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Ú References
Modern Economic Theory (K.K Dewett)

Resource Person: ë  










Whether to buy a car or not?

Whether to have Ô

for dinner tonight, or
something else?

Whether to marry your ______or some one else?

Which course to study/ where to take admission?

And many other decisions are related with

economics Õ






Ú Ô   is the study of how individuals/society

manages its scarce resources.

â Ô  

 The science which studies human behavior as a
relationship between ends and scarce means
which have alternative uses.³

 means that available    are
insufficient to satisfy all wants and needs. Absent
of scarcity and alternative uses of available
resources there is no  
 . The
subject thus defined involves the study of 

as they are affected by incentives and resources.

 (from Greek prefix micro-
meaning "small" + "economics") is a branch of
economics that studies how the individual parts of
the economy, the household and the firms, make
decisions to allocate limited resources
 (from prefix "macr(o)-"
meaning "large" + "economics") is a branch of
economics that deals with the performance,
structure, behavior and decision-making of the
entire economy, be that a national, regional, or the
global economy .
 : Applies the tools of statistics to
economic problems.
 ëife is full of choices. People make many choices
everyday. Choices, often called decisions, vary in
their difficulty. Regardless of the level of difficulty,
all choices carry costs and benefits. Young children
make many choices/decisions. Research reveals that
they should begin to learn decision-making skills at
an early age. ëearning basic economics concepts
and principles fosters the development of good
decision-making skills.
 Economics is the study of choice under scarcity. Our
resources are limited, and our wants are unlimited
(scarcity). Scarcity is the inability to satisfy all of
our wants at the same time. We must make choices
about how to use our limited resources. >
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 is widely regarded as the first modern
school of economic thought. Its major developers include
Adam Smith, ßean-Baptiste Say, David Ricardo, Thomas
Malthus and ßohn Stuart Mill.
â Publication of Adam Smith's ×  

1776, has been described as "the effective birth of
economics as a separate discipline. "The book identified
land, labor, and capital as the three factors of production
and the major contributors to a nation's wealth.
Adam Smith (father of economics) defined economics as ³ 
    ´. He emphasized the 
  of wealth as the subject matter of economics. |Œ
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â ^ 

Takes into account only material goods.

· ^


· Considered economics as a dismal or selfish science.

· Defined wealth in a very narrow and restricted sense
which considers only material and tangible goods.
· Have given emphasis only to wealth and reduced
man to secondary place in the study of economics.

§  d  ^      

 According to A. Marshall ³Ô 







Thus, it is on one side a study of wealthà and on otherà and more
important side, a part of the study of man.
â ^    d     
Emphasize on material welfare as the primary concern of
economics i.e., that part of human welfare which is related to
Takes into account ordinary business of life ± It is not concerned
with social, religious and political aspects of man¶s life.
ëimited the scope to activities amenable to measurement in terms
of money.
Economics is social science and not a study of isolated individuals
 ^ economics deals with the part of
social welfare that can be brought directly or
indirectly into relation with the measuring rod
of money.
     It is the study of causes of
material welfare.
 Ô    It is the study of general methods
by which man cooperate to meet their
material needs.

    (1842 to 1924) was an
English economist and one of the most
influential economists of his time, being one
of the founders of  

His book, ¦   Ô   (1890),
brings the ideas of  supply and demand, of 
marginal utility and of . the costs of
production into a coherent whole. It became
the dominant economic textbook in England
for a long period.
i. Relationship between the quantity of a commodity that producers have
available for sale and the quantity that consumers are willing and able to
ii. the
  of a good or service is the utility gained (or lost) from
an increase (or decrease) in the amount available of that good or service.
iii. the     is the theory that the price of an
object or condition is determined by the sum of the cost of the resources
that went into making it.
d  l     

Criticized for treating economics as a social science rather

than a human science, Thus welfare definition restricts the
scope of economics to the study of persons living in
organized communities only.
It addresses only material welfare of man & neglects
immaterial welfare.
Welfare definition was advertised as extensions and
refinements of Classical Definition
Quantitative measurement of welfare

· ëionel Robbins led a frontal attack on the Marshallian view.

   ^  ^  
 According to ëionel Robbins (1898 - 1984) Ô 





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³True individual freedom cannot exist without economic

security and independence. People who are hungry and out of a
job are the stuff of which dictatorships are made.´
 According to Prof. Samuelson (May 15, 1915 ± December 13, 2009)
³Economics is the study of how men and society choose with or
without the use of money, to employ the scarce productive resources
which have alternative uses, to produce various commodities over
time and distribute them for consumption now and in future among
various people and groups of society.

 Characteristics of Growth Oriented Definition:

The definition is not merely concerned with the allocation of given
resources but also with the expansion of resources, tries to analyze
how the expansion and growth of resources to be used to cope with
increasing human wants.
More dynamic approach.
According to him problem of resource allocation is a universal
problem whether it is a better economy or an exchange economy.
Definition is comprehensive in nature as it is both growth oriented as
well as future oriented.
 Even today economist don't agree on any one definition of
economics. Thus every time we face a dilemma therefore
Prof. Viner defined Ô 











Factors of production are the resources that are used to
produce goods and services:
   : (economically referred to as  or raw
materials) The things created by acts of nature such as land,
water, mineral, oil and gas deposits, renewable and
nonrenewable resources.

     are ones that can be replenished or reproduced

easily. like sunlight, air, wind, etc., are continuously available and
their quantity is not affected by human consumption. Many renewable
resources can be depleted by human use, but may also be replenished.
Some of these, like agricultural crops, take a short time for renewalÃ
others, like water, take a comparatively longer time, while still others,
like forests, take even longer.

     are formed over very long geological

periods. Minerals and fossil fuels are included in this category. Since
their rate of formation is extremely slow, they cannot be replenished
once they get depleted. Of these, the metallic minerals can be re-used
by recycling them. But coal and petroleum cannot be recycled. Œ]

The human effort, physical and mental,
used by workers in the production of goods
and services.

   ^. &  

5 '
All the machines, buildings, equipment,
roads and other objects made by human
beings to produce goods and services.
Capital goods may be acquired with money or financial
capital. ŒÕ
refers to the stock of competences, knowledge and
personality attributes embodied in the ability to
perform labor so as to produce economic value. It
is the attributes gained by a worker through
education and experience.
The effort to coordinate the production and sale
of goods and services. Entrepreneurs take risk
and commit time and money to a business without
any guarantee of profit. Entrepreneurs assemble
resources including innovations, finance and
business acumen in an effort to transform
innovations into economic goods. Œ[
    (What is? What was? What will be?) ±
actual happenings. ¦

 is the branch of
economics that concerns the description and explanation
of economic phenomena.
- ëahore is an over-populated city.
- Prices in Pakistani economy are constantly rising.
  (What ought to be? What ought to have
 is the branch of economics
that incorporates value judgments about what the

 like or what particular policy actions

    to achieve a desirable goal
- Fundamental principle of economic development should
be the development of rural areas of Balochistan.
- Agricultural income should also be taxed.

What should the economy produce efficiently in order to satisfy
wants as best as possible using the limited resources available with
alternate options. It also implies between allocation of resources
between different type of goods: Consumer goods and capital
goods (Consumer goods are finished products whereas capital
goods are bought as an investment to help produce something else
include factories, machinery, tools, & equipment etc. )
   ëabor intensive vs. capital intensive
  How the national product be distributed ?
who should get how much? Should the economy produce goods
targeted towards those who have high incomes or those who have
low incomes.
Õ §
     How to achieve efficiency of
resource and how to ensure further growth and development in the
[ §

 fullest possible use of all resources
including labor & other resources.

is the system of production,
distribution and consumption of goods and services
of an economy. It is the set of principles and
techniques by which problems of economics are
addressed, such as the economic problem of scarcity
through allocation of resources.




Capitalism: It is the economic system

based on the principle of private
ownership of factors of production
which include natural resources and
capital. Government control over the
economic activities of the people is
minimum. people have much
freedom to make choices about
consumption, production, and making
contracts. Full capitalism is not found
in any country. Capitalism is also
called Market economy, free
economy or price system. Œƒ

A theory or system of social organization that

advocates the vesting of the ownership and control
of the means of production and distribution, of
capital, land, etc., in the community as a whole. The
government in a planned way, decides what is to be
produced in the country. Means of production such
as farms, factories, shops etc are owned by
government. It is also called marxism.
Mixed economy
 Features of both capitalism and socialism are
found side by side. A part of industry, trade,
energy, transport and communication, is
controlled by the government while private
sector is also quite strong.


accordance with Islamic law.
People have freedom to
produce and consume goods
but within the limits
prescribed by the Holy Quran
and Hadith. E.g. following
Islamic law in regards to
spending, saving, investing,
giving, etc

  ' (
Show the different combinations of goods and
services that can be produced with a given amount
of resources
Any point inside the curve ± suggests resources are
not being utilised efficiently
Any point outside the curve ± not attainable with the
current level of resources
Useful to demonstrate economic growth and
opportunity cost
 When the economy is  Point is desirable
at point , resources are because it yields
not fully employed more of both goods,
and/or they are not but not attainable
used efficiently. given the amount of
resources available.

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 The PPF curve is bowed out
because resources are not  To increase the production
perfectly adaptable to the of one good without
production of the two goods. decreasing the production
 As we increase the production of the other, the PPF
of one good, we sacrifice curve must shift outward.
 of the

     § ë  
 The PPF curve shifts
outward as a result of:
1. An increase in the
economy¶s resources,
2. A technological
innovation that
increases the output
obtained from a given
amount of resources.
i From point , an
additional 200 tons
of factory goods or
20 tons of farm
goods are now
possible (or any
combination in

The ^   consists of two directed
lines that perpendicularly intersect their
respective zero points.


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