Introduction

MULTITECH BUSINESS SCHOOL
CHAPTER 1: INTRODUCTION
1.1 Defi nition of
economics
There are many defi nitions of economics with no single

of them being generally accepted to all economists.
Robbins.
He defi ned economics as a science, which studies
human behaviors as the relationship between ends and
scarce means, which have alternative uses. Hence
Robbins defi nition looks at scarcity as the major aspect
of economics.
Adam Smith
He defi ned economics as a study of natural resources
or wealth as an end in itself. He was not interested in
the value of non-materials such as services.
Alfred Marshal
He defi ned economics as a study of man land in
ordinary business life. He considered economics as a
social science and study of material welfare.
Harrison
Defi nes economics as a study of how society chooses
to use the resources that have alternative uses to
LECTURER: TUBENAWE AMBROSE (0772467417)

tubenawea@gmail.com
BUSINESS ECONOMICS JAN- APRIL 2015
Page1
MBS
produce commodities of various kinds and to distribute

among diff erent groups.
Thus economics can generally be defi ned as a social
science that deals with the methods which people use
to allocate scarce resources in the production of goods
and services to satisfy human wants.
Wants
These are human desires that can be satisfi ed by
material and non-material goods. They can also be
called needs, ends, and desires
Characteristics of human wants
They are insatiable i.e. all of them cannot be
satisfi ed at once.
They are unlimited i.e. endless
They are dynamic i.e. ever changing.
They are complementary i.e. satisfaction of one
need may lead to the satisfaction of another.
Wealth
This refers to material goods that can be owned and
sold. Wealth has the following characteristics: It is scarce
It has value
It has to be exchanged at a price.
It is transferable from one person to another i.e. it
changes hands
It gives satisfaction
atubenawe@multitech.co.ug,
There are three categories of wealth i.e. personal

wealth, company wealth and social wealth.
Personal wealth: This includes items, which are owned
and enjoyed by an individual e.g. TV, Radio, and clothes
e.t.c.
Company or Business Wealth: This includes assets that
are used in the running of a business e.g. company
vehicles, Buildings, industries e.t.c.
Social wealth: This is the wealth which is collectively or
public owned e.g. roads, Hospitals, school, bridges
e.t.c.
1.2 The basic principles of economics
(fundamental principles of economics)
The basic principles of economies explain the
fundamental economic problems of man. These
problems are scarcity, choice and opportunity cost.
(a ) SCARCITY
This refers to the fact that resources are not enough to
are not enough to satisfy all human wants i.e. they are
limited in supply. Because of this problem individuals
have to decide what to produce or buy.
(b ) CHOICE
Page2
MBS
This refers to taking the right decisions between

alternative needs. Because resources are scarce or
limited supply, man has to make a choice in making
choice he normally follows the scale of preference.
The scale preference refers to a least of alternative
needs when arranged in order of their importance i.e.
starting with the most pressing / important needs and
then the least important needs.
(c ) OPPORTUNITY COST.
This refers to the alternative fore gone when choice has
been made between alternative needs i.e. when making
choice the goods or needs which are left out are
referred to opportunity cost.
1.3 THE PRODUCTION POSSIBILITY FRONTIER (PPF
CURVE, Opportunity cost curve)
In this topic we consider a PPF and its relationship
with the fundamental economic problems
This is the fi rst economic model presented in Micro
Principles.
The production possibility frontier /curve is a locus of
points shows combinations of two commodities that can
be produced when all the available resources are fully
utilized/ employed.
It is based on the following assumptions

tubenawea@gmail.com
Resources are fully employed

The quantity of the available resources is fi xed
The technology is fi xed/ constant
Only two commodities are produced using the
available resources e.g. beans and peas
The time period is short
Assuming a country specializes in the production of

only two commodities. I.e. beans and peas and uses all
the available resources to produce these two goods,
then the production possibility frontier will be as
follows.
Page3
MBS
o According to the diagram resources are

divided diff erently between peas and beans
Points along the PPF curve e.g. a and b
show the maximum possible combined out
put of beans and peas which the economy
can produce.
o Points inside the PPF curve e.g. g shows
that resources are not
fully/under/ineffi ciently utilized
Points outside the PPF curve shows that such
combinations as at point k can not be
attained at the current level of resources.
IMPORTANCE OF THE PPF CURVE:
(i). It shows the problems of scarcity i.e. we cant
produce more beans and at same produce more
peas. This is because resources are fi xed.
(ii). The PPF curve also explains the concept of
choice i.e. choice must be made between
alternative needs. We must choose to produce
more beans than peas and vice-versa.
(iii). It also explains opportunity cost. Opportunity
cost is shown by the slope of the ppf curve e.g.
moving from B to C means that in order to
produce more three units of peas. We must give
up three units of beans.
(iv). The PPF shows the effi cient in production eff ort
when production is done along the ppf curve, it
means that resources are fully utilized. Any

tubenawea@gmail.com
combination below the ppf implies that there is

effi cient and under utilization of resources.
(v). The PPF curve shows the economic growth. The
shift of the ppf curve out wards to the right
shows the economic growth. It implies more
goods and services being produced and
consumed. This can be possible through
Improvement in technology,
Research and innovations.
increase in the ability of workers to produce more
output
Page4
MBS
Biased shift is when the factors that affect the PPF shift change
differently for the two commodities. E.g. in the diagram below the
shifts are in respect to commodity x only.
Economic growth can be illustrated as below:-
Unbiased shift in when the factors that affect shifts of the PPF
change in the same way for the two commodities.
WHY A CONCAVE SHAPE OF THE PPF?

SHIFTS OF THE PPF
The PPF can shift to the right or to the left in a biased or unbiased
form

tubenawea@gmail.com
We normally draw a PPF with concave shape. This is because:
The increase in the output of one commodity implies

reduction in the output of the other hence a negative
slope.
Increasing opportunity cost i.e. more of a commodity on

Y axis has to be given up to increase the commodity on
X axis by one unit. In reality, some resources are better
suited for the production of certain kinds of goods than
for other. That is some resources have a comparative
advantage over other resources in the production of a
given good. When this is the case, the opportunity cost
of a production increases as output increases. The
reasoning here is that when the production of a good
requires the use of a resource that is well suited to its
production but poorly suited to the production of other
goods
1.4 ECONOMIC QUESTIONS and ECONOMIC

AGENTS
Scarcity of resources gives rise to economic question
answering these questions help an economist in taking
economic decisions. These questions are: 1.
What to produce?
E.g. decisions on whether to produce capital or
consumer goods; the producer has to make a choice of
what exactly to produce. The decision will be
determined by the availability of resources.
2.
How to produce?
This question is related the type of technology to be
used and also the special needs of the consumer e.g.
fashions. The technology to be used should normally
suit the fashion and tastes of consumers.
tubenawea@gmail.com
Page5
MBS
3.
How much to produce?
This is infl uenced by market the availability of
resources and the type of technology to be used i.e.
labour intensive and capital-intensive technology.
4.
Where to produce?
The question is normally answered in relation to the
market, location of resources. Power and
communication system e.t.c. e.g. furniture industries
are allocated near markets because it is easy to
transport timber to make furniture than transporting
furniture itself. All food industries are normally located
near gardens due to perish ability.
5.
When to produce?
The choice here is related to time e.g. production is
normally carried out when market is available e.g.
characteristics cards are normally bought in December
while umbrellas are normally produced and bought in
rainy seasons.
6.
For whom to produce?
This is usually determined by availability of market and
this can be local or foreign. It will however be
infl uenced by other conditions i.e. economic and noneconomic conditions.
Economic agents
These are decision-making elements or groups in the
economy. They also provide market business units i.e.
by buying the products. These are mainly categorized

in two forms.
a)
House holds: This refers to individuals or groups
of individuals that own factor resources in the economy.
They also provide market to business units by buying
products.
b)
Firms: A fi rm is a business unit that enjoys factors
of production and transforms them into goods and
services. They turn resources into fi nal products.
1.5 ECONOMIC SYSTEMS
An economy
This refers to the material and non-material resources
of a country and how they are governed
On the other hand
An economic system refers to the ownership
management distributions and allocation of resources
in a country.
There are three major economic systems and these
include: Free enterprise economy
Centrally planned economy
Mixed economy
1.5.1 FREE ENTERPRISE ECONOMY/MARKET/
LAISEZ FAIRE ECONOMY

tubenawea@gmail.com
Page6
MBS
This refers to where the ownership management

distribution and allocation of resources is by private
individuals in the economy. I.e. the economic decision s
concerning what, how, for whom, how much to produce
are taken by private individuals on the economy.
Characteristics of a market economy
Prices are determined by forces of demand and
supply
Limited intervention of the government
The driving of the economic activities is profi t
Maximisation.
There is freedom of choice and enterprise. I.e.
an entrepreneur is free to choose any economic
activity.
Many buyers and sellers in the market
Advantages of a free market enterprise economy
(i). Effi ciency in production. Producers tend to
use highly productive methods of
production so as to produce high out put
and incur low average costs.
(ii). There is consumer sovereignty. I.e.
consumers determine what, how, when
and how much to be produced.
(iii). There is free setting of prices in the
economy and this enhances automatic
distribution of resources.
(iv). Encourages innovations and inventions
due to competition and this is likely to
lead to production of better quality

products.
Disadvantages of a free market enterprise economy
(i). Goods of the poor may not be produced
i.e. because of profi t motive resources
may be geared towards the production of
goods for the rich.
(ii). Public goods can not be produced this is
because they are very expensive and yet it
is diffi cult to charge them from the users
e.g. roads, streets lines, Railway lines,
defense and police.
(iii). There is fl uctuation in prices. Since prices
are fi xed by the forces of demand and
supply. As a result consumers may be
exploited with high prices due to the
absence of government protection.
(iv). Monopoly power may develop when new
fi rms go out of business i.e. through
competition.
(v). Harmful products may be produced and
this may aff ect the health of citizens e.g.
cigarettes and marijuana.
1.5.2 COMMAND/CENTRALLYPLANNED/PURE
SOCIALISM ECONOMY

tubenawea@gmail.com
Page7
MBS
It is sometimes called a planned or centrally planned

economy. This is an economic system where resources
are owned and controlled by the state (government).
The central authority carries out economic decisions.
When this economic arrangement takes a political
dimension we call it socialism or communism.
Examples of such economies include Cuba, North Korea
China and former Soviet Union.
Advantages of a Command Economy
(i). There is no price fl uctuation since the
government sets prices.
(ii). Public goods can be made available by the
government e.g. roads, Hospitals schools
e.t.c.
(iii). There is no consumer exploitation because
the government will protect consumers.
(iv). Monopoly power cannot arise in a planned
economy.
(v). Harmful products are controlled by the
government e.g. cigarettes, marijuana and
cocaine e.t.c
(vi). Essential products or goods of the poor
can be produced though they are not
highly profi table e.g. basins, plastic cups,
plates e.t.c.
Disadvantages of a Command Economy
(i). There is no consumer sovereignty i.e.

consumers cannot consumers goods of
their choice.
(ii). A command economy is associated with
corruption and embezzlement.
(iii). Misallocation of resources i.e. some goods
will be produced irrespective of whether
they are demanded or not.
(iv). There are no incentives to work hard this
is because will not work for sell benefi t but
for the common good.
(v). There is a problem of excesses and
shortages i.e. there is no direct
relationship between supply and demand.
1.5.3 MIXED ECONOMY
This is a compromise between a market and command
economy.
Features of a mixed economy
Decision making on economic issues is shared
out between individuals
Both the state and the individuals jointly own
resources.
Market forces operate along side prices
determined by the government.
Discuss the advantages and disadvantages of a mixed
economy
Note:
tubenawea@gmail.com
Page8
MBS
In reality all economies in the world are mixed

economize because state infl uence is ever present
along side private ventures.
1.6: METHODS OF INQUIRY IN THE STUDY OF
ECONOMIC THEORY
There are two methods of reasoning in theoretical
economics namely;
Deductive approach
Inductive approach
Deductive approach
Deduction means reasoning from the general to
particular i.e. it derives conclusions from fundamental
assumptions. It involves the process of reasoning from
certain laws or principles which are assumed to be true,
to the analysis of facts. Then inferences are drawn
which are verifi ed against observed facts. Deduction
approach involves the following stages:
1) Selecting the problem: the problem to be
investigated has to be stated clearly. It may be
very wide like poverty, unemployment, infl ation
e.t.c r narrow relating to an industry. The narrower
the problem the better it would be to conduct the
inquiry.
2) The formulation of assumptions on the basis of
the problem to be explored. To be fruitful, the
assumptions must be general.
3) The formulation of a hypothesis through the

process of logical reasoning whereby formulation
of hypothesis through the process of logical
reasoning whereby inferences are drawn
4) Verifying the hypothesis: this consists in
confi rming whether the hypothesis is in
agreement with facts. A hypothesis is true or not
can be verifi ed by observation and experiment.
Since economics is concerned with human
behavior, there are problems of in making
observation and testing the hypothesis.
1.6: METHODS OF INQUIRY IN THE STUDY OF
ECONOMIC THEORY
Page9
MBS
observed facts. Deduction approach involves the following

stages:
5) Selecting the problem: the problem to be investigated
has to be stated clearly. It may be very wide like
poverty, unemployment, inflation e.t.c r narrow relating
to an industry. The narrower the problem the better it
would be to conduct the inquiry.
6) The formulation of assumptions on the basis of the
problem to be explored. To be fruitful, the assumptions
must be general.
7) The formulation of a hypothesis through the process of
logical reasoning whereby formulation of hypothesis
through the process of logical reasoning whereby
There are two methods of reasoning in theoretical

economics namely;
Deductive approach
Inductive approach
inferences are drawn

8) Verifying the hypothesis: this consists in confirming
whether the hypothesis is in agreement with facts. A
hypothesis is true or not can be verified by observation
Deductive approach
and experiment. Since economics is concerned with
Deduction means reasoning from the general to particular i.e.
human behavior, there are problems of in making
it derives conclusions from fundamental assumptions. It
observation and testing the hypothesis.
involves the process of reasoning from certain laws or

principles which are assumed to be true, to the analysis of
facts. Then inferences are drawn which are verified against

tubenawea@gmail.com
Advantages of deductive approach

i).
The method is close to reality since it is based on

complete assumptions.
ii). It is simple since complex problems are divided into

easier smaller components.
iii). It is exact since it involves use of mathematics in
deriving generalizations.
iv). Helps in drawing conclusions which are of universal
validity i.e. can be applicable to most parts of the
world.
Disadvantages
i).
If the assumptions are unrealistic the theory breaks
down
ii). Often the conclusions derived from deductive reasoning
are not applicable universally because of the
differences in economic conditions.
iii). It is based on the assumption that economic conditions
are constant but economic conditions are always
changing.
Induction approach
It is the process of reasoning from a part to the whole, from
particulars to generals or from the individual to the universal.
It is an ascending process of collecting facts, arranging them
and then drawing general conclusions.
It involves the following steps
1) Selecting the problem

tubenawea@gmail.com
Page10
MBS
2) Collection, enumeration, classification, and analysis of

data by using appropriate statistical techniques.
3) Use of data to make observation about particular facts
concerning the problem
4) Generalization basing on the observation which
establishes general truth from particular facts
Merits of inductive approach
i). It is realistic because it is based on facts and explains
them as they actually are.
ii). Induction helps in future inquiries by discovering and
providing general principals.
iii). It more applicable in the formulation of economic
policies on poverty, and other development issues
since it makes use of statistical methods.
iv). It is flexible since it involves taking of remedial
measures as economic conditions change.
Demerits of inductive approach
i). It relies on statistical numbers for analysis which can be
misused and misinterpreted when the assumptions that
were used are forgotten.
ii). It time consuming since it involves statistical methods
i.e. collection, classification, analysis and interpretation
of data.
iii). It is also costly as it involves use of expertise in

statistical investigation and analysis which is usually
expensive to hire.
iv). Economic behavior defers from person to person and
there is therefore little or no experimentation of the
hypothesis.
Page11
MBS
income, total investment, aggregate demand, aggregate

supply and the general price level.
Normative and positive economics
Economics can again be broken down in two branches. I.e.
positive and normative economics
a)
1.7: THE SCOPE OF ECONOMICS
Positive Economics
This is the branch of economics which deals with the

statements that explain how things are and how actually the
There are two main branches in terms of approaches to

economic problems and analysis namely: micro economics
and macro economics
Micro economics
This is the study of the economic actions of individuals and
small groups of individuals. It includes the study of particular
firms, particular households, individual prices, wages,
income, individual industries, and particular commodities. It
is concerned with the analysis of price determination and
allocation of resources to specific uses.
economy operates. Disagreements with such statements are

usually settled by reference to real facts in life e.g. what
policy measures can solve unemployment, how demand
reacts to supply e.t.c.
b)
Normative Economics
This is the branch of economics that describes the world, as it

ought to be e.g. full employment, sufficient supply, balancing
balance of payment. Disagreements of over these situations
cannot be solved by facts. Norm active economics deals with
imagined situations just as we would want them to be.
Macro economics
It is the study of aggregate behavior of the entire economy,
in relation to total employment, unemployment, national
tubenawea@gmail.com

Introduction

Enviado por

Dados do documento

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Introduction

Enviado por

Direitos autorais:

Formatos disponíveis

MULTITECH BUSINESS SCHOOL

There are many defi nitions of economics with no single

LECTURER: TUBENAWE AMBROSE (0772467417)

BUSINESS ECONOMICS JAN- APRIL 2015

produce commodities of various kinds and to distribute

MULTITECH BUSINESS SCHOOL

There are three categories of wealth i.e. personal

BUSINESS ECONOMICS JAN- APRIL 2015

This refers to taking the right decisions between

LECTURER: TUBENAWE AMBROSE (0772467417)

MULTITECH BUSINESS SCHOOL

Resources are fully employed

Assuming a country specializes in the production of

BUSINESS ECONOMICS JAN- APRIL 2015

o According to the diagram resources are

LECTURER: TUBENAWE AMBROSE (0772467417)

MULTITECH BUSINESS SCHOOL

combination below the ppf implies that there is

BUSINESS ECONOMICS JAN- APRIL 2015

Economic growth can be illustrated as below:-

WHY A CONCAVE SHAPE OF THE PPF?

LECTURER: TUBENAWE AMBROSE (0772467417)

We normally draw a PPF with concave shape. This is because:

The increase in the output of one commodity implies

MULTITECH BUSINESS SCHOOL

Increasing opportunity cost i.e. more of a commodity on

1.4 ECONOMIC QUESTIONS and ECONOMIC

BUSINESS ECONOMICS JAN- APRIL 2015

MULTITECH BUSINESS SCHOOL

by buying the products. These are mainly categorized

LECTURER: TUBENAWE AMBROSE (0772467417)

BUSINESS ECONOMICS JAN- APRIL 2015

This refers to where the ownership management

MULTITECH BUSINESS SCHOOL

lead to production of better quality

LECTURER: TUBENAWE AMBROSE (0772467417)

BUSINESS ECONOMICS JAN- APRIL 2015

It is sometimes called a planned or centrally planned

MULTITECH BUSINESS SCHOOL

(i). There is no consumer sovereignty i.e.

BUSINESS ECONOMICS JAN- APRIL 2015

In reality all economies in the world are mixed

MULTITECH BUSINESS SCHOOL

3) The formulation of a hypothesis through the

BUSINESS ECONOMICS JAN- APRIL 2015

observed facts. Deduction approach involves the following

There are two methods of reasoning in theoretical

inferences are drawn

and experiment. Since economics is concerned with

Deduction means reasoning from the general to particular i.e.

human behavior, there are problems of in making

it derives conclusions from fundamental assumptions. It

observation and testing the hypothesis.

involves the process of reasoning from certain laws or

LECTURER: TUBENAWE AMBROSE (0772467417)

Advantages of deductive approach

The method is close to reality since it is based on

MULTITECH BUSINESS SCHOOL

ii). It is simple since complex problems are divided into

If the assumptions are unrealistic the theory breaks

LECTURER: TUBENAWE AMBROSE (0772467417)

BUSINESS ECONOMICS JAN- APRIL 2015

2) Collection, enumeration, classification, and analysis of

MULTITECH BUSINESS SCHOOL