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Economic Activity

Economic Theory

Dr. Luzviminda Rodrin


Maricel M. Escat (MBA 201610837)

Topic Outline

I. Definition of Economics

II. Definition of Economic Activity

III. Key Elements of Economic

A. Human Wants
B. Resources
C. Techniques

IV. Economic Theory

A. Steps in constructing
Economic Theory
B. Functions of Economic

V. Price Theory

A social science concerned chiefly with description and analysis of the

production, distribution, and consumption of goods and services.

Economics is the science that deals with the production, allocation, and use
of goods and services.

Economics is concerned with humanity's well-being or welfare.It

encompasses the social relationships or social organization involved in
allocating scarce resources among among alternative human wants and in
using those toward the end of satisfying wants as fully as possible .



Economic activities are related to production ,distribution, exchange and

consumption of goods and services.

The primary aim of the economic activity is the production of goods and services
with a view to make them available to consumer.
"Human activities which are performed in exchange for money or money's worth are
called economic activities."

Key Elements of Economic


1. Human wants
2. Resources
3. Techniques of production

Human wants

"Human wants" are those things that people desire to have above what they truly
need in order to live. Only a limited number of needs actually exists, but wants are
virtually unlimited, restricted only by a person's imagination.

Resources are materials, energy, services, staff, knowledge, or other assets that are
transformed to produce benefit.

Labor of all kinds

Raw materials of all kinds


A. Professionals
B. Skilled workers
C. Laborers


A. Land Resources
B. Buildings
C. Machineries
D. Power Resources
E. Transportation
F. Fuels


1. Limitedness
Limitedness of Resource is of two types namely Qualitative and
Quantitative. Human Resources are Qualitatively limited where as Non-human
resources are Quantitatively limited .

2. All resources are inter-related.

Human as well as non human resources are inter-related. The use of one
resource depends on the use of other another resource.

3. Usefulness. All resources are useful.

Techniques are the know-how and the physical means of transforming resources
into want-satisying form.


Economic theory consists of sets of principles or causal relationships among

the important facts or variables that surround economic activity.

It is a broad concept for the explanation and understanding of the movement

of goods in a market.

Steps of Economic Theory

1. Selecting the Problem:

The problem to be explored may be very wide like poverty, unemployment,
inflation, etc., or it may be
narrow relating to an industry.

2. Collection of Data:
The second step is to collect data or facts pertaining to the problem to be
explored. If the problem is simple the data can be easily collected.

3. 3. Classification of Data:
The data are enumerated, classified and analysed. For instance, if the problem
is to study the trend in population growth, the census data may be collected and
classified by sex, age groups, literacy, marital status, occupational distribution etc.

4. Formulation of Hypothesis:
A hypothesis is a suggested answer to a problem by the aid of which we
endeavour to explain facts by discovering their orderliness. The hypothesis arises
from the observed facts, experience or previous knowledge of the researcher.
5. Testing of Hypothesis:
The hypothesis should be tested by well-established techniques of logic and
statistics which may then be subjected to confirmation. A successfully tested
hypothesis is a theory.

6. Verification of Theory:
The tested hypothesis or theory should be verified. The process of verification
may be carried out by observation or by checking the consistency of the theory with
related facts that are believed to be true.

7. Formulation of Solutions:
Once the theory is verified and proved true, possible solution or suggestions to
the problem under investigation are to be formulated. This final stage relates to
applied economics and involves value judgements.

Functions of Economic Theory

1. To explain the nature of economic activity.

Economic theory helps in interpreting and explaining economic phenomena of the
real world.
For instance, to find out the causes of unemployment in the country, data or facts
are collected, enumerated, analysed and classified. Then they are interpreted in
the light of our knowledge of the nature of unemployment.

2. To predict what will happen to the economy.

It provides a basis for predicting unobserved economic events. It possesses
much predictive accuracy in exploring the economic problems of the real world.

For instance, if we find that with the increase in the supply of flour, its price does
not fall, given the demand for flour,we can predict that there is likely to be shortage
of flour in the coming year.

Price Theory and Economic Theory

Price theory, is a microeconomics principle that involves the analysis of supply and
demand in determining an appropriate price point for a good or service. The goal is
to achieve equilibrium in which the quantities of goods or services provided match
the corresponding market's desire and ability to acquire the good or service.

Understanding Supply and Demand and the Relation

to Price Theory
Demand applies to the markets desire for the item, be it tangible or
intangible. At any point in time, there is also only a finite number of potential
consumers available.
Supply denotes the amount of products or services the market is able to
provide. This can include tangible goods, such as automobiles, or intangibles,
such as the ability to have an appointment with a skilled service provider.