ECO 101:PRINCIPLES OF ECONOMICS

Module Overview
This course is designed to give students a broad
view of what Principles of Economics is all about.
The contents are:
•the emergence of Economics;
•problems of households, business firms and
government in the business world,
•the economic systems and social change.
•The basics of business policy formulation and
implementation process by individuals, firms and
government in business administration.
 Aim of the Course
• The aim of the course is to enable
students have a sound knowledge of basic
economic concepts, problems and
government intervention. At the end of the
course, students will know the economic
way of thinking.
 Week 1: Introducing Economics
Various Definitions of Economics:
• An enquiry into the nature and causes of the wealth of nations.
(Adam Smith, 1776).
• A practical science of the production and distribution of wealth.
(J S Mill).
• The study of mankind in the ordinary business of life. (Alfred
Marshall).
• A science which studies human behavior as a relationship
between ends and scarce means among alternative uses. (Prof
Robbins).
• Last definition is more acceptable and that is why modern
economics is based upon the theory of scarcity and choice.
 Economics as a Social Science
• Economics is considered to be a science
because it employs scientific tools of analysis
in its methodology. The basic stages involved
in scientific enquiry include:
• 1. Statement of the problem.
• 2. Formulation of hypothesis.
• 3. Data collection and interpretation.
• 4. Verification and conclusion.
 Economics as a Social Science
• The above four stages are involved under
scientific investigation. These stages are also
used by economics as a way of investigation.
• When problems are stated, then a hypothesis
is formed, Ho and H1. That is null and
alternative hypothesis. After this, relevant
data is collected which can be used to test the
hypothesis.
• Accepting Ho, means rejecting H1 and vice
versa.
 Economics as a Social Science

• If Ho is accepted, then H1 is rejected and a

conclusion can be reached and a fact is
established.
• If Ho is rejected however, it means that the
researcher will have to go on and collect new
data and probably follow a different
methodology until a given fact is established.
That is under verification and conclusion.
 Week 2: Basic Concepts

• Economic goods.
• Resources.
• Human wants.
• Scarcity.
• Choice.
• Scale of Preference.
• Opportunity Cost.
 Basic Concepts

• Economic Goods: These are goods that we

make use of in our daily activities. They
comprise of both consumer and producer
goods, as well as durable and none durable
goods.
• Economic goods have three important
characteristics:
• 1. They are scarce.
• 2. They possess utility.
• 3. They command a price.
 Basic Concepts

• Resources:
• These are resources consisting of land, labour,
capital, entrepreneurship, and raw materials
that are used in the production of goods and
services for the satisfaction of human wants.
• Human Wants:
• This is the human desire to possess economic
goods which is unlimited. Human wants are
many and not all of them can be satisfied.
 Basic Concepts

• Scarcity:
• This refers to non availability of resources that
can be used to produce economic goods for the
satisfaction of human wants. So, we conclude
that resources are scarce, they are not enough
to produce all what we need in our society.
• Choice:
• The problem of scarcity of resources leads to
the issue of choice. Since resources are scarce,
individuals, business firms and governments are
forced to make choices.
 Basic Concepts

• Scale of Preference:
• In making a choice, individuals, business firms
and governments are forced by nature to
arrange all their unsatisfied wants in their
order of importance. This is called scale of
preference. For example, a particular student
may have his scale of preference a:
• 1. Car.
• 2. Latest Handset.
• 3. Latest Laptop.
• 4. latest Wristwatch.
 Basic Concepts

• The above example of a scale of preference

can be the same with that of another student,
but it is not necessary that they must be the
same.
• Opportunity Cost:
• This is the cost of the forgone alternative. It is
the sacrifice involved in order to get
something. You give up something in order to
get something else because of the problem of
scarcity. It is the real cost.
 Basic Problem of Society

• The basic problem of every society is that of

limited resources and unlimited wants. Human
wants are so many, but the resources which can
be used to produce economic goods for the
satisfaction of human wants are limited. Thus
every society is faced with the problem of
scarcity and choice. To solve this problem, the
society must be able to answer three important
questions:
• 1. What to produce?
• 2. How to produce?
• 3. For whom to produce?
 PRODUCTION POSSIBILITY CURVE
• In economics, a production–possibility frontier
(PPF), sometimes called a production–possibility
curve, production-possibility boundary or product
transformation curve, is a graph representing
production tradeoffs of an economy given fixed
resources. In its microeconomic applications the
graph shows the various combinations of amounts
of two commodities that an economy can produce
(e.g., number of guns vs kilos of butter) using a
fixed amount of each of the factors of production.
 PRODUCTION POSSIBILITY CURVE
• At the macroeconomic level it can be used to depict
other rivalrous trade-offs like savings versus
consumption. Graphically bounding the production set
for fixed input quantities, the PPF curve shows the
maximum possible production level of one commodity
for any given production level of the other, given the
existing state of technology. By doing so, it defines
productive efficiency in the context of that production
set: a point on the frontier indicates efficient use of the
available inputs, while a point beneath the curve
indicates inefficiency.
 PRODUCTION POSSIBILITY CURVE
• PPFs are normally drawn as bulging upwards (“convex”)
from the origin but can also be represented as bulging
downward or linear (straight), depending on a number of
factors. A PPF can be used to illustrate a number of
economic concepts, such as scarcity of resources (i.e., the
fundamental economic problem all societies face),
opportunity cost (or marginal rate of transformation),
productive efficiency, allocative efficiency, and economies
of scale. In addition, an outward shift of the PPF results
from growth of the availability of inputs such as physical
capital or labour, or technological progress in our knowledge
of how to transform inputs into outputs.
 PRODUCTION POSSIBILITY CURVE
• Such a shift allows economic growth of an economy
already operating at its full productivity (on the PPF),
which means that more of both outputs can be produced
during the specified period of time without sacrificing
the output of either good. Conversely, the PPF will shift
inward if the labor force shrinks, the supply of raw
materials is depleted, or a natural disaster decreases the
stock of physical capital. However, most economic
contractions reflect not that less can be produced, but
that the economy has started operating below the
frontier—typically both labor and physical capital are
underemployed.
PRODUCTION POSSIBILITY CURVE
PRODUCTION POSSIBILITY CURVE
 Factors of Production

• These are resources that are used for the

production of goods and services in order to
satisfy human wants. These factors include
land, labour, capital and the entrepreneur.
• 1. Land: This refers to all free gifts of nature. It
consists of the earth surface, rivers, forest and
forest reserves, oceans and even mineral
deposits that can be obtained from land. Land
as a factor of production is immobile. In other
words, it cannot be moved from one place to
another. The supply of land in every country is
fixed.
 Factors of Production

• 2. Labour: This refers to human mental and

physical effort that is used in production.
Unlike land, labour is a mobile factor of
production as it can move from one location
to another and from one occupation to
another. Land can move occupationally but
geographically it cannot move. Among the
factors that influences the supply of labour in
a given country we have:
• A) School leaving age.
• B) Male or female.
 Factors of Production

• C) Age of the worker.

• D) The wage rate.
• E) Level of education.
• The supply of labour curve is an upward
sloping curve showing a positive relationship
between labour supply and the wage rate
holding other factors constant. In other words,
the higher the wage rate the higher the labour
supply and the lower the wage rate the lower
the labour supply.
 Factors of Production

• 3. Capital: Capital refers to wealth that is used

for the creation of other wealth. It is mainly
divided into two. We have fixed capital and we
have circulating capital. Fixed capital consists
of machine and equipment, buildings and
factory plant. While circulating capital consists
of money that is used to buy variable factors
of production, which re then transformed into
output and sold in the market, after selling the
same money again used to purchase more raw
materials that are used in the production of
output.
 Factors of Production

• 4. Entrepreneurship: This is the organizer of

production. He organizes factors of production
to produce output for the satisfaction of
human wants. He alone bears the risks of a
business and enjoys all the profits when they
are made. The basic decision of what to
produce, the production method to be
followed and where the industry should be
sited are all carried out by the entrepreneur.
 Week 3: Basic Tools in Economic Analysis
• The Coordinate graph:
• Coordinate geometry deals with graphing (or plotting) and
analyzing points, lines, and areas on the coordinate plane
(coordinate graph).
• Each point on a number line is assigned a number. In the same
way, each point in a plane is assigned a pair of numbers. These
numbers represent the placement of the point relative to two
intersecting lines.
• In coordinate graphs (see Figure below), two perpendicular
number lines are used and are called coordinate axes. One axis is
horizontal and is called the x‐axis. The other is vertical and is
called the y‐axis. The point of intersection of the two number lines
is called the origin and is represented by the coordinates (0, 0).
An Example of a
 Basic Tools in Economic Analysis

• Tables:
Price of Eggs Quantity Demanded
7 5
6 10
5 15
4 20
3 25
2 30
1 35
 Basic Tools in Economic Analysis

• Curves:
 Basic Tools in Economic Analysis

• Curves: