CHAPTER ONE
INTRODUCTION TO ECONOMICS
Economics is the study of how humans make decisions in the face of scarcity. These can be individual decisions,
family decisions, business decisions or societal decisions. If you look around carefully, you will see that scarcity is a
fact of life.
Scarcity means that human wants for goods, services and resources exceed what is available. Resources, such as
labor, tools, land, and raw materials are necessary to produce the goods and services we want but they exist in
limited supply. Of course, the ultimate scarce resource is time- everyone, rich or poor, has just 24 hours in the day to
try to acquire the goods they want. At any point in time, there is only a finite amount of resources available.
Human wants are divided is a form of human desire, these cannot all be satisfied because of scarcity of resources
used to produce goods that satisfy the human want and that these wants are virtually unlimited. The satisfaction of
human want is the basis of all economic activity. Because all human wants cannot be satisfied due to scarcity of
resources, then a choice has to be made. It means that preference will be given to some wants as compared to others.
The wants which have greater importance will be satisfied first and this selection is known as choice. The types of
human wants include;
i. Basic or primary wants; these are necessaries of existence (food, shelter and clothing), necessaries of
efficiency and conventional necessaries.
ii. Secondary wants; these are mainly goods and services that provide comfort and luxury such as television
sets, laundry machine or car.
Any commodity that can satisfy human want has utility, the quality of that commodity which satisfies any human
want is called utility.
A good is an item that satisfies human want and that has exchange value. Goods can be classified into;
a. Free goods; these occur freely in nature
b. Economic goods; these are those which are scarce because the resources available to produce these goods are
scarce. These resources are also known as factors of production
c. Consumer goods; these are directly capable of satisfying economic wants or in a form that can be consumed
without the need for further production processes
d. Producer goods; are those which help to produce consumer goods, hence they are called capital goods and
include machinery, raw materials, premises, workshops and automobiles
e. Perishable goods; this have shorter utility duration examples fresh fruits and vegetables
f. Durable goods; have longer time to satisfy human wants
g. Material goods; consist of material items like food and clothing
h. Non material goods; these are services provided through skills and/or professions
Characteristics of human wants
Wants are unlimited in number; people keep on changing their tastes and preferences
Particular wants can be fully satisfied; food satisfies hunger
Wants are alternative or competitive; thirst can be satisfied with water or cold milk
Wants are complementary; satisfying one want requires that other wants also be satisfied
Wants vary in urgency and intensity; wants are compete for resources used to satisfy them
Wants are felt again and again for example the desire for food
Economic resources used for production of consumer goods and services include the following;
i. Natural resources; occurring free in nature such as water’ flora and fauna within an ecosystem
ii. Human resources; provided through manual labour, skilled and unskilled labour also professional services
such as those of a teacher, doctor, lawyer and mechanic
iii. Man made resources; artificially produced items usefull for production such as plastics
The Problem of Scarcity
Every society, at every level, must make choices about how to use its resources. Families must decide whether to
spend their money on a new car or a fancy vacation. Towns must choose whether to put more of the budget into
police and fire protection or into the school system. Nations must decide whether to devote more funds to national
defense or to protecting the environment. In most cases, there just isn’t enough money in the budget to do
everything. So why do we not each just produces all of the things we consume? The simple answer is most of us do
ECONOMICS COURSE NOTES: CHAPTER 1 – INTRODUCTION TO ECONOMICS PREPARED BY MR. ANTONY AMBIA Page 1
, not know how, but that is not the main reason. The reason why is something called the division and specialization of
labor, a production innovation first put forth by Adam Smith, in his book, The Wealth of Nations.
The Division of and Specialization of Labor
Division of labor means that the way a good or service is produced is divided into a number of tasks that are
performed by different workers, instead of all the tasks being done by the same person. To illustrate the division of
labor, Smith counted how many tasks went into making a pin: drawing out a piece of wire, cutting it to the right
length, straightening it, putting a head on one end and a point on the other, and packaging pins for sale, to name just
a few. Smith counted 18 distinct tasks that were often done by different people—all for a pin!
Modern businesses divide tasks as well. Even a relatively simple business like a restaurant divides up the task of
serving meals into a range of jobs like top chef, sous chefs, less-skilled kitchen help, servers to wait on the tables, a
greeter at the door, janitors to clean up, and a business manager to handle paychecks and bills—not to mention the
economic connections a restaurant has with suppliers of food, furniture, kitchen equipment, and the building where
it is located.
Why the Division of Labor Increases Production
When the tasks involved with producing a good or service are divided and subdivided, workers and businesses can
produce a greater quantity of output. In his observations of pin factories, Smith observed that one worker alone
might make 20 pins in a day, but that a small business of 10 workers (some of whom would need to do two or three
of the 18 tasks involved with pin-making), could make 48,000 pins in a day. How can a group of workers, each
specializing in certain tasks, produce so much more than the same number of workers who try to produce the entire
good or service by themselves? Smith offered three reasons.
First, specialization in a particular small job allows workers to focus on the parts of the production process where
they have an advantage. (In later chapters, we will develop this idea by discussing comparative advantage.) People
have different skills, talents, and interests, so they will be better at some jobs than at others. The particular
advantages may be based on educational choices, which are in turn shaped by interests and talents.
Second, workers who specialize in certain tasks often learn to produce more quickly and with higher quality. This
pattern holds true for many workers, including assembly line laborers who build cars, stylists who cut hair and
doctors who perform heart surgery.
Third, specialization allows businesses to take advantage of economies of scale, which means that for many goods,
as the level of production increases, the average cost of producing each individual unit declines. For example, if a
factory produces only 100 cars per year, each car will be quite expensive to make on average. However, if a factory
produces 50,000 cars each year, then it can set up an assembly line with huge machines and workers performing
specialized tasks, and the average cost of production per car will be lower. The ultimate result of workers who can
focus on their preferences and talents, learn to do their specialized jobs better, and work in larger organizations is
that society as a whole can produce and consume far more than if each person tried to produce all of their own goods
and services. The division and specialization of labor has been a force against the problem of scarcity.
Trade and Markets
Specialization only makes sense, though, if workers can use the pay they receive for doing their jobs to purchase the
other goods and services that they need. In short, specialization requires trade.
Instead of trying to acquire all the knowledge and skills involved in producing all of the goods and services that you
wish to consume, the market allows you to learn a specialized set of skills and then use the pay you receive to buy
the goods and services you need or want. This is how our modern society has evolved into a strong economy.
Why Study Economics?
Virtually every major problem facing the world today, from global warming, to world poverty, to the conflicts
in Syria and Somalia, has an economic dimension. If you are going to be part of solving those problems, you
need to be able to understand them. Economics is crucial.
It is hard to overstate the importance of economics to good citizenship. You need to be able to vote intelligently
on budgets, regulations, and laws in general.
A basic understanding of economics makes you a well-rounded thinker. When you read articles about economic
issues, you will understand and be able to evaluate the writer’s argument. The study of economics does not
dictate the answers, but it can illuminate the different choices.
Microeconomics and Macroeconomics
Economics is concerned with the well-being of all people, including those with jobs and those without jobs, as well
as those with high incomes and those with low incomes. Economics acknowledges that production of useful goods
ECONOMICS COURSE NOTES: CHAPTER 1 – INTRODUCTION TO ECONOMICS PREPARED BY MR. ANTONY AMBIA Page 2
INTRODUCTION TO ECONOMICS
Economics is the study of how humans make decisions in the face of scarcity. These can be individual decisions,
family decisions, business decisions or societal decisions. If you look around carefully, you will see that scarcity is a
fact of life.
Scarcity means that human wants for goods, services and resources exceed what is available. Resources, such as
labor, tools, land, and raw materials are necessary to produce the goods and services we want but they exist in
limited supply. Of course, the ultimate scarce resource is time- everyone, rich or poor, has just 24 hours in the day to
try to acquire the goods they want. At any point in time, there is only a finite amount of resources available.
Human wants are divided is a form of human desire, these cannot all be satisfied because of scarcity of resources
used to produce goods that satisfy the human want and that these wants are virtually unlimited. The satisfaction of
human want is the basis of all economic activity. Because all human wants cannot be satisfied due to scarcity of
resources, then a choice has to be made. It means that preference will be given to some wants as compared to others.
The wants which have greater importance will be satisfied first and this selection is known as choice. The types of
human wants include;
i. Basic or primary wants; these are necessaries of existence (food, shelter and clothing), necessaries of
efficiency and conventional necessaries.
ii. Secondary wants; these are mainly goods and services that provide comfort and luxury such as television
sets, laundry machine or car.
Any commodity that can satisfy human want has utility, the quality of that commodity which satisfies any human
want is called utility.
A good is an item that satisfies human want and that has exchange value. Goods can be classified into;
a. Free goods; these occur freely in nature
b. Economic goods; these are those which are scarce because the resources available to produce these goods are
scarce. These resources are also known as factors of production
c. Consumer goods; these are directly capable of satisfying economic wants or in a form that can be consumed
without the need for further production processes
d. Producer goods; are those which help to produce consumer goods, hence they are called capital goods and
include machinery, raw materials, premises, workshops and automobiles
e. Perishable goods; this have shorter utility duration examples fresh fruits and vegetables
f. Durable goods; have longer time to satisfy human wants
g. Material goods; consist of material items like food and clothing
h. Non material goods; these are services provided through skills and/or professions
Characteristics of human wants
Wants are unlimited in number; people keep on changing their tastes and preferences
Particular wants can be fully satisfied; food satisfies hunger
Wants are alternative or competitive; thirst can be satisfied with water or cold milk
Wants are complementary; satisfying one want requires that other wants also be satisfied
Wants vary in urgency and intensity; wants are compete for resources used to satisfy them
Wants are felt again and again for example the desire for food
Economic resources used for production of consumer goods and services include the following;
i. Natural resources; occurring free in nature such as water’ flora and fauna within an ecosystem
ii. Human resources; provided through manual labour, skilled and unskilled labour also professional services
such as those of a teacher, doctor, lawyer and mechanic
iii. Man made resources; artificially produced items usefull for production such as plastics
The Problem of Scarcity
Every society, at every level, must make choices about how to use its resources. Families must decide whether to
spend their money on a new car or a fancy vacation. Towns must choose whether to put more of the budget into
police and fire protection or into the school system. Nations must decide whether to devote more funds to national
defense or to protecting the environment. In most cases, there just isn’t enough money in the budget to do
everything. So why do we not each just produces all of the things we consume? The simple answer is most of us do
ECONOMICS COURSE NOTES: CHAPTER 1 – INTRODUCTION TO ECONOMICS PREPARED BY MR. ANTONY AMBIA Page 1
, not know how, but that is not the main reason. The reason why is something called the division and specialization of
labor, a production innovation first put forth by Adam Smith, in his book, The Wealth of Nations.
The Division of and Specialization of Labor
Division of labor means that the way a good or service is produced is divided into a number of tasks that are
performed by different workers, instead of all the tasks being done by the same person. To illustrate the division of
labor, Smith counted how many tasks went into making a pin: drawing out a piece of wire, cutting it to the right
length, straightening it, putting a head on one end and a point on the other, and packaging pins for sale, to name just
a few. Smith counted 18 distinct tasks that were often done by different people—all for a pin!
Modern businesses divide tasks as well. Even a relatively simple business like a restaurant divides up the task of
serving meals into a range of jobs like top chef, sous chefs, less-skilled kitchen help, servers to wait on the tables, a
greeter at the door, janitors to clean up, and a business manager to handle paychecks and bills—not to mention the
economic connections a restaurant has with suppliers of food, furniture, kitchen equipment, and the building where
it is located.
Why the Division of Labor Increases Production
When the tasks involved with producing a good or service are divided and subdivided, workers and businesses can
produce a greater quantity of output. In his observations of pin factories, Smith observed that one worker alone
might make 20 pins in a day, but that a small business of 10 workers (some of whom would need to do two or three
of the 18 tasks involved with pin-making), could make 48,000 pins in a day. How can a group of workers, each
specializing in certain tasks, produce so much more than the same number of workers who try to produce the entire
good or service by themselves? Smith offered three reasons.
First, specialization in a particular small job allows workers to focus on the parts of the production process where
they have an advantage. (In later chapters, we will develop this idea by discussing comparative advantage.) People
have different skills, talents, and interests, so they will be better at some jobs than at others. The particular
advantages may be based on educational choices, which are in turn shaped by interests and talents.
Second, workers who specialize in certain tasks often learn to produce more quickly and with higher quality. This
pattern holds true for many workers, including assembly line laborers who build cars, stylists who cut hair and
doctors who perform heart surgery.
Third, specialization allows businesses to take advantage of economies of scale, which means that for many goods,
as the level of production increases, the average cost of producing each individual unit declines. For example, if a
factory produces only 100 cars per year, each car will be quite expensive to make on average. However, if a factory
produces 50,000 cars each year, then it can set up an assembly line with huge machines and workers performing
specialized tasks, and the average cost of production per car will be lower. The ultimate result of workers who can
focus on their preferences and talents, learn to do their specialized jobs better, and work in larger organizations is
that society as a whole can produce and consume far more than if each person tried to produce all of their own goods
and services. The division and specialization of labor has been a force against the problem of scarcity.
Trade and Markets
Specialization only makes sense, though, if workers can use the pay they receive for doing their jobs to purchase the
other goods and services that they need. In short, specialization requires trade.
Instead of trying to acquire all the knowledge and skills involved in producing all of the goods and services that you
wish to consume, the market allows you to learn a specialized set of skills and then use the pay you receive to buy
the goods and services you need or want. This is how our modern society has evolved into a strong economy.
Why Study Economics?
Virtually every major problem facing the world today, from global warming, to world poverty, to the conflicts
in Syria and Somalia, has an economic dimension. If you are going to be part of solving those problems, you
need to be able to understand them. Economics is crucial.
It is hard to overstate the importance of economics to good citizenship. You need to be able to vote intelligently
on budgets, regulations, and laws in general.
A basic understanding of economics makes you a well-rounded thinker. When you read articles about economic
issues, you will understand and be able to evaluate the writer’s argument. The study of economics does not
dictate the answers, but it can illuminate the different choices.
Microeconomics and Macroeconomics
Economics is concerned with the well-being of all people, including those with jobs and those without jobs, as well
as those with high incomes and those with low incomes. Economics acknowledges that production of useful goods
ECONOMICS COURSE NOTES: CHAPTER 1 – INTRODUCTION TO ECONOMICS PREPARED BY MR. ANTONY AMBIA Page 2
