This presentation is on the fundamentals of economics. This is a part of a project of Concept Research Foundation. The name of the project is "Increasing Economical Awareness". The main aim of the project is to increase economical knowledge and awareness in common people so that they can take sound economic decisions in their lives. So that is also the main aim of the presentation.

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Introduction to Economics

A Presentation by

Anamitra Roy

Introduction to Economics

"The Science of

Economics is made

for the benefit and

development of the

world."

- Chanakya

Economic Problems

•Unlimited Wants

•Scarce Resources –

Land, Labour,

Capital, …..

•Resource Use

•Choices

Economic Problems

Economic Problems

(continued)

(continued)

The problem of 'choice making' arising out of limited

means and unlimited wants is called economic problem.

Why do economic problems arise?

Unlimited wants

Different priorities

Limited means

Means having alternative uses

Multiplicity of want

Types of Resources

Types of Resources

Land: naturally occurring resources whose

supply is inherently fixed (i.e., does not

respond to changes in price)

Labor: the physical work that is needed to make

the products or provide the services.

Capital: the machines that is used to produce

the products.

Entrepreneurial Talent: the bright ideas that

people contribute to making or improving the

goods and services.

Economic Problems

Economic Problems

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?

Economic Problems

(continued)

Oikonomous – 'one who manage household'

Economics is the study of how societies use scarce

resources to produce valuable commodities and

distribute them among different people.

What is Economics?

Objectives

To understand the subject matter & the

essence of Economics and Managerial

Decision-Making

Managerial Economics: It refers to the application of

economic theory & the tools of analysis of decision

science to examine how an organization can achieve its

aims or objectives most efficiently. It studies the

economic aspects of managerial decision making

Maximizing the value of the firm

(Through profit maximization)

Alternative objectives:

=>Market share maximization

=>Growth Maximization

=>Maximizing their own benefits

Managers' Objectives

Market

Conditions

Factor

Prices

Economic

Conditions

Managerial

Problems

Managerial Decision

Company's

Performance

Market

Conditions

Why do we study Economics?

You are the manager of your own business firm.

For taking any decision for your firm what

variables should you consider?

Why do we study Economics?

•To Learn a Way of Thinking

•To Understand the Society

•To Understand Global Affairs

•To Be An Informed Voter

To Learn a Way of

Thinking

•Opportunity Cost

•Marginalism

•Sunk Cost

•Efficient Market

Opportunity Cost

Definition – the cost expressed in terms of the next

best alternative sacrificed

When a particular alternative is chosen from a set of

alternatives it implies sacrificing the other alternatives

The cost of the forgone alternatives is the opportunity

cost of the decision

Helps us view the true cost of decision making

Implies valuing different choices

Example : Firm purchases a new piece of equipment

for Rs.10,0000 to generate more profit, this amount

could have been deposited in an interest- earning

account.

Marginalism

Definition : The process of analysing the additional or

incremental costs or benefits arising from a choice or

decision

It should not be confused with average.

Example : Marginal labor unit Marginal

output of labor , Marginal revenue

Additional unit sold

Sunk Cost

•Definition : Costs that can not be avoided,

regardless of what is done in the future,

because they have already been incurred

Example : For an airplane that is about to take off with

empty seats, the marginal costs of an extra passenger is

zero, but giving a big discount for a few seats will be

profitable

Efficient Market

•Definition: A market in which profit

opportunities are eliminated almost

instantaneously.

Why do we study Economics?

•Economic knowledge serves us in

managing our personal lives, in

understanding society and in improving the

world around us.

•The ways that economics can help us

individually will be as different as are our

personal lives.

•Learning about stock market may help

people manage their own finances.

•Better awareness of the determinants of

cost and revenue will produce better business

decisions.

•The doctor, the investor and the farmer all

need to know about profit from their

businesses.

Why do we study Economics?

Scope of Economics: Micro

Economics

•The study of how households and firm

make decisions and how they interact in

specific markets

•Examples: impact of foreign competition

on the Indian automobile industry

Scope of Economics: Macro

Economics

•The study of economy-wide phenomena

•Examples: the effect of borrowing by the

Indian government, When politicians talk

about "the economy" being in recession

they are talking about Macroeconomics.

Methods of Economics

Positive Economics

Purely descriptive statements or scientific predictions; "If

A, then B," a statement of what is (attempts to describe the

world as it is ).

Eg.: Minimum wage law cause unemployment.

Normative Economics

Analysis involving value judgments; relates to whether

things are good or bad, a statement of what ought to be

(attempts to prescribe how the world should be).

Eg.: The Govt. should raise the minimum wage.

Descriptive Economics and

Economics Theory

Descriptive Economics

The compilation of data that describe phenomena and facts.

Eg.: Economic survey of India publish many data related to

economics.

Economic Theory

A statement or set of related statements about cause and

effect ,action and reaction.

Eg.: The Law of Demand, Law of Supply etc.

Theories and Models

A model is a formal statement of a theory, usually a

mathematical statement of a presumed relationship

between two or more values.

Variable is a measure that can change from time to time

or from observation to observation.

Ceteris Paribus / all else equal : A device used to

analyse the relationship between two variables while the

values of other variables are held unchanged.

•In all areas of economics, old and new, certain

pitfalls lie in the path of the serious economist.

•Falling to keep "others Things Equal"

•The Post Hoc Fallacy

•Fallacy of Composition

Pitfalls in Economic Reasoning

Most of economic problems involve

several forces interacting at the same time.

E.g..: the number of cars bought in a given

year is determined by the price of cars,

consumer incomes, gasoline prices etc.

How can we isolate the impact on car sales

of a single variable such as the price of

gasoline.

Others Things Equal

The Post Hoc Fallacy

•A common mistake in studies of cause-and-effect

relationships is the Post Hoc Fallacy.

E.g.: Dr. Optimist's observation is that after the

Government has cut tax rates, the Government's total

tax revenues began to rise. Dr.Optimist then claims

"Aha, if we lower the tax rates, we will rise revenues

and reduce the budget deficit."

The Post Hoc Fallacy

Dr.Optimist fallacy was to assume that the

tax cut was responsible for the increase in

Govt.s revenues; overlooked was the fact that

the growing economy was raising people's

income and might have increased tax

revenues even more had taxes not been cut.

The Fallacy of Composition

The erroneous belief that what is true for a

part is necessarily true for the whole.

Example : Increasing saving is obviously good

for an individual, since it provides for retirement or

a "rainy day," but if everyone saves more, it may

cause a recession by reducing consumer demand.

Economic Policy

Efficiency : An efficient economy is one that produces

what people want at the least possible cost.

Equity : It is a concept or idea of fairness in

Economics.

Economic Growth : A sustainable rise in per Capita

Income overtime.

Stability : A condition in which national output is

growing steadily , with low inflation and full employment

of resources.

The Circular-Flow Diagram

Firms Households

Market for

Factors

of Production

Market for

Goods

and Services

SpendingRevenue

Wages,

rent,

interest and

prot

Income

Goods &

Services

sold

Goods &

Services

bought

Labor, land,

and capital

Inputs for

production

COMBINATION CLOTH

(METER)

STEEL

(TON)

A 0 18

B 1 17

C 2 15

D 3 12

E 4 7

F 5 0

COMBINATION CLOTH

(METER)

STEEL

(TON)

OPPORTUNITY

COST OF CLOTHS

(TONS OF STEEL)

A 0 18 0

B 1 17 1

C 2 15 2

D 3 12 3

E 4 7 5

F 5 0 7

PRODUCTION POSSIBILITY

FRONTIER

A graph that shows all

the combination of

goods and services that

can be produced if all of

society's resources are

used efficiently - P.P.F.

Slope = Marginal rate

of Transformation

Law of Increasing

Opportunity Cost

Alternative

Economic System

Economic

System

Market Economy Command

Economy Mixed Economy

General Equilibrium

A General equilibrium is defined as a

situation in which all markets and all decision

making units are simultaneously in

equilibrium and each market is interrelated.

Theories of International

Trade

Absolute Advantage : A producer has an

absolute advantage over another in the

production of a good or services if it can

produce the same amount of output with less

input relative to other countries.

Comparative Advantage: A producer has a

comparative advantage over another in the

production of a good or services if it can

produce that product at a lower opportunity cost

Theory of Absolute

Advantage

Country Commodity

A B

Country 1 80 100

Country 2 120 90

Theory of Comparative

Advantage

Country Commodity

A B

Country 1 80 90

Country 2 120 100

`Laissez-Faire Economics

An economy in which individual people and

firms pursue their own self interests without

any central direction or regulation.

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