Introduction to Economics

Learning Objective: Explain fundamental economic concepts and types of economic systems

Nepal has limited land, a growing population, and scarce resources. Every day, the government must decide: Should the budget prioritize building roads or expanding hospitals? Should farmers grow rice or switch to commercial crops? These choices exist because resources are limited while human wants are unlimited. This is the fundamental problem that economics studies.

What Is Economics?

Economics is the social science that studies how individuals, businesses, and governments allocate scarce resources to satisfy unlimited wants. It helps us understand why prices rise, why some countries are richer than others, and how to make better decisions.

Core Concepts

Scarcity

Scarcity means there are not enough resources to fulfill all human wants. Nepal has limited arable land, limited foreign currency reserves, and limited skilled labor. Because of scarcity, choices must be made.

Opportunity Cost

When you choose one option, the next best alternative you give up is the opportunity cost. For example, if Nepal's government spends Rs. 500 crore on a new highway, the opportunity cost might be the hospital that could have been built with that money.

Personal example: If you spend Rs. 500 on a movie ticket, the opportunity cost is the book or meal you could have purchased instead.

Wants vs. Needs

• Needs: Essential for survival -- food, shelter, clothing
• Wants: Desires beyond basic survival -- smartphones, branded clothing, vacations

Types of Economic Systems

| System | Description | Example | |--------|------------|---------| | Traditional | Based on customs, traditions, and barter | Some rural communities in Nepal | | Command (Planned) | Government controls all resources and decisions | North Korea | | Market (Capitalist) | Private individuals and firms make decisions based on supply and demand | United States | | Mixed | Combination of market and government intervention | Nepal, India, most modern economies |

Nepal operates as a mixed economy -- private businesses operate freely in many sectors, while the government controls key areas like electricity (Nepal Electricity Authority), telecommunications, and sets policies for agriculture and education.

Microeconomics vs. Macroeconomics

• Microeconomics studies individual units -- a single consumer, a firm, a market. Example: Why does the price of tomatoes increase during winter in Kathmandu?
• Macroeconomics studies the economy as a whole -- national income, inflation, unemployment, trade. Example: Why is Nepal's GDP growing at 4-5% annually?

Key Term: Scarcity is the basic economic problem that arises because human wants are unlimited while resources are limited.

Summary

• Economics studies how scarce resources are allocated to meet unlimited wants.
• Opportunity cost is the value of the next best alternative given up.
• Nepal operates as a mixed economy with both private enterprise and government control.
• Microeconomics focuses on individual markets; macroeconomics looks at the whole economy.