The document provides an introduction to economics. It defines economics as the study of how societies allocate scarce resources to satisfy unlimited wants. It identifies Adam Smith as the father of economics and discusses how he introduced economics as a social science that studies human behavior. The document also summarizes the key concepts of microeconomics, macroeconomics, positive and normative economic statements, and the basic economic problems of what to produce, how to produce, and for whom to produce.

1. Introduction to
economics©

2. RASHAIN PERERA
077 059 37 52
rashainperera@gmail.com
Prepared by

3. Who is the Father of
economics?????
Adam Smith

5. Introduced economics
through….

6. What is economics??? Define
economics????

7.  Economics is the social science that aims
to describe the factors which determine
the production, distribution and
consumption of goods and services

8. What is economics?
 Adam Smith is considered to be the father
of economics
 Is a social science
 Studies human behavior
 Teaches how to take rational decisions
 Society is the laboratory concerned with
any test related to economics
 Can be basically divided into two branches
as micro and macro economics according to
the scope

9. Micro-economics
 Is a study of individual parts
 Study how individual parts known as micro
economic agents takes decisions in the
dynamic environment
 Look at one economic agent at once and
come up with informational phrases or
economic statements
 Ex; market demand for SOAP

10. Macro-economics
 Studies the economy in aggregate
 Look at the entire economy as a whole and
come up with economic statements.
 Ex; inflation rate

11.  As you can see, the primary objective of
both micro and macro economics is to give
or generate economic statements.
 Now let us classify economic statements

12. Economic statements
 There are two types of economic
statements
 They are positive and normative economic
statements

13. Positive economic statements
 Deals with facts
 Can be proved
 Can be measured
 Realistic
 Objective
 Quantitative
 Ex; disposable income is the income that is
arrived after deducting taxes from gross
earnings

14. Normative economic statements
 Can not be measured
 Is only a judgment
 Subjective
 Qualitative
 Words such as aught to and should to are
used
 Ex; minimum wage should be increased in
an effort to increase standards of living

15.  Now try to present your own examples for
 Positive macro economic statements
 Positive micro economic statements
 Normative macro economic statements
 Normative micro economic statements
Test your understanding

16. Why do we study economics???
What is the purpose???

17. What gave birth to the subject
economics?
 Scarcity

19. What is scarcity?
 Amal wants to buy an iphone ..hmm a
macbook. .and…an.ipod…ipad..and ……….
 What?
 But has Amal got enough money to buy
them all?
 No 

20. Scarcity……….
 The gap between unlimited wants and
limited resources could be simply known as
scarcity
 In the previous example Amal had lot of
wants but he didn’t have enough money to
buy them all
 So he should make a choice
 This is simply called economizing

21. What is “Economizing”?
 Economizing simply means avoiding wastes
or reducing expenditures.
 Economics teaches how to economize
 To economize, we have to take rational
decisions

22. Rational decisions? What is that?
 A method for systematically selecting
among possible choices that is based on
reasons and facts.
 In a rational decision making process, a
business manager/individual/decision
maker will often employ a series of
analytical steps

23. So u say to make a choice?
 We cant have all what we want.
 We have to make choice among alternative
options available
 This is simply known as “choice”.

25. So what about other options?
 As mentioned before we cant have all what
we want.
 Its due to scarcity.
 So we have to make a choice
 Choice involves an opportunity cost

26. Opportunity cost?
 The cost of the next best alternative
forgone when making a choice can be
simply known as opportunity cost
 Opportunity cost can be measured by
dividing forgone production by increased
production.

27.  What is the opportunity cost of holding
money?
 What is the opportunity cost of economic
growth?
 What is the opportunity cost of going for a
movie cutting the lecture?
 What is the opportunity cost of marriage?
Test your understanding

28.  A person is available with following options
 Option 1; investing 1mn in a business and
getting a salary of 10k per month
 Option 2; making a deposit at 10% interest p.a.
 Option 3; holding the money in hand
 Determine the opportunity cost of
selecting option 1
Test your understanding

29.  X and Y are produced in ABC limited using
the same machine. To produce 100 more
units of X, 250 units of Y should be
sacrificed. What is the opportunity cost of
producing one unit of X?
Test your understanding

30. Scarcity, alternative options,
choice and opportunity cost??? All
inter-related??
 Yes it is
Scarcity
Alternative
options
Choice Opportunity
cost

31.  A busy girl finds time to be scarce
 She can either marry or not marry
(options)
 So she decides not to marry (choice)
 The opportunity cost is the marriage
forgone or the love, family responsibilities
she has to give up.

32. Needs
 Essential requirements
 Basic
 Primary
 Taken from birth
 Common
 Limited
 Broader concept
 Can be shown in terms of a hierarchy

33. Self actualization needs
Esteem needs
Social needs
Health and safety needs
Physiological needs
Maslow’s hierarchy of needs

34.  Ways of satisfying needs
 Vary
 Secondary
 Unlimited
 Business create
 Narrow concept
 No theories introduced as yet
Wants

35. What are the solutions for needs
and wants?
 Goods and services
 In economics the term goods refers to
both goods and services
 Goods are the final outcome of production
process
 Hence studying on production process is
vital

36. Production process
 What are economic inputs?
 Economic inputs are:
 Factors of production
 Factors of productivity
Input Process Output

37. Factors of production
 Property resources
 Land
 Capital
 Human resources
 Labour
 Entrepreneurship
 Time
 Knowledge
 Skills
 Experiences

38.  Includes all the natural resources
 The supply of land is limited
 Immobile
 Productivity of land can be improved
through
 Cultivation
 Fertilizing etc.
 Land is used in production and the return
given is RENT. (factor payment/factor
income)
Land

39.  Live factor
 Labor productivity can be improved
through
 Training, education etc
 Factor payment is WAGE
 Can be moved
 P.S. the composition, activity rates and
many theories of labor will be covered in
unit 10
Labour

40.  Is a man made resource
 Improves the productivity of the
production
 The return is INTEREST
 There are various types of capital
 Human capital
 Natural capital
 Social capital
 Infrastructure
 Money capital
 Fixed capital
 Working capital
Capital

41.  Investment is the way of generating
capital
 Savings are the sources of investments
 Gross investments include depreciation
 Net investment excludes depreciation
Capital V Investments

42.  Combines all the other factors of
production
 Manages the production
 Takes decisions
 Bears risks
 Innovates
 Plan the production
 Return is PROFIT/LOSS
Entrepreneurship

43. Factors of productivity
 Human capital
 Technological developments
 Specialization and division of labour
 Management and administration

44.  Assigning different tasks to different
people in the same production line can be
simply known as division of labour
 For an example a person might be assigned
to cut the clothes only where another
person is assigned to sew.
Division of labour

45.  Specialization is the special ability or skill
gained by an individual by performing a
certain task for a long period of time
 DOL results in specialization
 Levels of specialization
 Personal
 Institutional
 Regional
 National
Specialization

46.  Explain how factors of productivity
contributes to the improvement of the
productivity of the production process?
(10 marks)
 Introduction & conclusion – 2marks
 Explanation of each FOP – 2*4=8marks
Test your understanding

47. Resources? Economic input?
 Yes
 Factors of production and productivity
together stands for “RESOURCES”
 Resources are inputs that can be used up in
production
 Anything that can be used in production is
a resource.

48. Classification of resources
 Economic resources Vs non economic
resources
 Renewable resources Vs non renewable
resources
 Finite and infinite resources

49. Economic resources Non economic resources
The resources that are scarce in
relation to the demand are simply
known as economic resources
Scarcity involves making a choice,
therefore consumption or extraction
of economic resources involves an
opportunity cost
Abundant in supply
No opportunity cost involved
Economic resources V non-
economic resources

50.  Renewable resources are the resources that
re-generates themselves with their usage. Ex;
forests
 Non renewable resources are the resources
that exhaust with the usage. Ex; minerals, oil
etc
 Note; since all the resources here in
consideration are natural ,this
classification is also the classification of
LAND
Renewable resources V non-
renewable resources

51.  Finite resources are those that are limited
in supply
 Infinite resources are those that are
unlimited in supply
Finite V infinite resources

52.  Now try to give examples for each of the
following
 Finite non renewable resources
 Finite renewable resources
 Economic resources
 Non economic resources
Test your understanding

53. What are the economic outputs?
 Goods and services
 Anything that satisfies a want for a need
can be known as a good or a service

54. Classification of goods
 Economic goods Vs non economic
goods/free goods
 Consumer goods Vs producer goods
 Consumer goods
 Durable consumer goods
 Non durable consumer goods
 Producer goods/industrial goods
 Investment goods/Capital goods
 Intermediate goods

55. Economic goods Non economic goods
Are scarce in relation to the demand
Opportunity cost is involved
As a result of production
Has an economic value
A price can be charged
Naturally abundant in supply
No opportunity cost is involved
Naturally available
No economic value
A price can not be charged
Economic goods V non-economic
goods

56.  Explain the relationship between a non
economic good and an economic good using
a suitable example.
Test your understanding

57.  Consumer goods are the goods that
consumers buy for final consumption
purposes.
 Durable consumer goods; the consumer goods
with a relatively higher life span
 Non durable consumer goods; shorter life span
Consumer goods

58.  These are the goods that are used to make
other goods and services
 Investment goods/capital goods; the goods
that helps in production. Most of them are non
current assets. Ex; Machines
 Intermediate goods; is a final good that is a
part of the final product. Ex; tire is a final
product that is a part of the car
Producer goods/industrial goods

59. Production = Productivity????
 No!!!!! 
 Productivity is the relationship between
output and the input
Productivity= output / input
 Production is the conversion of input into
outputs.

60. What is economic efficiency?
 “Doing the thing right”
 Can be divided in to 2
 Allocative efficiency; Allocative efficiency
occurs when MB=MC. In other words if
resources are allocated optimally is said that
Allocative efficiency exists.
 Productive efficiency; productive efficiency
can be defined as producing goods and services
for the lower cost

61.  Productive efficiency
 Full employment
 Full production
 Allocative efficiency
 MB=MC
 MC=P
Measurement criteria

62. What is effectiveness?
 “Doing the right thing”

63. Inter relationship among
effectiveness, efficiency and
productivity.
Productivity = effectiveness / efficiency
productivity = output / input

64. Basic economic
problems

65. What are basic economic
problems?
 Are also called central/fundamental
economic problems
 The economic problems arise due to two
main reasons.
 Human wants are unlimited
 But means to satisfy wants are limited
 In other words due to scarcity of
resources.

66. What are the basic economic
problems?
 What in what quantity to produce?
 How to produce?
 For whom to produce?

67. What in what quantity to produce?
 This is a problem of resource allocation
 Decide what goods to produce
 Determine or estimate the demand of
products to be used in production decisions
so that resources are not wasted or over
used

68. How to produce?
 Deciding the means of production
 This is a production problem
 Deciding the method or technique of
production
 Either labour intensive method
 Or capital intensive method
 Land intensive
 Technology intensive

69. For whom to produce?
 This is a distribution problem
 A product can be targeted at
 poor people
 Or rich people
 Or entire community

70. Static efficiency
 Static advantage occurs when an economy
is able to solve all 3 basic economic
problems in an efficient way at once

71. Dynamic efficiency
 Dynamic advantage occurs when all three
basic problems are optimally solved over a
long period of time.
 If the economy achieves static efficiency
over a period of time then it is dynamically
efficient

72. Scarcity
Rational decisions
Economizing
Options
Choice
Opp. cost
Basic economic
problems