CSSC 0102 INTRO TO ECON

INTRODUCING ECONOMICS
 LEARNING OUTCOMES

• DEFINE ECONOMICS
• DEFINE MACROECONOMICS AND MICROECONOMICS
• IDENTIFY AND EXPLAIN THE FACTORS OF PRODUCTION (LAND, LABOUR,
CAPITAL & ENTERPRISE)
• EXPLAIN NEEDS, WANTS, SCARCITY, CHOICE AND OPPORTUNITY COST AS KEY
ECONOMIC CONCEPTS
• EXPLAIN THE DIFFERENT ECONOMIC SYSTEMS
READINGS
CHAPTER 1
 DEFINING ECONOMICS

• ECONOMICS IS THE STUDY OF HOW SOCIETY MAKE DECISIONS, GIVEN SCARCE

RESOURCES WHICH HAVE ALTERNATIVE USES.
• ECONOMICS IS "THE SOCIAL SCIENCE THAT STUDIES THE PRODUCTION,
DISTRIBUTION, AND CONSUMPTION OF GOODS AND SERVICES.
 SCARCITY

• SCARCITY REFERS TO THE BASIC ECONOMIC

PROBLEM, THE GAP BETWEEN LIMITED
RESOURCES AND LIMITLESS WANTS. THIS
SITUATION REQUIRES PEOPLE TO MAKE DECISIONS
ABOUT HOW TO ALLOCATE RESOURCES
EFFICIENTLY, IN ORDER TO SATISFY BASIC NEEDS
AND AS MANY ADDITIONAL WANTS AS POSSIBLE.
• SCARCITY IS THE CONDITION IN WHICH HUMANS
WANTS ARE FOREVER GREATER THAN THE
AVAILABLE SUPPLY OF TIME, GOODS AND
RESOURCES
 MICROECONOMICS VS MACROECONOMICS

• ECONOMIC THEORY IS TRADITIONALLY DIVIDED INTO TWO BROAD CATEGORIES;

MACROECONOMICS AND MICROECONOMICS.
• MICROECONOMICS IS THE BRANCH OF ECONOMICS THAT FOCUSES ON HOW
HOUSEHOLDS AND FIRMS INTERACT IN MARKETS AND MAKE CHOICES.
• MACROECONOMICS IS THE BRANCH OF ECONOMICS THAT STUDIES THE
OVERALL WORKING OF AN ECONOMY. IT IS FOCUSED ON BIG ISSUES THAT
RELATES TO THE PERFORMANCE OF AN ECONOMY (COUNTRY) AS ONE UNIT.
 MACROECONOMICS VS MICROECONOMICS

Macroeconomics Microeconomics

• Analyzes the economy as a whole • Analyzes individual components of the economy

• Deals with economic issues that affect the entire • Deals with the decision making of a particular firm
economy or household

• Study the overall price level • Study individual prices

• Analyze aggregate demand and aggregate supply • Analyzes the demand and supply of goods
 ECONOMICS, ECONOMY AND ECONOMIC
ACTIVITY DEFINITIONS
• ECONOMICS IS THE STUDY OF HOW SCARCE RESOURCES ARE USED, AMONG
ALTERNATIVE USES TO SATISFY THE NEEDS AND WANTS OF SOCIETY.
• NEEDS ARE SOMETHING THAT YOU MUST HAVE, IN ORDER TO LIVE.
• WANTS ARE SOMETHING THAT YOU WISH TO HAVE, SO AS TO ADD COMFORT IN YOUR
LIFE.
• NEEDS REPRESENTS THE NECESSITIES WHILE WANTS INDICATE DESIRES.
• EXAMPLES OF NEEDS: FOOD, SHELTER, CLOTHING,
• EXAMPLES OF WANTS: NON-ESSENTIALS GOODS AND SERVICES
NEEDS VS WANTS
 ECONOMICS, ECONOMY AND ECONOMIC
ACTIVITY DEFINITIONS
• ECONOMICS IS THE STUDY OF HOW SCARCE RESOURCES ARE USED TO SATISFY
THE NEEDS AND WANTS OF SOCIETY.
• AN ECONOMY IS A STATE OR REGION IN WHICH PRODUCTION, CONSUMPTION
AND ALLOCATION OF RESOURCES TAKES PLACE.
• ECONOMIC ACTIVITY REPRESENTS THE ACTIONS THAT INVOLVES THE
PRODUCING CONSUMING AND DISTRIBUTING OF GOODS AND SERVICES
 FACTORS OF PRODUCTION
RESOURCES
• RESOURCES AVAILABLE TO US ARE CATEGORIZED INTO FOUR TYPES:
• 1. LAND: THIS IS THE NATURAL RESOURCE. IT INCLUDES THE SURFACE OF THE EARTH, LAKES, RIVERS, AND FOREST.
IT ALSO INCLUDES MINERAL DEPOSITS BELOW THE EARTH AND CLIMATE ABOVE.
• 2. LABOUR: THIS IS THE HUMAN RESOURCE
• 3. CAPITAL: THIS ACCOUNTS FOR ALL MAN-MADE PRODUCTION FACILITIES SUCH AS MACHINES, OFFICE EQUIPMENT,
TOOLS, FACTORIES.
• 4. ENTERPRISE (ENTREPRENEURSHIP): THIS FACTOR CARRIES OUT TWO FUNCTIONS. THE ENTERPRISE ORGANIZES
THE OTHER THREE FACTORS OF PRODUCTION AND THE ENTERPRISE INVOLVES TAKING THE RISK OF PRODUCTION.

• MONEY BY ITSELF DOES NOT PRODUCE GOODS AND SERVICES; INSTEAD IT IS ONLY A MEANS OF BUYING CAPITAL
)
 SCARCITY, CHOICE AND
OPPORTUNITY COST
SCARCITY FORCES ECONOMIC AGENTS TO MAKE
CHOICES

CHOICE MEANS THAT WHEN ONE ACTION IS

TAKEN ANOTHER MUST BE SACRIFICED.
COSTS ARE MEASURED BY THESE SACRIFICED
ALTERNATIVES.
 THE OPPORTUNITY COST OF AN ACTION IS THE
LOSS OF THE NEXT BEST ALTERNATIVE. IT IS
THIS FACT THAT MAKES THE FIRST ITEM COSTLY.
 THE PROBLEM OF SCARCITY

• BECAUSE OF THE ECONOMIC PROBLEM, SOCIETY NEEDS TO CONFRONT THREE

INTERRELATED QUESTIONS:
• 1. WHAT TO PRODUCE
• 2. HOW TO PRODUCE
• 3. FOR WHOM TO PRODUCE
 ECONOMIC SYSTEMS

• AN ECONOMIC SYSTEM IS A MECHANISM THAT A SOCIETY USES TO DETERMINE

HOW RESOURCES ARE ALLOCATED AND DISTRIBUTED AND HOW GOODS AND
SERVICES ARE PRODUCED.
 ECONOMIC SYSTEMS

• AN ECONOMIC SYSTEM THEREFORE ANSWERS THE THREE FUNDAMENTAL QUESTION

FACING EVERY SOCIETY:
• WHAT TO PRODUCE? WHAT COMBINATIONS OF VARIOUS GOODS AND SERVICES SHOULD BE
PRODUCED WITH THE AVAILABLE RESOURCES?
• HOW TO PRODUCE? GIVEN THAT THERE ARE NUMEROUS METHODS BY WHICH GOODS AND
SERVICES COULD BE CREATED FROM AVAILABLE RESOURCES, WHICH METHOD SHOULD BE
EMPLOYED?
• FOR WHOM TO PRODUCE? HOW WILL THE GOODS AND SERVICES WHICH ARE PRODUCED
BE DISTRIBUTED AMONG CONSUMERS WITHIN THE ECONOMY?
 TYPES OF ECONOMIC SYSTEM OR
ALLOCATIVE MECHANISMS
• PLANNED ECONOMIES
• MARKET ECONOMIES
• MIXED ECONOMIES
ECONOMIC SYSTEMS
 FREE MARKET ECONOMY
• IN A MARKET ECONOMY THE PRODUCTION FACILITIES ARE OWNED BY
PRIVATE INDIVIDUALS WHO PRODUCE GOODS AND SERVICES TO BE SOLD
TO CONSUMERS.
• IN THIS SYSTEM FIRMS PRODUCE GOODS AND SERVICES TO MAKE A PROFIT
AND CONSUMERS PURCHASE THE GOODS AND SERVICES THAT GIVES THE
MOST LEVEL OF SATISFACTION.
• MARKET ECONOMIES UTILIZED THE PRICE OR MARKET SYSTEM AS THE
MECHANISM TO MAKE DECISIONS. A MARKET IS DEFINED AS A GROUP OF
BUYERS AND SELLERS WHO INTERACT WITH EACH OTHER FOR THE
PURPOSE OF BUYING OR SELLING A PARTICULAR GOOD OR SERVICE.
 FREE MARKET
• A MARKET IS ANY SITUATION THAT BRINGS TOGETHER BUYERS AND SELLERS OF
GOODS AND SERVICES.
• A MARKET ECONOMY IS A SYSTEM WHERE THE LAWS
OF SUPPLY AND DEMAND DIRECT THE PRODUCTION OF GOODS AND SERVICES.  
• EXAMPLES: CANADA, SOUTH KOREA, SINGAPORE, GERMANY, GREAT BRITAIN, AND
THE UNITED STATES!
 ADVANTAGES OF MARKET ECONOMIES

• THERE IS CONSUMER SOVEREIGNTY, AS CONSUMERS DETERMINE WHAT TO

PRODUCE.
• FREE MARKETS OFFER A WIDER VARIETY OF GOODS THAN ANY OTHER
ECONOMIC SYSTEM BECAUSE PRODUCERS HAVE AN INCENTIVE TO MEET
CONSUMER DEMAND (FIRMS ARE PROFIT DRIVEN)
• ECONOMIC EFFICIENCY: BECAUSE THE FREE MARKET SYSTEM IS SELF
REGULATING IT RESPONDS EFFICIENTLY TO RAPIDLY CHANGING CONDITIONS.
 DISADVANTAGES OF MARKET ECONOMIES

• THERE IS AN INADEQUATE OR NON-PROVISION OF ESSENTIAL COMMODITIES

SUCH AS MERIT AND PUBLIC GOODS AND SERVICES.
• DEMERIT GOODS SUCH AS ALCOHOL AND TOBACCO WHICH LOWERS SOCIETY’S
WELFARE MAY BE PRODUCED.
• INEQUALITY. IN MANY FREE MARKET ECONOMIES, SOME PEOPLE MAY BECOME
VERY RICH FROM HARD WORK OR PURE LUCK OR A COMBINATION OF BOTH
WHICH ENHANCES THEIR INCOME AND PERSONAL WEALTH. IN OTHER CASES
MAY BECOME OR REMAIN POOR DUE TO THEIR DECISIONS OR BAD LUCK.
 COMMAND/PLANNED ECONOMY

• A COMMAND ECONOMIC SYSTEM IS A MECHANISM IN

WHICH ALL PRODUCTIVE RESOURCES ARE OWNED
BY THE STATE WHICH IS RESPONSIBLE FOR
UNDERTAKING ALL ECONOMIC DECISIONS.
• THE PLANNED ECONOMY IS AN AUTOCRATIC SYSTEM
AS THE DECISIONS BASED ON WHAT, HOW AND FOR
WHOM ARE MADE BY THE STATE AND DICTATED TO
THE REST OF THE ECONOMY
 COMMAND/PLANNED ECONOMY

• THE STATE USUALLY CONDUCTS AN APPRAISAL ABOUT

THE NEEDS OF THE POPULATION BEFORE MAKING
DECISIONS IN A PLANNED ECONOMY.

• THE STATE DETERMINES WHAT GOODS AND

SERVICES TO PRODUCED AND WHICH METHOD TO
EMPLOY.
• THE STATE DISTRIBUTES GOODS AND SERVICES IN
THE PLANNED ECONOMY BASED ON THE CONCEPT
OF EQUITY.
 COMMAND ECONOMY

EXAMPLES: NORTH KOREA, CUBA,

VIETNAM, FORMER USSR
 ADVANTAGES OF PLANNED ECONOMIES

• GOVERNMENT CONTROLS PRODUCTION TO MAKE SURE ESSENTIAL

GOODS AND SERVICES ARE PRODUCED (HEALTHCARE, HOUSING,
EDUCATION, INFRASTRUCTURE).
• GOVERNMENT CONTROLS DISTRIBUTION TO ENSURE THAT
EVERYONE HAS A REASONABLE STANDARD OF LIVING.
• EQUALITY AND EQUITY IS ACHIEVED.
 DISADVANTAGES OF PLANNED ECONOMIES

• THERE IS A LACK OF CHOICE AND FREEDOM ON THE PART OF INDIVIDUALS IN

CONTROLLING THEIR ECONOMIC AFFAIRS. AS A RESULT, ECONOMIC WELL BEING
IS DIMINISHED AND SO TOO ARE LIVING STANDARDS.
• DUE TO THE ABSENCE OF THE PROFIT INCENTIVE WHICH PROMOTES EFFICIENCY
IN THE UTILIZATION OF RESOURCES, PRODUCTIVE EFFICIENCY MAY NOT BE
ACHIEVED.
• THIS SYSTEM DISCOURAGES INNOVATION AND NEW IDEAS AND THERE IS
USUALLY NO INCENTIVE FOR INDIVIDUALS TO WORK HARD.
 MIXED ECONOMY

• MIXED ECONOMIES ARE ECONOMIES IN WHICH SOME ECONOMIC DECISIONS

ARE TAKEN BY THE PRICE SYSTEM AND SOME COLLECTIVELY BY THE STATE
• GOVERNMENT TAKES CARE OF PEOPLE’S NEEDS
• MARKETPLACE TAKES CARE OF PEOPLE’S WANTS.
• UNDER THIS MARKET SYSTEM THE ECONOMY BENEFITS FROM THE
IDENTICAL ADVANTAGES ENJOYED BY A FREE MARKET ECONOMY WHILST
RETAINING MOST OF THE BENEFITS OF A PLANNED ECONOMY. IN ESSENCE,
THERE ARE CERTAIN GOODS AND SERVICES WHICH THE STATE PROVIDES
WHILE ALL OTHER GOODS AND SERVICES ARE PROVIDED BY THE PRIVATE
SECTOR.
 MIXED ECONOMY

• ADVANTAGES: • DISADVANTAGES:
• FREEDOM OF CHOICE • LESS EFFICIENT THAN MARKET
• THOSE WHO ARE LESS ECONOMIES
FORTUNATE STILL SHARE IN • CITIZENS HAVE TO PAY TAXES
THE BENEFITS OF SOCIETY • INEQUAL DISTRIBUTION OF
• BOTH PUBLIC AND PRIVATE WEALTH
SECTORS WORK HARD TO
BRING ABOUT AN INCREASE IN
PRODUCTION
 DEFINING ECONOMICS

• WHAT PHRASE MOST CLOSELY DESCRIBES ECONOMICS? THE STUDY OF HOW……..

A – GOODS AND SERVICES ARE PRICED.

B - PEOPLE MAKE DECISIONS.
C – TO MAKE MONEY.
D- GOVERNMENTS SPEND MONEY.
E – PEOPLE BECOME EMPLOYED.
 DEFINING ECONOMICS

• WHAT PHRASE MOST CLOSELY DESCRIBES ECONOMICS? THE STUDY OF HOW……..

A – GOODS AND SERVICES ARE PRICED.

B – PEOPLE MAKE DECISIONS.
C – TO MAKE MONEY.
D – GOVERNMENTS SPEND MONEY.
E – PEOPLE BECOME EMPLOYED.
 QUESTION 1

WHICH OF THE FOLLOWING IS A DEFINING FEATURE OF FREE MARKETS?

• A. THE GOVERNMENT DOES NOT INTERFERE IN ANY WAY WITH THE ECONOMIC
DECISIONS OF BUYERS AND SELLERS.
• B. THE MEANS OF PRODUCTION ARE OWNED BY THE GOVERNMENT AND NOT PRIVATE
INDIVIDUALS
• C. THERE IS A LARGE NUMBER OF BUYERS AND SELLERS
 QUESTION 1

WHICH OF THE FOLLOWING IS A DEFINING FEATURE OF FREE MARKETS?

• A. THE GOVERNMENT DOES NOT INTERFERE IN ANY WAY WITH THE ECONOMIC
DECISIONS OF BUYERS AND SELLERS.
• B. THE MEANS OF PRODUCTION ARE OWNED BY THE GOVERNMENT AND NOT PRIVATE
INDIVIDUALS
• C. THERE IS A LARGE NUMBER OF BUYERS AND SELLERS
 QUESTION 2

• THE ECONOMY OF ATLANTIA IS DEFINED BY THE PRIVATE OWNERSHIP OF THE MEANS OF

PRODUCTION. ALTHOUGH PRODUCTS PRODUCED AND PRICES ARE BASED ON MARKET
FACTORS, THE GOVERNMENT INTERVENES AS A REGULATOR TO BAN HARMFUL PRODUCTS
AND TO SET A MINIMUM WAGE. ATLANTIA IS AN EXAMPLE OF A ________ ECONOMY.

• A. MIXED MARKET
• B. FREE MARKET
• C. COMMAND ECONOMY
 QUESTION 2

• THE ECONOMY OF ATLANTIA IS DEFINED BY THE PRIVATE OWNERSHIP OF THE MEANS OF

PRODUCTION. ALTHOUGH PRODUCTS PRODUCED AND PRICES ARE BASED ON MARKET
FACTORS, THE GOVERNMENT INTERVENES AS A REGULATOR TO BAN HARMFUL PRODUCTS
AND TO SET A MINIMUM WAGE. ATLANTIA IS AN EXAMPLE OF A ________ ECONOMY.

• A. MIXED MARKET
• B. FREE MARKET
• C. COMMAND ECONOMY
 QUESTION 3
• JANE DOE IS A SHOP OWNER IN THE FICTIONAL COUNTRY OF XANADU. EVERY MONTH THE
GOVERNMENT’S PLANNING MINISTRY SENDS HER A LARGE BOOKLET (WHICH RESEMBLES A
PHONE BOOK) REGULATING THE PRICE OF ESSENTIAL COMMODITIES INCLUDING MILK,
FLOUR, AND EGGS. IN RESPONSE TO THESE REGULATIONS JANE DOE HAS REDUCED HER
INVENTORY OF ESSENTIAL GOODS AND SWITCHED TO SELLING LUXURIES SUCH AS CAKES,
PIES, AND SOFT DRINKS. LUXURY GOODS ARE NOT PRICE CONTROLLED. DOES JANE DOE
RESIDE IN A COMMAND ECONOMY? WHY OR WHY NOT?

• A. JANE DOE DOES NOT RESIDE IN A COMMAND ECONOMY. PRICES AND MONEY HAVE NO
PLACE IN A REAL COMMAND ECONOMY.

• B. JANE DOE DOES NOT RESIDE IN A COMMAND ECONOMY. SHE OWNS HER OWN
BUSINESS AND IS FREE TO MAKE SOME PRODUCTION AND PRICE DECISIONS.

• C. JANE DOE RESIDE IN A COMMAND ECONOMY, AS THE GOVERNMENT REGULATES SOME

PRICES.
 QUESTION 3
• JANE DOE IS A SHOP OWNER IN THE FICTIONAL COUNTRY OF XANADU. EVERY MONTH
THE GOVERNMENT’S PLANNING MINISTRY SENDS HER A LARGE BOOKLET (WHICH
RESEMBLES A PHONE BOOK) REGULATING THE PRICE OF ESSENTIAL COMMODITIES
INCLUDING MILK, FLOUR, AND EGGS. IN RESPONSE TO THESE REGULATIONS JANE DOE
HAS REDUCED HER INVENTORY OF ESSENTIAL GOODS AND SWITCHED TO SELLING
LUXURIES SUCH AS CAKES, PIES, AND SOFT DRINKS. LUXURY GOODS ARE NOT PRICE
CONTROLLED. DOES JANE DOE RESIDE IN A COMMAND ECONOMY? WHY OR WHY NOT?

• A. JANE DOE DOES NOT RESIDE IN A COMMAND ECONOMY. PRICES AND MONEY HAVE
NO PLACE IN A REAL COMMAND ECONOMY.

• B. JANE DOE DOES NOT RESIDE IN A COMMAND ECONOMY. SHE OWNS HER OWN
BUSINESS AND IS FREE TO MAKE SOME PRODUCTION AND PRICE DECISIONS.

• C. JANE DOE RESIDE IN A COMMAND ECONOMY, AS THE GOVERNMENT REGULATES

SOME PRICES.