1 Principles Of Economics For 2 nd Semester BS Forestry Mid - Term Notes ACCORDING TO HEC SYLLABUS Prepared By: Muhammad Tabish Khan and SSG Gang Checked by: Sir Mr. Johar Zaman Composed By: Muhammad Tabish Khan The University of Agriculture Dera Ismail Khan First Edition 2 Preface Assalam o Alaikum, “ In the name of Allah, the Most Graciou s , the Most Merciful ” I am glad to present these Economics Notes to my respected teacher Sir Mr. Johar Zaman and to all my class fellows who are looking for comprehensive and perfect notes for the preparation of mid - term exams. These Notes have been made from different sources and are compiled in such an easiest way that every student can prepare him self for the economics paper and can give his/her best performance in the economics paper. Dedicated To These notes are whole heartedly dedicated to my all beloved teachers from school to university level, who have made me able to prepare these Notes. I love and respect them all. Special Thanks To I especially thank to Sir Johar for his kind guidance and attention. Special Thanks To SSG Gang who encouraged me and helped me. SSG Members : Muhammad Tabish Khan, Muhammad Kamran, Ahtasham Fareed, Muhammad Usama Bhitani, Muhammad Kafeel Asad, Malik Muhammad Farhan, Muhammad Shakeel, Muhammad Irfan, Mueen - ud - Din Mehsood. 3 Contents Topic 1; Introduction and Definition of Economics.... 4 Topic 2; Nature and Scope of Economics............ ........ 8 Topic 3; Importance of Economics in common life.... 11 Topic 4; Microeconomics Vs Macroeconomics.......... 15 Topic 5; Law of Demand................................................ 22 Topic 6; Non - price f actors of cha nge in demand... ... 2 8 4 Topic 1; Introduction of Economics Meaning of Economics: The word “ E conomics ” is derived from a Greek word “ Oik onomo s ” which means “ To manage the house” , so Economics means ”the Management of households especially in those matters which are relating to the income and expenses of the family” Definitions of Economics: General Definition : “Economics is a social science concerned with the production, exchange, distribution and consumption of goods and services (Wealth) ”. Adam Smith Definition : No doubt Adam Smith is a founder of Economics. Adam Smith wrote the book “An inquiry into the Na ture and causes of W ealth of Nations” in 1 7 76 Adam Smith defined Economics as, “the science of National wealth” 5 Marshall Definition : Alfred Marshall i s the founder of neo - classical school of thought. He was an English Economist. Marshall wrote a book “ Prin ciples Of Economics” in 187 8 Marshall defined the economics in these words which are simplified as, “Economics is the study of man’s action in ordinary business of life” J.B. says : A French Economist Mr. J.B Says , “Economics is the science which treats wealth”. Professor Walker’s Definition : An American Economist Professor Walker says that, “Economics is the body of knowledge which relates to the wealth” Chapman’s Definition : Chapman defined Economics as, “ Economics treats all actions of human beings in relation to the wealth” 6 Professor Elley’s Definition : “Economics is the science that treats those social phenomena that are due to wealth - getting and wealth - using activities of man”. Concept of Wealth in Economics: The concept of Wealth in Economics is very simple, “ Those material things which are produced by labor, can satisfy human wants and have an exchange value” Characteristics of Wealth: Wealth must have the following characteristics: ➢ Wealth is material , we will not consider human skill and mental ability as wealth. ➢ It is produced by labor. If we consider land have all the characteristics of Wealth except one that is not produced by labor. 7 ➢ Capability to satisfy human desire, for insta nce money is not Wealth but a medium of exchange ➢ Wealth must have exchange value. EXTRA INFORMATION Production of Wealth: Production of wealth means goods and services produced by labor and bring to the consumers. Factors of wealth include land, labor and capital The main goal of production of wealth is to satisfy the human wants. Exchange of Wealth: Exchange of wealth refers to the transfer of goods (material good only) from one person to another or one sector of economy to the other to maintain economic activities. Distribution of Wealth: Distribution of wealth refers to the di vis ion of products amon g different segments of the society or among those who produce these goods and services. The factors of distribution are rent, wages and interest. Transportation charges and acquiring of wealth does not come under the umbrella of distribution of wealth but under production of wealth. Consumption of Wealth: The ultimate aim of production, exchange and distribution of goods and services is to satisfy the human desires. Conclusion : In the light of above discussion, we conclude that according to Adam Smith, “ Economics is the science of wealth in which we study Wealth through its four aspects: production, exchange, distribution and consumption of wealth” • -- -- ------------------------ • 8 Topic 2 ; Nature and Scope of Economics Nature of Economics : The nature of economics deals with the question that whether economics falls into the category of science or arts. Various Economists have given their arguments in the favour of science while other have their reservation for arts. Economics as a Science: To consider anything as a science, first we should know that what science is all about? “ Science deals with the systematic studies that signifies the cause and effect of relationships” OR: “ Science is the body of knowledge which shows relationship between cause and effect” Economics is Science because of the following reasons : 1 - It involves a systematic collection of facts and figures. 2 - Like Science, economics is based on theories and laws. 3 - It deals with the cause and effect relationships. e.g. The law of demand in economics says that, when price of a commodity rises (cause) , its quantity demanded falls (effect). 4 - Like Science, Economics is also measured. e.g. In Economics, Measurement is in terms of money. 5 - Science has a methodological apparatus. Economics can also be studied using various methods. 9 6 - Science has an ability to forecast. Like science , various laws of economics, can help in forecasting , which are beneficial for making policies. e.g. consumer demand, supply of product etc can be predicted using various laws Economics as an Art: It is said that, “ knowledge is science and action is art”. Economics theories are used to solve various economic problems in the society. Economics is an art due to following reasons: 1 - Art tells us how to do things i.e. to achieve an objective. Economics also used to achieve a variety of goals. For example: All policies made in economics has an ultimate objective of solving economics problems. 2 - Art is a practical application of theoretical knowledge. Like art, economics also practices its theoretical laws. For example: The various policies are made only afte r having a theoretical knowledge of society and country as a whole. 10 Scope of Economics: Economics uses different economic theories to solve various economic problems in the society. Its applicability is very vast. The scope of economics can be understood under two subheadings i.e. Microeconomics and Macroeconomics. The scope covers all the central issues faced by society. E.g., economic growth, poverty, etc. It is a social science based on problems. And it is concerned with all the central problems of our modern world. EXTRA INFORMATION Normative Economics: It is concerned with the expression of value judgements by economists, of w hat they would like to happen - e.g. what sort of economic society they would like to see in o peration. Positive economics: It is concerned with objective statements about what does happen or what w ill happen. A positive approach is more objective, and more scientific. • -------------------------------------- • 11 Topic 3 ; Importance of Economics in Common Life Economics play a vital role in our everyday life. Studying Economics enables us to understand past, future, and current models, and apply them to societies, government, businesses and individuals. Today all over the world , people h ave become highly economic minded. They have realized that the study of Economics can provide them a solution to their economic and social problems. Today Economics is more useful than any other branch of science , it makes a direct and primary concern wit h human welfare. Important Points : Following are some of the important points which describe the importance of economics in common life: 1 - Inform Decisions: Economists provide information and forecasting (prediction) to inform decisions within companies and governments. 2 - Influence Everything: Economics issues influence our daily lives. This includes issues such as tax and inflation, interest rates, wealth, inequality, emerging markets, energy and environment. 12 3 - Impacts Industries: Firms of all sizes and industries have to relay on Economics , whether that’s for product research or how to advertise. 4 - Inspire Business Success: Unders tanding how consumer behave is vital for a business to succeed. Economists use theories and models to predict behaviour of consumers and inform business strategies. 5 - International Perspective: Economics effect the world we live in. For international corporations, understanding the world economy is a key to success. 6 - Useful for Producers: Economics is very useful for producer. It guides him how he should combine the four factors of production and minimize the cost of production. Do you Know? About the importance of economics, Malthus says, “Political Economy is perhaps the only science of which it may be said that the ignorance of it is not merely a derivation of good but produce great positive evil”. 13 7 - Useful for Consumers : The consumers can adjust his experience of various goods in better way if he knows the principles of Economics. 8 - National Economy and Problems: Economics enables us to improve the performance of the economy and helps to deal with many problems that our country faces. 9 - World Affairs: Economics enhance our understanding of world affairs. And help us to be informed citizens. 10 - Logical Thinking: Economics develops logical thinking and problem solving skills. 11 - Useful for Finance Minister: Finance Minister prepares the yearly budget of the country. Economics guides him that how he should frame the tax policy and monetary policy. 14 12 - Sense of Responsibility: Economics develops the sense of responsibility among citizens by explaining the various problems and their solutions. Note: Due to economic awareness Pakistan citizens presented a huge amount in the Prime Minister fund to get rid - off from the foreign dept in 1997, and 2009 , they helped the refugees of Swat. 13 - Solution for Economic Crisis : Economics guides the nation that how they can save themselves from the economic crisis. 14 - Useful for International Trade: Study of economics is very useful for international trade. It helps the importers and exporters to earn maximum profit. A business can easily understand the trade pol icies of various countries. • ------------------ ------- ---------------- - ---------------------------- ------- ---- • Do you Know? Bu dget is a n estimate of income and expenditure for a set period of time, often one year. 15 Topic 4; Microeconomics Vs Macroeconomics Microeconomics : Meaning of Micro : The word “ Micro” comes from a Greek word, its meaning is “Small” Definition: “Microeconomics is the study of Economic actions of individuals and small groups of individuals”. OR: “Microeconomics is the study of individual units or particular parts of the economy”. ➢ Microeconomics studies individual income. ➢ Microeconomics studies individual prices. ➢ It analyzes demand and supply of goods. Main Features of Microeconomics: 1 - Concerned With: Microeconomics is concerned with particular household , firms ( Small Companies) and industries. 2 - Deals With: Microeconomics deals with individual economic variables. It deals with household and firm (company) decisions. 3 - Central Problems: Microeconomics is used in price determination and resource allocation. 16 4 - Business Application: Microeconomics is applied to o perational or internal issues. 5 - Approach: Microeconomics takes a BOTTOM - UP approach to analyze any economy. 6 - Objective: The objective of Microeconomics , on the demand side is to maximize utility whereas on the supply side its objective is to minimize the profit at minimum cost. 7 - Basis: Basis of Microeconomics is price mechanism which operates with the help of demand and supply forces. 8 - Limitations: Limitations of Microeconomics is the existence of full employment. 17 9 - Tools of Microeconomics: Tools of Microeconomics are Demand and Supply. 10 - Examples : 1 - How does an individual household decides to spend its income? 2 - How does an individual firm decide what volume of output to produce w what products to make? 3 - How is the price of an individual product determined. 4 - How are the wage levels determined in a particular industry etc. 18 Macroeconomics : Meaning of Macro: The word “Macro” comes from a Greek word and its meaning is “ Large” Definition: “Macroeconomics studies the economy as a whole and do not a single unit but combination of all. It is aggregative economics which deals with the behaviour of economy as a whole. OR: “ Macroeconomics is the study of global or collective decisions by indivi dual households or producers. It looks at a national or international economy as a whole”. ➢ Macroeconomics studies the national income. ➢ Macroeconomics studies the prices. ➢ It analyzes aggregate demand and aggregate supply. Main Features: 1 - Concern With: Macroeconomics is concerned with national income, general price levels, national output, unemployment and poverty. 19 2 - Deals With: Macroeconomics deals with the aggregate economic variables. It deals with the aggregate decisions. 3 - Central Problems: Macroeconomics is used for the determination of levels of income and employment. 4 - Business Application: Macroeconomics is applied to environment and external issues. 5 - Approach: Macroeconomics takes a TOP - DOWN a pproach to analyze any economy. 6 - Objective: The objectives of macroeconomics are full employment, price stability, economic growth and favourable balance of payments. 20 7 - Basis: Basis of Macroeconomics is the national income, output and employment which are determine d by aggregate demand and aggregate supply. 8 - Limitations: Limitations of Macroeconomics is the involvement of “ Fallacy of Composition ” which does not prove true. 9 - Tools : Tools of Macroeconomics are aggregate demand and aggregate supply