PRINCIPLES OF ECONOMICS

Dr. Jalandhar Pradhan

Reference: Karl E. Case, Ray C. Fair and Sharon M. Oster: Principles of Economics, Pearson Publisher
Syllabus
Unit I Basic Concepts of Economics
• Scope and Method of Economics: What is Economics, Why study Economics, Scope and Fields of Economics,
The methods of Economics, The Economic Policy.
• Demand, Supply and Market Equilibrium: Firms and Household; input markets and output markets: The
Circular Flow; Demand and supply, individual and market demand and supply and their determinants, Market
Equilibrium, Price Elasticity and its determinants.
• Household Behaviour and Consumer Choice: The consumption decisions –Choices made by Households;
budget constraints, Basis of Choice: Utility; Diminishing MU, allocating income to maximise utility, income and
substitution effects, Consumer and Producer Surplus.

Unit II Firm Behaviour and Market

• Production: Production, Behaviour of profit maximizing firms, Production Functions with one variable factor of
production, TP, MP, AP, Production Functions with Two variables factor of production, Isoquant and Iso-cost
lines, Cost minimizing equilibrium Condition
• Cost and Revenue Functions: Accounting and Economic costs, Costs in the short run, Fixed costs, variable
costs, Marginal costs, Long run AC and MC, TR,MR,AR.
• Markets, Perfect and Imperfect, Features of Perfect Competition, Monopoly, Oligopoly and Monopolistic
Competition
Contd…
Unit III Input Markets
• Input Markets: Labour, Land and Capital Markets (Basic concepts), Demand for inputs, Diminishing
Returns, Marginal Revenue Product, Input demand curve; Labour Market and demand for labour; shifts
in input demand curves; Land markets and rent, Capital Market, Capital Income-Interest and profit
Unit IV Introduction to Macroeconomics
• The roots of macroeconomics, Difference between micro and macro economics, macroeconomic
concerns, the role of government in the macro economy, the components of the macro economy, the
methodology of macroeconomics. Introduction to National Income Accounting: Concepts of GDP, GNP
and national income, approaches to calculating GDP, personal income, Nominal and real GDP,
Limitations of the GDP concept, GDP and the black economy.
Unit V Money in the Modern Economy
• Characteristics of a monetary economy; The demand for money; The supply of money and overall
liquidity position; credit creation. Inflation: The causes of inflation, level of prices and the value of
money, the Fisher effect, the cost of inflation.
Unit VI The International Economy
• Trade surpluses and deficits, the economic basis for trade—absolute advantage and comparative
advantage, terms of trade, exchange rates; Trade Barriers--tariffs, subsidies and quotas; The cases for
free trade or protection; Balance of Payments--The current and capital account.
What is Economics?
• Economics is a study of rationing systems

• It is the study of how scarce resources are allocated to fulfill the

infinite wants of consumers

• According to Prof. Lionel Robbins

“Economics is the science which studies human behaviour as a relation
between ends and scarce means which have alternative uses”
Characteristics of Robbins Definition
A. Unlimited Wants
• According to Prof Robbins definition, human wants are unlimited. On satisfaction of one wants,
another want arises immediately and this sequence continues forever.
 B. Scarce Means
• Robbins definition stated that through on one side human needs are unlimited yet on the other
side, the means to satisfy these wants, like- time, power, money etc. are also limited. Due to this,
many of man’s needs remain unsatisfied.
 C. Alternative Use of Scarce Means
• In Robbins’s view though the to ‘satisfy man’s needs are scarce, yet he has alternative uses.  For
example – such a resource like land can be used in many ways, such as it can be used for
agriculture or for building a house or to established a factory etc.
 D. Variation in the Intensity of wants
• Robbins definition states that the intensity of man’s needs is different. Some wants are more
intense than the others. Since our means are limited and all wants cannot be satisfied with the
limited means; as a result, we have to select some more intense wants from our unlimited wants
and the less intense wants have to be either dropped or postponed to a future date.
 Why Study Economics?
•There are four main reasons to study economics:
• to learn a way of thinking,
• to understand society,
• to understand global affairs, and
• to be an informed voter.
The Scope of Economics
MICROECONOMICS AND MACROECONOMICS

• microeconomics The branch of economics that

examines the functioning of individual industries and
the behavior of individual decision-making units—that
is, business firms and households.

• macroeconomics The branch of economics that

examines the economic behavior of aggregates—
income, employment, output, and so on—on a national
scale.
Microeconomics looks at the individual unit—the household, the firm, the industry. It
sees and examines the “trees.” Macroeconomics looks at the whole, the aggregate. It
sees and analyzes the “forest.”
 THE DIVERSE FIELDS OF ECONOMICS
TABLE 1 Examples of Microeconomic and Macroeconomic Concerns

DIVISION OF
ECONOMICS PRODUCTION PRICES INCOME EMPLOYMENT

Microeconomics Production/output in individual Price of individual Distribution of Employment by

industries and businesses goods and services income and individual businesses
    wealth and industries
How much steel
How much office Price of medical care Wages in the auto Jobs in the steel
space Price of gasoline industry industry
How many cars Food prices Minimum wage Number of employees
Apartment rents Executive salaries in a firm
Poverty Number of
accountants

Macroeconomics National Aggregate price level National income Employment and

production/output   unemployment in
  the economy
Total industrial output Consumer prices Total wages and Total number of jobs
Gross domestic Producer prices salaries   Unemployment rate
product Rate of inflation Total corporate
Growth of output profits

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The Economic Problem

Unlimited Wants
Scarce Resources – Land, Labour, Capital
Resource Use
Choices
The Central Problem of an Economy

What goods and services should an economy produce? – should the

emphasis be on agriculture, manufacturing or services, should it be on
sport and leisure or housing?

How should goods and services be produced? – labour intensive, land

intensive, capital intensive? Efficiency?

Who should get the goods and services produced? – even

distribution? more for the rich? for those who work hard?
Factors of Production
• Land
- natural resources available for production
- renewable resources: those that replenish
- non-renewable resources: cannot be replaced
• Labor
- physical and mental effort of people used in production
• Capital
- all non-natural (manufactured) resources that are used in the creation and
production of other products

• Enterprise (Entrepreneurship)
- refers to the management, organization and planning of the other three factors
of production
 Payments
to factors Factors of Production
of Production

Enterprise
Land Labor Capital

Rent Wages Interest Profit

INCOME
Opportunity Cost

• Definition – the cost expressed in terms of the next best alternative

sacrificed
• Helps us view the true cost of decision making
• Implies valuing different choices
 Production Possibility Curves (Frontier) also
known as PPF

• Production – output of goods and services

• Possibility – maximum attainable amount

• Frontier – border or boundary

• PPF shows the boundary of what is possible and is used as an

illustration in economics to show the choices facing all countries in
producing goods which use limited factors of production.
Production Possibility Frontiers
Show the different combinations of goods and services that can be produced with
a given amount of resources

No ‘ideal’ point on the curve

Any point inside the curve – suggests resources are not being utilised efficiently

Any point outside the curve – not attainable with the current level of resources

Useful to demonstrate economic growth and opportunity cost

 Production Possibility Frontiers

Capital Goods IfIf it devotes all

the
Assume country is
a country
resources to capital
can
at
goods
produce
point A ontwo
it could the
Ym types
PPF
produceIt ofagoods
can maximum
If it reallocates its with
of Ym.its resources
produce the
resources (moving round – capital goods
the PPF from A to B) it can combination
If it devotes all of
its Yo
A and consumer
resources to
produce more consumer Yo capital
goods goods and
goods but only at the consumer goods it
expense of fewer capital
Xo consumer
could produce a
goods. The opportunity goods
maximum of Xm
cost of producing an extra
Xo – X1 consumer goods
is Yo – Y1 capital goods. Y1 B

Xo X1 Xm Consumer Goods
 Shift of PPF

It Production
can only produce at
Capital Goods points outside the PPF
inside the PPF
if it finds a way of
– e.g. point
expanding its B
means or
resources theimproves

Y1
C the productivity
country of
is not
those resources it
usinghas.all This
its will
A already

.
Yo resources
push the PPF further
outwards.

Xo X1 Consumer Goods
Any Questions?