INTRODUCTION TO

ECONOMIC SCIENCE

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Lecture 2

An Overview of Economic Science

Intended Learning Outcomes:

1) Identify the nature of economic science

2) Clarify the scope of economics

3) Recognize productive resources

4)Explain input/output interactions

5) Discuss the Key Economic Decisions

6) Explain Types of Economic Systems

7) Identify the relation between economics and Economic Systems

8) Clarify the relation between economics and the other Social Sciences

9) Identify the main subfields of economics studies

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10) Explain the importance of training in economics
 An Overview
of Economic Science

I. The Nature of Economics

Economics is generally defined as the study of the production, distribution,

and consumption of goods and services.

Economics is a social science that examines how people (i.e. individuals,

businesses, and governments) choose among available alternative choices
to use scarce resources to satisfy their unlimited needs and wants.

Economics is social for it involves people and their behavior, and it is a

science because it uses -as much as possible- a scientific approach in its
investigation of choices.
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II. The Scope of Economics

One of the main facts of life is that there is a gap between what
people need and want and what they are able to get. Economics is
concerned about how to deal with this situation. Generally, there
are two approaches that may be considered: one is to want less;
and the other is to get more. Economists cannot say which way is
better. Economic studies however, are limited to the second
approach. In other words, economics studies how people organize
the use of limited productive resources to satisfy their unlimited
needs and wants.

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III. Productive Resources

Productive resources refer to the inputs (i.e. factors of production)

used to produce outputs of goods and services required to satisfy
people’s needs and desires. They include:
1) Natural resources (e.g. Land and other raw materials)
2) Human resources (i.e. physical and mental) which refer to:
a- Labor: needed to transform raw materials into goods& services
b- Entrepreneurship: that provides the skill and creativity needed
to combine resources together to produce a good or service.
3) Capital resources (e.g. equipment, buildings, vehicles, cash etc.)
that are needed for the production process.
If resources are so abundant or wants are so few, we can produce
everything people need/want, and there would be no economic
problem (and no economics). But this situation does not exist.
Resources are usually not enough “scarce” to produce goods and
services required to satisfy all people’s growing needs and desires.
Therefore, a society has to take certain decisions to balance
between the available resources and people’s needs and desires. 5
IV. Input/output interactions

The Circular Flow of Inputs and Outputs diagram

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Both inputs and outputs of production interact in the economy -
through their various markets- to provide people with goods and
services required to satisfy their needs and wants. This process is
represented in the above The Circular Flow of Inputs and Outputs
diagram indicates the following:

1) Many of the factors of production (or resources) are provided to

businesses by households.
2) Businesses pay households for these resources by providing them
with income, such as wages, rent, and interest.
3) Resources obtained from households are then used by businesses
to produce goods and services.
4) These goods and services are sold to households that provide
businesses with revenue.
5) These revenue are used to buy additional resources to produce
more required goods and services, and the cycle continues. 7
V. The Key Economic Decisions
Economic choices of individuals, businesses, and government are generally
related to the following three basic economic decisions:

1) What goods and services should be produced to meet consumers’

needs?, In what quantity?, and When should they be produced?

2) How should goods and services be produced? Who should produce

them, and what resources, including technology, should be combined to
produce them?

3) Who should receive the goods and services produced? How should
they be allocated among consumers?

The answers to these questions depend on a country’s economic

system—the means by which a society (households, businesses, and
government) makes decisions about allocating resources to produce
products and about distributing those products. The degree to which
individuals and business owners, as opposed to the government, enjoy 8
freedom in making these decisions varies according to the type of
economic system.
VI. Types of Economic Systems

Generally speaking, economic systems can be classified as: planned systems and
free market systems. However, the most applied system in modern history is a mix
of these two systems which is referred to as Socialist/mixed economy.

1) The Capitalist/Free Market System: in which economic decisions are left to

individuals who act in response to what is known as "the invisible hand". The main
examples of that system are the United States and Canada

2) The Planned/Command Economy: is one in which some central agency decides

what is to be produced, how to do each of the tasks in production, and how the output
is to be divided. Germany under Hitler, Italy under Mussolini, and Russia under the
Communists are examples of that system.

3) The Socialist/Mixed Economy: in actual life, no economic system conforms

completely with either of the above systems or models. There is always some blending
of central direction and individual decision-making. Many of previously communist
economies, such as Eastern Europe and China have converted businesses owned
by government to private ownership through the privatization process.
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VI. Economics and Economic Systems

Economic science studies how each economic system has worked in

practice, where and when it has been used, the problems that arise
under each system, and the possible solutions to those problems.

However, an economist is not capable to pass final judgment on

the relative advantages/disadvantages of the economic systems.
He/she can only point out what can be expected of each system. It
is then up to the people to determine which economic system they
wish to use.

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VII. Economics and the other Social Sciences

As a social science, economics is closely related to other social sciences.

1) Economists must turn to history to understand how economic systems

have developed/declined and how they have worked in practice.

2) Economics is related to sociology since economists must examine the

social conditions necessary to allow each economic system to operate
efficiently; as well as its consequences , policy, or action.

3) Economists need to study psychology to understand people’s behavior

4) Economics is connected to political science for every economic system

must operate in a political environment and will influence and be
influenced by that environment.

The person who understands economics must never lose sight of the
relationships between economics and the other branches of learning.
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VIII. The Main Subfields of Economics Studies

The field of economics is generally divided into two broad subfields:

microeconomics and macroeconomics.

1) Microeconomics: it focuses on the choices made by individual

decision-making units in the economy—typically consumers, and
firms; and the implications of such decisions on them. The key
word in microeconomics is individuals.

2) Macroeconomics: it studies the total or aggregate effects of

choices made by economic units (individuals, businesses, and
government) on the national as well as global economies. Major
topics of Macroeconomics include inflation, unemployment, and
economic development. The key world in macroeconomics is
aggregate.
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IX. The importance of Training in Economics

Economics is a science that helps people learn how to best utilize

available resources to maximize the production of goods and service
needed to satisfy their needs and wants. Because the economic way
of thinking has proven quite useful, training in economics can be
utilized in a wide range of fields.

Economists work mainly in three types of organizations:

government agencies; business firms; as well as colleges,
universities and research institutions. Economists working for
business firms and government agencies can assist their employers
in planning for the most feasible future economic activities. They also
apply economic analysis to the activities of the firms or agencies for
which they work or consult. Economists employed at colleges and
universities teach and conduct research. 13
 Important Note:

Economics is not something to memorize,

it is something to conceptualize.
As you study it, think about it too.
The success of your future job or business may depend on it.

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Thank you 

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