Basic Economic Concepts and Principles
Senior 4 · Economics
Basic Economic Concepts and Principles
Lesson 1 of 5
25 min
The word economics comes from the Greek oikonomia, which joins oikos (a household) and nomos (a rule, or management). In the fourth century BC the Athenian writer Xenophon wrote a dialogue, the Oeconomicus, about how a landowner should run his estate: how to direct workers, store harvests and avoid waste. Aristotle used the same word for managing a household well, and set it apart from making money for its own sake.
Two thousand years later the questions are bigger, but they have the same shape. A household in Nyagatare, a cooperative in Huye and the Government of Rwanda all have limited means and many uses for them, and each must decide how to use what it has. This lesson traces how the subject grew from household management into a science of choice, and why it is worth studying.
There is no single agreed definition. Each famous one reflects the problems of its own time, and each was criticised by the next. You should be able to state, explain and criticise all four.
| Definition | Main writer and book | Central idea | Main criticisms |
|---|---|---|---|
| Wealth definition | Adam Smith, The Wealth of Nations (1776) | Economics studies the nature and causes of the wealth of nations: how wealth is produced, exchanged and used. | Puts wealth above human welfare; takes a narrow, material view; pictures people as driven only by self-interest. |
| Welfare definition | Alfred Marshall, Principles of Economics (1890) | "A study of mankind in the ordinary business of life", centred on the material means of well-being. | Leaves out non-material services such as teaching and nursing; welfare cannot be measured; some economic activity (selling alcohol or tobacco) lowers welfare yet is still economic. |
| Scarcity definition | Lionel Robbins, An Essay on the Nature and Significance of Economic Science (1932) | Human behaviour as a relationship between ends and scarce means which have alternative uses. | Static: says little about growth; in a depression resources lie idle, so scarcity is not the whole problem; treats economics as neutral about which ends are good. |
| Growth (development) definition | Paul Samuelson, Economics (first edition 1948) | How society chooses to use scarce resources that have alternative uses to produce goods, and to share them out now and in the future. | Very broad; still accepts the scarcity idea but adds time and growth, so it is more a refinement than a new view. |
Definition
Economics: the social science that studies how individuals, firms and governments choose to use scarce resources, which have alternative uses, to satisfy unlimited wants, and how the results are shared and change over time.
Example: deciding whether a school's plot of land should grow vegetables for the canteen or become a second football pitch is an economic choice: one scarce resource, two competing uses.
Definition
Political economy: the older name for economics, used by Smith, Ricardo and Marx. It stressed the links between production, the state and the distribution of income. Marshall's book of 1890 helped make the shorter name economics standard.
Economics grew in stages, each a response to the problems of its age.
| School or landmark | Key ideas |
|---|---|
| Ancient Greeks (Xenophon, Aristotle) | Good management of the household and estate; a "just" price; suspicion of lending at interest. |
| Mercantilists (for example Thomas Mun, England's Treasure by Forraign Trade, published 1664) | A nation is rich when it holds gold and silver, so it should export more than it imports and protect its industries. |
| Physiocrats (François Quesnay, Tableau économique, 1758) | Only land produces a true surplus; the economy is a flow of goods and money between classes, drawn as a table. |
| Classical economists (Smith 1776, Malthus 1798, Ricardo 1817, J. S. Mill 1848) | Division of labour, free markets guided by the "invisible hand", comparative advantage, the labour theory of value. |
| Karl Marx (Das Kapital, volume 1, 1867) | Capitalism rests on the exploitation of workers by the owners of capital; it would be replaced by socialism. |
| Marginalists and neoclassicals (Jevons and Menger 1871, Walras 1874, Marshall 1890) | Value comes from marginal utility; demand and supply curves; equilibrium. Much of what you learn this year (Units 2 to 7) comes from this school. |
| John Maynard Keynes (The General Theory of Employment, Interest and Money, 1936) | Written in the Great Depression: total demand can be too low to employ everyone, so government spending can restore employment. The start of modern macroeconomics. |
| Since 1945 | Monetarism (Milton Friedman), development economics (W. Arthur Lewis), behavioural economics and others. |
Worked example 1: Robbins's definition applied to a real decision
A farmer in Musanze has 1 hectare of land, the labour of her household for one season and Frw 150,000 for seed and fertiliser (illustrative figures). She could plant Irish potatoes, beans or a mix.
| Element of Robbins's definition | In this decision |
|---|---|
| Ends (wants) | Food for the family, school fees, savings for a cow |
| Scarce means | 1 ha of land, one season of labour, Frw 150,000 |
| Alternative uses | Each piece of land and each franc could go to potatoes or beans |
| Behaviour (choice) | She ranks the ends and divides the means, for example 0.6 ha of potatoes for sale and 0.4 ha of beans for food |
Conclusion: all four parts of the definition are present, so this is an economic problem even though no economist is involved. If the land had only one possible use, there would be no choice and, in Robbins's sense, no economic problem.
Worked example 2: why economists separate prices from output
The National Institute of Statistics of Rwanda (NISR) estimates that Rwanda's gross domestic product (GDP, the value of everything produced in a year) at current prices was Frw 23,387 billion in 2025, up from Frw 19,918 billion in 2024. It also reports that GDP grew by 9.4% in 2025.
Step 1 Percentage rise in GDP at current prices:
Step 2 The 9.4% is measured at constant (2024) prices, so it counts only the extra goods and services produced. The gap between 17.4% and 9.4% is due to higher prices:
Interpretation: without economics we might say the economy grew by 17.4%. Economics teaches us to ask how much is real output and how much is inflation, because only real output raises living standards.
Warning
Economics is not the study of money. Money is one tool in the subject, but the core problem is choice under scarcity. Time, land, water, skilled teachers and hospital beds are all scarce resources, and allocating them is economics even when no money changes hands, as when a family decides who fetches water and who studies.
| For whom | How economics helps | Example |
|---|---|---|
| Individuals and households | Budgeting a limited income, comparing alternatives, judging prices, saving and borrowing wisely | Choosing between a mobile-money loan and saving for three months |
| Firms and cooperatives | Deciding what to produce, how to price it, how to cut costs and where to sell | A coffee cooperative deciding whether to sell cherries or invest in a washing station |
| Government | Planning, setting taxes and the budget, fighting inflation and unemployment, judging projects | MINECOFIN preparing the national budget; the National Bank of Rwanda (BNR) setting its central bank rate |
| Society and citizens | Understanding poverty, prices and jobs; taking part in public debate; careers in banking, planning and business | Understanding why fuel prices rise when world oil prices rise |
Economics also trains a way of thinking: identify what is scarce, list the alternatives, weigh costs against benefits and look for unintended effects. These habits are useful long after the exam.
Tip
Memory hook: W-W-S-G with dates 1776, 1890, 1932, 1948. Wealth (Smith) → Welfare (Marshall) → Scarcity (Robbins) → Growth (Samuelson). Each definition answers a weakness of the one before it, so in an essay you can criticise each by moving to the next.
Important
Discuss. Marshall's definition left out non-material services. Today services make up the largest share of Rwanda's GDP. Does that make Marshall's definition useless, or is the idea of "well-being" still the right aim for economics?
CrashCourse, "Intro to Economics: Crash Course Econ #1", presented by Adriene Hill and Jacob Clifford. Listen for how they define economics in terms of scarcity and choice, and compare it with the four definitions in the table above.
Practice
Key points
Sources and credits
Written by Ganzaa: the text, the timeline, the tables, the worked examples and the practice items. The Musanze farm figures are illustrative.
Quick check
A definition says economics studies how people use scarce means, which have alternative uses, to meet competing ends. Whose definition is this?
