UNIT 1- BASIC CONCEPTS OF ECONOMICS

1.0 Economics is crucial for understanding how individuals, businesses,

governments, and societies make decisions about resource allocation
and how those decisions impact our daily lives. In this lecture, we will
explore the fundamental concepts and terminology of economics,
including microeconomics and macroeconomics, scarcity, opportunity
cost, supply and demand, and more. By the end of this lecture, you will
have a solid understanding of the basics of economics and be able to
apply economic principles to real-world scenarios.

1.1 Learning Objectives

i. Students will be able to define and explain key terms such as

scarcity, opportunity cost, supply and demand, market equilibrium,
and economic efficiency.
ii. Students will be able to identify and describe different market
structures (perfect competition, monopoly, oligopoly, etc.), analyse
consumer behaviour, and explain how markets respond to changes
in supply and demand.

1.2 Learning Content

1.2.1 The Term ‘ECONOMICS’

Economics is the social science that studies the production, distribution, and
consumption of goods and services. It examines how individuals, businesses,
governments, and societies allocate resources to meet their unlimited wants
and needs, given the scarcity of resources. Economics analyses the behaviour
of economic agents, such as households, firms, and markets, and how they
interact to determine prices, output, and income.

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The field of economics is divided into two main branches: microeconomics and
macroeconomics. Microeconomics focuses on individual economic units, such
as households and firms, and how they make decisions about resource
allocation. Macroeconomics looks at the economy as a whole, studying
aggregate variables like inflation, unemployment, and economic growth.

Economics is concerned with understanding the efficient allocation of

resources, the distribution of income, and the economic well-being of society. It
uses various tools, such as graphs, charts, and mathematical models, to
analyse economic data and forecast future trends.

The ultimate goal of economics is to improve the standard of living and

economic welfare of society by understanding how economic systems work and
how they can be improved. By applying economic principles and theories,
policymakers can make informed decisions about taxation, regulation, and
public policy, which can help promote economic growth, stability, and
prosperity.

1.2.2 Basic Terminologies and Characterisation Economics

Articulating the terminologies in Economics is best when defined under the two
(2) broad aspects: Micro and Macro Economics as described in the Introduction.

Some key concepts in Microeconomics include:

i. Scarcity
ii. Opportunity cost
iii. Supply and demand
iv. Consumer behaviour
v. Market structures (perfect competition, monopoly, oligopoly, etc.)
vi. Externalities

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Microeconomics helps us understand how markets work, how prices are
determined, and how resources are allocated. It also provides insights into
issues like:

 How consumers make decisions about what to buy and how much to pay
 How firms decide how much to produce and at what price
 How markets respond to changes in supply and demand
 How government policies affect the economy
Some key concepts in Macroeconomics include:

i. Economic cycles (boom, recession, recovery)

ii. Fiscal policy (government spending and taxation)
iii. Monetary policy (central bank control of money supply)
iv. International trade and finance
v. Economic development and growth

1.2.3 Definition of Some of the Economic Terms

i. Resources: Inputs used to produce goods and services, including
labour, capital, land, and entrepreneurship.
ii. Market: A platform where buyers and sellers interact to exchange
goods and services.
iii. Goods and Services: Tangible items (goods) and intangible activities
(services) that satisfy human wants and needs
iv. Scarcity: The fundamental problem of economics, scarcity refers to the
limited availability of resources to meet unlimited human wants and
needs.
v. Opportunity Cost: The value of the next best alternative forgone when
choosing to use resources in a particular way.
vi. Supply and Demand: The price and quantity of a good or service are
determined by the interaction of supply (quantity provided by
producers) and demand (quantity desired by consumers).
vii. Economic Efficiency: The optimal allocation of resources, achieving
the maximum satisfaction of human wants and needs.
viii. Economic Growth: An increase in the production of goods and
services in an economy over time.
ix. Inflation: A sustained increase in the general price level of goods and
services in an economy.
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x. Fiscal Policy: Government adjustments to spending and taxation to
influence the economy. It includes tools like government budgets, tax
policies, and public spending.
xi. Monetary Policy: Central bank actions to control the money supply
and interest rates to influence the economy. Key tools include open
market operations, reserve requirements, and discount rates.

1.3 Conclusion
Understanding the basic concepts of economics is crucial for analysing
how individuals, businesses, and governments allocate resources in the
face of scarcity. By studying both microeconomics and macroeconomics,
we can gain insights into how markets function, how economic policies
impact the economy, and how to improve economic well-being. These
principles and theories guide decision-making processes that aim to
promote economic growth, stability, and prosperity. Economics thus
plays a vital role in enhancing the standard of living and economic welfare
of society.
1.4 Summary

This unit introduced the basic concepts of economics, a social science

that studies how resources are produced, distributed, and consumed.
Economics is divided into two main branches: microeconomics, which
focuses on individual economic units like households and firms, and
macroeconomics, which looks at the economy as a whole, studying
aggregate variables such as inflation, unemployment, and economic
growth.
Key microeconomic concepts include scarcity, opportunity cost, supply
and demand, consumer behaviour, market structures, and externalities.
Macroeconomic concepts encompass economic cycles, fiscal policy,
monetary policy, international trade and finance, and economic
development and growth. The unit also defines fundamental economic
terms like resources, markets, goods and services, economic efficiency,
and inflation.

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1.5 Self-Study Questions
1. What is the main focus of economics as a social science?
A) Studying political systems
B) Analysing social behaviour
C) Examining the production, distribution, and consumption of goods and services
D) Understanding natural resources
Answer: C) Examining the production, distribution, and consumption of goods
and services
2. What is the primary challenge that economics seeks to address?
A) Unlimited resources and limited wants
B) Limited resources and unlimited wants
C) Unlimited wants and unlimited resources
D) Limited wants and limited resources
Answer: B) Limited resources and unlimited wants

3. Which branch of economics studies individual economic units like

households and firms?
A) Macroeconomics
B) Microeconomics
C) International Economics
D) Development Economics
Answer: B) Microeconomics

4. What is the ultimate goal of economics?

A) To maximise profits
B) To improve the standard of living and economic welfare of society
C) To stabilise the economy
D) To promote economic growth only
Answer: B) To improve the standard of living and economic welfare of society
5. What is the primary role of economics in society?
A) To create goods and services
B) To allocate resources and guide decision-making for economic well-being and
prosperity
C) To distribute income equally among all members of society
D) To regulate businesses and governments
Answer: B) To allocate resources and guide decision-making for economic
well-being and prosperity

6. What is the fundamental problem of economics?

A) Scarcity
B) Opportunity Cost
C) Supply and Demand
D) Economic Efficiency
Answer: A) Scarcity

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7. What determines the price and quantity of a good or service?
A) Supply and Demand
B) Scarcity and Opportunity Cost
C) Fiscal Policy and Monetary Policy
D) Economic Growth and Inflation
Answer: A) Supply and Demand

8. What is the goal of economic efficiency?

A) To maximize profits
B) To optimize resource allocation
C) To increase inflation
D) To reduce economic growth
Answer: B) To optimize resource allocation

9. Which policy tool adjusts government spending and taxation to influence

the economy?
A) Fiscal Policy
B) Monetary Policy
C) Supply and Demand
D) Economic Growth

Answer: A) Fiscal Policy

10. What is the increase in production of goods and services in an economy
over time called?
A) Economic Growth
B) Inflation
C) Scarcity
D) Opportunity Cost
Answer: A) Economic Growth

1.6 References/Further Reading

1. Mankiw, N. G. (2021). Principles of economics. Cengage Learning.
2. Flynn, S. M. (2018). Economics for dummies. John Wiley & Sons.
3. MIT Open Courseware:
https://ocw.mit.edu/search/?d=Economics&s=department_course_number
s.sort_coursenum

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