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Economics

Dr P James Daniel Paul

Professor VIT BS

Introduction to Economics

Dr P James Daniel Paul

Professor VIT Business School

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Thought to act: process mapping

Philosophy

Formulae

Application

Similarly, Economics starts with Philosophy, Formulae & Application

History of Economic Thought

Pre-Classical (up to 1776)
The Mercantilists (1500-1780)
The Physiocrats (1750-1800)
Classical (1776-1870s).
Socialism (1848-to date).
Marginal (1870s-1890s).
Neoclassical (1890s-to date).
Keynesian (1936-1960s).
Monetarist (1945 to date).

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Physiocrats vs Mercantilist

Physiocrats, a group
of economists who believed that the
wealth of nations was derived solely
from the value of "land agriculture"
or "land development."
The Tableau
Economique by Franois Quesnay in
1759,
Laid the foundation of the
Physiocrats economic theories.

Mercantilism is the economic doctrine

that government control of foreign
trade is of paramount importance for
ensuring the military security of the
country.

Classical Economists
Adam Smith
(1723-1790)

David Ricardo
(1772-1823)

Thomas
Malthus
(1766-1834)

J.B. Say
(1767-1832)

Robert Malthus
David Ricardo

J. S. Mill
(1806-1873)

Advocates of laissez-faire

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Adam Smith (1723-1790)

An Inquiry into the
Nature and Causes of
the Wealth of Nations
(1776)
Division of labour
Pin making

David Ricardo (1772-1823)

Definition of the Rent:
That portion of the
produce of earth which
is paid to the Land Lord
for the use of the
original and
indestructible powers of
the soil.

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Thomas Robert Malthus (1766-1834)

Essay on the Principle of
Population
While food output was likely
to increase in a series of
twenty-five year intervals in
the arithmetic progression
1, 2, 3, 4, 5, 6, 7, 8, 9, and so
on, population was capable
of increasing in the
geometric progression 1, 2,
4, 8, 16, 32, 64, 128, 256,

Marginal or Utilitarian
J.B. Say (1767-1832)
Supply will create its
own demand JB Say

J. S. Mill (18061873)

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Socialism- Karl Marx

The Communist
Manifesto (1848)
and Das Capital (1867
1894).
Capitalist vs labour
Cold war

Karl Marx

Keynesian Revolution
The Great Depression of
1930s
Doctor of doom
The General Theory of
Employment, Interest and
Money - John Maynard
Keynes, 1936
Liquidity preference:
Transaction
Precautionary
Speculative

Aggregate demand
Pump priming

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Monetarism
During the 1960s he
promoted an alternative
macroeconomic policy
known as "monetarism".
He theorized there
existed a "natural" rate of
unemployment, and
argued that governments
could increase
employment above this
rate

Milton Friedman

Evolution of Economics

Physiocrats
vs
Mercantilist

Socialist Vs
Capitalist

Keynesians
Vs
Monetarist

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Economics
It is the study of

Efforts

Satisfa
ction

Wants

Branches of Economics

Economics

Micro
Economics

Macro
Economics

Individuals,
Family,
Firms,
Markets

Aggregate
income,
savings,
investments
, Exports,
Imports

Monetary
Economics

Money
currency
coins

Interests

Public
Economics

forex

Revenue

Direct

Expenditure

Indirect

Capital Plan
Expenditure

Non Plan
Expenditure

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Agenda

Law of Demand
Elasticity of Demand
Forecasting Demand
Law of Diminishing
Marginal Utility
Indifference Curves

Law of Demand
Citrus Paribus when
price falls the demand
expands.
Assumptions
Demand depends on the
law of diminishing
marginal utility
Citrus Paribus
Negative slope
Linear relationship

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Exceptions to Law of Demand

Luxury goods
Addictive Goods

Elasticity of Demand

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Demand forecasting
Normal Equations:

Substitute the values in Normal

equation to estimate a & B

Law of diminishing marginal Utility

Cardinal Utility Theory
Assumptions
Utility is measurable
Utility is additive

As a product is consumed repeatedly the

utility of the product diminishes for every
consecutive product

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Indifference Curves
Ordinal Utility Theory
Assumptions :
Utility is relative [Not
measurable but
comparable]
Goods are consumed in
ordered pairs
Preferences are revealed

Circular Flow

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Law of Supply
When price of Onion
increases producers bring
more to the market
Price and quantity
relationship
Other things remain the
same

Marginal Productivity Theory

Cardinal Theory
Increase in inputs over
a period of time
provides diminishing
results

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Isoquants
It is an ordinal theory
Productivity can be
measured in relative
terms not in absolute
terms
Producers have ordered
pairs of the factors of
production.

Production functions
CobbDouglas production function

where:
Y = total production (the real value of all
goods produced in a year)
L = labor input (the total number of personhours worked in a year)
K = capital input (the real value of all
machinery, equipment, and buildings)
A = total factor productivity
and are the output elasticities of capital
and labor, respectively. These values are
constants determined by available
technology.

CES Production Function

where
Q = Output
F= Factor productivity
a= Share parameter
L and K = Primary production factors (Capital
and Labor)
R=(s-1)/s
S=1/(r+1)
r and s Elasticity of substitution.

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Concepts covered
Others
Evolution
Physiocrats Vs Mercantilist
Socialist Vs Capitalists
Institutionalism Vs Free market
Keynesians vs Monetarists
Branches of Economics
Circular Flow

Customers
Law of Demand
Elasticity
Demand Forecasting Normal
Equations
Law of diminishing marginal
Utility
Indifference Curves

Producers
Law of Supply
Law of Marginal Product
Isoquants

Thank you

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Market Equilibrium

Two women and a geese Definition of Market

Break Even Point, Costs & Revenue

Functions

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Average and Marginal costs

Types of Markets

Monopoly

Monopolistic
Competition

Oligopoly

Imperfect
Competition

Perfect
Competition

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Perfect competition
Many sellers
Many buyers
Buyers and sellers
determine the price.
Free Entry and exit.
Perfect Knowledge of
the product in the
market

Monopoly
Only one seller
Many buyers
Seller is the price maker
not the price taker
Entry Restricted

Indian Railways - Monopoly

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Oligopoly
Few dominant firms
Price setters
Objective : Profit
maximization
Perfect knowledge of
Customers
Interdependence

Theories in Oligopoly
Cournot Nash

Beterand

Kinked Demand

Game Theory

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Cournot Nash Equilibrium

Firms compete in
quantities
Firms do not collude.
output decision affects
the good's price;

Beterand Model

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Game Theory
Collusive oligopoly
Non-collusive oligopoly
Game theory
Prisoners dilemma
Explains collusion and
non collusive outcomes

Economics of Scale

When a business Expands the average cost increases.

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Constant, Increasing, Decreasing returns to scale

Cost and Revenue Functions

TR= a+b1X1
TC = a+b2X2
TR-TC

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