Economics

• ECONOMICS
The study of how people use their scarce resources to
satisfy their unlimited wants
Economics is described as the science of choice, centered
on the principle that society has unlimited wants but
depends on scarce resources
• RESOURCES
• Resources are the inputs, or factors of production, used
to produce the goods and services that people want
• Scarcity: A good or service is scarce if the amount
people desire exceeds the amount available at a zero
price
• Goods: tangible item used to satisfy human
wants
• Free Good vs. Economic Good
• SERVICE: An activity used to satisfy human
wants
• Economic Decision Makers: There are four
types of decision makers, or participants, in
the economy: households, firms,
governments, and the rest of the world
• Industry: Automobile Industry ( Firm, Firm,
Firm)
• Firm: Volkswagen , Hyundai
• Plant; Pune, Chennai
Factors of production Factor Income

LABOR Wages
The physical and mental
effort used to produce
goods and
services

CAPITAL Interest
The buildings, equipment,
and human skill used to
produce goods
and services or factors of
production

Land Rent

Entrepreneurial Profit
• MARKET
• A set of arrangements through which buyers and
sellers carry out exchange at mutually agreeable
terms
• PRODUCT MARKET
• A market in which a good or service is bought and
sold
• RESOURCE MARKET
• A market in which a resource is bought and sold
 Types of Economic Systems

• A Traditional Economy that deals with these questions by relying on

customs and traditions. This type of economy is usually associated with
cultures that practice subsistence agriculture, with customs and economic
roles being passed down from generation to generation. An example of
this might be the tribal's in Baxter
• A Command Economy answers these questions by having the government
make (or command) decisions pertaining to what is produced, how much
is produced, and how goods produced and services are provided. An
example of this would be the economic system developed in communists
countries such as the old Soviet Union.
• A Market Economy answers these questions by allowing the buyers and
the producers of goods and services to come to an agreement regarding
what is provided and bought in a society and what the price of a good or
service should be.
 Types of Economic Systems

• A Mixed Economy utilizes aspects of different

systems. For example, in India economic
system, at its base, would be classified as a
market economy. Businesses are privately
owned and consumers have the ability to
make economic decisions. However, the
government does play a prominent role in
regulated businesses, and by providing
services.
 Basic Economic Problems
1. What to Produce and How Much?
- Choice has to be made as Resources are limited
- Choice of Consumer Goods or capital Goods
- Choice of Present or future
- Theory of Value
2. How to Produce?
- Technique of Production
- Capital Intensive or Labour Intensive
- Theory of Production
 Basic Economic Problems
3. For Whom to Produce?
- Share of commodities among all members
- Share will depend on contribution to national
income
- Theory of Distribution

4.Problem of Full Employment

- Resources are Optimally Utilized
- Theory of Employment
 Basic Economic Problems
5.Are the Resources Economically Used?
- Production and Distribution is done Efficiently
- Economics of Welfare

6.Problem of Growth and Flexibility

- Adaptable to Change
- Change i.e. technology, taste, resources etc.
- Economics of Growth

-
 Basic Economic Problems
- 7.Is Purchasing Power of Money Constant or
being Eroded due to Inflation?
 Two Branches of Economics
• Microeconomics: Which basically analyzes individual
business situations or sectors of the economy. For this
course the topics we will study will include Supply and
Demand, Elasticity (the degree to which prices impact
behavior), and Market Structures (the level of
competition in a particular industry).
• Macroeconomics: Which analyzes the broad aspects of
a country’s economy. In this area we will study GDP,
unemployment, inflation and the government’s tools
to deal with economic circumstances. Also, included in
this topic will be topics pertaining international trade.
Points MICROECONOMICS MACROECONOMICS

Meaning It is the study of small It is the study of large

components of the components of the
economy. economy.
Origin It is derived from the Greek It is derived form the Greek
word MIKROS i.e. small word MACROS i.e. large
Study It is the study of small It is the study of aggregates
components like like National Income and
consumers, producers output through the process
through slicing of lumping
Approach It has an Individualistic It is aggregative in
approach. approach.
Equilibrium Equilibrium of demand and Equilibrium of aggregate
supply explains price demand and supply
theory. decides income theory.
Definition Boulding defined Boulding defined
Microeconomics as “It is Macroeconomics as “It is
the study of particular firm, not the study of individual
Particular price, wages, quantity but aggregate
income of individual quantity, not individual
output but national output
Deals With Individual economic Aggregate economic
variables variables
Scope Covers various issues like Covers various issues like,
demand, supply, product national income, general
pricing, factor pricing, price level, distribution,
production, consumption, employment, money etc
economic welfare, etc

Importance Helpful in determining Maintains stability in the

the prices of a product general price level and
along with the prices of resolves the major
factors of production problems of the economy
(land, labor, capital, like inflation, deflation,
entrepreneur etc.) within reflation, unemployment
the economy. and poverty as a whole.

Limitation It is based on unrealistic It has been analyzed that

assumptions of full 'Fallacy of Composition'
employment in the involves, which
society sometimes doesn't
Unrealistic Assumption of proves true because it is
Laissez-faire not true possible that what is true
Microeconomics study for aggregate may not be
parts and neglects whole true for individuals too
• Rational Self Interest: Rational self interest means that individuals try to
maximize the expected benefit achieved with a given cost or to minimize
the expected cost of achieving a given benefit.
• Economic Analysis is Marginal Analysis : Incremental, additional, or extra;
used to describe a change in an economic variable
• Variable: A measure, such as price or quantity, that can take on different
value
• Attribute:
• Paradox of Saving
• Laissez faire: the policy of leaving things to take their own course, without
interfering.
• "a laissez-faire attitude to life"
• ECONOMICS
• abstention by governments from interfering in the workings of the free
market.
 Normative Versus Positive
• Positive Economic Statement: A statement
that can be proved or disproved by reference
to facts

• Normative Economic Statement: A statement

that represents an opinion, which cannot be
proved or disproved. It reflects an opinion. It
involves value judgements
• The inflation has been above 5% per year for the
last 5 years
• The inflation should be kept at 0%
• The government should take measures to reduce
inflation
• The following statement given at a political rally:
“Poverty should be eliminated given the size of
our economy; and that’s a fact.” This is normative
because- It is expressing someone else's value
and opinions
 Science of
Economic Analysis
 Rational Self Interest: Rational self interest means that
individuals try to maximize the expected benefit
achieved with a given cost or to minimize the expected
cost of achieving a given benefit.
 Economic Analysis is Marginal Analysis : Incremental,
additional, or extra; used to describe a change in an
economic variable
Science of Economic Analysis

Economic Theory or Economic Model:A simplification of

reality used to make predictions about cause and effect in
the real world
Scientific Method
Some Pitfalls of Faulty
Economic Analysis
 Economic analysis, like other forms of scientific inquiry, is subject
to common mistakes in reasoning that can lead to faulty
conclusion.
 The Fallacy That Association Is Causation: The incorrect idea that
if two variables are associated in time, one must necessarily cause
the other
 The Fallacy of Composition: The incorrect belief that what is
true for the individual, or part, must necessarily be true for the group,
or whole
 The Mistake of Ignoring the Secondary Effects: Unintended
consequences of economic actions that may develop slowly over
time as people react to
events