Natural Science Students: Introduction to Economics Basics Assignment

This assignment provides a comprehensive introduction to the core concepts of economics, tailored for natural science students. It begins with a definition of economics, exploring its historical development and various perspectives. The assignment then delves into the rationales of economics, focusing on the fundamental facts of unlimited human wants and limited economic resources, emphasizing the central role of choice in addressing scarcity. It covers the scope and methods of economic analysis, differentiating between positive and normative economics, and explaining inductive and deductive reasoning. The assignment then explores scarcity, choice, and opportunity cost, including the production possibilities frontier (PPF) and its implications. It explains economic growth and its impact on the PPF. Finally, it addresses the basic economic questions of what, how, and for whom to produce, which are central to any economic system. This assignment is a valuable resource for students seeking a foundational understanding of economic principles.

Introduction to Economics, By: Mohammed Ibrahim (MSc.)
E-mail:- [e-mail]
(Introduction to Economics Lecturer Note), for Natural students
Chapter One
Basics of Economics
1.1 Definition of economics
Economics is one of the most exciting disciplines in social sciences. The word economy comes
from the Greek phrase ―one who manages a household‖. The science of economics in its current
form is about two hundred years old. Adam Smith – generally known as the father of economics
– brought out his famous book, ―An Inquiry into the Nature and Causes of Wealth of Nations‖,
in the year 1776. Though many other writers expressed important economic ideas before Adam
Smith, economics as a distinct subject started with his book. There is no universally accepted
definition of economics (its definition is controversial). This is because different economists
defined economics from different perspectives:
a. Wealth definition,
b. Welfare definition,
c. Scarcity definition, and
d. Growth definition
Hence, its definition varies as the nature and scope of the subject grow over time. But, the formal
and commonly accepted definition is as follow.
Economics is a social science which studies about efficient allocation of scarce resources so as
to attain the maximum fulfillment of unlimited human needs. As economics is a science of
choice, it studies how people choose to use scarce or limited productive resources (land, labour,
equipment, technical knowledge and the like) to produce various commodities.
1.2 The rationales of economics
There are two fundamental facts that provide the foundation for the field of economics.
1) Human (society‘s) material wants are unlimited.
2) Economic resources are limited (scarce).
The basic economic problem is about scarcity and choice since there are only limited amount
of resources available to produce the unlimited amount of goods and services we desire. Thus,
economics is the study of how human beings make choices to use scarce resources as they seek
to satisfy their unlimited wants. Therefore, choice is at the heart of all decision-making. As an
individual, family, and nation, we confront difficult choices about how to use limited resources
to meet our needs and wants. Economists study how these choices are made in various settings;
evaluate the outcomes in terms of criteria such as efficiency, equity, and stability; and search for
alternative forms of economic organization that might produce higher living standards or a more
desirable distribution of material well-being.
Scope and method of analysis in economics
1.3.1 Scope of economics
The field and scope of economics is expanding rapidly and has come to include a vast range of
topics and issues. In the recent past, many new branches of the subject have developed, including
development economics, industrial economics, transport economics, welfare economics,
environmental economics, and so on. However, the core of modern economics is
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Introduction to Economics, By: Mohammed Ibrahim (MSc.)
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(Introduction to Economics Lecturer Note), for Natural students
1.3.2 Positive and normative analysis
Economics can be analyzed from two perspectives: positive economics and normative
economics.
Positive economics: it is concerned with analysis of facts and attempts to describe the world as it
is. It tries to answer the questions what was; what is; or what will be? It does not judge a system
as good or bad, better or worse.
Example:
 The current inflation rate in Ethiopia is 12 percent.
 Poverty and unemployment are the biggest problems in Ethiopia.
 The life expectancy at birth in Ethiopia is rising.
All the above statements are known as positive statements. These statements are all concerned
with real facts and information. Any disagreement on positive statements can be checked by
looking in to facts.
Normative economics: It deals with the questions like, what ought to be? Or what the economy
should be? It evaluates the desirability of alternative outcomes based on one‘s value judgments
about what is good or what is bad. In this situation since normative economics is loaded with
judgments, what is good for one may not be the case for the other. Normative analysis is a matter
of opinion (subjective in nature) which cannot be proved or rejected with reference to facts.
1.3.3 Inductive and deductive reasoning in economics
The fundamental objective of economics, like any science, is the establishment of valid
generalizations about certain aspects of human behaviour. Those generalizations are known as
theories. A theory is a simplified picture of reality. Economic theory provides the basis for
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Introduction to Economics, By: Mohammed Ibrahim (MSc.)
E-mail:- [e-mail]
(Introduction to Economics Lecturer Note), for Natural students
economic analysis which uses logical reasoning. There are two methods of logical reasoning:
inductive and deductive.
a) Inductive reasoning is a logical method of reaching at a correct general statement or theory
based on several independent and specific correct statements. In short, it is the process of
deriving a principle or theory by moving from facts to theories and from particular to general
economic analysis.
Inductive method involves the following steps.
1. Selecting problem for analysis
2. Collection, classification, and analysis of data
3. Establishing cause and effect relationship between economic phenomena.
b) Deductive reasoning is a logical way of arriving at a particular or specific correct statement
starting from a correct general statement. In short, it deals with conclusions about economic
phenomenon from certain fundamental assumptions or truths or axioms through a process of
logical arguments. The theory may agree or disagree with the real world and we should check the
validity of the theory to facts by moving from general to particular. Major steps in the deductive
approach include:
1. Problem identification
2. Specification of the assumptions
3. Formulating hypotheses
4. Testing the validity of the hypotheses
1.4 Scarcity, choice, opportunity cost and production possibilities frontier
It is often said that the central purpose of economic activity is the production of goods and
services to satisfy consumer‘s needs and wants i.e. to meet people‘s need for consumption both
as a means of survival and also to meet their ever-growing demand for an improved lifestyle or
standard of living.
1. Scarcity
The fundamental economic problem that any human society faces is the problem of scarcity.
Scarcity refers to the fact that all economic resources that a society needs to produce goods and
services are finite or limited in supply. But their being limited should be expressed in relation to
human wants. Thus, the term scarcity reflects the imbalance between our wants and the means to
satisfy those wants.
Economic resources are usually classified into four categories.
 Labour: refers to the physical as well as mental efforts of human beings in the production
and distribution of goods and services. The reward for labour is called wage.
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Introduction to Economics, By: Mohammed Ibrahim (MSc.)
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(Introduction to Economics Lecturer Note), for Natural students
 Land: refers to the natural resources or all the free gifts of nature usable in the production of
goods and services. The reward for the services of land is known as rent.
 Capital: refers to all the manufactured inputs that can be used to produce other goods and
services. Example: equipment, machinery, transport and communication facilities, etc. The
reward for the services of capital is called interest.
 Entrepreneurship: refers to a special type of human talent that helps to organize and
manage other factors of production to produce goods and services and takes risk of making loses.
The reward for entrepreneurship is called profit.
Note: Scarcity does not mean shortage. We have already said that a good is said to be scarce if
the amount available is less than the amount people wish to have at zero price. But we say that
there is shortage of goods and services when people are unable to get the amount they want at the
prevailing or on going price. Shortage is a specific and short term problem but scarcity is a
universal and everlasting problem.
2. Choice
If resources are scarce, then output will be limited. If output is limited, then we cannot satisfy all
of our wants. Thus, choice must be made. Due to the problem of scarcity, individuals, firms and
government are forced to choose as to what output to produce, in what quantity, and what output
not to produce. In short, scarcity implies choice. Choice, in turn, implies cost. That means
whenever choice is made, an alternative opportunity is sacrificed. This cost is known as
opportunity cost.
3. Opportunity cost
In a world of scarcity, a decision to have more of one thing, at the same time, means a decision
to have less of another thing. The value of the next best alternative that must be sacrificed is,
therefore, the opportunity cost of the decision.
Definition: Opportunity cost is the amount or value of the next best alternative that must be
sacrificed (forgone) in order to obtain one more unit of a product. For example, suppose the
country spends all of its limited resources on the production of cloth or computer. If a given
amount of resources can produce either one meter of cloth or 20 units of computer, then the cost
of one meter of cloth is the 20 units of computer that must be sacrificed in order to produce a
meter of cloth.
When we say opportunity cost, we mean that: It is measured in goods & services but not in money costs It should be in line with the principle of substitution.
In conclusion, when opportunity cost of an activity increases people substitute other activities in
its place.
4. The Production Possibilities Frontier or Curve (PPF/ PPC)
The production possibilities frontier (PPF) is a curve that shows the various possible
combinations of goods and services that the society can produce given its resources and
technology. To draw the PPF we need the following assumptions. a. The quantity as well as
quality of economic resource available for use during the year is fixed.
b. There are two broad classes of output to be produced over the year.
c. The economy is operating at full employment and is achieving full production (efficiency).
d. Technology does not change during the year.
e. Some inputs are better adapted to the production of one good than to the production of the
other (specialization).
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Introduction to Economics, By: Mohammed Ibrahim (MSc.)
E-mail:- [e-mail]
(Introduction to Economics Lecturer Note), for Natural students
Suppose a hypothetical economy produces food and computer given its limited resources and
available technology (table 1.1).
The PPF describes three important concepts:
i) The concepts of scarcity: - the society cannot have unlimited amount of outputs even if it
employs all of its resources and utilizes them in the best possible way.
ii) The concept of choice: - any movement along the curve indicates the change in choice.
iii) The concept of opportunity cost: - when the economy produces on the PPF, production of
more of one good requires sacrificing some of another product which is reflected by the
downward sloping PPF. Related to the opportunity cost we have a law known as the
law of increasing opportunity cost. This law states that as we produce more and more of a
product, the opportunity cost per unit of the additional output increases. This makes the shape of
the PPF concave to the origin.
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Introduction to Economics, By: Mohammed Ibrahim (MSc.)
E-mail:- [e-mail]
(Introduction to Economics Lecturer Note), for Natural students
5. Economic Growth and the PPF
Economic growth or an increase in the total output level occurs when one or both of the
following conditions occur.
1. Increase in the quantity or/and quality of economic resources.
2. Advances in technology.
An economy can grow because of an increase in productivity in one sector of the economy. For
example, an improvement in technology applied to either food or computer would be illustrated
by a shift of the PPF along the Y- axis or X-axis. This is called asymmetric growth (figure 1.3).
Assosa University, college of Business and Economics, Department of Economics

Introduction to Economics, By: Mohammed Ibrahim (MSc.)
E-mail:- [e-mail]
(Introduction to Economics Lecturer Note), for Natural students
1.5 Basic economic questions
Economic problems faced by an economic system due to scarcity of resources are known as
basic economic problems. These problems are common to all economic systems. They are also
known as central problems of an economy. Therefore, any human society should answer the
following three basic questions.
What to Produce?
This problem is also known as the problem of allocation of resources. It implies that every
economy must decide which goods and in what quantities are to be produced. The economy must
make choices such as consumption goods versus capital goods, civil goods versus military
goods, and necessity goods versus luxury goods. As economic resources are limited we must
reduce the production of one type of good if we want more of another type. Generally, the final
choice of any economy is a combination of the various types of goods but the exact nature of the
combination depends upon the specific circumstances and objectives of the economy.
How to Produce?
This problem is also known as the problem of choice of technique. Once an economy has
reached a decision regarding the types of goods to be produced, and has determined their
respective quantities, the economy must decide how to produce them - choosing between
alternative methods or techniques of production. For example, cotton cloth can be produced with
hand looms, power looms, or automatic looms. Similarly, wheat can be grown with primitive
tools and manual labour, or with modern machinery and little labour. Broadly speaking, the
various techniques of production can be classified into two groups: labour-intensive techniques
and capital-intensive techniques. A labour-intensive technique involves the use of more labour
relative to capital, per unit of output. A capital-intensive technique involves the use of more
capital relative to labour, per unit of output. The choice between different techniques depends on
the available supplies of different factors of production and their relative prices. Making good
choices is essential for making the best possible use of limited resources to produce maximum
amounts of goods and services.
For Whom to Produce?
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Introduction to Economics, By: Mohammed Ibrahim (MSc.)
E-mail:- [e-mail]
(Introduction to Economics Lecturer Note), for Natural students
This problem is also known as the problem of distribution of national product. It relates to how
a material product is to be distributed among the members of a society. The economy must
decide, for example, whether to produce for the benefit of the few rich people or for the large
number of poor people. An economy that wants to benefit the maximum number of persons
would first try to produce the necessities of the whole population and then to proceed to the
production of luxury goods. All these and other fundamental economic problems center around
human needs and wants. Many human efforts in society are directed towards the production of
goods and services to satisfy human needs and wants. These human efforts result in economic
activities that occur within the framework of an economic system.
1.6 Economic systems
The way a society tries to answer the above fundamental questions is summarized by a concept
known as economic system. An economic system is a set of organizational and institutional
arrangements established to answer the basic economic questions. Customarily, we can identify
three types of economic system. These are capitalism, command and mixed economy.
1.6.1 Capitalist economy
Capitalism is the oldest formal economic system in the world. It became widespread in the
middle of the 19th century. In this economic system, all means of production are privately owned,
and production takes place at the initiative of individual private entrepreneurs who work mainly
for private profit. Government intervention in the economy is minimal. This system is also called
free market economy or market system or laissez faire.
Features of Capitalistic Economy The right to private property: The right to private property is a fundamental feature of a
capitalist economy. As part of that principle, economic or productive factors such as land,
factories, machinery, mines etc. are under private ownership. Freedom of choice by consumers: Consumers can buy the goods and services that suit their
tastes and preferences. Producers produce goods in accordance with the wishes of the
consumers. This is known as the principle of consumer sovereignty. Profit motive: Entrepreneurs, in their productive activity, are guided by the motive of profit-
making. Competition: In a capitalist economy, competition exists among sellers or producers of
similar goods to attract customers. Among buyers, there is competition to obtain goods. Among
workers, the competition is to get jobs. Among employers, it is to get workers and investment
funds. Price mechanism: All basic economic problems are solved through the price mechanism. Minor role of government: The government does not interfere in day-to-day economic
activities and confines itself to defense and maintenance of law and order. Self-interest: Each individual is guided by self-interest and motivated by the desire for
economic gain. Inequalities of income: There is a wide economic gap between the rich and the poor. Existence of negative externalities: A negative externality is the harm, cost, or
inconvenience suffered by a third party because of actions by others. In capitalistic economy,
decision of firms may result in negative externalities against another firm or society in general.
Advantages of Capitalistic Economy Flexibility or adaptability: It successfully adapts itself to changing environments. Decentralization of economic power: Market mechanisms work as a decentralizing force
against the concentration of economic power.
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Introduction to Economics, By: Mohammed Ibrahim (MSc.)
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(Introduction to Economics Lecturer Note), for Natural students Increase in per-capita income and standard of living: Rapid growth in levels of production
and income leads to higher per-capita income and standards of living. New types of consumer goods: Varieties of new consumer goods are developed and produced
at large scale. Growth of entrepreneurship: Profit motive creates and supports new entrepreneurial skills
and approaches. Optimum utilization of productive resources: Full utilization of productive resources is
possible due to innovations and technological progress. High rate of capital formation: The right to private property helps in capital formation.
Disadvantages of Capitalistic Economy Inequality of income: Capitalism promotes economic inequalities and creates social
imbalance. Unbalanced economic activity: As there is no check on the economic system, the economy
can develop in an unbalanced way in terms of different geographic regions and different sections
of society. Exploitation of labour: In a capitalistic economy, exploitation of labour (for example
bypaying low wages) is common. Negative externalities: are problems in capitalistic economy where profit maximization is the
main objective of firms. If economic makes sense for a firm to force others to pay the impacts of
negative externalities such as pollution.
1.6.2 Command economy
Command economy is also known as socialistic economy. Under this economic system, the
economic institutions that are engaged in production and distribution are owned and controlled
by the state. In the recent past, socialism has lost its popularity and most of the socialist countries
are trying free market economies.
Main Features of Command Economy Collective ownership: All means of production are owned by the society as a whole, and
there is no right to private property. Central economic planning: Planning for resource allocation is performed by the controlling
authority according to given socio-economic goals. Strong government role: Government has complete control over all economic activities. Maximum social welfare: Command economy aims at maximizing social welfare and does
not allow the exploitation of labour. Relative equality of incomes: Private property does not exist in a command economy, the
profit motive is absent, and there are no opportunities for accumulation of wealth. All these
factors lead to greater equality in income distribution, in comparison with capitalism.
Advantages of Command Economy Absence of wasteful competition: There is no place for wasteful use of productive resources
through unhealthy competition. Balanced economic growth: Allocation of resources through centralized planning leads to
balanced economic development. Different regions and different sectors of the economy can
develop equally. Elimination of private monopolies and inequalities: Command economies avoid the major
evils of capitalism such as inequality of income and wealth, private monopolies, and
concentration of economic, political and social power.
Disadvantages of Command Economy
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Introduction to Economics, By: Mohammed Ibrahim (MSc.)
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(Introduction to Economics Lecturer Note), for Natural students Absence of automatic price determination: Since all economic activities are controlled by
the government, there is no automatic price mechanism. Absence of incentives for hard work and efficiency: The entire system depends on
bureaucrats who are considered inefficient in running businesses. There is no financial incentive
for hard work and efficiency. The economy grows at a relatively slow rate. Lack of economic freedom: Economic freedom for consumers, producers, investors, and
employers is totally absent, and all economic powers are concentrated in the hands of the
government. Red-tapism: it is widely prevalent in a command economy because all decisions are made by
government officials.
1.6.3 Mixed economy
A mixed economy is an attempt to combine the advantages of both the capitalistic economy and
the command economy. It incorporates some of the features of both and allows private and
public sectors to co-exist.
Main Features of Mixed Economy Co-existence of public and private sectors: Public and private sectors co-exist in this
system. Their respective roles and aims are well-defined. Industries of national and strategic
importance, such as heavy and basic industry, defense production, power generation, etc. are set
up in the public sector, whereas consumer-goods industry and small-scale industry are developed
through the private sector. Economic welfare: Economic welfare is the most important criterion of the success of a
mixed economy. The public sector tries to remove regional imbalances, provides large
employment opportunities and seeks economic welfare through its price policy. Government
control over the private sector leads to economic welfare of society at large. Economic planning: The government uses instruments of economic planning to achieve co-
ordinated rapid economic development, making use of both the private and the public sector. Price mechanism: The price mechanism operates for goods produced in the private sector, but
not for essential commodities and goods produced in the public sector. Those prices are defined
and regulated by the government. Economic equality: Private property is allowed, but rules exist to prevent concentration of
wealth. Limits are fixed for owning land and property. Progressive taxation, concessions and
subsides are implemented to achieve economic equality.
Advantages of Mixed Economy Private property, profit motive and price mechanism: All the advantages of a capitalistic
economy, such as the right to private property, motivation through the profit motive, and control
of economic activity through the price mechanism, are available in a mixed economy. At the
same time, government control ensures that they do not lead to exploitation. Adequate freedom: Mixed economies allow adequate freedom to different economic units
such as consumers, employees, producers, and investors. Rapid and planned economic development: Planned economic growth takes place, resources
are properly and efficiently utilized, and fast economic development takes place because the
private and public sector complement each other. Social welfare and fewer economic inequalities: The government‘s restricted control over
economic activities helps in achieving social welfare and economic equality.
Disadvantages of Mixed Economy Ineffectiveness and inefficiency: A mixed economy might not actually have the usual
advantages of either the public sector or the private sector. The public sector might be inefficient
Assosa University, college of Business and Economics, Department of Economics

Introduction to Economics, By: Mohammed Ibrahim (MSc.)
E-mail:- [e-mail]
(Introduction to Economics Lecturer Note), for Natural students
due to lack of incentive and responsibility, and the private sector might be made ineffective by
government regulation and control. Economic fluctuations: If the private sector is not properly controlled by the government,
economic fluctuations and unemployment can occur. Corruption and black markets: if government policies, rules and directives are not
effectively implemented, the economy can be vulnerable to increased corruption and black
market activities.
1.7 Decision making units and the circular flow model
There are three decision making units in a closed economy. These are households, firms and the
government.
i) Household: A household can be one person or more who live under one roof and make joint
financial decisions. Households make two decisions.
a) Selling of their resources, and
b) Buying of goods and services.
ii) Firm: A firm is a production unit that uses economic resources to produce goods and
services. Firms also make two decisions:
a) Buying of economic resources
b) Selling of their products.
iii) Government: A government is an organization that has legal and political power to control
or influence households, firms and markets. Government also provides some types of goods and
services known as public goods and services for the society. The three economic agents
interact in two markets:
o Product market: it is a market where goods and services are transacted/ exchanged. That is, a
market where households and governments buy goods and services from business firms.
o Factor market (input market): it is a market where economic units transact/exchange factors
of production (inputs). In this market, owners of resources (households) sell their resources to
business firms and governments. The circular-flow diagram is a visual model of the economy
that shows how money (Birr), economic resources and goods and services flows through markets
among the decision making units. For simplicity, let‘s first see a two sector model where we
have only households and business firms. In this case, therefore, we see the flow of goods and
services from producers to households and a flow of resources from households to business
firms. In the following diagram, the clock – wise direction shows the flow of economic
resources and final goods and services. Business firms sell goods and services to households in
product markets (upper part of the diagram). On the other hand, the lower part shows, where
households sell factors of production to business firms through factor market. The anti – clock
wise direction indicates the flow of birr (in the form of revenue, income and spending on
consumption). Firms, by selling goods and services to households, receive money in the form of
revenue which is consumption expenditure for households in the product market. On the other
hand, households by supplying their resources to firms receive income. This represents
expenditure by firms to purchase factors of production which is used as an input to produce
goods and services.
Assosa University, college of Business and Economics, Department of Economics

Introduction to Economics, By: Mohammed Ibrahim (MSc.)
E-mail:- [e-mail]
(Introduction to Economics Lecturer Note), for Natural students
Assosa University, college of Business and Economics, Department of Economics