Basic Economics

Basic Economics

Economics is the social science that analyzes the production, distribution, and consumption of goods and services. 

The term economics comes from the Ancient Greek (oikonomia, "management of a household, administration") from (oikos, "house") + (nomos, "law"), hence "rules of the house". 

Political economy was the earlier name for the subject, but economists in the late 19th century suggested "economics" as a shorter term for "economic science".

A focus of the subject is how economic agents behave or interact and how economies work. Consistent with this, a primary textbook distinction is between microeconomics and macroeconomics. 

Microeconomics examines the behavior of basic elements in the economy, including individual agents (such as households and firms or as buyers and sellers) and markets, and their interactions. 

Macroeconomics analyzes the entire economy and issues affecting it, including unemployment, inflation, economic growth, and monetary and fiscal policy.

Adam Smith is known as father of Economics. He wrote a book “Wealth of Nations” in 1776.

Definition:

Economics is a social science, which studies the human behavior as a relationship between ends (unlimited human wants) and the scarce means (limited resources) which have alternative uses

Economics explains how limited resources can be used to fulfill our wants and needs.

Needs: These are basic requirements or necessities of life. These are the things people can’t live without. 

Wants: These are the things people would like to have over and above their needs. Wants are unlimited. When we satisfy one want another will come up. Example: Computers, Apartment etc…..

Scarcity: It means insufficient resources to completely satisfy our wants. Scarcity arises because human wants are unlimited and economic resources are limited/scarce.

Q) What is basic economic problem?

Scarcity

Q) Explain the nature of the economic problem

Human wants are unlimited and the means to satisfy it (resources) are limited/Scarce.

Resources: Resources are the scares materials used to produce goods and services. They are also called factors of production. Resources can be classified into three.

1)      Natural Resources: These are gifts of nature. Example: Land, trees, air, sunlight.

2)      Human Resources: All efforts of human, whether physical or mental, skilled or unskilled.

3)      Man Made Resources: These resources are all man     made (Manufactured) for further production of goods and services. Example: Machinery.

Q) Why are resources important?

Resources help produce goods and services to satisfy 

human wants hence it is important.

Q) What we need and what we want?

We need basic necessity things like food, clothing, water and shelter to live a life whereas our wants are unlimited. We want all the luxuries of life and even after getting it we want something else. Example: car, laptop, bungalow etc. 

Economizing: Economizing is making the most of what we have, that is using the limited resource in such a way that it gives the maximum benefit and reduces wastage.

Choice: It is selection between two or more commodities (any marketable item produced to satisfy wants or needs). People cannot find enough resources to satisfy all their wants and need, so they must choose most urgent wants or the commodity that gives them the maximum satisfaction. 

Q) Why is choice necessary?

Choices are necessary because resources are limited while the human wants are unlimited. One has to make the best choice between two things to get satisfaction due to lack of abundant resources.

Q) What might be the choice from the following?

a.      Maria wants build a house of her own but due to less money has to rent a house.

b.      Shazia has to buy an apple cake from the shop as pineapple cake was unavailable.

c.       Poor child has to work but he wants to study.

Opportunity Cost: opportunity cost is the next best alternative forgone (Sacrificed).

 

It is the real cost of choosing something. When we make a choice we have to give up something or forgo something. The forgone thing is opportunity cost. 

Example: Ahmed has just enough money to buy a football or volleyball. He chooses to buy football hence his choice is football. He gave up or sacrificed volleyball hence his opportunity cost is the volleyball.

Example: If we assume that land can either be used to produce corn, or it can be used for raising cattle to produce beef, but it cannot be used to do both at the same time, we have two choices and we must make a decision. Our decision will decide choice and opportunity cost. The thing we choose is choice and the thing we forgo is opportunity cost.

Opportunity cost is not how much money we spend on goods, but other goods and services we could have bought with that money. Therefore we cannot consider money as opportunity cost for the product we buy, but the other product which we can buy with the same money will be opportunity cost.

Opportunity cost should also involve other relevant costs like the value of time spend and the value of the opportunities we forgo.

Q) if there were enough resources to produce everything everybody wanted, would there be any opportunity cost? Explain your answer.

Q) What might be the better opportunity cost from the following?

d.      Maria has limited money to buy orange or apple and she purchase apple

e.       Shazia decides to study Economics at a university. 

f.        A school is built on farm land

g.      A woman has a TV set which cost her $800 two years ago. A new set would cost her $1000 and she could sell her TV set for $450. What is opportunity cost of keeping the old TV