Economics

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MICROECONOMICS

CHAPTER 1

INTRODUCTION TO ECONOMICS
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1.0 INTRODUCTION – THE SUBJECT MATTER OF ECONOMICS

Economics comes from the verb ‘to economise’, and this means making ends meet. This is a study of how society makes decisions, regarding the allocation of scarce resources. Economics as a subject is divided into two parts; Economics, social science concerned with the production, distribution, exchange, and consumption of goods and services. Economists focus on the way in which individuals, groups, business enterprises, and governments seek to achieve efficiently any economic objective they select. Other fields of study also contribute to this knowledge: Psychology and ethics try to explain how objectives are formed; history records changes in human objectives; sociology interprets human behavior in social contexts. Standard economics can be divided into two major fields. The first, price theory or microeconomics, explains how the interplay of supply and demand in competitive markets creates a multitude of individual prices, wage rates, profit margins, and rental changes. Microeconomics assumes that people behave rationally. Consumers try to spend their income in ways that give them as much pleasure as possible. As economists say, they maximize utility. For their part, entrepreneurs (see Entrepreneur) seek as much profit as they can extract from their operations. The second field, macroeconomics, deals with modern explanations of national income and employment. Macroeconomics dates from the book, The General Theory of Employment, Interest, and Money (1935), by the British economist John Maynard Keynes. His explanation of prosperity and depression centers on the total or aggregate demand for goods and services by consumers, business investors, and governments. Because, according to Keynes, inadequate aggregate demand increases unemployment, the indicated cure is either more investment by businesses or more spending and consequently larger budget deficits by government. (a) Microeconomics, which deals with individual economic decision makers or

agents, namely households, firms etc. Households as resource owners supply factors of
production to firms, and earn an income. In return households demand goods and
services produced by firms, and spend their income.

Firm in general demand and pay for factors of production from households and in
return, supply goods and services at a price, to households.

The interaction between the individual decision makers is known as the circular flow
of income, it is dealt with in detail at a later chapter.

Economics assumes that these individual economic units behave rationally: * Firms or producers always try to maximise their profits. * Households or consumers always try to maximise the satisfaction or utility they * derive from their income.

* Governments always attempt to maximise the welfare of society (b) Macroeconomics looks at the total (aggregate) picture, the practical effects of
decisions of the Economic units.

Economics as a subject makes use of normative statements of Economic and social value judgments of what society thinks ought to happen in an ideal scenario, such as Zambia winning the world cup!

Economics is also concerned with positive statements and objective explanations of what has happened in the past, and based on that, what is likely to happen in the future. Economics is a social science subject; it deals with human behaviour, which is diverse. Therefore, it is difficult to come up with blanket conclusions. The assumption, ceteris paribus “all things remain equal”, usually applies.

The subject matter of Economics is concerned with human beings “trying to make ends meet with what they have”, the basic Economic problem is that:-

* Human wants are unlimited or...
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