Introduction to Economics

Unit 1

The word µeconomics ¶ has been derived from an ancient Greek word µOikonomia¶ (management of a house hold) which is a a combination of two words µoikos¶ (a house) & µNomos¶ (customs or law). Hence, economics means rules of the house (hold). Economics means managing a household with the limited funds available in an economical manner. Economics is the study of how society chooses to use its limited resources to produce, exchange and consume goods and services.

Adam Smith ³Economics inquires into the factors that determine wealth of the country and its growth´ This definition emphasizes production & expansion of wealth

.Definition Lionel Robbins ³Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses´. The three components in Robbins¶ definition are: ends. scarce means and alternative uses.

This is a fundamental fact of economic life. . They are unlimited.    Multiplicity of ends: Ends means human wants. another want crops up.Features of Robbins· definition 1.  When one want gets satisfied.

e.Features con«.  Wants are of different intensity. . Scarcity of means  Resources are scarce in relation to wants. resources are limited and wants are unlimited... some are more intense than other  People have to choose which want satisfaction they desire the most. 2. i.

g. Coal can be used as fuel in production of industrial goods or for running trains or for domestic cooking. Alternative uses of resources  Resources are not only scarce but they have alternative uses.  Human beings have to decide for the satisfaction of which wants the resources should be used.Features con««  All wants cannot be satisfied. . 3. E.

classified and analyzed.Nature of Economics Economics as a science Science can be defined as a systematic body of knowledge that explains the relationships between causes and effects In economics. . relevant facts are systematically collected.

Nature of Economics con« In science the results are easily measurable. In economics money is used as a µmeasuring rod¶ for organizational and individual economic activities. .

Nature of Economics con« A science must be capable of formulating laws explaining the circumstances under which a particular result can be achieved. Economics often fails to predict future course of events due to complex and variable forces involved such as unemployment and price fluctuations. .

Nature of Economics con« Science is quantifiable where as economics often has to deal with human attitudes and emotions which are difficult to predict. We cannot predict how an individual is going to react to a particular situation. . This is the case with economy also.

Nature of Economics con« For e. and buy other vegetables instead. But we cannot assume that this will always happen. a shortage in the supply of an agricultural product. prices of tomatoes may remain stable. If people decide to stop buying tomatoes because of their high price. can lead to an increase in its price. ..g. say tomatoes. or even fall.

Economics is an art in the sense that it has several branches which gives practical direction to solve economic problems of the society.Nature of economics con«. Economics as an art Art is defined set of rules for the achievement of a given objective. . It provides specific solutions to specific problems.

we study human decisions as facts which can be verified with actual data.Nature of economics con«. It explains economic phenomena according to their causes and effects. Economics as a positive science. . In positive economics. Positive economics deals with what is or how an economic problem can be solved.

g. a) India is an over populated country b) An increase in real per capita income increases the standard of living of people . E.Nature of economics con«.

Economics as a normative science Normative economics deals with what ought to be or how an economic problem should be solved.Nature of economics con«. It prescribes that course of action which is desirable and necessary to achieve social goals. .

b) Free education should be given to the poor.g.Nature of economics con«. . a) Government should guarantee a minimum wage for every worker. E.

micro economics & macroeconomics.Scope of Economics Before 1930 there was only one economics Ragnar Frisch coined the words µmicro¶ & µmacro¶ in 1933 to denote the two branches of economic theory. namely. .

Microeconomics Meaning  The word micro is derived from the Greek word µmikros¶ which means µsmall¶ Microeconomics deals with small segments of the society.  Microeconomics is defined as µthe study of human behaviour of individual decision making units. . such as consumers. resource owners & firms¶.

Microeconomics  It is also known as Price Theory since its major subject matter deals with the determination of price of commodities and factors .

Scope of Microeconomics  Micro economics has both theoretical & practical importance  It solves three central problems of the economy. i.. a) What to produce? b) How to produce? & for c) Whom to produce? .e.

Microeconomics Product Pricing Factor pricing Welfare Economics Theory of Theory of Demand Supply Wages Rent Interest Profit .

 Macroeconomics deals with aggregative economics  Macroeconomics is defined as µthe study of overall economic phenomena such as problem of full employment. economic growth. . savings. investment.Macroeconomics  The word macro is derived from the Greek word µmakros¶ which means large. GNP. aggregate investment. etc. aggregate consumption.

Macroeconomics  It is also known as Theory of Income & Employment since its major subject matter deals with the determination of income & employment .

disequilibrium in the balance of payments position. etc. . general unemployment. monetary problems.Scope of Macroeconomics  The study of macroeconomics is used to solve many problems of an economy like. economic fluctuations. inflation.

Macroeconomics Theory Theory of of Income Price Level & & Employment Inflation Theory of Economic Growth Theory of Distribution .

Economic Systems  Economic system is defined as an arrangement by which the central problems of the economy can be solved. Economic system Capitalist Economy Socialist Economy Mixed Economy .

. there is no incentive to compete.  Consumers are not independent to decide what to consume.  Social welfare is the only basis of production activities. Since there is no profit motive. how to produce & whom to produce  Prices are determined by central planning authority. Hungary. etc.g. E.  All economic decisions are taken by the government ± what to produce.Socialist/Command Economy  This system is based on public ownership of property & social welfare motive. Poland. They can consume only those goods produced are produced by the economy.

Australia etc. prices are determined by the market forces of demand and supply.  Consumers are free to buy goods & services of their choice and producers allocate their resources based on the demand. E.g.Capitalist /Market Economy  It is an economic system based on private property and private profit.  It is also called Laissez faire or free market economy  Price plays a major role .  The role of the government is negligible. United States.  In this system. .

g. India .Mixed Economy  It is a combination of a free market economy and a command economy  Ownership of property is both by both private & public sector  There is freedom of enterprise in the private sector but no freedom in the public sector  Private sector produces with profit motive & public sector with welfare motive  Government controls the price fluctuations to reduce unemployment and high level of inflation E.

political and social environment changes constantly.  To have a better understanding of the changing environment. managers have to analyze problems at two levels ± microeconomic level & macroeconomic level. . the success of a business depends how managers anticipate changes and cope with these changes.Economics & Business  As the economic.

there is problem of deciding the quantity to be produced & price to be charged to the customers .  Business economics deals with the application of economic theory to analyze problems faced by a firm while making decisions. firms face problems such as the selection of a product to manufacture and sell..  After a product is selected .Economics & Business con.  Even at a basic level of business.

the firm can look at the demand for the product. and also identifies the possible consequences of the decisions taken by the firm. and its cost of production. .  To find an answer to this problem.Economics & Business con.  Economics explains how economic forces affect a firms working..

revenues. including the factors influencing its prices.  Knowledge of macroeconomic environment allows a manager to analyze the impact of external environment on his business.Economics & Business con.. costs etc. .  Managers use their knowledge of micro economic environment to analyze the operations of the firm in its immediate market.

. legal and economic decisions at national & international levels . managers should be aware of the factors that affect business decisions.Economics & Business con.  The external environment includes political.  Thus to make effective decisions..

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