Basic concept and Ideas

What Is Economics?
Economics is a social science that focuses on the production,
distribution, and consumption of goods and services, and
analyzes the choices that individuals, businesses,
governments, and nations make to allocate resources.
Assuming humans have unlimited wants within a world of
limited means, economists analyze how resources are
allocated for production, distribution, and consumption.
The study of microeconomics focuses on the choices of
individuals and businesses, and macroeconomics
concentrates on the behavior of the economy as a whole, on an
aggregate level.

KEY TAKEAWAYS
❖ Economics is the study of how people allocate scarce
resources for production, distribution, and consumption, both
Individually and collectively.
❖ The two branches of economics are microeconomics and
macroeconomics.
❖ Economics focuses on efficiency in production and
exchange.
❖ Gross Domestic Product (GDP) and the Consumer Price
Index (CPI) are widely used economic indicators.
Microeconomics
Microeconomics studies how individual consumers and firms
make decisions to allocate resources. Whether a single person,
a household, or a business, economists may analyze how
these entities respond to changes in price and why they
demand what they do at particular price levels.
Microeconomics analyzes how and why goods are valued
differently, how individuals make financial decisions, and how
they trade, coordinate, and cooperate. microeconomics studies
how businesses are organized and how individuals approach
uncertainty and risk in their decision-making.

Microeconomics is the study of decisions made by people and

businesses regarding the allocation of resources, and prices at
which they trade goods and services. It considers taxes,
regulations, and government legislation. microeconomics
examines how a company could maximize its production and
capacity so that it could lower prices and better compete.

Microeconomics involves several key principles, including

(but not limited to):

• Demand, Supply and Equilibrium: Prices are determined by

the law of supply and demand. In a perfectly competitive
market, suppliers offer the same price demanded by
consumers. This creates economic equilibrium.
• Production Theory: This principle is the study of how goods
and services are created or manufactured.
• Costs of Production: According to this theory, the price of
goods or services is determined by the cost of the resources
used during production.
• Labor Economics: This principle looks at workers and
employers, and tries to understand patterns of wages,
employment, and income.

Macroeconomics
Macroeconomics is the branch of economics that studies the
behavior and performance of an economy as a whole. Its
primary focus is the recurrent economic cycles and broad
economic growth and development. It focuses on foreign trade,
government fiscal and monetary policy, unemployment rates,
the level of inflation, interest rates, the growth of total
production output, and business cycles
Macroeconomics studies the behavior of a country and how its
policies impact the economy as a whole. It analyzes entire
industries and economies, rather than individuals or specific
companies, which is why it’s a top-down approach. It tries to
answer questions such as “What should the rate of inflation
be?” or “What stimulates economic growth?”

Macroeconomics examines economy-wide phenomena such as

gross domestic product (GDP) and how it is affected by
changes in unemployment, national income, rates of growth,
and price levels. Macroeconomics analyzes how an increase or
decrease in net exports impacts a nation’s capital account, or
how gross domestic product (GDP) is impacted by the
unemployment rate. Macroeconomics focuses on aggregates
and econometric correlations, which is why governments and
their agencies rely on macroeconomics to formulate economic
and fiscal policy. Investors who buy interest-rate-sensitive
securities should keep a close eye on monetary and fiscal
policy.

Microeconomics vs. Macroeconomics: An Overview

Economics is divided into two categories: microeconomics and
macroeconomics. Microeconomics is the study of individuals
and business decisions, while macroeconomics looks at the
decisions of countries and governments.
Though these two branches of economics appear different,
they are actually interdependent and complement one another.
Many overlapping issues exist between the two fields.

KEY TAKEAWAYS
❖ Microeconomics studies individuals and business decisions,
while macroeconomics analyzes the decisions made by
countries and governments.
❖ Microeconomics focuses on supply and demand, and other
forces that determine price levels, making it a bottom-up
approach.
❖ Macroeconomics takes a top-down approach and looks at
the economy as a whole, trying to determine its course and
nature.
❖ Investors can use microeconomics in their investment
decisions, while macroeconomics is an analytical tool mainly
used to craft economic and fiscal policy.
Comparison Chart

BASIS FOR
MICROECONOMICS MACROECONOMICS
COMPARISON

Meaning The branch of economics The branch of economics

that studies the behavior that studies the behavior of
of an individual consumer, the whole economy, (both
firm, family is known as national and international) is
Microeconomics. known as Macroeconomics.

Deals with Individual economic Aggregate economic

variables variables

Business Applied to operational or Environment and external

Application internal issues issues

Tools Demand and Supply Aggregate Demand and

Aggregate Supply

Assumption It assumes that all macro- It assumes that all micro-

economic variables are economic variables are
constant. constant.

Concerned with Theory of Product Pricing, Theory of National Income,

Theory of Factor Pricing, Aggregate Consumption,
Theory of Economic Theory of General Price
Welfare. Level, Economic Growth.

Scope Covers various issues like Covers various issues like,

demand, supply, product national income, general
pricing, factor pricing, price level, distribution,
production, consumption, employment, money etc.
economic welfare, etc.
BASIS FOR
MICROECONOMICS MACROECONOMICS
COMPARISON

Importance Helpful in determining the Maintains stability in the

prices of a product along general price level and
with the prices of factors resolves the major problems
of production (land, labor, of the economy like inflation,
capital, entrepreneur etc.) deflation, reflation,
within the economy. unemployment and poverty
as a whole.

Limitations It is based on unrealistic It has been analyzed that

assumptions, i.e. In 'Fallacy of Composition'
microeconomics it is involves, which sometimes
assumed that there is a doesn't proves true because
full employment in the it is possible that what is true
society which is not at all for aggregate may not be
possible. true for individuals too.

❖ Positive vs. Normative Economics: An Overview

Positive economics and normative economics are two standard

branches of modern economics. Positive economics describes
and explains various economic phenomena, while normative
economics focuses on the value of economic fairness or what
the economy should be.
To put it simply, positive economics is called the "what is"
branch of economics. Normative economics is considered the
branch of economics that tries to determine the desirability of
different economic programs and conditions by asking what
"should" or what "ought" to be.
KEY TAKEAWAYS
❖ Positive economics describes and explains various economic
phenomena.
❖ Normative economics focuses on the value of economic
fairness, or what the economy "should be" or "ought to be."
❖ While positive economics is based on fact and cannot be
approved or disapproved, normative economics is based on
value judgments.
❖ Most public policy is based on a combination of both positive
and normative economic

Positive Economics
Positive economics is a stream of economics that focuses on
the description, quantification, and explanation of economic
developments, expectations, and associated phenomena. It
relies on objective data analysis, relevant facts, and associated
figures. It attempts to establish any cause-and-effect
relationships or behavioral associations which can help
ascertain and test the development of economic theories.
Positive economics is objective and fact-based where the
statements are precise, descriptive, and clearly measurable.
These statements can be measured against tangible evidence
or historical instances. There are no instances of approval-
disapproval in positive economics.
Here's an example of a positive economic statement:
"Government provided healthcare increases public
expenditures." This statement is fact-based and has no value
judgment attached to it. Its validity can be proven (or disproven)
by studying healthcare spending where governments provide
healthcare.
Normative Economics
Normative economics focuses on value-based judgments
aimed at improving economic development, investment
projects, and the distribution of wealth. Its goal is to summarize
the desirability (or lack thereof) of various economic
developments, situations, and programs by asking what should
happen or what ought to be.
Normative economics is subjective and value-based, originating
from personal perspectives or opinions involved in the decision-
making process. The statements of this type of economics are
rigid and prescriptive in nature. They often sound political,
which is why this economic branch is also called "what should
be" or "what ought to be" economics.
An example of a normative economic statement is:
"The government should provide basic healthcare to all
citizens." As you can deduce from this statement, it is value-
based, rooted in personal perspective, and satisfies the
requirement of what "should" be.

Scarcity
Scarcity explains the basic economic problem that the world
has limited or scarce resources to meet seemingly unlimited
wants. This reality forces people to make decisions about how
to allocate resources in the most efficient way possible so that
as many of their highest priorities as possible are met.
For example, there is only so much wheat grown every year.
Some people want bread and some would prefer beer. Only so
much of a given good can be made because of the scarcity of
wheat. How do we decide how much flour should be made for
bread and beer? One way to solve this problem is a market
system driven by supply and demand.

We live in a world of limited resources that requires choices

about how they are allocated. In that sense, every product
down to a pack of gum or a book of matches is scarce, since
someone expended resources that could have been deployed
elsewhere to produce it.
Scarcity is so fundamental to economics that scarce goods are
also known as economic goods. In economics, scarce goods
are those for which demand would exceed supply at a price of
zero. Some natural resources that may appear to be free
because they are easily and widely accessible eventually prove
scarce as they are depleted from overuse in a tragedy of the
commons. Economists increasingly view clean air and a climate
compatible with human welfare as scarce goods because of the
significant cost of protecting them, and may place a price on
them for the purposes of a cost-benefit analysis.

KEY TAKEAWAYS
❖ In economics, the concept of scarcity conveys the
opportunity cost of allocating limited resources.
❖ Scarce goods are those for which demand would exceed
supply if they were free
❖ Common resources like clean air and a sustainable climate
have been increasingly recognized as scarce goods with
costs as well as value.
❖ Scarcity can also be used to denote the relative availability of
production inputs or the decrease in the supply of a resource
or product relative to demand over time.
Choice:
Choice refers to the ability of a consumer or producer to decide
which good, service or resource to purchase or provide from a
range of possible options.
Because of resource scarcity, economic agents must make
choices. Making choices not only applies to consumers but also
businesses and governments. We have to make choices about
the money and time we have. What items should we choose?
How much money should we save? How to divide time
between family and work?

Businesses must decide how to meet the needs and desires of

consumers with existing resources. They must decide:
❖ Types of products and services what to produce
❖ How to produce it efficiently
❖ How to distribute them to consumers

Why do we have to make choices?

Choice arises as a result of economic scarcity. Scarcity occurs
because finite economic resources must meet our infinite
needs and wants.
if we choose something, we sacrifice others. If you have money
to buy sports shoes, you might have to decide between Nike or
Adidas. You cannot buy both because your money (resources)
is not enough. And you have to choose one. Such a situation
also applies to other economic resources, such as natural
resources, capital, labor, and even time.
I will give you three examples of economic choices.
Leisure or work. You have to decide whether to spend more
leisure to have fun or work. If you have more time to have fun,
you sacrifice opportunities to get more money. But you are
happier. And, if you work more, you have less free time. You
are unhappy and even stressed by being a workaholic. But,
more work means more money you get.
Renting or buying an apartment. Buying an apartment is a
wish. But that is not the right choice if you do not have enough
money. You might prefer to rent an apartment. And, conversely,
if you have enough money, buying an apartment might be a
better option, depending on your wishes.
Public transportation or private vehicles. Driving your car
makes you more time to do personal things than take public
transit. But, you have to bear the higher costs. And, if you take
public transportation, you save more costs. But, you do not get
much satisfaction as when you drive your car.

Making choices involves opportunity costs

From the example above, you can see each of your decision;
it requires something that you sacrifice. In economics, the cost
of sacrifice refers to the opportunity cost, more precisely, the
next best alternative you sacrifice when choosing something.
Each choice involves a level of risk. You must, of course, have
to consider the costs and benefits of the decision, not only the
current costs and benefits but also the future.

Opportunity Cost
Opportunity costs represent the potential benefits that an
individual, investor, or business misses out on when choosing
one alternative over another. Because opportunity costs are
unseen by definition, they can be easily overlooked.
Understanding the potential missed opportunities when a
business or individual chooses one investment over another
allows for better decision making.
KEY TAKEAWAYS
❖ Opportunity cost is the forgone benefit that would have been
derived from an option not chosen.
❖ To properly evaluate opportunity costs, the costs and
benefits of every option available must be considered and
weighed against the others.
❖ Considering the value of opportunity costs can guide
individuals and organizations to more profitable decision
making.
❖ Opportunity cost is a strictly internal cost used for strategic
contemplation; it is not included in accounting profit and is
excluded from external financial reporting.
❖ Examples of opportunity cost include investing in a new
manufacturing plant in Los Angeles as opposed to Mexico
City, deciding not to upgrade company equipment, or opting
for the most expensive product packaging option over
cheaper options.

Formula and Calculation of Opportunity Cost

Opportunity Cost=FO−CO
where:
FO=Return on best forgone option
CO=Return on chosen option
Assume the expected return on investment (ROI) in the stock
market is 12% over the next year, and your company expects
the equipment update to generate a 10% return over the same
period. The opportunity cost of choosing the equipment over
the stock market is 2% (12% - 10%). In other words, by
investing in the business, the company would forgo the
opportunity to earn a higher return.

Production Possibility Frontier (PPF)

The production possibility frontier (PPF) is a curve on a graph
that illustrates the possible quantities that can be produced of
two products if both depend upon the same finite resource for
their manufacture. The PPF is also referred to as the
production possibility curve.
PPF also plays a crucial role in economics. For example, it can
demonstrate that a nation's economy has reached the highest
level of efficiency possible.
KEY TAKEAWAYS
❖ When producing goods, opportunity cost is what is given up
when you take resources from one product to produce
another.
❖ The maximum amount that can be produced is illustrated by
a curve on a graph.
❖ The production possibility frontier (PPF) is above the curve,
illustrating impossible scenarios given the available
resources.
❖ The PPF demonstrates that the production of one commodity
may increase only if the production of the other commodity
decreases.
❖ The PPF is a decision-making tool for managers deciding on
the optimum product mix for the company

Understanding the Production Possibility Frontier(PPF)

The PPF is the area on a graph representing production levels
that cannot be obtained given the available resources; the
curve represents optimal levels. Here are the assumptions
involved:
• A company/economy wants to produce two products
• There are limited resources
• Technology and techniques remain constant
• All resources are fully and efficiently used

If a company is deciding how much of each product to produce,

it can plot points on a graph representing the number of
products made using variables based on amounts of available
resources. Keeping in mind that resources are limited, if the
desire is to produce more of one product, resources must be
taken away from the other.

For example, if a non-profit agency provides a mix of textbooks

and computers, the curve may show that it can provide either
48 textbooks and six computers or 72 textbooks and two
computers. This results in a ratio of about six textbooks to one
computer.
The agency's leadership must determine which item is more
urgently needed. In this example, the opportunity cost of
providing an additional 30 textbooks equals five more
computers, so it would only be able to give out one computer
with 78 textbooks. If it wanted more computers, it would need to
reduce the number of textbooks by six for every computer.

Textbooks Computers
18 11
24 10
30 9
36 8
42 7
48 6
54 5
60 4
66 3
72 2
78 1
84 0