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INTRODUCTION TO ECONOMICS
July 2009
What is Economics
Micro and Macroeconomics
Positive and Normative Economics
PREPARED BY CHOMPOLOLA A.
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Introduction
Economics is a science that studies the production,
distribution, and consumption of goods and services
(Layman’s definition)
Generally, economics studies human behaviour vis a
vis distribution of “scarce resources which have
alternative use”.
Two things to note:
Economics is a social science coz it studies human
behaviour
Resources are scarce & have alternative use
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The Economic Problem
Resources are scarce but human wants are unlimited
The economic problem therefore thrives on ‘scarcity’
(insufficiency of resources to meet all needs &
wants).
But scarcity brings in the problem of choice
Rational behaviour: choices are not random but are
done in a way that maximises individuals’ utility
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Economic Problem cont’d
Economics agents have to choose WHAT to produce,
for WHOM to produce, and HOW to produce.
Hence economics tries to answer the three questions
of WHAT (allocative efficiency), HOW (technical
efficiency) & for WHOM to produce.
The idea of scarcity and choice is best illustrated
using the Production Possibility Frontier/curve
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The Production Possibility Frontier
Rice PPF
5
Y
4
5 6 a
Maize
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PPF cont’d
If all resources are used to produce rice, “b” amount
of rice will be produced & zero amount of Maize
If all resources are used to produce Maize, “a”
amount of Maize will be produced
If the production of Maize increases from 5 to 6
units, rice production reduces by 1 unit
With limited resources, we cannot increase the
production of the two goods simultaneously
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PPF cont’d
If all resources are employed, production will be
along the PPF
If some resources are not utilised, production will lie
below the PPF like point X
Point Y represents production levels we cannot
achieve with the available resources & technology
Point Y can only be achieved if
productivity increases
New resources are discovered
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Opportunity Cost
Scarce resources & unlimited wants implies that
economic agents make choices
Wants will be arranged in order of importance
Some wants will not be satisfied & this introduces the
concept of opportunity cost
Opportunity cost is the value of the next best
alternative foregone e.g.
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Cont’n
Suppose Rupiah has K5 billion and constructs the
following scale of preferences.
Paying the striking lecturers
Going for holiday to Mfuwe
Paying gratuity for ministers
Suppose Rupiah decides to pay the lecturers, the
opportunity cost of doing so is the holiday to Mfuwe
foregone.
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Methodology of Economics
Like other sciences economics relies on the scientific
method with the following elements
Observation of facts
Uses facts to formulate hypothesis (possible explanation
of cause and effect)
Testing the hypothesis using specific events
Acceptance, rejection or modification of hypothesis
Continued testing of hypothesis (results into formation of
theory or model)
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Cont’n
A well-tested & widely accepted theory becomes law
or principle
Process of deriving theories & principles is called
theoretical economics
Facts Theories Policy
Economics
Economic theories/principles are statements about
economic behaviour that enable prediction of the
probable effects of certain actions
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Cont’n
Generalisations: economic theories, principles, &
laws are generalisations relating to economic
behaviour or to the economy
Other-things-equal assumption: in natural sciences
variables can be controlled but not in economics
In the absence of controlled experiments, we
assume some factors are constant
Abstractions: economic theories are abstractions-
simplifications
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Model Representation
Models can be represented in the following ways:
Graphical expression
Mathematical expression
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Policy Economics
Policy economics: application of theory & data to
formulate policies
Policy formulation takes the following steps:
State the goal
Determine policy options – look at cost, benefit &
political feasibility of alternatives
Implement & evaluate the policy selected
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Economic Goals
Economic policies aim at the following:
Economic growth
Full employment
Economic efficiency
Price level stability
Equitable distribution of income
Balance of trade
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MICROECONOMICS
Microeconomics: looks at specific economic units (industries, firms,
and households)
Looks at how economic agents allocate limited resources in a market
How people’s choices affect the SS & DD for goods and services,
how prices are determined and how they affect SS & DD
May also deal with some aggregates
Market demand of a commodity
Market supply of a commodity
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Macroeconomics
Macroeconomics (macro is Greek for large) looks at the
economy as a whole
Macroeconomics looks at economic aggregates such as
unemployment, inflation, GDP, and the BOP.
It is these variables that give an idea of the pulse of the
economy
Other variables include interest rates, the exchange rate
and stock price, all of which have a major impact on the
level of production and employment.
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Caution
Fallacy of composition: what is true for an
individual mkt may not be true for all mkts.
Correlation & causation: correlation denotes
association in some systematic/dependable way
E.g. Health & education are correlated
Post hoc fallacy: the fact that event B happens after
event A has happened does not mean that A cause
B.
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Goals of Macroeconomics
Key among the goals are the following:
Sustainable economic growth: growth that does not take
place at the expense of structural/environmental concerns
Full employment: those who are able and willing to have a
job can get one given the natural rate of unemployment
Price stability: Price stability does not entail zero inflation. It
means steady levels of low-moderate inflation.
External balance
Equitable distribution of income and wealth.
Increased productivity: more output per unit of inputs per
hour.
Positive & Normative Economics
Positive economics looks at facts and cause-and-
effect relationships
Is objective & avoids value judgement
Uses scientific methods to establish what the
economy actually is like
Looks at “what is”
example of positive statement ”the price of copper
is higher this year than last year”
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Cont’n
Normative economics uses value judgement about
what the economy should be like
Reflects subjective desirability of aspects of the
economy
Looks at what ought to be
Example of normative statement “the price of mealie
meal should be reduced so that most people can
afford”
Note that it is with regards to the normative policy
options that most economists differ.
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