CHAPTER:1

INTRODUCTION
Economics is the science that deals with the production, allocation, and use of goods and
services. It is important to study how resources can best be distributed to meet the needs of the
greatest number of people. As we are more connected globally to one another, the study of
economics becomes extremely important. While there are many subdivisions in the study of
economics, two major ones are macroeconomics and microeconomics. Macroeconomics is the
study of the entire system of economics. Microeconomics is the study of how the systems affect
one business or parts of the economic system. Economics can be defined in a few different ways.
It’s the study of scarcity, the study of how people use resources and respond to incentives, or the
study of decision-making. It often involves topics like wealth and finance, but it’s not all about
money. Economics is a broad discipline that helps us understand historical trends,
interpret today’s headlines, and make predictions about the coming years.

Economics is the study of how societies, governments, businesses, households, and individuals
allocate their scarce resources. Our discipline has two important features. First, we develop
conceptual models of behavior to predict responses to changes in policy and market conditions.
Second, we use rigorous statistical analysis to investigate these changes.

Economists are well known for advising the president and congress on economic issues,
formulating policies at the Federal Reserve Bank, and analyzing economic conditions for
investment banks, brokerage houses, real estate companies, and other private sector businesses.
They also contribute to the development of many other public policies including health care,
welfare, and school reform and efforts to reduce inequality, pollution and crime. The study of
economics can also provide valuable knowledge for making decisions in everyday life. It offers a
tool with which to approach questions about the desirability of a particular financial investment
opportunity, whether or not to attend college or graduate school, the benefits and costs of
alternative careers, and the likely impacts of public policies including universal health care and a
higher minimum wage. The complementary study of econometrics, the primary quantitative
method used in the discipline, enables students to become critical consumers of statistically
based arguments about numerous public and private issues rather than passive recipients unable

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to sift through the statistics. Such knowledge enables us to ask whether the evidence on the
desirability of a particular policy, medical procedure, claims about the likely future path of the
economy, or many other issues is really compelling or whether it simply sounds good but falls
apart upon closer inspection.

Economics is the study of how humans make decisions in the face of scarcity. These can be
individual decisions, family decisions, business decisions or societal decisions. If you look
around carefully, you will see that scarcity is a fact of life. Scarcity means that human wants
for goods, services and resources exceed what is available. Resources, such as labor, tools,
land, and raw materials are necessary to produce the goods and services we want but they exist
in limited supply. Of course, the ultimate scarce resource is time- everyone, rich or poor, has
just 24 hours in the day to try to acquire the goods they want. At any point in time, there is
only a finite amount of resources available.

Economics is not primarily a collection of facts to be memorized, though there are plenty of
important concepts to be learned. Instead, economics is better thought of as a collection of
questions to be answered or puzzles to be worked out. Most important, economics provides the
tools to work out those puzzles.

Economics seeks to solve the problem of scarcity, which is when human wants for goods and
services exceed the available supply. A modern economy displays a division of labor, in which
people earn income by specializing in what they produce and then use that income to purchase
the products they need or want.

The division of labor allows individuals and firms to specialize and to produce more for
several reasons:

 It allows the agents to focus on areas of advantage due to natural factors and skill
levels.
 It encourages the agents to learn and invent.
 It allows agents to take advantage of economies of scale. Division and specialization of
labor only work when individuals can purchase what they do not produce in markets.

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 CHAPTER:2

WHAT IS ECONOMICS
Economics is a social science concerned with the production, distribution and consumption of
goods and services. It studies how individuals, businesses, governments and nations make
choices on allocating resources to satisfy their wants and needs, and tries to determine how these
groups should organize and coordinate efforts to achieve maximum output. Economics is
sometimes called catallarchy or catallactics, meaning the science of exchanges. Economic
analysis often progresses through deductive processes, much like mathematical logic, where the
implications of specific human activities are considered in a "means-ends" framework. The study
of economics can be subcategorized into microeconomics and
macroeconomics. Microeconomics is the study of economics at the individual or business level;
how individual people or businesses behave given scarcity and government intervention.
Microeconomics includes concepts such as supply and demand, price elasticity, quantity
demanded, and quantity supplied. Macroeconomics is the study of the performance and structure
of the whole economy rather than individual markets. Macroeconomics includes concepts such
as inflation, international trade, unemployment, and national consumption and production.

Economists take their inspiration from exactly the kinds of observations that we have discussed.
Economists look at the world around them—from the transactions in fast-food restaurants to the
policies of central banks—and try to understand how the economic world works. This means that
economics is driven in large part by data. In microeconomics, we look at data on the choices
made by firms and households. In macroeconomics, we have access to a lot of data gathered by
governments and international agencies. Economists seek to describe and understand these data.
But economics is more than just description. Economists also build models to explain these data
and make predictions about the future. The idea of a model is to capture the most important
aspects of the behavior of firms (like KFC) and individuals (like you). Models are abstractions;
they are not rich enough to capture all dimensions of what people do. Yet a good model, for all
its simplicity, is still capable of explaining economic data.

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Economics is both prescriptive and descriptive. Economics is prescriptive because it tells you
some rules for making good decisions. Economics is descriptive because it helps us explain the
world in which we live. As well as uncovering some principles of good decision making, we
discuss whether these are also useful descriptions of how people actually behave in the real
world.

The central focus of economics is on scarcity of resources and choices among their alternative
uses. The resources or inputs available to produce goods are limited or scarce. This scarcity
induces people to make choices among alternatives, and the knowledge of economics is used to
compare the alternatives for choosing the best among them. For example, a farmer can grow
paddy, sugarcane, banana, cotton etc. in his garden land. But he has to choose a crop depending
upon the availability of irrigation water.

Two major factors are responsible for the emergence of economic problems. They are:

i) The existence of unlimited human wants

ii) The scarcity of available resources. The numerous human wants are to be satisfied
through the scarce resources available in nature. Economics deals with how the
numerous human wants are to be satisfied with limited resources. Thus, the science of
economics centres on want - effort - satisfaction.

Political Economy or Economics is a study of mankind in the ordinary business of life; it

examines that part of individual and social action which is most closely connected with the
attainment and with the use of the material requisites of well being. Thus it is on the one side a
study of wealth; and on the other, and more important side, a part of the study of man. For man's
character has been moulded by his every-day work, and the material resources which he thereby
procures, more than by any other influence unless it be that of his religious ideals; and the two
great forming agencies of the world's history have been the religious and the economic. Here and
there the ardour of the military or the artistic spirit has been for a while predominant: but
religious and economic influences have nowhere been displaced from the front rank even for a
time; and they have nearly always been more important than all others put together. Religious
motives are more intense than economic, but their direct action seldom extends over so large a
part of life. For the business by which a person earns his livelihood generally fills his thoughts
during by far the greater part of those hours in which his mind is at its best; during them his

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character is being formed by the way in which he uses his faculties in his work, by the thoughts
and the feelings which it suggests, and by his relations to his associates in work, his employers or
his employees.

CHAPTER:3

SCOPE OF ECONOMIC
Scope means province or field of study. In discussing the scope of economics, we have to
indicate whether it is a science or an art and a positive science or a normative science. It also
covers the subject matter of economics. i) Economics - A Science and an Art a) Economics is a
science: Science is a systematized body of knowledge that traces the relationship between cause
and effect. Another attribute of science is that its phenomena should be amenable to
measurement. Applying these characteristics, we find that economics is a branch of knowledge
where the various facts relevant to it have been systematically collected, classified and analyzed.
Economics investigates the possibility of deducing generalizations as regards the economic
motives of human beings. The motives of individuals and business firms can be very easily
measured in terms of money. Thus, economics is a science. Economics - A Social Science: In
order to understand the social aspect of economics, we should bear in mind that labourers are
working on materials drawn from all over the world and producing commodities to be sold all
over the world in order to exchange goods from all parts of the world to satisfy their wants.
There is, thus, a close inter-dependence of millions of people living in distant lands unknown to
one another. In this way, the process of satisfying wants is not only an individual process, but
also a social process. In economics, one has, thus, to study social behaviour i.e., behaviour of
men in-groups. b) Economics is also an art. An art is a system of rules for the attainment of a
given end. A science teaches us to know; an art teaches us to do. Applying this definition, we
find that economics offers us practical guidance in the solution of economic problems. Science
and art are complementary to each other and economics is both a science and an art. ii) Positive
and Normative Economics Economics is both positive and normative science. a) Positive
science: It only describes what it is and normative science prescribes what it ought to be. Positive
science does not indicate what is good or what is bad to the society. It will simply provide results
of economic analysis of a problem. b) Normative science: It makes distinction between good and

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bad. It prescribes what should be done to promote human welfare. A positive statement is based
on facts. A normative statement involves ethical values. For example, “12 per cent of the labour
force in India was unemployed last year” is a positive statement, which could is verified by
scientific measurement. “Twelve per cent unemployment is too high” is normative statement
comparing the fact of 12 per cent unemployment with a standard of what is unreasonable. It also
suggests how it can be rectified. Therefore, economics is a positive as well as normative science.
iii) Methodology of Economics Economics as a science adopts two methods for the discovery of
its laws and principles, viz., (a) deductive method and (b) inductive method. a) Deductive
method: Here, we descend from the general to particular, i.e., we start from certain principles
that are self-evident or based on strict observations. Then, we carry them down as a process of
pure reasoning to the consequences that they implicitly contain. For instance, traders earn profit
in their businesses is a general statement which is accepted even without verifying it with the
traders. The deductive method is useful in analyzing complex economic phenomenon where
cause and effect are inextricably mixed up. However, the deductive method is useful only if
certain assumptions are valid. (Traders earn profit, if the demand for the commodity is more). b)
Inductive method: This method mounts up from particular to general, i.e., we begin with the
observation of particular facts and then proceed with the help of reasoning founded on
experience so as to formulate laws and theorems on the basis of observed facts. E.g. Data on
consumption of poor, middle and rich income groups of people are collected, classified, analyzed
and important conclusions are drawn out from the results. In deductive method, we start from
certain principles that are either indisputable or based on strict observations and draw inferences
about individual cases. In inductive method, a particular case is examined to establish a general
or universal fact. Both deductive and inductive methods are useful in economic analysis. iv)
Subject Matter of Economics Economics can be studied through a) traditional approach and (b)
modern approach. a) Traditional Approach: Economics is studied under five major divisions
namely consumption, production, exchange, distribution and public finance. 1.Consumption: The
satisfaction of human wants through the use of goods and services is called consumption.
2.Production: Goods that satisfy human wants are viewed as “bundles of utility”. Hence
production would mean creation of utility or producing (or creating) things for satisfying human
wants. For production, the resources like land, labour, capital and organization are needed. 3.
Exchange: Goods are produced not only for self-consumption, but also for sales. They are sold to

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buyers in markets. The process of buying and selling constitutes exchange. 4. Distribution: The
production of any agricultural commodity requires four factors, viz., land, labour, capital and
organization. These four factors of production are to be rewarded for their services rendered in
the process of production. The land owner gets rent, the labourer earns wage, the capitalist is
given with interest and the entrepreneur is rewarded with profit. The process of determining rent,
wage, interest and profit is called distribution. 5. Public finance: It studies how the government
gets money and how it spends it. Thus, in public finance, we study about public revenue and
public expenditure.

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 CHAPTER:4

TYPES OF ECONOMICS
Economics Has Been Bifurcated Into two Categories:

1. MICROECONOMICS
2. MACROECONOMICS

 Microeconomics

Microeconomics is the social science that studies the implications of individual human action,
specifically about how those decisions affect the utilization and distribution of scarce resources.
Microeconomics shows how and why different goods have different values, how individuals
make more efficient or more productive decisions, and how individuals best coordinate and
cooperate with one another. Generally speaking, microeconomics is considered a more complete,
advanced and settled science than macroeconomics. Microeconomics is the study of economic
tendencies, or what is likely to happen when individuals make certain choices or when the
factors of production change. Individual actors are often broken down into microeconomic
subgroups, such as buyers, sellers and business owners. These actors interact with the supply and
demand for resources, using money and interest rates as a pricing mechanism for coordination.

 The Uses of Microeconomics

As a purely normative science, microeconomics does not try to explain what should happen in a
market. Instead, microeconomics only explains what to expect if certain conditions change. If a
manufacturer raises the prices of cars, microeconomics says consumers will tend to buy fewer

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than before. If a major copper mine collapses in South America, the price of copper will tend to
increase, because supply is restricted.

Microeconomics could help an investor see why Apple Inc. stock prices might fall if consumers
buy fewer iPhones. Microeconomics could also explain why a higher minimum wage might
force Wendy's Company to hire fewer servers. However, questions about aggregate economic
numbers remain the purview of macroeconomics, such as what might happen to the gross
domestic product (GDP) of China in 2020.

 Macroeconomics

Macroeconomics is a branch of the economics field that studies how the aggregate economy
behaves. In macroeconomics, a variety of economy-wide phenomena is thoroughly examined
such as, inflation, price levels, rate of growth, national income, gross domestic product and
changes in unemployment. It focuses on trends in the economy and how the economy moves as a
whole.

Macroeconomics differs from microeconomics, which focuses on smaller factors that affect

choices made by individuals and companies. Factors studied in both microeconomics and
macroeconomics typically have an influence on one another. For example
the unemployment level in the economy as a whole has an effect on the supply of workers from
which a company can hire. Macroeconomics, in its most basic sense, is the branch of economics
that deals with the structure, performance, behavior and decision-making of the whole, or
aggregate, economy, instead of focusing on individual markets. Macroeconomics study
aggregated indicators such as unemployment rates, GDP and price indices, and then analyze how
different sectors of the economy relate to one another to understand how the economy functions.
Macroeconomists develop models explaining relationships between a variety of factors such as
consumption, inflation, savings, investments, international trade and finance, national income
and output. Contrarily, microeconomics analyzes how individual agents act, namely consumers
and corporations, and studies how these agents' behavior affects quantities and prices in certain
markets. Such macroeconomic models, and what the models forecast, are used by government
entities to aid in the construction and evaluation of economic policy.
Macroeconomics is a rather broad field, but two specific areas of research are representative of
this discipline. One area involves the process of understanding the causation and consequences
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of short-term fluctuations in national income, also known as the business cycle. The other area
involves the process by which macroeconomics attempts to understand the factors that determine
long-term economic growth, or increases in the national income.

CHAPTER:5

TYPES OF ECONOMY
Market-based economies allow goods to flow freely through the market, according to supply and
demand. This type of economy has a tendency to naturally balance itself: as the prices in
one sector for an industry rise due to demand, the money and labor necessary to fill that demand
filter to the places where they are needed.

Command-based economies are dependent on a central political agent, which controls the price
and distribution of goods. Supply and demand cannot play out naturally in this system because it
is centrally planned, so imbalances are common.

Green economies depend on renewable, sustainable forms of energy. These systems operate with
the end goal of cutting carbon emissions, restoring biodiversity, relying on alternative energy
sources and generally preserving the environment. This report from the United Nations
Environment Program, "Examples of the Green Economy in Practice," gives a few examples of
societies that are embracing this system.

The study of the economy and the factors affecting the economy is called economics.The
discipline of economics can be broken into two major areas of
focus, microeconomics and macroeconomics. Microeconomics studies the behavior of
individuals and firms in order to understand why they make the economic decisions they do and
how these decisions affect the larger economic system. It focuses on specific industries and
markets, rather than on the market as a whole. Macroeconomics, on the other hand, studies the
entire economy, focusing on large-scale decisions and issues, including unemployment and gross
domestic product (GDP). Macroeconomics can be used on a national scale to a global scale.

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 CHAPTER:6

HISTORY OF ECONOMICS
The first writings on the subject of economics occurred in early Greek times as Plato, in The
Republic, and Aristotle wrote on the topic. Later such Romans as Cicero and Virgil also wrote
about economics.

In medieval times the system of feudalism dominated. With feudalism, there was a strict class
system consisting of nobles, clergy and the peasants. In the system, the king owned almost all the
land and under him were a series of nobles that had land holdings of various sizes. On these
landholdings were series of manors. These were akin to large farming tracts in which the
peasants or serfs worked the land in exchange for protection by the nobles.

Later the system of mercantilism predominated. It was an economic system of the major trading
nations during the 16th, 17th, and 18th centuries, based on the idea that national wealth and
power were best served by increasing exports and collecting precious metals in return.
Manufacturing and commerce became more important in this system.

In the mid eighteenth century, the Industrial Revolution ushered in an era in which machines
rather than tools were used in the factory system. More workers were employed in factories in
urban areas rather than on farms. The Industrial Revolution was fueled by great gains in
technology and invention. This also made farms more efficient, although fewer people were
working the farms. During this time the idea of "laissez faire" became popular. This means that
economies work best without lots of rules and regulations from the government. This philosophy
of economics is a strong factor in capitalism, which favors private ownership.

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In the nineteenth century, there was reaction to the "laissez-faire" thinking of the eighteenth
century due to the writings of Thomas Malthus. He felt that population would always advance
faster than the science and technology needed to support such population growth. David Ricardo
later stated that wages tend to settle at a poor or subsistence level for most workers. John Stuart
Mill provided the backdrop for socialism with his theories that supported farm cooperatives and
labor unions, less competition. These theories were brought to a high point by Karl Marx who
attacked the capitalistic, "laissez-faire" theories of competition and instead favored socialisms,
marked more government control and state rather than private ownership of property.

Another important idea at this time was the change in how items are valued. While formerly an
item's value stayed the same according to what the item was, now the worth of an item was
determined by how many people wanted the item and how great the supply of the item was. This
was the beginning of the laws of supply and demand.

In the first half of the twentieth century, John Maynard Keynes wrote about business cycles -
when the economy is doing well and when it is in a slump. His theories led to governments
seeking to put more controls on the economy to prevent wide swings.

After World War II, emphasis was placed on the analysis of economic growth and development
using more sophisticated technological tools.

In recent years, economic theory has been broadly separated into two major fields:
macroeconomics, which studies entire economic systems; and microeconomics, which observes
the workings of the market on an individual or group within an economic system. In the later
twentieth century such ideas as supply side economics which states that a healthy econonomy is
very necessary for the health of the nation and Milton Friedman's ideas that the money supply is
the most important influence on the economy were favored.

In the twenty-first century, the rapid changes and growth in technology have spawned the term
"Information Age" in which knowledge and information have become important commodities.

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 CHAPTER:6

DIFFERENT THEORIES
 Welfare Definition

Lionel Robbins published a book “An Essay on the Nature and Significance of Economic
Science” in 1932. According to him, “economics is a science which studies human behaviour as
a relationship between ends and scarce means which have alternative uses”. The major features
of Robbins’ definition are as follows: a) Ends refer to human wants. Human beings have
unlimited number of wants. b) Resources or means, on the other hand, are limited or scarce in
supply. There is scarcity of a commodity, if its demand is greater than its supply. In other words,
the scarcity of a commodity is to be considered only in relation to its demand. c) The scarce
means are capable of having alternative uses. Hence, anyone will choose the resource that will
satisfy his particular want. Thus, economics, according to Robbins, is a science of choice.

 Growth Definition

Prof. Paul Samuelson defined economics as “the study of how men and society choose, with or
without the use of money, to employ scarce productive resources which could have alternative
uses, to produce various commodities over time, and distribute them for consumption, now and
in the future among various people and groups of society”. The major implications of this
definition are as follows: a) Samuelson has made his definition dynamic by including the
element of time in it. Therefore, it covers the theory of economic growth. b) Samuelson stressed
the problem of scarcity of means in relation to unlimited ends. Not only the means are scarce, but
they could also be put to alternative uses. c) The definition covers various aspects like
production, distribution and consumption.

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Isn't economics nicknamed the "dismal science" because it is all about running out of resources
and the inevitable decline of life as we know it? Who coined the phrase "the dismal
science"? The Secret History of the Dismal Science: Economics, Religion, and Race in the 19th
Century, by David M. Levy and Sandra J. Peart. Econlib

Everyone knows that economics is the dismal science. And almost everyone knows that it was
given this description by Thomas Carlyle, who was inspired to coin the phrase by T. R.
Malthus's gloomy prediction that population would always grow faster than food, dooming
mankind to unending poverty and hardship. While this story is well-known, it is also wrong, so
wrong that it is hard to imagine a story that is farther from the truth. At the most trivial level,
Carlyle's target was not Malthus, but economists such as John Stuart Mill, who argued that it was
institutions, not race, that explained why some nations were rich and others poor.

Diane Coyle talks with host Russ Roberts about the ideas in her new book, The Soulful Science:
What Economists Really Do and Why it Matters. The discussions starts with the issue of
growth--measurement issues and what economists have learned and have yet to learn about why
some nations grow faster than others and some don't grow at all. Subsequent topics include
happiness research, the politics and economics of inequality, the role of math in economics, and
policy areas where economics has made the greatest contribution.

Richard McKenzie of the University California, Irvine and the author of Why Popcorn Costs So
Much at the Movies and Other Pricing Puzzles,talks with EconTalk host Russ Roberts about a
wide range of pricing puzzles. They discuss why Southern California experiences frequent water
crises, why price falls after Christmas, why popcorn seems so expensive at the movies, and the
economics of price discrimination.

 Wealth Definition
Adam smith (1723 - 1790), in his book “An Inquiry into Nature and Causes of Wealth of
Nations” (1776) defined economics as the science of wealth. He explained how a nation’s wealth
is created. He considered that the individual in the society wants to promote only his own gain
and in this, he is led by an “invisible hand” to promote the interests of the society though he has
no real intention to promote the society’s interests.

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Thomas Malthus studied populations, and his main contributions include his work on the
relationship between food supply and populations.

Karl Marx is most noted for his advocacy of socialism and communism over capitalism, which
he strongly denounced. He is arguably one of the most influential economists in history. Marx
believed that communism was inevitable in the process of evolution.

 Welfare Definition

Alfred Marshall (1842 - 1924) wrote a book “Principles of Economics” (1890) in which he
defined “Political Economy” or Economics is a study of mankind in the ordinary business of life;
it examines that part of individual and social action which is most closely connected with the
attainment and with the use of the material requisites of well being”. The important features of
Marshall’s definition are as follows: a) According to Marshall, economics is a study of mankind
in the ordinary business of life, i.e., economic aspect of human life. b) Economics studies both
individual and social actions aimed at promoting economic welfare of people. c) Marshall makes
a distinction between two types of things, viz. material things and immaterial things. Material
things are those that can be seen, felt and touched, (E.g.) book, rice etc. Immaterial things are
those that cannot be seen, felt and touched. (E.g.) skill in the operation of a thrasher, a tractor
etc., cultivation of hybrid cotton variety and so on. In his definition, Marshall considered only
the material things that are capable of promoting welfare of people.

John Maynard Keynes (1883–1946), one of the greatest economists of the twentieth century,
pointed out that economics is not just a subject area but also a way of thinking. Keynes, shown
in, famously wrote in the introduction to a fellow economist’s book: “[Economics] is a method
rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its
possessor to draw correct conclusions.” In other words, economics teaches you how to think,
not what to think.

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 CHAPTER:7

ECONOMIC INDICATORS
Economic indicators are reports that detail a country's economic performance in a specific area.
These reports are usually published periodically by governmental agencies or private
organizations, and they often have a considerable effect on stock , fixed income, and forex
markets when they are released. An economic indicator is a piece of economic data, usually of
macroeconomic scale, that is used by analysts to interpret current or future investment
possibilities or to judge the overall health of an economy. Economic indicators can be anything
the investor chooses, but specific pieces of data released by government and non-profit
organizations have become widely followed. Such indicators include but aren't limited to:
the consumer price index (CPI), gross domestic product (GDP), unemployment figures and the
price of crude oil. Below are some of the major U.S. economic reports and indicators used for
fundamental analysis.

Gross Domestic Product (GDP) The Gross Domestic Product (GDP) is considered by many to be
the broadest measure of a country's economic performance. It represents the total market value of
all finished goods and services produced in a country in a given year or other period (the Bureau
of Economic Analysis also issues a report monthly during the latter end of the month). Many
investors, analysts and traders don't actually focus on the final annual GDP report, but rather on
the two reports issued a few months before: the advance GDP report and the preliminary report.
This is because the final GDP figure is frequently considered a lagging indicator, meaning it can
confirm a trend but it can't predict a trend. In comparison to the stock market, the GDP report is
somewhat similar to the income statement a public company reports at year-end.

Retail Sales Reported by the Department of Commerce during the middle of each month,
the retail sales is a very closely watched report that measures the total receipts, or dollar value, of
all merchandise sold stores. The report estimates the total merchandise sold by taking sample
data from retailers across the country. This figure serves as a proxy of consumer spending levels.

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Because consumer spending represents more than two-thirds of the economy, this report is very
useful to gage the economy's general direction. Also, because the report's data is based on the
previous month sales, it is a timely indicator. The content in the retail sales report can cause
above normal volatility in the market, and information in the report can also be used to gage
inflationary pressures that affect Fed rates.

Industrial Production The industrial production report, released monthly by the Federal Reserve,
reports on the changes in the production of factories, mines and utilities in the U.S. One of the
closely watched measures included in this report is the capacity utilization ratio, which estimates
the level of production activity in the economy. It is preferable for a country to see increasing
values of production and capacity utilization at high levels. Typically, capacity utilization in the
range of 82-85% is considered "tight" and can increase the likelihood of price increases or supply
shortages in the near term. Levels below 80% are usually interpreted as showing "slack" in the
economy, which might increase the likelihood of a recession.

Employment Data The Bureau of Labor Statistics (BLS) releases employment data in a report

called the non-farm payrolls, on the first Friday of each month. Generally, sharp increases in
employment indicate prosperous economic growth. Likewise, potential contractions may be
imminent if significant decreases occur. While these are general trends, it is important to
consider the current position of the economy. For example, strong employment data could cause
a currency to appreciate if the country has recently been through economic troubles, because the
growth could be a sign of economic health and recovery. Conversely, in an overheated economy,
high employment can also lead to inflation, which in this situation could move the currency
downward.

Consumer Price Index (CPI) The Consumer Price Index (CPI) , also issued by the BLS,
measures the level of retail price changes (the costs that consumers pay) and is the benchmark
for measuring inflation. Using a basket that is representative of the goods and services in the
economy, the CPI compares the price changes month after month and year after year. This report
is one of the more important economic indicators available, and its release can increase volatility
in equity, fixed income, and forex markets. Greater-than-expected price increases are considered
a sign of inflation, which will likely cause the underlying currency to depreciate.1

1
 https://www.investopedia.com/terms/e/economics.asp#ixzz4zWP6BiUd 

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  Problems With Economic Indicators

An economic indicator is only useful if one interprets it correctly. History has shown

strong correlations between economic growth, as measured by GDP, and corporate profit growth.
However, determining whether a specific company may grow its earnings based on one indicator
of GDP is nearly impossible. Indicators provide signs along the road, but the best investors
utilize many economic indicators, combining them to glean insight into looking patterns and
verifications within multiple sets of data.2

2
 https://www.investopedia.com/terms/e/economics.asp#ixzz4zWPRa0cz

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 CHAPTER:8

PROBLEM OF CHOICES
As the science of decision-making, economic philosophy operates in our daily lives whether we
realize it or not. When we are evaluating the interest rates on our credit cards or trying to decide
whether to buy or lease a new car or go out to dinner or on vacation, these are all decisions we
make using economic thinking. We live in a world of limited resources, and economics helps us
decide how to use these limited inputs to satisfy our never-ending list of wants and needs.
Economics is also a large field with a rich history that's been explored and examined by hundreds
of influential people, ranging from philosophers to politicians.

One of the earliest recorded economic thinkers was the 8th century Greek farmer/poet Hesiod,
who wrote that labor, materials and time needed to be allocated efficiently to overcome scarcity.
But the founding of modern western economics occurred much later, generally credited to the
publication of Scottish philosopher Adam Smith's 1776 book, "An Inquiry Into the Nature and
Causes of the Wealth of Nations."3

The principle (and problem) of economics is that human beings occupy a world of unlimited
wants and limited means. For this reason, the concepts of efficiency and productivity are held
paramount by economists. Increased productivity and a more efficient use of resources, they
argue, could lead to a higher standard of living.

Despite this view, economics has been pejoratively known as the "dismal science," a term coined
by by Scottish historian Thomas Carlyle in 1849. He may have written it to describe the gloomy
predictions by Thomas Robert Malthus that population growth would always outstrip the food
supply, though some sources suggest Carlyle was actually targeting economist John Stuart
Mill and his liberal views on race and social equality.

Scarcity is the basic economic problem that exists because we as humans have unlimited wants
that cannot be met by the limited amount of resources our world has. Any good or service that
has a non-zero price is considered scarce. It will cost you something to consume that good or
3
https://www.investopedia.com/terms/e/economics.asp#ixzz4zVpPrrs4

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service. Without scarcity, there would be no reason to study economics. People would consume
everything they could possibly consume and not have to make choices or trade-offs between
goods and services.

In economics, marginal means the impact of a small, or one-unit, change. How much better off
will you be with one additional unit? As a rational thinker, you will continue to increase the
variable until the additional (marginal) benefit gained from the last small increase is no less than
the additional (marginal) cost of the last small increase. Consider your favorite dollar menu item
from your preferred fast food restaurant. Each additional one you consume costs you $1. And
with each additional one you eat or drink, you are satisfying a want. At some point, you will stop
consuming that item. The point at which you stop consuming is the point at which the additional
benefit you gained by eating or drinking that item is valued no more than $1. That is the point at
which the marginal benefit equals the marginal cost.

When making decisions, we have to give up something. The benefit or value of the next best
alternative is called the opportunity cost. What did you have to give up to sleep in an extra hour?
If you were headed to work, you gave up an additional hour of pay. Therefore, the opportunity
cost of sleeping in one hour was your hourly wage. The concept of opportunity cost is illustrated
on the below Production Possibility Frontier for food and computers. Moving from
point Q to R will require one less food unit to produce one more computer. Therefore, the
opportunity cost for one more computer is one food unit. Moving from point T to V requires
three less food units to produce one more computer.

Individuals look at the prices of different goods and services in the economy when deciding what
to buy. They act in their own self-interest when they purchase goods and services: it would be
foolish for them to buy things that they don’t want. As prices change, individuals respond by
changing their decisions about which products to buy. If your local sandwich store has a special
on a breakfast bagel today, you are more likely to buy that sandwich. If you are contemplating
buying an Android tablet computer but think it is about to be reduced in price, you will wait until
the price comes down.

Just as consumers look at the prices they face, so do the managers of firms. Managers look at the
wages they must pay, the costs of the raw materials they must purchase, and so on. They also
look at the willingness of consumers to buy the products that they are selling. Based on all this

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information, they decide how much to produce and what to buy. Your breakfast bagel may be on
special because the owner of your local sandwich shop got a good deal on bagels from the
supplier. So the owner thinks that breakfast bagels can be particularly profitable, and to sell a lot
of them, she sets a lower price than normal. The buying and selling of a bagel may seem trivial,
but similar factors apply to much bigger decisions. Potential students think about the costs and
benefits of attending college relative to getting a full-time job. For some people, the best thing to
do is to work full time. For others, it is better to go to school full time. Yet others choose to go to
school part time and work part time as well. Presumably your own decision— whichever of these
it may be—is one you made in your own best interests given your own specific situation.
Economics is partly about how we make decisions as individuals and partly about how we
interact with one another. Most importantly—but not exclusively—economics looks at how
people interact by purchasing and selling goods and services. In a typical transaction, one person
(the buyer) hands over money to another (the seller). In return, the seller delivers something (a
good or a service) to the buyer. For example, if you buy a chocolate bar for a dollar, then a dollar
bill goes from your hands to those of the seller, and a chocolate bar goes from the seller to you.
At the level of an individual transaction, this sounds simple enough. But the devil is in the
details.

In any given (potential) transaction, we can ask the following questions:

 How many? Will you buy 1, 2, or 10 chocolate bars? Or will you buy 0—that is, will the
transaction take place at all?

 How much? How much money does the buyer give to the seller? In other words, what is the
price?

Incentives affect all transactions. When you buy a breakfast bagel on sale, both you and the
owner of the sandwich shop are responding to the incentives that you face. The owner responds
to the lower price of bagels. You respond to the lower price of the sandwich. Economists think
that we can understand a great deal about people’s behavior if we have a good understanding of
the incentives that they face. Notice that not everyone makes the same choices.

There are two main reasons for this:

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 People have different desires or tastes. Some people like bagels; others hate them. Some people
like being students; others would prefer to work rather than study.

 People have different incentives. Some people face very different job prospects and thus make
different decisions about schooling. If you have this great idea for a new web product (for
example, the next Google or Facebook), then you might be wise to spend your time on this
project instead of studying.

Economists are not the only social scientists who study how we make choices. Psychologists also
study decision making, although their focus is different because they pay more attention to the
processes that lie behind our choices. The decision-making process that we have described, in
which you evaluate each possible option available to you, can be cognitively taxing.
Psychologists and economists have argued that we therefore often use simpler rules of thumb
when we make decisions. These rules of thumb work well most of the time, but sometimes they
lead to biases and inconsistent choices. This book is about economics, not psychology, so we
will not discuss these ideas in too much detail. Nevertheless, it is worth knowing something
about how our decision making might go awry.

On occasion, we make choices that are apparently inconsistent. Here are some examples. The
endowment effect. Imagine you win a prize in a contest and have two scenarios to consider:

The prize is a ticket to a major sporting event taking place in your town. After looking on eBay,
you discover that equivalent tickets are being bought and sold for $500.

The prize is $500 cash.

Rational decision makers would treat these two situations as essentially identical: if you get the
ticket, you can sell it on eBay for $500; if you get $500 cash, you can buy a ticket on eBay. Yet
many people behave differently in the two situations. If they get the ticket, they do not sell it, but
if they get the cash, they do not buy the ticket. Apparently, we often feel differently about goods
that we actually have in our possession compared to goods that we could choose to purchase.

Mental states. We may be in a different mental state when we buy a good from when we
consume it. If you are hungry when you go grocery shopping, then you may buy too much food.
When we buy something, we have to predict how we will be feeling when we consume it, and

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we are not always very good at making these predictions. Thus our purchases may be different,
depending on our state of mind, even if prices and incomes are the same.

Anchoring. Very often, when you go to a store, you will see that goods are advertised as “on
sale” or “reduced from” some price. Our theory suggests that people simply look at current
prices and their current income when deciding what to buy, in which case they shouldn‘t care if
the good used to sell at a higher price. In reality, the “regular price” serves as an anchor for our
judgments. A higher price tends to increase our assessment of how much the good is worth to us.
Thus we may make inconsistent choices because we sometimes use different anchors.

Economics is about you. It is about how you make choices. It is about how you interact with
other people. It is about the work you do and how you spend your leisure time. It is about the
money you have in your pocket and how you choose to spend it. Because economics is about
your choices plus everyone else’s, this is where we begin. As far as your own life is concerned,
you are the most important economic decision maker of all.

So we begin with questions you answer every day:

 What will I do with my money?

 What will I do with my time?

Studying economics can help you better understand your own choices and make better decisions
as a consequence. Economics provides guidelines about how to make smart choices. Our goal is
that after you understand the material in this chapter, you will think differently about your
everyday decisions. Decisions about spending money and time have a key feature in common:
scarcity. You have more or less unlimited desires for things you might buy and ways that you
might spend your time. But the time and the money available to you are limited. You don’t have
enough money to buy everything you would like to own, and you don’t have enough time to do
everything you would like to do.

Because both time and money are scarce, whenever you want more of one thing, you must accept
that you will have less of something else. If you buy another game for your Xbox, then you can’t
spend that money on chocolate bars or movies. If you spend an hour playing that game, then that
hour cannot be spent studying or sleeping. Scarcity tells us that everything has a cost. The study

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of decision making in this chapter is built around this tension. Resources such as time and money
are limited even though desires are essentially limitless.

 COMPLICATION

People may be rational yet have more complicated preferences than we have considered.

Fairness. People sometimes care about fairness and so may refuse to buy something because the
price seems unfair to them. In one famous example, people were asked to imagine that they are
on the beach and that a friend offers to buy a cold drink on their behalf. They are asked how
much they are willing to pay for this drink. The answer to this question should not depend on
where the drink is purchased. After all, they are handing over some money and getting a cold
drink in return. Yet people are prepared to pay more if they know that the friend is going to buy
the drink from a hotel bar rather than a local corner store. They think it is reasonable for hotels to
have high prices, but if the corner store charged the same price as the hotel, people think that this
is unfair and are unwilling to pay.

Altruism. People sometimes care not only about what they themselves consume but also about
the wellbeing of others. Such altruism leads people to give gifts, to give to charity, to buy
products such as “fairtrade” coffee, and so on.

Relative incomes. Caring about the consumption of others can take more negative forms as well.
People sometimes care about whether they are richer or poorer than other people. They may want
to own a car or a barbecue grill that is bigger and better than that of their neighbors.

 LIFE DECISION

Two things make these decisions hard. First, there is the element of time—not the 24 hours in a
day, but the fact that you must make decisions whose consequences will unfold over time. In
choosing an occupation, deciding on graduate school, or picking a portfolio of financial assets,
you must look ahead. Second, there is the element of uncertainty. Will you be healthy? Will you
live to an old age? Will you succeed as a rock musician? The future is unknown, yet we cannot
ignore it. The future is coming whether we like it or not. We cannot tell you whether you should

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buy a new car or if you will be a rock star. But we can give you some tools that will help you
when you are making decisions that involve time and uncertainty.

In this chapter we tackle the following questions:

 How do we make decisions over time?

 How do we make plans for an uncertain future?

Economists typically assume that individuals are capable of choosing consistently among the
bundles of goods and services they might wish to consume. The ability to make such a choice is
perhaps not too onerous in the case of simple choices at a given time (such as whether to go to a
movie or go to dinner).

It is more difficult when we consider choices over a broad range of goods from now into the
future.  There are goods and services that will be available to you in the future that you cannot
imagine today. When people chose among different types of handheld calculators 30 years ago,
they could not imagine that today they would be choosing among different types of tablet
computers. Many products that we now consume simply did not exist in any form until
comparatively recently, and when we make choices now, we do so in ignorance of future
consumption possibilities.

 Your tastes may change. When you are 20 years old, it is difficult to predict what goods and
services you will want to buy when you are 30, 40, or 50 years old. Your future self might regret
past decisions.

We tackle time and uncertainty separately. To begin with, we will suppose that the future is
known with certainty. This allows us to focus on including time in our analysis of economic
decision making. We begin with a discussion of the choice between consumption and saving and
explain how this decision is affected by changes in interest rates. We then look at problems such
as how to choose an occupation. A major part of this analysis is an explanation of how to
compare income that we receive in different years.

 HOW TO SPEND MONEY : ECONOMICS

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Begin by supposing you neither save nor borrow. We can construct your budget set in three
steps.

Look at spending on each good and service in turn. For example, your monthly spending on cups
of coffee is as follows:

spending on coffee = number of cups purchased × price per cup.

A similar equation applies to every other good and service that you buy. Your spending on music
downloads equals the number of downloads times the price per download, your spending on
potato chips equals the number of bags you buy times the price per bag, and so on.

Now add together all your spending to obtain your total spending:

total spending = spending on coffee + spending on downloads + …..

where … means including the spending on every different good and service that you buy.

Observe that your total spending cannot exceed your income after taxes:

total spending ≤ disposable income.

You are consuming within your budget set when this condition is satisfied

In principle, your list of expenditures includes every good and service you could ever imagine
purchasing, even though there are many goods and services you never actually buy.

 Why Economic Conditions Matter for Investors and Businesses

Indicators of economic conditions provide important insights to investors and businesses.

Investors use indicators of economic conditions to adjust their views on economic growth and
profitability. An improvement in economic conditions would lead investors to be more optimistic
about the future and potentially invest more as they expect positive returns. The opposite could
be true if economic conditions worsen. Similarly, businesses monitor economic conditions to
gain insight into their own sales growth and profitability. For example, a fairly typical way of
forecasting growth would be to use the previous year's trend as a baseline and augment it with
the latest economic data and projections that are most relevant to their products and services. For

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example, a construction company would look at economic conditions in the housing sector to
understand whether momentum is improving or slowing and adjust its business strategy
accordingly.4

CONCLUSION
Economics is all around us. We all make dozens of economic decisions every day—some big,
some small. Your decisions—and those of others—shape the world we live in. In this book, we
will help you develop an understanding of economics by looking at examples of economics in
the everyday world. Our belief is that the best way to study economics is to understand how
economists think about such examples. economics is all about money, but economists recognize
that much more than money matters. Economics summarizes these decisions in a simple way by
using the concept of demand. We show how demand arises from the choices you make. Demand
is one of the most useful ideas in economics and lies at the heart of almost everything we study
in this book.

4
https://www.investopedia.com/terms/e/economics.asp#ixzz4zWPhmFBF

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