The Fundamentals of

Economics

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Syed Arshad Hussain Lecturer

The Fundamentals of
Economics
Main Reasons to Study Economics
To learn a way of thinking
To understand society
To understand global affairs, etc.

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Syed Arshad Hussain Lecturer

The Fundamentals of
Economics
A Definition of Economics
Economics is the study of how societies use
scarce resources to produce valuable
commodities and distribute them among
different people.
Samuelson 18e

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Syed Arshad Hussain Lecturer

The Fundamentals of
Economics
Another Definition of Economics
Economics is the science of choice the
science that explains the choices that we
make and how those choices change as we
cope with scarcity.
Parkin 4e

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Syed Arshad Hussain Lecturer

The Fundamentals of
Economics
Another Definition of Economics
Economics is a field of social science
concerned with the efficient use of scarce
resources to achieve the maximum
satisfaction of human wants.
McConnell 16e

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Syed Arshad Hussain Lecturer

The Fundamentals of
Economics
Needs
Air, Water, Cloth, Food and Shelter

Wants
Societys wants exceed the resources
available to satisfy them.
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Syed Arshad Hussain Lecturer

The Fundamentals of
Economics
Free Goods
Goods which are free.

Economic Goods
Goods which are not free.

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Syed Arshad Hussain Lecturer

The Fundamentals of
Economics
Scarcity
In economics scarcity refers to all useful things, i.e.
things which are capable of satisfying a human
want.
Goods which are not economic are of little or no
concern to economists.
Rich and poor alike face the problem of scarcity.
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Syed Arshad Hussain Lecturer

The Fundamentals of
Economics
Efficiency
Efficiency denotes the most effective use of
a societys resources in satisfying peoples
wants and needs.
How do we maximize the total value of all
production, ignoring who gets it and who
bears the costs?
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Syed Arshad Hussain Lecturer

The Fundamentals of
Economics
Choice and Opportunity Cost
What is the opportunity cost of attending
university?
There is no such thing as a free lunch

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Syed Arshad Hussain Lecturer

The Fundamentals of
Economics
Opportunity Cost
The opportunity cost of something is that
which we give up when we make that choice
or decision.
The best alternative that we forgo, or give
up, when we make a choice or a decision.
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Syed Arshad Hussain Lecturer

The Fundamentals of
Economics
Macroeconomics
Is the study of the national economy and the global
economy as a whole.
Macro = Big

Microeconomics
Is the study of individual goods and services, people,
and businesses and the interaction of people, firms,
and governments in markets.
Micro = Small
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Syed Arshad Hussain Lecturer

The Fundamentals of
Economics
EXAMPLES OF MICROECONOMIC & MACROECONOMIC CONCERNS

Microeconomics

Production

Prices

Income

Employment

Production/Output in
Individual Industries and
Businesses

Price of Individual
Goods and Services

Distribution of Income
and Wealth

Price of medical care

Price of gasoline
Food prices
Apartment rents

Wages in the auto

industry
Minimum wages
Executive salaries
Poverty

Employment by
Individual Businesses &
Industries

Aggregate Price Level

National Income

Consumer prices
Producer Prices
Rate of Inflation

Total wages and salaries

Total corporate profits

How much steel

How many offices
How many cars
National
Production/Output
Macroeconomics
Total Industrial Output
Gross Domestic Product
Growth of Output

Jobs in the steel industry

Number of employees in
a firm
Number of accountants
Employment and
Unemployment in the
Economy
Total number of jobs
Unemployment rate

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Syed Arshad Hussain Lecturer

The Fundamentals of
Economics
The Method of Economics
Positive Economics
Describes the facts of an economy.
What it is?

Normative Economics
Involves value judgments.
What ought to be?
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Syed Arshad Hussain Lecturer

The Fundamentals of
Economics
Other Fields of Economics

Islamic Economics
Monetary Economics
Econometrics
Economic Development
Environmental Economics
International Economics
Public Economics
Urban and Regional Economics, etc.
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Syed Arshad Hussain Lecturer

The Fundamentals of
Economics
The Logic of Economics
Economists use the scientific approach to understand
economic life.
Economic Theory
An economic theory is a statement or set of related
statements about cause and effect, action and reaction.

Economic Model
An economic model is a formal statement of an economic
theory. Usually a mathematical representation of a presumed
relationship between two or more variables.
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Syed Arshad Hussain Lecturer

The Fundamentals of
Economics
The Logic of Economics
Post Hoc Fallacy
A common error made when thinking about causation: if A
happened before B then A did not necessarily cause B.

Failure to hold other things constant

Two variables are correlated if one variable changes when the
other changes. This does not imply that one caused the other.

Fallacy of Composition
The fallacy of composition implies that what is true for a part is
necessarily true for the whole.
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Syed Arshad Hussain Lecturer

The Fundamentals of
Economics
The Three Problems of Economic
Organization
What commodities are produced and in what
quantities?
How are goods produced?
For whom are goods produced?
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Syed Arshad Hussain Lecturer

The Fundamentals of
Economics
The Three Problems of Economic Organization
Market Economy or Laissez-faire Economy
Individuals and private firms make the major decisions about
production and consumption. The concept of invisible hand.

Command Economy
Government makes all important decisions about production
and distribution.

Mixed Economy
Use mixed element of market and command
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Syed Arshad Hussain Lecturer

The Fundamentals of
Economics
Societys Technological Possibilities
Inputs & Outputs
Factors of Production
Production Possibility Frontier

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Syed Arshad Hussain Lecturer

The Fundamentals of
Economics
Societys Technological Possibilities
Inputs
Commodities or services that are used to produce
goods and services.

Outputs
Various useful goods and services that result from
the production process and are either consumed or
employed in further production.
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Syed Arshad Hussain Lecturer

The Fundamentals of
Economics
Societys Technological Possibilities
Factors of Production
Factors of production are the resources, or primary
inputs that we use to produce goods and services.

Land
Labor
Capital
Entrepreneur
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Syed Arshad Hussain Lecturer

The Fundamentals of
Economics
Societys Technological Possibilities
Factors of Production (cont.)
The gifts of nature, i.e. all natural resources, that we use to
produce goods and services are land.
The work time and effort that people devote to producing
goods and services is labor.
The quality of labor depends on human capital, which is the
knowledge and skill that people obtain from education, on-thejob training, and work experience.
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Syed Arshad Hussain Lecturer

The Fundamentals of
Economics
Societys Technological Possibilities
Factors of Production (cont.)
The tools, instruments, machines, buildings, and other manmade durable, physical, things that are used to produce
goods and services are capital.
The human resource that organizes land, labor, and capital,
and bears the risks involved, is entrepreneurship. The
reward for organization and risk-bearing is profit [or loss!]
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Syed Arshad Hussain Lecturer