ECONOMICS; ANOTHER PERSPECTIVE

Economics is the study of the choices made by people who are faced with scarcity.
Scarcity is a situation in which resources are limited but can be used in different ways; so one
good or service must be sacrificed for another.
SOCIETY’S CHOICES
The decisions of producers, consumers and government determine how an economic system answers three fundamental questions:
1. What products do we produce?
2. How do we produce these products?
3. Who consumes the products?
FACTORS OF PRODUCTION
Factors of production are the resources that are used to produce goods and services:
1. Natural resources:
The things created by acts of nature such as land, water, mineral, oil and gas deposits, renewable and nonrenewable resources.
2. Labor:
The human effort, physical and mental, used by workers in the production of goods and services.
3. Physical capital.
All the machines, buildings, equipment, roads and other objects made by human beings to produce goods and services.
4. Human capital:
The knowledge and skills acquired by a worker through education and experience.
5. Entrepreneurship:
The effort to coordinate the production and sale of goods and services.
Entrepreneurs take risk and commit time and money to a business without any guarantee of profit.

WHAT IS A MARKET?

 Markets vs. Industries
Market is a geographically defined area where buyers and sellers interact to determine the price of a product or a set of products. Industries are the supply side of the market.

 Defining the Market
The market parameters must be set before an analysis of the market can take place. 

 Arbitrage
Buying a product at a low price in one location and selling at a high price in another.

 Competitive vs. Noncompetitive Markets 

 In competitive Markets,because of the large number of buyers and sellers, no individual buyer or seller can influence the price. Example: Most agricultural markets.Noncompetitive Markets are the markets where individual producers can influence the price.  Example: OPEC

 Market Price
– Competitive markets establish one price.
– Noncompetitive markets may set many prices for the same product.

Market Definition - The Extent of a Market– Market Definition
Which buyers and sellers should be included in a given market?
– Market Extent Defines the boundaries of the market 

 Geographic  Range of products
– Examples
– Geographic boundaries

 Gold: Lahore vs. Karachi

 Housing: Islamabad vs. Rawalpindi
– Range of Products

 Gasoline: regular, super, & diesel

 Cameras: Polaroid, point & shoot, digital
– Markets for Prescription Drugs

 Well-defined markets - therapeutic drugs

 Ambiguous markets – painkillers

THEORIES AND MODELS

Microeconomic Analysis
Theories are used to explain observed phenomena in terms of a set of basic rules and assumptions. For example, the theory of the firm or the theory of consumer behavior.

Models:
A mathematical representation of a theory used to make a prediction.

Validating a Theory
The validity of a theory is determined by the quality of its prediction, given the assumptions.
Evolving the Theory
Testing and refining theories is central to the development of the science of economics.
POSITIVE VERSUS NORMATIVE ECONOMICS
Positive economics deals with the observations or predictions of the facts of economic life. For example:
What will be the impact of an increase in wages on the price of a product? Normative Economics is the value judgments about how economics should operate, based on
certain moral principles or preferences?” For example:
What wage rate should be paid to the auto workers to make them an active member of the society?

Economics

Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people.
MICROECONOMICS VS. MACROECONOMICS
Microeconomics deals with behavior of individual units.
• When Consuming; How we choose what to buy
• When Producing; How we choose what to produce
• Markets: The interaction of consumers and producers.
Macroeconomics deals with analysis of aggregate issues:  

Economic growth  Inflation  Unemployment
Microeconomics is the foundation of macroeconomic analysis.
THEMES OF MICROECONOMICS
According to Mick Jagger & the Rolling Stones, “You can’t always get what you want”. Why  Not?

Limited Resources  Unlimited Wants  Allocation of Scarce Resources and Trade-offs In a planned economy

 In a market economy Microeconomics and Optimal Trade-offs
1. Consumer Theory
2. Workers
3. Theory of the Firm
Microeconomics and Prices
– The role of prices in a market economy
– How prices are determined