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G.C.E. Advanced Level Examination 2024

ECONOMICS

INTRODUCTION To rath
ECONOMICS &
BASIC ECONOMIC CONCEPTS
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PUSHPA KUMARA HEARATH

B.Sc. Business Administration (Special) University of Sri Jayewardenepura
 Introduction to Economics

INTRODUCTION T0 ECONOMICS
If someone asks from you how much of money is needed to buy all what you want at
this moment, you may say that a certain amount of money is needed to buy all of
them. But the issue is you don't have such an amount of money at the moment. Say at
a future point of time you earn this amount of money. But, by the time you earn that
amount of money, you will be thinking of consuming some other goods and services
which were not included to the previous list. For an example a person who has a
motorbike at the moment may be thinking of buying a car. But, by he time he
purchases a basic car, he will be thinking of buying a luxury car than what he bought. It
is the general nature that the human being is having an unlimited desireofconsuming
goods and services. But the resources available to satishy those wants are always
limited. So in economicsS we discuss about the logical behavior of human being in
satisfying their unlimited wants with a limited amount of resources
When the price of a certain good is increased, the consumersare discouraged to consume
that good. But at the same time producers are encouraged to produce more when the
price goes up. In economics we build up theories and models to learn and observe these
relationships exist among different economic variables So economics is not a subject with
some set of facts, but it isa subject which builds un theeries to observe the practice...

What is Economics...?
Economics is an old subject which has been evolving for about two centuries. It is also
treated as the queen of secial sciences. When observing the facts discussed within
economics and the methodology used in analyzing those facts, it could be identified as
a subject which covers wide seope. Most of the problems faced by modern societies
take an economical naturé Cost of living, rate of inflation, depreciation in the foreign
exchange rate, economic growth, poverty etc are fallen under the scope of economics.

Economics basically eoneerns about the human behavior towards the fulfillment of
their needsand wants for a better life. It is not a vision or a view, but a methodology
which provides guidelines to arrive at the accurate conclusions.
Economics is not a permanent truth. But it could be used to search for a permanent
truth.

For a better understanding about the nature of the subject and the scope of economics,
we will refer to some of the definitions given by world famous economists.

"The study of man in the ordinary business of life";

Alfred Marshall

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 Introduction to Economics

"The science which studies human behaviour in the relation between scarce resources

having alternative uses and the human wants."

Lionel Robbins

Based on the above definitions, the scope of economics and the methodology used in
economics, the subject 'economics' could be defined as follows.

Economics is the social science which studies the behaviour of the human
being in the fields of production, distribution, and consumption ofgoods
and seroices when they attempt to fulfill their unlimited oants with a
limited amount of resources.

a r
Whether Economics is a Science or an
Art..
An art is a formal set of facts which does not follow thescientificmethod.
A science is a subject which collects the data relevant to the respective field, analyze
them and arrive into logical conclusions using the seientific method. Here the scientific
method refers to the ability of accepting orejeeting by comparing the actual results
with the hypothesis made.
m o

Why economics is treated as a seience..

Any subject which follows the seientificmethod in its analysis is identified as a science.

In economics, the actual facts are compared with the hypothesis made and come into
logical condusions by following the scientific method. Therefore economics is
identified as a science
Sciences are divided into two categories as social sciences and natural sciences.

Economics is treated as a social science..

The sciences which are logically analyzing the behavior of people in the society are
identified as social sciences. Economics, political science, psychology can be identified
as examples for social sciences.

In economics, the behavior of people living in a socio economy is studied from the
economics point of view. Therefore economics is identified as a social science.

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 Introduction to Economics

The difference between economics and the natural sciences

In natural sciences, the experiments could be carried out in a factor controlled

environment. But in economics the experiments cannot be carried out in a factor
controlled environment. Due to the inability to carry out experiments in a factor
controlled environment, assumptions are made in economic theories to simplify the
complicated practice.

The difference between economics and other social sciences

In different social sciences, the behavior of human being in differentfields isdiseussed.

But in economics, the physical behavior of the human being is discussed That is the
behavior of human being in fulfilling his physical needs andwants isdiscussed in
economics. Through this, economics is differentiated from other socal sciences.

Importance of Learning Economics

Importance of learning economics can be listedas follows,

*Creates as ability to understand the econonmic behavior of a society
Important to become a successful citizen
Important when ruling a coùntry
Important in efficient decision making as consumers, producers and investors
Important when making political decisions such as voting for a certain political
party
Important in diecisionsregarding higher education and professions

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 Introduction to Economics

Major facts to be studied in Economics

There are five major facts that should be studied in economics.

01. Economic Reasoning

Economics train people to think in various ways. Economists take decisions
after analyzing everything in detail and comparing all the costs and the
benefits.
Economic decisions are taken in a way the benefits are exceeding the costs.
There isa technical methodology for economic reasoning.

02. Economic Terminology

There is a certain set of terms inherent for economics tob as tor the other
subjects (glossary of terms). It is vital to understand these terms in
relation to economics in order to understand the subject
Eg: Inflation, G.D.P, Opportunity cost, utility

03. Economic Theory

Economic theory is useful in understanding the óperations of an economic
system.
A n economic theory is a summarized description based on assumptions.
If the assumptions are not kndwn, theory will also be clear. And the
theories are used to explain the dbserved events.
Whether to accept or o reject a theory is depending not only upon the
accuracy of the theory but also upon the ability to accurately predict
based on that theoryThat is a successful theory assists in forecasting the
events whchare not yet observed.

Folowing methodology is used in a theory

Defining the problems
Assuming
P U S
Presenting hypothesis
Forecasting
Researching with the actual information and the forecasts
04. Economic Institutions
The places which are influencing us in our day today life and which are located
surrounding us could be identified as economic institutions.
In order to understand the application of economic theory, it is compulsory to
know about these economic institutions.
Economic institutions comprise of the collection of historical incidents, cultural
characteristics, political influences, social behavior, and regulatory system.

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 Introduction to Economics

05. Economic Policies

Economic policies refer to the actions taken by the government which influence
on the economic units. In other words these are the tools used by a government
to operate the economic system.
Eg when the unemployment is a major problem of an economy, government
should device policies to minimize unemployment.
It is important to understand properly the theory and the institution structure to
device economic policies.

Theoretical Components
There are few components in the scientific theories.
earatr
Variables

An event which may change and where such change could be qtántitatively measured
is identified as a variable. Basic elements of any theory are its variables. There is a set
of definitions which explain the variables in a theory
Assumptions
The summarized statements which explain the conditions under which a theory
should be applied are identified as assumptions. Assumptions are made to easily
understand a theory.

Hypothesis
This is a statement which shows the relationship among the variables. Through a
theory, hypothesis is testéd. If the hypothesis is proven through the theory, then that
theory would bearealistic theory.
Forecasts/Ptedictions
Theforeeasts ofá certain theory are the conclusions that can be made through that
theory A scientific forecast is expressed with some conditions. Therefore a scientific
forecastis diferent from a prediction.

Tests

Any theory is tested through the comparison of forecasts with the actual incidents. It
should be observed whether the forecasts made based on the theory are actually
happened or not.

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 Introduction to Economics

Constructing a theory/Model in economics

Properly identifieng the problem

Selecting the neccessary variablesdescribe the

to
problem and making assumptions

Constructing Hypothesis

Forecasting Based on the Hypothesis

Observing the Actual Results

Arriving into conclusions whether to accept or reject

based on the comparison between hypothesis and the
actual results

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 Introduction to Economics

Positive Economics & Normative Economics

Positive Economics
Positive economics is the study of a certain situation,

Which is currently prevailing (What is happening?)

Which prevailed in the past (What has happened?)
Which will prevail in the future (What will happen?)
Positive economic statements are highly objective (theoretical) and do not depend
upon the personal judgments. These can be scientifically proven. There a r e no
arguments regarding the positive economic statements among the economistsand they
are commonly accepted. The positive statements may be true or false

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Normative Economics

Normative economics is the study of a certain situation which should prevail or what
should happen. These statements are highly based on personal judgments (subjective).
The normative statements may be decided upon religion, culture and rituals of the
person who make them. These statementscannot be scientifically proved.

01. Identify the positivestatementoutof the following statements

I. Increasing the priceleyel is a severe economic problem in a society
II. The economic growth rate should be maintained at least at 10%.
IL The gqvernnent should minimize the budget deficit
IV. Therate ofinflation in Sri Lanka in 2018 was 2.1

02. Identily the pormative statement out of the following statements

Theterms of trade of Sri Lanka has depreciated by 10%
Economic growth rate of 2020 was 2.5%
L The resource allocation of a centrally planned economy is done by the
government
IV. Obtaining foreign loans to finance the budget deficit would not be
appropriate

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 Introduction to Economics

03. State whether the following statements are positive or normative

01. The per capita GDP of Sri Lanka was 4085 USDs in 2020

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02. The consolidated broad money supply has been increased by 6.71 in
year 2020
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03. The domestic savings ratio could have been at least maintained at 20%
in 2020
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04. The Sri Lankan government should not obtain loans from International
Monetary Fund
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Micro Economics & Macro Economics

Micro Economics

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Macro Economics
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