AN INTRODUCTION TO

ECONOMICS
The word ‘economics’ is based on two
Greek roots – ‘oikos’ meaning the
household and ‘nemin’ management.
 Definitions of Economics
 Adam Smith – Wealth definition. ‘Economics is the Science
that studies production & consumption of wealth. ’His
famous book, ‘An Inquiry into the Nature and Causes of the
Wealth of Nations’ was published in 1776.
 Alfred Marshall – Welfare definition. ‘Economics studies
those economic activities of a social man which are
concerned with attainment and use of material requisites of
well-being.
 Lionel Robbins – Scarcity definition.
 Paul .A. Samuelson – Growth oriented definition.
‘It analyses the costs and benefits of improving patterns of
resource allocation.’
 SUBJECT MATTER OF
ECONOMICS
 Economics if concerned with the analysis of
consumption, production, exchange and
distribution of wealth plus the allocation of
scarce resources among competing uses.
 With the publication of Lord Keynes,
“General Theory of Employment, Interest
and Money”, after the great depression of
the 1930, the subject matter of Economics
widened.
 LORD JOHN MAYNARD KEYNES
 Considered as father of Macro-Economics,
Keynes defined economics as “the study of
factors affecting employment and standard
of living.”
 He approached the economic problem of
choice from the point of view of society
instead of viewing it from the angle of the
individual as done by Robbins and Marshall.
MAIN FOCUS OF ECONOMICS
 What goods and services need to be produced
and in what quantities?
 What methods of production are used to produce
these goods?
 How is the total output of goods and services to be
allocated among the members of society?
 Are the resources being utilized optimally?
 What are the problems faced in International
Trade?
 To what extent should the government intervene in
the working of the market forces?
 BASIC CONCEPTS
 Economic and non-economic activities.
 Economy – its four sectors.
 GDP, GNP, National Income.
 Micro and Macro Economics.
 Economic problem – Why does it arise?
 Central (or basic) problem of an economy.
 What to produce? How to produce? For
whom to produce?
 MICRO ECONOMICS & MACRO
ECONOMICS
 Prof. Ragnar Frisch of the Oslo University
developed the term micro & macro
economics in 1933. The word ‘micro’ is
derived from the Greek word, ‘Mikros’
meaning ‘small’ & ‘makro’ meaning large.
 Economic theory is an integration of micro &
macro economics. They are the two
approaches to study the economic problem
of choice.
MAJOR AREAS OF STUDY UNDER
MICRO ECONOMICS
 How are resources to be allocated the production f
goods & services?
 How are goods & services distributed?
 How efficiently are the goods & services
distributed?
 Another area which micro-economics studies is
international trade. – it provides a framework to
understand the need for international trade,
reasons fro trade, gains from int. trade &
determination of the terms of trade.
 IMPORTANCE OF MICRO-
ECONOMICS
 Provides a better understanding of the working of
decision-making units in the economy.
 Provides tools for examining the appropriateness
of economic policies.
 Helps to examine & suggest conditions for welfare
optimizations.
 Helpful in efficient allocation of scarce resources.
 Helpful in understanding international trade.
 Provides a basis for making conditional
predictions.
 Helpful in formulation of Models & using them.
 ECONOMIC PROBLEMS
 Problem of Allocation of Resources.
 Problem of Full and Efficient utilization of
Resources.
 Problem of Economic Growth.
 The concept of Opportunity cost.
Leftwitch says, “Opportunity cost of a
particular product is the value of the
foregone alternative product that resources
used in its production could have produced.”
 PRODUCTION POSSIBILITY
CURVE
 PPC is a curve which shows all possible
combinations of any two goods produced
simultaneously by an economy during a specific
period with given resources and technology.
 Assumptions – i) The amount of productive
resources is fixed, ii) There is no change in
technology, iii) All the productive resources are
fully employed and iv) All resources are not
equally efficient in the production of all goods.
 CHARACTERISTICS OF PPC
 It slopes downwards to right.
 It is concave to the point of origin.
 Three situations of PPC – under-utilization, fair or
optimum utilization and full-utilization of resources
– growth or development-economics.
 The concavity of the curve reflects the operation of
the law of increasing marginal opportunity cost.
 It is also known as transformation curve as
movement along it indicates transformation of one
commodity into the other by diverting resources.
 ECONOMIC SYSTEMS
 An economic systems is the social organism
through which people work and earn their living to
satisfy their wants.
 It stands for the totality of economic life of a
community. Communities are grouped into
nations. Different nations follow different political
systems.
 Capitalism (free enterprise economy or laissez
faire (leave us alone).
 Socialism (Command or government economies)
 Mixed economies.
 Few basics……
 Production – Transformation of input into output is
called ‘Production’ in Economics.
 Factors of Production – Land, labor, capital and
organization or entrepreneurship.
 Consumption.
 Investments.
 Capital formation = Production – Consumption.
 Utility – Want satisfying power of a commodity is
called utility.
 Is Economics a Science?
 “Science is a systematic study of knowledge
which traces the relationship between cause
and effect.”
 Features of Science – Systematized Study,
Cause and effect relationship, Universal
Laws, Experiments, Scale of Measurement.
 Economics as a Positive Science.
 Economics as a Normative Science.
 Consumer’s Equilibrium
 It refers to a situation wherein the consumer gets
maximum satisfaction out of his scarce resources,
i.e. monthly income.
 Assumptions – Consumer is rational, utility can be
measured cardinally, marginal utility of money
remains constant, Income of the consumer and
the price of the commodity remains fixed, Goods
are neither complementary nor substitutes for one
another, Taste/ preference does not change.
 Producer’s Equilibrium
 Equilibrium indicates a situation or a point of rest.
It thus, refers to a stage of no change. It signifies a
situation in which there is complete adjustment of
the various forces operating there. There is no
inducement or urge to change. It is an ideal state.
 A Producer or firm is said to be in equilibrium
when he is produc8ng desired quantity of output
with the least possible cost or with the given
resources, he is producing maximum possible
output.
 Producer’s equilibrium is the point at which a
producer gets maximum profitability.
 THANK YOU.