INTRODUCTION TO

ECONOMICS

Dr. Samir Ul Hassan

 Learning Outcomes

1. Acquiring conceptual clarity of various functional

areas
2. Understand fundamentals of decision making of
consumers and producers
3. Analysis and interpretation of data which is used in
decision making
4. Demonstrate the ability to develop
models/frameworks to reflect critically on specific
business context.
 Introduction of Course
Fundamentals of Economics
Basic Problems of Economics
Micro Vs Macro Economics
Demand and supply mechanism
Elasticity
Consumer Behavior/Consumer Theory
Consumer decision making process
Choice and Preferences
Utility and it’s various approaches
Producers Behavior/ Theory of production/firms
Producers Decision making process
Costs and Outputs
Optimization
Market Structures
Types of Markets
Concepts and Features
Equilibrium:- short and long Run
 Economics !!!!!!!???? Why???
The word economy comes from the Greek word oikonomos, which
means “one who manages a household.”
Households and economies have much in common.
Household faces many decisions
Who will do what and what will they get in return
Who will cook dinner
What to cook
Who does laundry
Household must allocate scarce resources among its members taking
in account their ability, desire and efforts
Society/Economy also face many decisions
What to do and who will do it
Limited/Scarce resources Vs Unlimited wants
Management of society’s resource is important
 Scarcity
Limited nature of society’s resources:
To produce all the goods and services people wish to have.
Cannot attain higher standard of living to which he/she might aspire
Alternative uses
Unlimited Wants
People never get enough, that there is always something else that they would
like to have:
 Satisfy maximum wants
Fundamental Problem of scarcity
 The basic concern of an economy is to allocate the scarce resources to the best
possible use in order to satisfy maximum wants.
 It studies how society manages its scarce resources.
 Allocated by actions of millions of
 Households
 Firms
 Markets
 Studies how people make decisions: How much to work; what they buy; how much
to save; hove much to spend etc.
 Interaction among the agents of Economy
 Why Study Economics
Firstly:
It helps to understand the world in which you live in better way
Things that make you curious:
Why are apartments/flats so hard to find in Mumbai
Why indigo charge less for round-trip tickets than one way
Why Deepika/Ranbir is paid more in Movies
Why some countries are poor some rich
Secondly:
To be more judicious participant in the Economy
Rational decision maker
As Student
As Employee
As Entrepreneur
Thirdly:
Better Understanding of both the potential and the limits of Economic policy
Taxation
Advertising
Investment
 Principles of Economics
• 1

Principle 1: People Face Trade-offs

Principle 2: Opportunity Cost
How people Make Decision Principle 3: Rational people maximize their
goals
Principle 4: People respond to incentives

Principle 5: Trade can Make everyone better

Principle 6: Markets are good ways to

How people Interact Organize Economic Activity

Principle 7: Governments have resources to

improve the economic outcomes

Principle 8: Ability to produce goods and

services decide living standard of country

How Economy as a whole Principle 9: Price rise when the Government

prints too much money
works
Principle 10: Trade-off between
Unemployment and Inflation
 Ten Principles Of Economics
Principle 1: People Face Trade-offs

Nothing is free
To get one thing we need to give up another thing that we like
Making best decision required that individual is aware of trade off he /she is
going to make to reach to his/her goal.
Consider yourself
As student
As head of the family
As corporation head
As Government head
Every choice you make has a trade off
Efficiency Vs Equality
Nonetheless, people are likely to make good decisions only if they
understand the options they have available
Principle 2: The Cost of Something Is What You Give Up To Get It
Because people face trade-offs, making decisions requires comparing the costs and
benefits of alternative courses of action.
Whether to go to College or to work?
Whether to study or go out on a date?
Whether to go to have food or stay hungry
Opportunity Cost
Whatever must be given up to obtain some item.
When making any decision, decision makers should be aware of the
opportunity costs that accompany each possible action
Principle 3: Rational People Think At The Margin
People are rational
Systematically and purposefully do the best they can to achieve their objectives,
given the available opportunities.
Consumers: How much to spend; what goods to buy; to achieve Max. satisfaction.
Firms: How to produce; how much to produce; to Max. profit.
Rarely Black and White
Dinner Time
During Examination
Marginal Changes
Small incremental adjustments to an existing plan of action
Rational people often make decisions by comparing marginal benefits
and marginal costs.
Airlines
Water Diamond paradox
A rational decision maker takes an action if and only if the marginal
benefit of the action exceeds the marginal cost
Principle 4: People Respond to Incentives
An incentive is something that induces a person to act, such as the
prospect of a punishment or a reward.
Because rational people make decisions by comparing costs and
benefits, they respond to incentives.
Incentives play a central role in the study of economics.
Price raise
Producers
Market Economy
Decisions drawn based on incentives
Direct and Indirect: Seat Belt/ Driving car
Positive and Negative: Punishments and Rewards.
Principle 5: Trade can make everyone better off
Rather than being self-sufficient, people can specialize one or few goods
and services and exchange them for other goods and services.
People gain from their ability to trade
with one another.
 Competition results in gain from trading.
Enjoy a greater variety of goods and services
at lower price
Trade allows people to specialize in what they do best
Homes
Clothes
Food
Countries also benefit from trade and Specialization
Get a better price aboard for goods they produce
Buy other goods more cheaply from aboard than could be produced at home
Principle 6: Markets Are Good Ways To Organize Economic Activity
Market economy is an economy that allocates resources through the
decentralized decisions of many firms and households as they
interact in markets for goods and services
• In a market economy, households deicide what to buy and who to work for
• Firms decide who to hire and what to produce
Prices:
Determines the interaction of buyers and sellers
Reflects the good’s value to buyers
Reflects the cost of producing the good
Invisible Hand
Prices guide self-interested households and firms to make decisions
that maximize society’s economic well-being
 Principle 7: Governments Have Resources To Improve Economic
Outcomes
If the invisible hand of the market is so great, why do we need government?
One purpose of studying economics is to refine your view about the proper role and
scope of government policy.
One reason we need government is that the invisible hand can work its magic only
if the government enforces the rules and maintains the institutions that are key to a
market economy.
Enforce Property Rights
 Farmers
 Producers
Market Failure
 Externalities
 Public Goods
 Asymmetric Information
 Market Power
The invisible hand does not ensure that everyone has sufficient food, decent
clothing, and adequate healthcare.
Principle 8: Ability to produce goods and services decide living standard
of country
Within country and across countries huge variation in living standards
Difference in Income:
 High Income Gadgets, cars, nutrition, healthcare, life expectancy,
 Low Income education

Productivity
 The quantity of goods and services produced from each unit of input
Higher productivity Higher Income
Lower Productivity Lower Income
Productivity depends:
 Equipment's
 Skills
 Technology
Principle 9: Price Rise When The Government Prints Too Much Money
Inflation is an increase in the overall level of prices in the economy
“public enemy number one.”
High inflation imposes various costs on the society
Reduce Value of money
Decline in Competitiveness
Reduce Investment
Reduce demand for goods and service
Causes of Inflation
Quantity of Money Increase
When a government creates large quantities
of the nation’s money, the value of the money falls.
Principle 10: Short-run Trade-off Between Unemployment And Inflation
 Although a higher level of prices is, in the long run, the primary effect of
increasing the quantity of money, the short-run story is more complex and
controversial.
When Quantity of money increase:
 Stimulates level of spending on goods and services (Increase demand for goods and services)
 Firms get incentive to produce more and increase prices for goods and services
 To produce more, firms need to hire more labor
 More hiring means lower unemployment
Higher inflation becomes opportunity cost of lower inflation
Business cycle
 Fluctuations in economic activity, such as
 Employment
 production
During this period:
 Government spending
 Taxation
 Printing
Focus on demand and supply
The Economic Problem: Scarcity and Choice
Basic Problems of an economy
“Economics is a study of mankind in
the ordinary business of life.”
-Alfred Marshall
 What Are Needs
Needs are the things that a person has to have to
survive.
Consumer
Food
Water
Shelter
Producer
Profit
Office
Market
Government
Votes
Rules
Resources
 What Are Wants?
Wants are those things that you would like, but do not need to survive.
Households/Consumers
Car
I-Pad
Concert Tickets
Producers
Factors of production
Technology
Governments
Efficiency
Regulation
Equal distribution of wealth
 Scarcity
 A Limited Amount Of Resources To Meet Unlimited Wants And Needs.
 A Situation Of Scarcity Is One In Which Goods Are Limited Relative To Desires
Everything Is Scarce!
 If “No scarcity”
 People would not worry about stretching out their limited incomes because they
could have everything they wanted;
 businesses would not need to fret over the cost of factors of production
 Governments would not need to struggle over taxes or spending because
nobody would care
 Moreover, since all of us could have as much as we pleased, no one would be
concerned about the distribution of incomes among different people or classes.
 Why do we have scarcity!!?
We have Unlimited Wants and Needs
But

Limited Resources

Create Scarcity

So we need to make Choices

What to produce, How to Produce, For Whom to produce

 Choice
 Because of scarcity, we cannot fulfill all wants and must choose
from the available alternatives.
 Choice is necessary because resources can be used in lots of ways
to make different goods & services.
 The only way unlimited wants can be reconciled with limited
resources is through choice
 As there are insufficient resources to satisfy all wants, choices
must be made at all levels i.e.
 Individual consumers,
 Producers
 The government
 As scarcity is universal, everyone must choose.
SCARCITY  CHOICES
 Opportunity Cost
 The second best alternative forgone after making a choice.
 the second best foregone alternative.
 Example:
 Government has a piece of vacant land to be used either to build
a hospital, a school, or a sports center (scarcity).
 Because the land is enough for only one project, then choice
must be made from the alternatives available (choice).
 The government decides to build a hospital, so the school must
be forgone/sacrificed (opportunity cost)
Opportunity Cost Cont.
Every choice involves a sacrifice or trade-off
Choosing more of one thing means giving up something else in exchange
It is a direct result of scarcity and occurs every time choice is made
This is a real cost, the cost of an item not in terms of money, but in terms of
the resource, good or service that had to be given up to obtain that item
 Basic Problems of Economics
Recap
Economic Problem:
Scarcity is the fundamental problem of every society
Reason: None of us can have all that we want
Limited amount of human and non human resources
Its not possible for any country/society to produce every type of good in an
unlimited quantity
Hence, every economy/Individual has to make a choice (decision) of choosing best
use of its available resources in producing goods and services.
Unlimited Wants
 Multiply over times
 Many wants recurring
 Wants differ in their urgency
Limited Resources
 Productive resources-Scarce
 Labour-by Size of population
 Capital & Technology-scarcity of various Inputs
Alternative uses of Resources

Scarcity Choice Opportunity Cost

 Basic Economic Problems
• Capital Goods
• Vehicles
• Electronics
What to Produce • Technology
• Consumer Goods
• Freshwater
• Fresh Air
• Coal
• Food Items

• Capital Intensive
How to produce • Labour Intensive

• Rich
For Whom to produce • Poor
• Future
Free (Market) Economic System
(Capitalism)
Mixed Economic System
Choice And Opportunity Cost
A decision to produce one good requires a decision to produce less of some other
good.
So choice involves sacrifice.
Thus every society is faced with the basic problem of deciding what it is willing to
sacrifice to produce the goods it wants the most.
Fever Resources to produce other goods
 Production Possibility Curve
There Are A Number Of Problems That Can Arise From Choices That Are Made By
People, Whether Individuals, Firms Or Government.
PPC is model used to show the tradeoffs associated with allocating resources
between production of two or more commodities.
PPC is graphical illustration of scarcity, Choice and Opportunity Cost.
The Production Possibilities Curve (PPC) is a model that captures scarcity and the
opportunity costs of choices when faced with the possibility of producing two goods
or services.
A production possibility curve shows all possible combinations of two goods that a
society can produce within a specified time period whose resources are fully and
efficiently employed.
Production possibilities frontier a graph that shows the combinations of output that
the economy can possibly produce given the available factors of production and the
available production technology
0.15
 NUMERICAL
• Given below is a production possibility curve for growing cereals and pulses. Answer
the questions related to this curve.

1. What is the nature of the slope and shape of the PPC. Give reason in a sentence
each.
2. What is the opportunity cost (marginal rate of transformation) of moving from
point E to F and F to G. Draw a table to show the MRT.
3. What is the reason for increasing opportunity cost?
4. Consider 2 economies, A & B. B allocates more of its resources to Investment,
especially in R&D. A allocates more resources to consumer goods. Where would
you see greater outward shift in PPC over time and why?
 II Through entrepreneurial discovery and innovation, new products and methods of production are continuously
replacing old ones. Harvard economist, Joseph Schumpeter called this creative destruction. Automobile caused
demise of horse and carriage industry, compact discs caused demise of vinyl records. It destroys some businesses
and industries but creates new and better ones in time. What possible effect can creative destruction have on PPC.
III. In the recent trade war between China & USA, President Trump imposed tariffs on imports of aluminium and
steel from China in March. More recently, he announced a 25% tariff $50 billion to $60 bn in Chinese exports to
the US including aerospace, ICT and machinery. China in turn, imposed duties on a wide range of US goods
including scrap aluminium, sparkling wine and apples. Trump further promised tariffs on 1300 more Chinese
products. Hours later China came out with tariffs on Boeing planes.
Trump insists that is not a trade war but a response to Chinese intellectual property theft of US technology. China
has the reputation of making knockoffs of designer brand while borrowing technological breakthroughs.
Farmers in the US are keeping a close watch on the escalating trade war, fearing that it will pose a threat to the
rural economy.
a. Considering that China has a trade surplus with the US currently, which country is likely to see a greater
shrinkage in the PPC.
b. Give an example of any government policy, which according to you has a positive effect on PPC
 Try this…….
Combination Machines (X) Shoes (Y)
A 0 800
B 400 600
C 500 400
D 550 200

Scenario A (Jk Industries)

Labur
Illustrate the PPC for JK Industries
Opportunity Cost
Scenario B
Jk Industries is producing at Combination B. Govt. wants to enhance machine
production and therefore reduce tax/give assistances to machine manufacturing
industry.
Illustrate New PPC and mark new combinations
THANK
YOU