involves the use of
economic theory to analysis economic
problems in real life and to prescribe to solve
these problems.
 Applied Micro economics
 Applied Micro economics
 Applied Development theory
 The branch of economics that analyzes the
market behavior of individual consumers and
firms in an attempt to understand the decision-
making process of firms and households. It is
concerned with the interaction between
individual buyers and sellers and the factors that
influence the choices made by buyers and sellers.
In particular, microeconomics focuses on
patterns of supply and demand and the
determination of price and output in individual
markets (e.g. coffee industry).
 According to K. E. Boulding
“Micro economics is the study of particular firm,
particular household, individual price, wage,
income, industry and particular commodity”.
 According to Ackley
“ Microeconomics deals with the division of total
output among industries, products and firms and
the allocations of resources among competing
groups. It considered problems of income
distribution. Its interest is in relative prices of
particular goods and services.”
 To understand the working of the economy: It helps us in
understanding the working of a free enterprise economy. It gives us
an idea about how major economic decisions are taken in a market
economy.
 Helpful in the efficient employment of resources: It suggests
economizing, that is how efficiently the scarce available resources
can be utilized in production process in an economy.
 Helps in International Trade: Micro economics is used to explain
gains from internal trade, external trade, foreign exchange, balance
of payment, disequilibrium and in the determination of exchange
rate.
 Basis of welfare economics: The entire structure of micro economics
has been built on the basis of price theory which is an important
constituent of micro economics. It suggests the conditions of
efficiency and explains how it can be achieved. It helps in improving
the standard of living of population.
 Helpful in understanding the consequences of taxation:
Imposition of tax leads to reallocation of resources from
one place to another. Micro economics explains how
imposition of different types of direct and indirect taxes
lead to attainment of social welfare.
 Tool for evaluating economic policies: It helps the states
and central government to frame economic policies like
price policy, taxation policy etc. It also explains the
condition of efficiency in production and consumption.
 Construction and use of models: Micro economics
construct and uses simple models in order to understand
the actual economic phenomenon. It uses abstract models
to explain the economic phenomenon.
 There are certain economic problems which
cannot be analyzed with the aid of
microeconomics. For example, important
problems relating to public finance, monetary
and fiscal policies etc are beyond the scope
of microeconomics.
 Microeconomics instead of studying the total
economy concentrates only on small parts of
it. Consequently it throws no light on the
collective functioning of the national
economy.
 Microeconomic analysis assumes other things being equal
and is based on the assumption of full employment in
society. This is a highly unrealistic assumption. What
exists in society normally is not full employment but under
employment.

 What is true in the case of an individual unit may not be

true in the case of aggregates. For example, individual
thrift may be good, but social thrift is definitely harmful
for the community. If the entire community starts saving
more, effective demand will be reduced and employments
retarded. Likewise wage cutting in a particular firm may
promote employment, but general wage cutting may
actually result in reducing the volume of employment in a
community. The result of microeconomic analysis should
therefore be applied to the aggregates with caution.
 Micro economics is based on the assumption
of laissez-faire. However, I actual practice it
hardly exists and practiced anywhere in the
world.