ECON 211 ELEMENTS OF ECONOMICS I Session 1 – What is Economics? Lecturer: Dr. (Mrs.) Nkechi S. Owoo, Department of Economics Contact Information: nowoo@ug.edu.gh

Session Overview Economics is the study of choice under conditions of scarcity. This session explores the concepts of scarce time, scarce spending power, and scarce resources. It introduces the four categories of resources: labor, capital (including physical capital and human capital), land, and entrepreneurship. It also discusses important economics concepts and terminologies.

Session Outline The key topics to be covered in the session are as follows: Economics, Scarcity and Choice Economic Terminologies The Methods of Economics How to Study Economics

Reading List Hall and Lieberman Chapter 1

Economics, scarcity and choices Topic One Economics, scarcity and choices

Economics, Scarcity, and Choice Economics- What is it? First, Economics is a social science Seeks to explain something about society Therefore, may have elements in common with other social science disciplines like psychology, sociology, political science. Difference is in what Economics studies, and how it studies it Economists ask different questions from other disciplines, and use different tools to analyze these questions.

Economics, Scarcity, and Choice Economics- What is it? Given limited resources, Economics studies how individuals choose to allocate their limited time or money to their unlimited wants Therefore, Economics may be defined as a study of choice under conditions of scarcity Scarcity is a very crucial concept in Economics This is a situation in which the amount of something available is insufficient to satisfy the desire for it Many examples of scarcity A new house, new clothes, more time to sleep, etc

Scarcity and Individual Choice Situations of scarcity, as experienced by individuals, may be classified into two main groups: Scarce time Limited number of hours in each day to satisfy our desires Examples include time to see a movie, take a vacation, etc Scarce spending power Cannot afford to buy more of the things we want Individuals would prefer to have higher incomes so that all wants can be satisfied

Scarcity and Individual Choice There time and money limitations force each of us to make choices Economists study these choices and the consequences of those choices For example, with an increase in primary school enrollment, what will be the effect on government budgets? Economists also study the indirect effects of individual choice on our society For example, as the population of Ghana ages, what will be the effect on quality and accessibility of health care for the aged? Will traffic congestion in major areas continue to worsen? These questions depend, to a large extent, on separate decisions made by millions of different people. To analyse these questions, therefore, we need to understand how individuals make decisions under conditions of scarcity

Scarcity and Social Choice We may also think about scarcity from the point of view of society, as opposed to the individual What are some of the goals of society? Better health care, better schools, good transportation systems, good national defense programs, clean water, dependable power supply, etc Society faces a scarcity of resources i.e. there is a scarcity in the resources we use to make goods and services that help us to achieve these goals. We can classify these resources into four (4) categories: Labor Capital Human capital Capital stock Land/natural resources Entrepreneurship

Scarcity and Social Choice Labour This is the time that human beings spend in the production of goods and services E.g. 8 hours a day; 3 hours a day; 400 hours a year, etc

Scarcity and Social Choice Capital Capital may be defined as a long-lasting tool that is itself produced, but also used to produce goods and services We may distinguish between two (2) main types of capital Physical capital Human Capital Physical Capital This refers to items like machinery and equipment, factory buildings, computers, hand-held tools like hammers, screw-drivers, etc These are all long-lasting physical goods that are used to make other things This refers to the skills and knowledge possessed by workers These are produced through education and training and help us to produce other things that last for a long-time E.g. a trained educator imparting knowledge to a group of students Capital Stock= Physical Capital + Human Capital Total amount of capital at a nation’s disposal at any point in time, consisting of physical and human capital that is still productively useful

Scarcity and Social Choice Land This refers to the physical space on which production takes place, as well as useful natural resources found under or on it. E.g. crude oil, iron, coal, fertile soil, etc

Scarcity and Social Choice Entrepreneurship This refers to the ability and willingness to combine the other resources (Labour, Capital and Land) into a productive enterprise E.g. the University of Ghana may be described as an entrepreneur as the institution brings together land (on which buildings are constructed), labour (time devoted to various academic activities by university employees), physical capital (e.g. desks, chairs, projectors, etc), human capital (trained educators and lecturers) to provide education and training to students.

Scarcity and Social Choice Anything produced in the economy comes ultimately from a combination of these four (4) resources As a society, our resources are insufficient to produce all the goods and services that we desire Society faces a scarcity of resources E.g. to enjoy greater quality education might imply less of society’s resources devoted to other goals like good roads, on dependable power supply.

Scarcity and Economics The scarcity of resources and the choices that this forces us to make is the source of all the problems studied in Economics Households have limited income to allocate among goods and services They must therefore choose carefully how they allocate their spending Firms want to make the highest profit possible but production is limited by costs of production They must therefore choose carefully what to produce, how much to produce and how to produce it Government agencies work with limited budgets, so goals must be carefully chosen Economists study these decisions made by household, firms and governments in order to explain how our economic system works in order to Forecast the future of the economy Suggest ways to make the future even better

Economic terminologies Topic Two Economic terminologies

Microeconomics Micro comes from the Greek word mikros, meaning “small” Studies the behavior of individual households, firms, and governments Choices they make Interaction in specific markets Focuses on individual parts of an economy i.e. households, firms and government Examines the choices that these individuals parts of the economy make Examples of microeconomics issues: How many management –trainee jobs will open up for university graduates? How would Ghanaian rice farmers be affected by a tax on imported rice?

Macroeconomics Macro comes from the Greek word makros, meaning “large” Studies the behavior of the overall economy Focuses on big picture and ignores fine details Example of macroeconomics issues The impact of higher national savings on economic growth The relationship between the inflation rate and the changes in the quantity of money

Positive and Normative Economics Positive economics: how the economy works Can be true or false Need not be sensible or even accurate E.g. Government policy has no effect on our standard of living Can be tested by looking at the facts Normative economics: what should be Value judgments, identify problems, and prescribe solutions Cannot be proved or disproved by the facts alone

Positive and Normative Economics Positive and normative statements closely related We cannot argue about how the world should run if we know nothing about how it actually runs Even normative analysis is based on underlying positive analysis While a positive analysis can, at least in principle, be conducted without value judgments, a normative analysis is always based, at least in part, on the values of the person conducting it.

Why Economists Disagree The difference of opinion may be positive in nature Facts are being disputed The disagreement can be normative Facts are not being disputed When economists have different values, they may arrive to different conclusions Example: Let us assume that the world is suffering from a recession Economist A: Increase gov’t spending to create jobs and end recession Economist B: Cut taxes and increase disposable incomes so people spend more and create jobs Disagreement - over goals and values

The methods of economics Topic Three The methods of economics

The Methods of Economics Economists rely heavily on economic models to develop economic theories Economic models are built with words, diagrams, and mathematical statements Economic models Abstract representation of reality Should be as simple as possible to accomplish its purpose Economic models are not supposed to be exactly as reality, but rather represents the world by taking specific details from the real world in order to help us to understand it better By definition, a model leaves out some features of the real world

Economic Models: Assumptions and Conclusions Each economic model begins with assumptions about the world Two types of assumptions: Simplifying assumptions The purpose of this type of assumption is to rid the model of unnecessary details so that essential details can stand out more clearly E.g. on a road map, a simplifying assumption may be that there are no trees. This assumption does not interfere in finding the route from point A to point B Critical assumptions These assumptions on the other hand affect the conclusions of a model in important ways If critical assumptions are wrong, the model will be wrong E.g. on a road map, we assume that all roads are open. If this assumption is wrong, then a conclusion on the best route to take from Point A to Point B is likely to be wrong.

The Three Step Process Economists follow the same three-step process to analyze almost any economic problem: The first two steps explain how economists build an economic model The last step explains how they use the model. We will discuss the Three Step Process in greater detail when we begin the model of Demand and Supply later in the semester

Topic Three How to study economics

How to Study Economics As one reads the textbook, it is tempting to assume that everything makes perfect sense and therefore, it suffices to read over materials only once Indeed, it is easy to follow Economics as the subject area is based largely on simple logic However, there is a difference between following and learning Economics must be studied actively, not passively Active study Reproduce what you have learned List the steps in each logical argument Retrace the cause-and-effect steps Draw the graphs Basic principles relate to what you are learning

References Economics: Principles and Applications: Hall R.E. and Lieberman M. (2008), Thomson/ South Western (4th Edition)