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Course Contents
 Introduction to Economics
 Demand, Supply and Equilibrium
 Consumer and Producer Surplus, Government Intervention
 The Theory of Production and Cost of Production
 Market Structures and Optimization
Fundamentals of Economics
IS 1007  Macroeconomic Problems
 Introduction to Exchange Rate Determination
Lecture 1
 Introduction to Balance of Payment

Introduction to Economics
 Assignment – 30%  What is Economics?
 Study on how people choose between resources to satisfy
 Final Paper – 70% their wants

 Reference
 These resources are scares
 Economics, 10th Edition by Lipsey and Chrystal  Economics
 Microeconomics Theory and Applications, D N Dwivedi  Micro Economics - study of the behavior of individual
households, firms and governments
 Macroeconomics Theory and Policy, D N Dwivedi
 Macro Economics - study of the behavior of the overall
economy

Sectors of Economy Distinctions made in Economics

 Primary – extraction of natural resources  Positive economics deals with how the economy works
 agriculture  Samsung employs X number of workers
 Secondary – converting natural resources into a finished good
 Furniture  Normative economics deals with what should be

 Tertiary – services  used to make judgments about the economy

 Banking, teaching
 identify problems and prescribe solutions

 More aid should be given to developing countries

 Quaternary – Information Services
 Software engineers

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Economic Concepts Direct vs Derived Demand

 Scarcity – resources are limited compared to needs and  Direct - Demand for a goods or services that are
available for final consumption
wants  Food, house, readymade garments

 Derived - Demand for good or service is associated with

the demand for another good or service
 Need – the basic desires of humans
 Demand for cement is derived based on the demand for
 Want – the different ways of satisfying a need constructions

Opportunity Cost Find the Opportunity Costs

 A consultant gets $75 an hour. Instead of working he goes
to a concert that costs $25 which lasts for two hours
Opportunity
scarcity choice  The opportunity cost of the concert is $150 for two hours of
cost
work

 John makes $400 an hour as a driver and is considering

Opportunity cost – the value of next best alternative that
paying someone $1000 to clean the car. If he decides to
was forgone
do it himself, it will take four hours
E.g. : Giving up going to see a movie to study for a test to get  His opportunity cost for doing it himself is the lost wage of
a good grade. $1600 for four hours
The opportunity cost is the enjoyment you lost

Specialization Example
 Anne and Mary can produce following amount of units
 Absolute Advantage
Food Clothes
 Produce a good or service using less number of inputs Anne 6 3
than the other producers
Mary 1 2
 Compares the productivity
 Opportunity cost of producing 1 unit of clothes is 2 units of food by
Anne
 Comparative Advantage
 Opportunity cost of producing 1 unit of clothes is 0.5 units of food
 The ability to produce a product or service at lowest by Mary
 Opportunity cost of clothes production by Mary is low
opportunity cost
 Therefore Mary has comparative Advantage in clothes

2

Find the comparative advantage in food
 Opportunity cost of producing 1 unit of food is 0.5 units
of clothes by Anne
 Opportunity cost of producing 1 unit of food is 2 units of
clothes by Mary
 Opportunity cost of food production by Anne is low
 Therefore Anne has comparative Advantage in food
Explicit and Implicit Cost
 Explicit cost – expense that is spent for using a resource
owned by someone else
 Rent a building - paying monthly rent to the owner
 Implicit cost - foregone opportunity cost to the resource
owner
 farmers who own their own land do not pay a land rent but he
could rent a land as the next best alternative. Therefore, Lost
rent is the implicit cost.
Factors of Production
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Exercise
 Find comparative advantage in berry collection
 Find comparative advantage in fishing
Mary: Opportunity cost of 1 fish = 2 cups of berries
Ann: Opportunity cost of 1 fish = 3 cups of berries
Mary has CA in fishing
Mary: Opportunity cost of 1 cup of berries = ½ a fish
Ann: Opportunity cost of 1 cup of berries = 1/3 a fish
Ann has CA in berry collecting
Marginal Benefit and Marginal Cost
 Marginal Benefit is the additional satisfaction that a
person gets by consuming an additional unit of a good or
service
 Marginal Cost is the change occur in the total cost when
1 unit of quantity is produced more
Production Possibility Frontier/ Curve
(PPF/PPC)
 Curve showing all combinations of two goods that can be
produced with resources and technology available
 Society’s choices are limited to points on or inside the
PPF
Clothes
Bread