Nature and Scope of Economics – Quick Review

Learning Objectives

  • Distinguish between microeconomics and macroeconomics
  • Apply scarcity, choice and opportunity cost to decision making
  • Identify and describe the factors of production
  • Differentiate positive from normative economics

Definition & Nature of Economics

  • Origin: Greek “oikos” (household) + “nemein” (management)
  • Social science on allocating scarce resources to satisfy unlimited wants; “art and science of decision-making”
  • Art: uses graphs, models, assumptions to illustrate laws
  • Science: systematic body of knowledge with universally valid laws (e.g., Law of Demand)

Scarcity, Choice & Opportunity Cost

  • Scarcity: limited supply of land, labor and capital vs unlimited wants → fundamental problem
  • Choice: selection among alternatives created by scarcity
  • Scale of preference: ranking wants by importance for rational choice
  • Opportunity cost: value of best alternative forgone when a choice is made

Central Economic Problems

  • 1 What to produce? Allocation of resources among goods & quantities
  • 2 How to produce? Choice of technique (labor-intensive vs capital-intensive) to minimize cost
  • 3 For whom to produce? Distribution of output across population (income determines access)
  • Economic growth: decide portion of resources for saving & investment to raise future living standards

Circular Flow Model

  • Agents: Households & Firms
  • Markets: Goods & Services; Factors of Production
  • Real flow (inner loop): factors \rightarrow firms; goods \rightarrow households
  • Money flow (outer loop): consumption spending \rightarrow firms; wages, rent, profit \rightarrow households

Factors of Production

  • Land: natural resources; reward = rent; free gift, immobile, fixed supply
  • Labor: human effort (mental/physical); reward = wages; non-storable, heterogeneous
  • Capital: man-made productive assets; reward = interest; mobile, produced, passive
  • Entrepreneur: organizes factors & bears risk; reward = profit; requires initiative, organization, decision-making

Branches of Economics

  • Microeconomics: analyzes individual consumers, firms, markets; pricing, factor payments, specific output levels
  • Macroeconomics: studies aggregate economy; overall price level, national income/output, employment, money supply, trade

Positive vs Normative Economics

  • Positive: fact-based, answers “what is/will be”, empirically testable
  • Normative: value-based, answers “what should be”, rooted in ethics/policy preferences, not empirically testable