This section introduces to you the subject of Economics, taking you through its importance, definition, nature and scope and basic concepts. It also briefly explains its main branches - microeconomics and macroeconomics.

Section 1: Objectives

After completing this section, you will be able to:

1. appreciate the importance of learning the subject.
2. define the nature, scope and meaning of economics.
3. explain the basic concepts of economics.

Topic 1.1  Introduction

Origin of Economics

The word "Economics" was derived from two Greek words – "Oikos" meaning a house and "Nemein" meaning to manage. In other words, Economics originally meant "household management". It meant that since most homes have limited income and this money has to be spent carefully to pay the bills, that means ‘economizing’.

Today, Economics as a subject covers a lot more than just management of finances of households.

The science of Economics was born with the publication of " An Enquiry into the Nature and Causes of Wealth of Nations" by Adam Smith in 1776. The subject was originally called "Political Economy". Different names were suggested at different times. However in 1890, Alfred Marshall used the term "Economics", which has been accepted since then.

Why do people work?

In our country and in most parts of the world, we see that most people work. We see,

• a farmer cultivating land to grow crops,
• a factory worker using machines to produce goods,
• doctors, teachers, lawyers, etc. rendering specialized services…

We thus find that the whole world is at work. But why do people work? They work to make money. And why do they do that? So that they can buy various things. Therefore, we see that people are either busy earning money or spending it.

• We need food to satisfy our hunger.
• We need clothes to protect us from heat and cold.
• We need a shelter (house) to live in.

We want a lot more things.

• Cosmetics to look good,
• Expensive cars to feel good,
• Nice clothes to impress others

But there is a catch. You are right. We have to pay for whatever we want. Product and services do not come free. They come at a price.

To buy them, we need money. That's the reason we work. So that we can earn money to buy whatever we want. Earning and spending are called economic activities.

Goods and services are scarce

All the products and services you see have to be produced. Let's say you want a pair of those great looking Levis jeans you have seen in the department store.

Let's see what goes into making those jeans. A farmer somewhere in the world cultivates cotton and sells it to companies that make yarn (thread) out of it. This yarn is then sold to companies that make cloth out of it and the cloth is then sold to Levis where it is made into those jeans that you have seen.

At every stage of production, land, labor (workers), capital (money) are used. All these are called factors of production. These factors are not unlimited. They are scarce. They can be put to various uses. Someone has to organize things. For example, the farmer can use his land to grow wheat instead of cotton. If he chooses to grow wheat then, he will have to give up cotton. So you see, these means of production are scarce making the goods they produce also scarce.

Thus, as our resources (goods and factors of production) are scarce and can be put to a variety of uses, we cannot produce all things we want. That means we will not be able to satisfy all our wants. So what do we do? We have to arrange our wants in the order of their importance. We make choices. What to buy, how much to buy and when to buy. These are economic choices. Economics is a study of these economic choices.

We learned so far that

• Our wants drive all economic activities.
• Most goods that satisfy our wants are scarce.
• They have to be produced.
• We all participate in the production of goods - as a farmer, worker, organizer, etc.
• We earn money with which we buy goods.
• Wants lead to efforts.
• Efforts give us the satisfaction.

1. Production of goods and services.
2. Distribution of goods and services.
3. Exchange of goods and services.
4. Consumption of goods and services.

Online Practice Quiz

Online Quiz
Students: You can take this online quiz as many times as you need in order to insure you understand the topic.