Course Content
Definition of economics Basic economic concepts: economic resources, human wants, scarcity and choice, opportunity cost, production possibility curves/frontiers Scope of economics: Micro and macro economics Methodology of economics: positive and normative economics, scientific methods, economics as a social science. Economic systems: free market economy, mixed economy.
Definition Individual demand versus market demand Factors influencing demand Exceptional demand curves Types of demand Movement along and shifts of demand curves Elasticity of demand Types of elasticity: price, income and cross elasticity Measurement of elasticity; point and arc elasticity Factors influencing elasticity of demand Application of elasticity of demand in management and economic policy decision making
Definition Individual versus market supply Factors influencing supply Movements along and shifts of supply curves Definition of elasticity of supply Price elasticity of supply Factors influencing elasticity of supply Application of elasticity of supply in management and economic policy decision making
Interaction of supply and demand, equilibrium price and quantity Mathematical approach to equilibrium analysis Stable versus unstable equilibrium Effects of shifts in demand and supply on market equilibrium Price controls Reasons for price fluctuations in agriculture
Approaches to the theory of the consumer - cardinal versus ordinal approach Utility analysis, marginal utility (MU), law of diminishing marginal utility (DMU) Limitations of cardinal approach Indifference curve analysis; Indifference curve and budget line Consumer equilibrium; effects of changes in prices and incomes on consumer equilibrium Derivation of a demand curve Applications of indifference curve analysis: substitution effect and income effect for a normal good, inferior good and a giffen good; derivation of the Engels curve Consumer surplus /Marshallian surplus
Factors of production Mobility of factors of production Short run analysis Total product, average and marginal products Stages in production and the law of variable proportions/the law of diminishing returns Long run analysis Isoquant and isocost lines The concept of producer equilibrium and firm’s expansion curve Law of returns to scale Demand and supply of factors of production Wage determination theories Trade unions: functions and challenges Producer surplus/economic rent/Marshallian surplus
Short run costs analysis and size of the firm’s total cost, fixed cost, average cost, variable costs and marginal cost Long run costs analysis Optimal size of a firm Economies and diseconomies of scale
Definition of a market Necessary and sufficient conditions for profit maximization Mathematical approach to profit maximization Output, prices and efficiency of: perfect competition, monopoly, monopolistic competition, oligopolistic competition
Definition of national income Circular flow of income Methods/approaches to measuring national income Concepts of national income: gross domestic product (GDP), gross national product (GNP) and net national product (NNP), net national income (NNI) at market price and factor cost, disposable income Difficulties in measuring national income Uses of income statistics Analysis of consumption, saving and investment and their interaction in a simple economic model Determination of equilibrium national income Inflationary and deflationary gaps - The multiplier and accelerator concepts - Business cycles/cyclical fluctuations
The differences between economic growth and economic development Actual and potential growth The benefits and costs of economic growth Determinants of economic development Common characteristics of developing countries Role of agriculture and industry in economic development Obstacles to economic development The need for development planning Short term, medium term and long term planning tools Challenges to economic planning in developing countries
The nature and functions of money Demand and supply of money Theories of demand for money: The quantity theory, the Keynesian liquidity preference theory
Definition of commercial banks The role of commercial banks and non-banking financial institutions in the economy Credit creation Definition of central bank The role of the central bank; traditional and changing role in a liberalised economy, such as financial sector reform, exchange rate reform Monetary policy, definition, objectives, instruments and limitations Determination of interest rates and their effects on the level of investment, output, inflation and employment Harmonisation of fiscal and monetary policies Simple IS–LM Model Partial equilibrium and general equilibrium
Definition and types of inflation Causes of inflation: cost push and demand pull Effects of inflation Measures to control inflation
Definition of unemployment Types and causes of unemployment Control measures of unemployment Relationship between unemployment and inflation: the Phillips curve
Definition of International trade Theory of absolute advantage and comparative advantage World trade organization (WTO) and concerns of developing countries Protection in international trade Regional integration organizations, commodity agreements and the relevance to less developed countries (LDCs) Terms of trade, balance of trade, balance of payments (causes and methods of correcting deficits in balance of payments), exchange rates, types of foreign exchange regimes, factors influencing exchange rates, foreign exchange reserves International financial institutions: International Monetary Fund (IMF) and World Bank National debt management: causes and interventions Structural Adjustment Programmes (SAPs) and their impacts on the LDCs
CPA 004: Economics
About Lesson
  • Economics comes out as an evolutionary discipline.
  • It is scientific and begins with the formulation of a theory about behavior.
  • For example, we may argue that its price determines the demand for a good. Based on this, we may reason that as the price increases, demand goes down, while if the prices are decreased, the demand will go up. This then gives us a hypothesis that can be tested on observed behavior. This testing of ideas on the evidence is known as empiricism.

Ceteris Paribus 

  • Ceteris paribus is a Latin phrase that generally means “all other things being equal.”
  • In economics, it acts as a shorthand indication of the effect one economic variable has on another, provided all other variables remain the same.
  •  It is used in economics to rule out the possibility of ‘other’ factors changing, i.e. the specific causal relation between two variables is focused.
  • The economic world is complicated. There exist a lot of cause-effect relationships. One possible way of figuring out economic laws in such a setting is by controlled experiments.
  • A controlled experiment takes place when everything else but the item under investigation is held constant.
  • This is an essential component of scientific methods. When formulating economic principles, economists usually state that such and such will happen, ceteris paribus, the Latin expression meaning all other things remaining constant.

Methodology of Economics

Positive vs. Normative Economics

  • Whereas Positive economics describes and explains various economic phenomena, normative economics focuses on the value of economic fairness or what the economy “ought” to be.
  • Simply put, positive economics is called the “what is” branch of economics.
  • On the other hand, normative economics is considered the branch of economics that tries to determine people’s desirability to different economic programs and conditions by asking what “should” be or what “ought” to be.

Positive Economics 

  • It is a discipline that studies the description, quantification, and explanation of economic processes, expectations, and other related phenomena.
  • It is founded on objective data analysis, pertinent facts, and figures.
  • It looks for any cause-and-effect correlations or behavioral associations that can assist with economic theory formulation and testing.
  • It is fact-based and objective, with claims that are explicit, descriptive, and measurable.
  • These assertions can be contrasted to historical examples or verifiable proof.
  • There are no approval-disapproval situations in positive economics.
  • Consider the following example of a positive economic statement: “State healthcare increases government spending.” This statement is fact-based and does not involve any value judgments. Examining healthcare expenditures in areas where governments provide care can confirm (or refute) their validity.
  • Positive economics is empirically supported and cannot be denied.

Normative Economics 

  • Normative economics is concerned with ideological, prescriptive, value judgments, and “what should be” comments on economic development, investment initiatives, and situations.
  • Its goal is, to sum up, people’s desire (or lack thereof) for various economic outcomes, conditions, and programs by asking or quoting what should happen or be.
  • It is subjective and value-based, arising from the decision-making process’s viewpoints, feelings, or opinions.
  • The nature of normative economics claims is inflexible and prescriptive.
  • This economic branch is often known as “what should be” or “what ought to be” economics since they frequently seem political or dictatorial.
  • “The government should offer basic healthcare to all citizens,” for example, is an example of a normative economic statement. This statement is value-based, rooted in personal perspective, and meets the condition of what “should” be, as you can see.
  • To formulate policies for a country, region, industrial sector, institution, or firm, both positive and normative economic statements are required.
  • The importance of economic justice, or what the economy “should” or “ought to be,” is the subject of normative economics.

Importance of Positive and Normative Economics 

  1. Normative economic assertions are regularly employed in discussions concerning public policies, according to observations. Because neither party can demonstrate their right, such discussions tend to be more contentious.
  2. Normative claims are important channels for innovative thinking, despite being general and subjective. Such perspectives can serve as the foundation for any necessary changes that can transform a project radically.
  3. However, normative economics cannot be utilized as the only basis for making critical economic decisions.
  4. The objective approach, which emphasizes facts and cause-and-effect links, is represented by positive economics.
  5. When combined with positive economics, normative economics can aid in developing, generating, and implementing new concepts and theories for various economic goals and perspectives.

Economics as a Scientific method

  • It involves identifying a problem, gathering data, formulating a hypothesis, testing it, and assessing the results.
  • Extensive testing and observation are essential in economics since the outcome must be achieved multiple times to be valid.
  • Moreover, it must be objective and procedural.

Economics as a social science

  • As a social science, economics refers to any subject that deals with human behavior. Political science, psychology, ethics, and other social sciences are all included in the definition of social science.
  • Because it focuses on one facet of human behavior, namely, how men deal with resources, it is known as a social science.
  • It is a social science as it studies human behavior concerning the distribution of scarce resources to meet the needs of each member of society. Thus, the human dimension is included in economics and the production and distribution of commodities and services.
  • Human participation in communicating their needs and wants, what the government is doing to ensure the society’s needs and wants are met, how production is structured to cater to the society’s needs adequately, and how rules and regulations are formulated to foster a fair exchange of goods and services within the society are all part of economics.
  • Below are the most important factors of production in economics:-
  1. Land: These are natural factors. They form the source of raw materials and include lakes, minerals, sun, forests, etc.
  2. Labor: This is the physical and mental human input. It may be unskilled, semiskilled, and professional labor.
  3. Capital: These are artificial factors of production. They include factories, infrastructure, and transportation equipment, among other things.
  4. Entrepreneurship: This mainly involves human innovation or the ability to organize the other factors of production to meet set goals or achieve solutions to societal needs concerning goods and services in the face of risk.

Use of Models in Economics

  1. An economic model is a simplified representation of reality used to generate hypotheses tested regarding economic activity.
  2. A set of mathematical equations that describe a theory of economic activity is called an economic model.
  3. As we see it, the reality is the consequence of various factors—systematic, seasonal, cyclical, and random—and is far too complex to be explained in this way. Thus, before we can understand reality, we must greatly simplify it.
  4. This is accomplished by simplifying assumptions about the nature and behavior of the relationships influencing the phenomena. When viewed in this light, economic models are a simplification of reality, an abstract from reality.

Type of Models

  • Economic models can be simple or complex, depending on whether they incorporate interactions between a small number of “variables” or a significant number of them.
  • “An economic model consists merely of a group or a set of economic interactions, each of which involves at least one variable that also exists in at least one other relationship that is part of the model.”
  • Depending on the aim, a model can be built at various aggregation, detail, and sophistication levels.
  • The lowest level is a company. We investigate a monopolistic or oligopolistic corporation. The industry is the second level of analysis, and the economy is the third.
  • Models are created for two primary purposes: analysis and prediction. The well-known Marshallian Supply-Demand Cross is a simple model that is rarely mentioned but frequently used. It determines the price and amounts exchanged for a specific item by combining supply and demand dynamics.
  • There are economic models with hundreds of equations and variables.
  • All economic models, however, have the same basic structure and key features. They are all motivated by the need to create links between economic variables using mathematical logic.

The validity of a model may be judged on several criteria.

  1. Its predictive power.
  2. The realism and consistency of its assumptions,
  3. The information it provides,
  4. Its generality and universality
  5. Its simplicity. 

Variables, Parameters, and Relationships

  • In the form of mathematical equations, a model must explicitly state the many relationships between distinct variables.
  • Any quantifiable magnitude that varies and whose change we are interested in, either because of its direct importance or effect on other variables, is referred to as a variable.
  • To lay down a model’s structure is to spell out our variables’ relationships conceitedly.
  • “The existence of a functional relationship between two or more variables indicates that the variables’ values or magnitudes are somehow related in some way. A change in one variable is linked to a change in another consistently and predictably.” For example, price and amount supplied can have a straight relationship, while price and quantity sought can have an inverse relationship.
  • The associations could be between a dependent variable on the left-hand side and one or more independent variables on the right-hand side. Only one or more variables are frequently written on the right-hand side of the equation. In contrast, others are presumed to be ‘given.’
  • Parameters are variables taken for granted and do not appear in the model’s functional relationships.
  • External circumstances—subject to change but not relevant to the topic at hand—are often summarized by “other things constant.” 

Economic relationships spelling out the model are classified as: 

  1. ‘Behavioral’ relationships which reflect the voluntary choices of economic subjects, i.e., individuals and firms;
  2. ‘Institutional restraints’ which show the operations of laws or rules of behavior;
  3. Technical’ relationships reflecting technical choice; and
  4. ‘Identities’ or ‘definitions’.
  • We can solve the model to obtain the equilibrium values of the variables involved if the relationships are precise and put in a mathematical form. 
  • Economists are increasingly employing mathematical terminology to construct economic theories in the form of models.
  • In reality, the evolution of economics has been marked by an increase in the rigor and precision of ideas. As a result of this trend, complex mathematical (and now economic) models have been developed.
  • To create predictions, a model uses what we know, or think we know, about economic behavior patterns, technology, or institutions.
  • Depending on how much or how little we know, these forecasts will be more or less specific.
  • We can forecast quantitatively if the linkages are quantitatively described. 
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