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

2. 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.

3. 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

4. Reading List
Hall and Lieberman
Chapter 1

5. Economics, scarcity and choices
Topic One
Economics, scarcity and choices

6. 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.

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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.

15. 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.

16. 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

17. Economic terminologies
Topic Two
Economic terminologies

18. 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?

19. 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

20. 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

21. 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.

22. 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

23. The methods of economics
Topic Three
The methods of economics

24. 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

25. 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.

26. 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

27. Topic Three
How to study economics

28. 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

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