What is Economics about?

Different economists have different viewpoints about economics.

Adam Smith says about economics as a science of wealth
Marshal is of opinion that economics relates with social actions of a man when he earns and
when he spends his earnings for his material welfare
Another economist Lionel Robbins has another different idea about economics. He says
economics deals with economic problem.

a.

The nature, scope and methods of economic analysis

b.

Importance of Economics

Like other subjects the economics has its own specific importance that is why it is becoming
more popular subject day by day

THEORATICAL IMPORTANCE
1. Intellectual development:
The study of Economics widens the mental scope of the people because it increases mental
capacity to understand various problems of life.
2. Spirit of co-operation:
The study of Economics realizes us that we are interdependent to meet our economic and social
wants. It leads to spirit of co-operation.
3. Critical analysis:
An economist critically analyses the situation and then draws conclusions which provides a
guide - line for successful life.
4. Rationality:
The study of Economics teaches rationality, i.e. to avail the best possible situation within the
given conditions.
5. Sense of responsibility:
Economics teaches us that we have to meet our unlimited wants with limited resources. It creates
a sense of responsibility which in turn makes a person a better citizen.
6. Vision about economic system:
The study of Economics not only enables to understand different economic systems, i.e.
capitalism, socialism, Islamic economic system but it also create a vision to look into the
working of a particular economic system.
7. Source of information:
To understand some problems like inflation, exchange rate, shares, BOP (balance of payment),
deficit financing (printing of extra currency notes) etc. has become unavoidable for a successful
By: M.Saleem Ullah Khan
ACMA, ACPA, APFA, AICSP, M Sc, B Ed

life. Economics is the major source of all these inevitable information.

PRACTICAL IMPORTANCE
1. To understand other subjects:
The study of Economics is very useful to understand other subjects like history, sociology,
psychology etc.
2. Solution of economic problems:
The study of Economics provides the solution of critical economic problems like poverty,
inflation, monopolies, unemployment, environmental pollution etc.
3. Government:
Planning and development strategies, budget, monetary policy, fiscal policy etc. are major
concerns of the government. Government depends heavily upon economists for policy decision making.
4. Producers:
The ultimate objective of a producer is to maximize profit in case of profit and minimize loss in
case of loss. It is the study of Economics which provides guideline to hit the target.
5. Consumers:
Consumers are always in search of maximization of satisfactions. It is Economics which
provides basic principles to maximize satisfaction.
6. Bankers:
Banking is the most challenging art of present era. A successful banking system is based on the
knowledge of Economics.
7. Speculators:
Speculation, i.e. purchase and sale of shares, bonds, certificates etc. is the major feature of
present business world. It is Economics which provides outlines for speculation.
8. Rulers:
Economic tactics are the most effective tactics to win the favour of masses. Hence it is must for a
successful ruler to have the awareness of at least basic knowledge of Economics.
9. Labour:
Labourer enriched with the knowledge of Economics can realize their role and importance to the
employer in production process. Hence Economics enables them to enjoy higher wages.
10. Citizen:
Knowledge of Economics is indispensable for a good citizen. Wooten has rightly remarked that:
You cannot be a citizen in real sense unless you are at least in some degree an economist.
11. Global supremacy:
Global supremacy is possible only on the basis of advanced studies in Economics. For instance
By: M.Saleem Ullah Khan
ACMA, ACPA, APFA, AICSP, M Sc, B Ed

G-8 countries are enjoying global supremacy on the basis of literature of Economics.
12. Best possible allocation of resources:
Optimum allocation of resources is key to economic development and the study of Economics
confirms best allocation of resources.
13. Equitable distribution of wealth:
Inequitable distribution of wealth has been the crucial problem of especially LDCs(less
developed countries). It is the study of the Economics which provides guide - line for equitable
distribution of wealth.
14. Gate-way to economic development:
Economic development has been the dream of all nations. It is the knowledge of Economics
which serves as a gate-way to economic development.

1.

Demand and Supply:

In daily routine words demand is the desire or willingness of any individual to buy any good or
service. But in economics demand has its specific meanings. In economics the demand is
completely defined when following three conditions are fulfilled
Desire to buy any commodity or service.
Buyer has purchasing power /have money to buy
At given price / price is clear to buyer

a.

Individual demand, aggregate or market demand,

Law of demand
The law of demand states that other factors being constant, price and quantity demand of any
good and service are inversely related to each other.

Definition: The law of demand states that other factors being constant, price and quantity
demand of any good and service are inversely related to each other. When the price of a
product increases, the demand for the same product will fall.

By: M.Saleem Ullah Khan

ACMA, ACPA, APFA, AICSP, M Sc, B Ed

Description: Law of demand explains consumer choice behavior when the price changes. In the
market, assuming other factors affecting demand being constant, when the price of a good rises,
it leads to a fall in the demand of that good. This is the natural consumer choice behavior. This
happens because a consumer hesitates to spend more for the good with the fear of going out of
cash.

The above diagram shows the demand curve which is downward sloping. Clearly when the price
of the commodity increases from price p3 to p2, then its quantity demand comes down from Q3
to Q2 and then to Q3 and vice versa.

changes in

demand, elasticity of demand, and measurement of

elasticity of demand
b.

What is supply law of supply, supply and stock, elasticity

of supply?
c.
2.

Equilibrium between demand and supply

Consumer Demand Theory:

Law of diminishing and marginal utility, consumers

equilibrium (cardinal approach)

2.

The Cost and Revenue of a Firm:

By: M.Saleem Ullah Khan
ACMA, ACPA, APFA, AICSP, M Sc, B Ed

First of all it is necessary to clear some basic concepts

Firm
Cost
Revenue

Classification of cost, fixed cost, variable cost, total average

cost, marginal cost, opportunity cost, total revenue, marginal and
average revenue
4.

Laws of Returns:
a.

The law of diminishing return

Total Product (TP) This is the total output produced by workers

Marginal Product (MP) This is the output produced by an extra worker

Definition: Law of Diminishing Marginal Returns

Diminishing Returns occurs in the short run when one factor is fixed (e.g. Land)
If the variable factor of production (Labour) is increased, there comes a point where it will
become less productive and therefore there will eventually be a decreasing marginal and then
average product
This is because if capital is fixed extra workers will eventually get in each others way as they
attempt to increase production. E.g. think about the effectiveness of extra workers in a small
caf. If more workers are employed production could increase but more and more slowly.
This law only applies in the short run because in the long run all factors are variable
Assume the wage rate is 10, then an extra worker Costs 10.
The Marginal Cost (MC) of a sandwich will be the Cost of the worker divided by the number of
extra sandwiches that are produced
Therefore as MP increases MC declines and vice versa
A good example of Diminishing Returns includes the use of chemical fertilizers- a small
quantity leads to a big increase in output. However, increasing its use further may lead to
declining Marginal Product (MP) as the efficacy of the chemical declines.
Diagram of Diminishing Returns

By: M.Saleem Ullah Khan

ACMA, ACPA, APFA, AICSP, M Sc, B Ed

Quantity of Labor
1
2
3
4
5
6
7
8
9
10

Marginal Product in KG wheat

100
95
90
85
80
75
70
65
60
55

Total Product in KG wheat

100
195
285
370
450
525
595
660
720
775

Explanation of the table

900

Total Product

800
700
600
Total Product in KG wheat
500
Marginal Product in KG
wheat

400

Quantity of Labour
300
200
100

Marginal Product

0
1

10

By: M.Saleem Ullah Khan

ACMA, ACPA, APFA, AICSP, M Sc, B Ed

b.

The law of increasing return

c.

The law of constant return

The law of costs

5.

a.

The law of diminishing cost

b.

The law of increasing cost

c.

The law of constant cost

Price and Output Determination:

Pure competition, concept and occurrences, price and output

determination under-perfect
6.

competition and monopoly

Resource Pricing:

Resources are the four factors of production when are necessary to produce any good or service.
Without efforts of four factors of production any good or service cannot be produced. When
these resources pay their services then they deserve to be paid. These payments are called their
rewards. Land receives rent, capital receives interest, labour receives wages and entrepreneur
gets profit. Here a question arises that how much should be paid to each factor of production.
Economists observed that factors of production are paid according to following theories.

a.

Marginal productivity theory of resource demand

b.

Factors of production (brief introduction)

By: M.Saleem Ullah Khan

ACMA, ACPA, APFA, AICSP, M Sc, B Ed