Module-1 Economic Development

Module I
Introduction to Development Economics
Anyone is not allowed to download and upload these learning materials in the web nor
1
distribute them. The learning materials are for the students enrolled in this subject.
Etymology of economics
(the study of the history of the word economics)
 Eco is a derivation of the Greek oikos, meaning an

extended family unit that consists of the house,
members of the family, slaves, farmland, and all
property.
 The suffix –nomy is derived from the
Greek nomos, meaning management, law, or
principle.
 Thus oikonomos, the original form of economics,
meant the management of the hearth and home
 https://www.altalang.com/beyond-words/etymology-of-
economy/#:~:text=The%20suffix%20%E2%80%93nomy%20is%20derived,of%20the%20hearth%20a
nd%20home .
2
Definition of Economics by
Adam Smith
• Adam Smith, an 18th-century Scottish

economist, philosopher, and author,
considered as the father of modern
economics, famous for his book written in
1776, "The Wealth of Nations“ defined
economics as “an inquiry into the nature and
causes of the wealth of nations.”
• Smith's ideas–the importance of free markets,
assembly-line production methods, and gross
domestic product (GDP)–formed the basis for
theories of classical economics.
3
Definition of Economics by
Alfred Marshall
 British economist Alfred Marshall defined

economics as the study of man in the ordinary
business of life.
 Marshall argued that the subject was both the
study of wealth and the study of mankind.
 The term "economics" was popularized by
Alfred Marshall as a concise synonym for
"economic science" and a substitute for the
earlier "political economy".
4
Definition of Economics by William
Walstad and Robert Bingham
 William Walstad and Robert Bingham

states that economics is a social
science concerned with using scarce
resources to obtain the maximum
satisfaction of the unlimited material
wants of society
5
In economics, scarcity refers to limitations–limited goods
or services, limited time, or limited abilities to achieve the
desired ends.
6
Definition of Economics by Paul
Anthony Samuelson and William
Nordhaus
 The study of how societies use scarce
resources to produce valuable
commodities and distribute them
among different people.
7
Definition of Economics by Lionel
Robbins
 “Economics is the science which studies human

behavior as a relationship between ends and scarce
means which have alternative uses" (Robbins,
1932)
 Ends simply means human needs, wants or desire.
8
GREGORY MANKIW
Economics is the study of how society

manages its scarce resources
9
Ten principles of economics by Mankiw
https://newworldeconomics.com/greg-mankiws-ten-principles/
https://wiki.ubc.ca/10_Principles_of_Economics
1. People Face Tradeoffs

To get one thing, we usually have to give up something else
Ex. Leisure time vs. work
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2. The Cost of Something is What You Give Up to

Get It
 Opportunity cost is the second best alternative
foregone.
 Ex. The opportunity cost of going to college is the
money you could have earned if you used that time
to work.
11
3. Rational People Think at the Margin

 Marginal changes are small, incremental changes to an
existing plan of action
 Ex. Deciding to produce one more pencil or not
12
Ten principles of economics by
Mankiw https://newworldeconomics.com/greg-mankiws-ten-principles/
4. People Respond to Incentives

 Incentive is something that causes a person to act.
Because people use cost and benefit analysis, they also
respond to incentives
 Ex. Higher taxes on cigarettes to prevent smoking
13
5. Trade Can Make Everyone Better Off

Trade allows countries to specialize according to their
comparative advantages and to enjoy a greater variety of
goods and services
14
6. Markets Are Usually a Good Way to Organize Economic

Activity
Adam Smith made the observation that when households and
firms interact in markets guided by the invisible hand, they
will produce the most surpluses for the economy
15
7. Governments Can Sometimes Improve Economic

Outcomes
Market failures occur when the market fails to allocate
resources efficiently. Governments can step in and intervene
in order to promote efficiency and equity.
16
8. The Standard of Living Depends on its ability to

produce goods and services
The more goods and services produced in a country, the
higher the standard of living. As people consume a larger
quantity of goods and services, their standard of living will
increase
17
9. Prices Rise When the Government Prints Too Much

Money.
 When too much money is floating in the economy, there

will be higher demand for goods and services. This will
cause firms to increase their prices in the long run
causing inflation.
18
19
10. Society Faces a Short-Run Tradeoff Between Inflation

and Unemployment
In the short run, when prices increase, suppliers will want to
increase their production of goods and services. In order to
achieve this, they need to hire more workers to produce
those goods and services. More hiring means lower
unemployment while there is still inflation. However, this is
not the case in the long-run.
20
Economics and Scarcity (Dowling,
Valenzuela, Brux)
 Economics
 Deals primarily with scarcity
 How should we allocate our limited resources
to satisfy seemingly unlimited human wants
and needs
 Scarcity
 Refers to the condition wherein most things
that people want are available only in limited
supply
 There are limited resources relative to wants
and needs
 Thus, one should choose
21
Two types of Economics:
Microeconomics and
Macroeconomics
22
Two major types of economics:
microeconomics and macroeconomics
 A. Microeconomics
 Microeconomics is the study of decisions made by
people and businesses regarding the allocation of
resources and prices of goods and services.
 Microeconomics focuses on supply and demand
and other forces that determine the price levels in
the economy.
 In other words, microeconomics tries to
understand human choices, decisions, and the
allocation of resources.
23
24
25
Welfare economics is the study of how the allocation
of resources and goods affects social welfare. This
relates directly to the study of economic efficiency
and income distribution, as well as how these two
factors affect the overall well-being of people in
the economy.
https://www.investopedia.com/terms/w/welfare_economics.asp#:~:text=Welfare%20economics%20is%20t
he%20study,of%20people%20in%20the%20economy .
26
Major Types of Economics
 B. Macroeconomics
 Macroeconomics, on the other hand, studies
the behavior of a country and how its
policies affect the economy as a whole. It
analyzes entire industries and economies,
rather than individuals or specific
companies.
27
Major Types of Economics
 B. Macroeconomics
 Macroeconomics is the study of the
economy as a whole.
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ECONOMICS AND SCARCITY
29
Economics and Scarcity
 Resources are the basis for producing the food, shelter, medical care
and luxury goods that we want
 Natural resources (land and timber)
 Capital goods resources (factories and machineries)
 Human capital (labor)
 Entrepreneurial ability – which is measured by how well
the entrepreneur combines resources, makes policy decisions,
innovates and how well he/she takes risks.
 Resources are scarce
 There are not enough of them to produce everything we need and
desire
 Scarcity forces as to choose among competing uses for society’s
resources.
30
 Easiest way to think about the problem

of societal choice is by looking at a basic
economic concept and graph called
production possibilities.
33
 Production possibilities curve

 A graph showing alternate combinations of the
maximum amounts of two different goods that can
be produced during any particular time period if the
economy’s resources are efficiently and fully
employed
 Explains scarcity and the need for choices
34
• In examining production possibilities, we must make these
assumptions about our economy.
1. All available resources are used fully (No workers unemployed, no idle
equipment, buildings, etc.)
2. All available resources are used efficiently (Efficiency means that we use
our knowledge and technology to produce the maximum amount of output
with these resources)
3. The quantity and quality of available resources are not changing during
our period of analysis, (The same number of workers, no additional
trainings, the same materials, no discovery or use of new resources)
4. Technology is not changing during our period of analysis (no technological
change)
5. We can produce only two goods with our available resources and
technology
35
Man cannot live by bread
alone and that life is
richer if we stop and
smell the roses.
36
37
Table 1-1: Production Possibilities Table (Brux)
Alternatives A to F – possible combinations of bread38and roses that

the economy could produce

Figure 1-1: Production Possibilities Curve (Brux)
Points A through F show alternative combinations of bread and roses that the economy can
produce, whereas
distribute them. point
The learning Uarerepresents
materials unemployed
for the students enrolled in this subject. resources (Connecting all points gives
39
us a production possibilities curve)

Economic concepts that is illustrated by
production possibilities
1. Opportunity cost
 The best alternative forgone in order to
produce or consume something else
 What you give up to get something else
 Ex. The opportunity cost of producing roses
(20) is the bread (30) we give up when we
produce the roses.
2. Unemployment
 A situation in which resources are not fully
used in production (at point U). (not in
production possibilities curve but at some
point below it)
40
Economic Growth
• A country is not restricted to a single production possibilities
curve forever. Economies may grow, and the variable that
we assumed that are not changing do change over time.
• Economic growth
• A sustained increase in production represented by an
outward shift of the production possibilities curve
• Economic growth may occur if
• The quality or quantity of society’s resources increases
• Or if new technologies are developed so that we can
produce more output with our available resources
41
Figure 1-2: Production possibilities curve with economic growth (Brux)
Note that more of both bread and roses can be produced when the production possibilities
curve
Anyoneshifts outward
is not allowed asanda upload
to download result theseof economic
learning growth
materials in the web nor
42
Luxury goods
Staple food
43
Things can be used in production
possibilities
Ex. Staple goods and luxury goods

Agricultural goods and manufactured goods
Consumer goods and capital goods
Military goods and civilian goods
Private goods and public goods
If we wish to expand public education, we may have to give up

some of our national defense.
We can’t have more of everything. There are always opportunity
costs to consider
44
Descriptions:
Private goods
Goods provided by businesses
Public goods
Goods provided by government like police and fire
protection
Services
• Activities such as haircuts, health care, and
education that are consumed (used) by consumers
Consumer goods
• Goods that are consumed (used) by consumers
Capital goods
• Goods such as machinery and factories that are used
to produce other goods
45
We can’t have more of everything. There are always
opportunity costs to consider
 US invasion in 2003 - full cost of war - $1 trillion to $ 2

trillion
46
Reference book - Brux, Dowling and Valenzuela
47
ECONOMICS AND DISTRIBUTION
48
Economics and Distribution
• Production and distribution choices of goods and services are
important.
• HUNGER IN THE WORLD OF PLENTY IS NOT A PROBLEM OF
PRODUCTION BUT OF DISTRIBUTION
• As important as production choices are choices relating to the distribution of
goods and services.
• On what basis should distribution choices be made?
• Should the decision be based on equality so that everyone receives the
same amount of every good that everyone else does?
• Should people receive a share of the goods and services that is proportional
to their contribution to producing these goods and services?
• Should the government make the distribution decisions, perhaps giving
higher rations to those most deserving?
49
Economics and Distribution
• In a market-based economy
• Choices of distribution & production are
based primarily on prices
• Prices are determined by demand and
supply
50
DEMAND AND SUPPLY
51
Demand and Supply
Demand schedule –
 A table that shows quantities consumers are
willing to buy at alternative prices during a
specified time period
 Law of Demand
 Price and quantity demanded are
negatively related all other things equal
52
53
Table 1-2: Demand schedule for tutoring services, one week
Table 1-2 Peoples willingness to buy tutoring services where: P =

alternative possible prices of tutoring services Qd (quantity demanded)
stands for the amounts of tutoring that students are willing and able to
purchase
distribute them. at these variousare for theprices.
The learning materials students enrolled in this subject.
54
Table 1-2: Demand schedule for tutoring services, one week
Law of demand: Price and quantity demanded are negatively related, all
other things equal. (When price goes up, quantity demanded goes down,
and vise versa)
People will be willing and able to buy more of a good or service at low
prices than at high prices.
55
Demand and Supply
 Demand curve - A graph that shows:

 Quantities consumers are willing to buy
 At alternative prices
 During a specified time period
 All possible combinations of alternative

prices and quantity demanded
 Assuming that all factors except price
that could affect quantity demanded are
held constant
56
Demand schedule and demand curve
57
Figure 1-3: Demand for tutoring services, one week
Demand schedule -
Q – stands for the hours of tutoring

that students are willing and able to
purchase at these various prices.
58
distribute them. Demand
The learning curve
materials –are
higher priceenrolled
for the students is associated
in this subject.with lower
quantity demanded
Demand and Supply
• Demand curve
• Downward sloping
• Reflects the law of demand
• Change in demand
• Caused by changes in factors affecting the demand
• Not the price
• New demand schedule
• New demand curve
Law of Demand
Price and quantity demanded are negatively
related all other things 59
distribute them. The learning materials are for the students enrolled in this subject. equal
Table 1-3: Increased demand schedule for tutoring
services, one week
Increase in demand:
Due to difficulty of
subject. Original
AnyoneDue to increase
is not allowed in upload these learning materials in the web nor
to download and
demand
60
income
Figure 1-4: Increased demand for tutoring
services, one week
Demand curve D’ represents larger quantities demanded at each price than does demand
61
curve D.them. The learning materials are for the students enrolled in this subject.
distribute
Demand and Supply
 Increase in demand
 Demand curve - shifts forward (to the
right)
 For every price: a higher quantity
demanded
 Decrease in demand
 Demand curve - shifts backward (to the
left)
 For every price: a smaller quantity
demanded
62
Demand and Supply
 “There is no free lunch”

 Every choice has an opportunity cost
 Every activity chosen entails another
activity given up
63
Demand and Supply
 Supply schedule - A table:

 Quantities that suppliers are willing to
sell
64
Table 1-4: Supply schedule for tutoring
services, one week
65
Demand and Supply
 Supply curve - A graph:

 Quantities that suppliers are willing to sell
 Law of supply
 There is a positive relationship between price and quantity
supplied. All other things equal
 It is upward sloping. Price and quantity supplied increase
together.
66
Figure 1-5: Supply curve for tutoring services, one
week
The graph
Anyone shows
is not allowed amounts
to download and uploadof tutoring
these supplied
learning materials at various prices.
in the web nor
67
Factors affecting supply changed.
Baby sitting costs might decrease so that some tutors would be more
willing to provide tutoring services. - effect - Increase the supply
of tutoring services.
Changes in cost of producing or supplying a product – factors that may

cause a shift in the supply curve.
. Anyone is not allowed to download and upload these learning materials in the web nor
68
Demand and Supply
 Increase in supply
 Supply curve - shifts forward (to the right)
 Decrease in supply
 Supply curve - shifts backward (to the left)
69
Table 1-5: Increased supply schedule for tutoring
services, one week
Table 1-4
70
Figure 1-6: Increased supply of tutoring
services, one week
Supply
Anyonecurve S’ represents
is not allowed larger
to download and upload thesequantities
learning materials of
in thetutoring
web nor supplied at each
71
price than does
supply curve S.
Demand and Supply
 Equilibrium
A state of balance
A point at which quantity demanded
equals quantity supplied
 Intersection of demand and supply
 Market
 Naturally tends to move toward the
equilibrium point
72
Figure 1-7: Market for tutoring services, one week
Tutors charge $1/hour

Quantity demanded is
100 hours (bargain)
Quantity supplied 20
hours (little incentive to
provide tutoring)
Shortage of tutoring
services of 80 hours
The market will clear at point E. At $3, quantity demanded equals quantity
73
supplied
Table 1-6: Supply and demand for tutoring
services, one week
Figure 1-7
74
Demand and Supply
 Shortage
 Quantity demanded > quantity supplied
 Shortage occur when the market price are below the
equilibrium price (Ex. 3 dollars)
 Students may bid for tutoring services that are available
and in the process price will be bid up.
 2 things happen as price increase
(Price - pushed up)
 Buyers decrease their quantity demanded
 Sellers increase the quantity supplied
 The process will come to a screeching halt when the
equilibrium is reached (shortage will disappear)
 Rationing function of price
Anyone is notPrice movement
allowed to download rations
and upload these learning materials inaway
the web nor a shortage
75
Figure 1-8: Response to a shortage of tutoring
services
At a price of $1, quantity demanded exceeds quantity supplied by 80 hours. The 80-hour
shortage will
distribute cause
them. price
The learning to rise
materials are forto
the the equilibrium
students price of $3.
enrolled in this subject.
76
Demand and Supply
 Surplus
 Quantity supplied > quantity demanded
 Occurs only when the price > market level
 Price - pushed down
 Increase in quantity demanded
 Decrease in quantity supplied
 The surplus will disappear
 Rationing function of price

 Falling price rations away a surplus
77
FIGURE 1-9: Response to a surplus of tutoring
services
At a price of $5, quantity supplied exceeds quantity demanded by 80 hours. This 80-hour
78
surplus will
distribute cause
them. price
The learning to fall
materials are forto
the the equilibrium
students price of $3.
enrolled in this subject.
SHIFT IN DEMAND AND SUPPLY
79
Demand and Supply
 An increase in demand
 Because of an increase in income
 Demand curve shifts forward (to the right)
 New equilibrium:
 Increase in price
 Increase in quantity
 Note: supply curve will not shift
80
Figure 1-10: Effects of increased demand for
tutoring services
The increase
distribute them.inThe
demand from
learning materials Dthetostudents
are for D’ causes equilibrium
enrolled in this subject. price to increase
81
from $3 to $4
and equilibrium quantity to increase from 60 to 80 hours.
Demand and Supply
 A decrease in demand
 Because of a decrease in income
 Demand curve shifts backward (to the left)
 Decrease in price
 Decrease in quantity
82
Demand and Supply
 An increase in supply
 Because of a decrease in babysitting costs
 Supply curve shifts forward (to the right)
 Decrease in price
 Increase in quantity
 Note: demand curve will not shift
83
Figure 1-11: Effects of an increased supply of
tutoring services
The increase in supply from S to S’ will increase equilibrium quantity from 60 to 80 hours
84
but decrease
distribute them. equilibrium price
The learning materials from
are for the $3
students to in$2.
enrolled this subject.
Demand and Supply
 A decrease in supply
 Because of an increase in babysitting costs
 Supply curve shifts backward (to the left)
 Increase in price
 Decrease in quantity
85
FACTORS THAT CAUSE REAL-WORLD
DEMAND AND SUPPLY CURVES TO SHIFT
 Factors that cause real-world demand curves to shift

 Changes in the number of consumers who wish to
purchase the product changes
 Changes in the taste of the consumers in the market
 Changes in the prices of complements or substitutes
 Changes in consumers’ incomes
 Changes in consumers’ expectations about a
product’s future price or availability
86
Demand and Supply
 Substitute relationships
 Occur when the consumer substitutes one good
for the other good
 E.g., butter and margarine; tea and coffee
 Complements
 The opposite of substitutes
 If the consumer uses more of one good, he or
she will also use more of the other
 E.g., digital cameras and memory cards
 pan cakes and maple syrup
87
Factors that cause real world
supply curves to shift
 Changes in the number of sellers
 Changes in the pricesof resources used to produce
the product
 Changes in the technology used to produce the
product.
 Changes in the prices of other products that could
be produced with the same resources
 Change in government taxes or subsidies.
 Changes in sellers’ expectations about the products’
future price
88
Demand and Supply
 Step-by-step procedure for the preparation of graphs –

cases 1 -4.
1. Graph the particular market in equilibrium
 Label vertical axis (P)
 Label horizontal axis (quantity axis) (Q)
2. Consider the situation
 Determine whether demand or supply curve
shifts
 Increase or decrease?
 Shift curve forwards or backwards
89
Demand and Supply
 Step-by-step procedure
3. Find the new point of equilibrium
 Label the new equilibrium price and
quantity along their respective axis
4. Compare the new quantity with the old
quantity and the new price with the old
price
90
Figure 1-13: Newspaper headlines: demand and
supply
Rising costs of producing cars causes their New Harry Potter book causes increased
prices to isrise.
Anyone
demand for Harry Potter toys, thereby raising
not allowed to download and upload these learning materials in the web nor
91
their price.
Figure 1-13: Newspaper headlines: demand and
supply
Boycott of chocolate decreases demand for Great weather causes an increase in the
chocolate,
Anyone is notcausing chocolate
allowed to download and uploadprices to fall.
these learning supply
materials in the web nor of pumpkins, which
92
causes a decrease
in their price.
Efficiency and Equity
93
Efficiency and Equity
 High prices encourage frugality and careful choices among
competing goods.
 Goods and services are allocated to those most willing to
pay, Thus, the market is an effective allocative device.
 High prices also encourage producers to offer more for
sale.
 Without prices, products might go to people who do not
strongly desire them and thus be wasted.
 In the market, prices ration away shortages and surpluses
suggesting that the marketplace is very efficient (using
resources in such a way as to maximize the desired output)
as a means of allocation and distribution.
 But the distribution of goods and services may not be
equitable (Fair)
 The market place
 Is often efficient, but not necessarily equitable
94
Equity is a value-laden concept.
The market is often efficient, but not necessarily equitable
Efficient - (especially of a system or machine) achieving maximum

productivity with minimum wasted effort or expense.
Equity –
Equity in economics is defined as process to be fair in economy which
can range from concept of taxation to welfare in the economy and it
also means how the income and opportunity among people is evenly
distributed.
https://www.wallstreetmojo.com/equity-in-economics/
95
A Glimpse of the Future
 Public goods and services

 Have unique characteristics
 Unlikely that the market will provide enough of
them
 The government often provides them
 Examples:
 National defense, police and fire
protection, public libraries, highway
construction, crime prevention, public
education
96
 ECONOMIC SPILLOVER
 Economic Spillovers occur when some costs (or benefit)
related to production or consumption “spills over “onto
people not involved in the production or consumption of
the good.
Spillovers are costs or benefits of private market activity
shifted onto society at large (also called an externality)
Ex. Pollution
Education – a spillover benefit
Beauty of a garden in a company – positive spillover
Neither economic efficiency nor equity occurs when
spillovers exits.
97
 ISSUES:
 Inequity`- Marketplace is not necessarily
equitable
 Discrimination
 Poverty
 Inequality of income distribution
98
 Terms
 Pure competition
 A market in which many producers sell a
standardized (identical) product to many
buyers
 Market power
 The ability of an individual firm to influence
the market price of its product
99
 Instability
 Production possibilities and employment are
very volatile
 Market economy inherently unstable because
prices and employment fluctuate
100
A Glimpse of the Future - TERMS
 Inflation
 A rise in the average price level in the
economy
 Microeconomics
 The study of individual areas of activity within
the total economy
 Macroeconomics
 The study of the total economy
101
 Gross domestic product (GDP)

 Total output of an economy
 Private
 Individual people and businesses
 Public
 Government
102
The Economic Left and the Economic Right
 Who are you?

 Economic conservative - Right (Dowling)
 A person who believes in very low levels of government involvement in the
economy
 Economic liberal - Left (Dowling)
 A person who believes in high levels of government involvement in the
economy.
103
 The enormous interest in the economic development of
postwar East Asia has continued into the new
millennium.
 The region’s economic history has been marked by an
“ economic miracle” that spanned several decades
followed by a severe financial and economic crisis.
 Problems of widespread poverty and economic
inequality remain despite significant economic progress.
 Addressing these issues, as well as the impact of
developments in the world economy is a challenge the
region's governments, international organizations, and
the economics profession face as a whole. (Dowling)
104

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Module I

Introduction to Development Economics

 Eco is a derivation of the Greek oikos, meaning an

• Adam Smith, an 18th-century Scottish

 British economist Alfred Marshall defined

 William Walstad and Robert Bingham

 “Economics is the science which studies human

Economics is the study of how society

1. People Face Tradeoffs

2. The Cost of Something is What You Give Up to

3. Rational People Think at the Margin

4. People Respond to Incentives

5. Trade Can Make Everyone Better Off

6. Markets Are Usually a Good Way to Organize Economic

7. Governments Can Sometimes Improve Economic

8. The Standard of Living Depends on its ability to

9. Prices Rise When the Government Prints Too Much

 When too much money is floating in the economy, there

10. Society Faces a Short-Run Tradeoff Between Inflation

 Easiest way to think about the problem

 Production possibilities curve

Alternatives A to F – possible combinations of bread38and roses that

the economy could produce

us a production possibilities curve)

Ex. Staple goods and luxury goods

If we wish to expand public education, we may have to give up

 US invasion in 2003 - full cost of war - $1 trillion to $ 2

Table 1-2 Peoples willingness to buy tutoring services where: P =

 Demand curve - A graph that shows:

 During a specified time period

 All possible combinations of alternative

Q – stands for the hours of tutoring

 “There is no free lunch”

 Supply schedule - A table:

 Supply curve - A graph:

Changes in cost of producing or supplying a product – factors that may

Tutors charge $1/hour

 Decrease in quantity supplied

 The surplus will disappear

 Rationing function of price

 Note: supply curve will not shift

 Note: demand curve will not shift

 Supply curve shifts backward (to the left)

 Factors that cause real-world demand curves to shift

 Step-by-step procedure for the preparation of graphs –

The market is often efficient, but not necessarily equitable

Efficient - (especially of a system or machine) achieving maximum

 Public goods and services

 Gross domestic product (GDP)

 Who are you?

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