Introduction to Economics

SCMS Pune
 Plan of Lecture
• Objectives
• What is Economics?
• Basic Assumptions
• Types of Economic Analysis
• Trade Offs
• Production Possibility Curve
• Basic Questions Economics tries to answer
 Objectives
• To introduce the learner to key economic concepts
• To help the learner differentiate the different types
of economic analysis.
• To help the reader understand what the three basic
questions are in economics
• To introduce the idea of Production Possibility Curve
to the learners
 What is Economics
• Tries to solve the human problems of unlimited
wants and scarce resources.
• Study of the choices made
• Deals with the society as a whole and human
behaviour in particular
• Studies the production, distribution, and
consumption of goods and services.
• A science in its methodology, and art in its
application.
 Economy & Economic Activity
• The economy is all the production and
exchange activities that take place every day
• Economic activity is how much buying and
selling goes on in the economy over a period
of time
 Basic Assumptions
• Rationality
– Consumers maximize utility
– Producers maximize profit or minimize cost

• Ceteris Paribus
– Latin phrase
– “With other things (being) the same” or “all other things
being equal”.
Types of Economic Analysis – Micro Vs. Macro

– Microeconomics (“micro” meaning small): study of

the behavior of individual economic units
• An individual consumer/ producer/ firm
• Supply and demand in individual markets

– Macroeconomics (“macro” meaning large): study

of averages & aggregates.
• Industry as a unit, and not the firm.
• Focus on aggregate demand and aggregate supply, national
income, employment, inflation, etc.
Types of Economic Analysis – Positive Vs. Normative

– Positive economics: “what is” in economic matters

• Establishes a cause and effect relationship between variables.
• Analyzes problems on the basis of facts.

– Normative economics: “what ought to be” in economic

matters.
• Concerned with questions involving value judgments.
• Incorporates value judgments about what the economy should be like.
Types of Economic Analysis – Short Vs. Long Run

– Short run: Time period not enough for consumers and

producers to adjust completely to any new situation.
• Some inputs are fixed and others are variable
– Long run: Time period long enough for consumers and
producers to adjust to any new situation.
• All inputs are variable
• Decisions to adjust capacity, to introduce a larger plant
or continue with the existing one, to change product
lines.
 Types of Economic Analysis –
Partial and General Equilibrium
– Partial equilibrium analysis: Related to micro analysis
• Studies the outcome of any policy action in a single market
only.
• Equilibrium of one firm or few firms and not necessarily the
industry or economy.
– General equilibrium: explains economic phenomena in an
economy as a whole.
• State in which all the industries in an economy are in
equilibrium.
• State of full employment
 Trade Offs – Individuals
To get one thing, we usually have to give up
another thing.
– Food Vs. clothing
– Leisure time Vs. work
 Trade Offs – Efficiency Vs. Equity
• Efficiency means society gets the most that it
can from its scarce resources.
• Equity means the benefits of those resources
are distributed fairly among the members of
society.
• Equity Vs. Efficiency…???
 Opportunity Cost
• Decisions require comparing costs and
benefits of alternatives:
– Whether to go to university or to work?
– Whether to study or go out on a date?
– Whether to go to class or sleep in?
• The opportunity cost of an item is what you
give up to obtain that item.
 Production Possibilities Curve
• Highlights the concepts of scarcity and
opportunity cost
– Indicates the opportunity cost of increasing one
item's production (or consumption) in terms of
the units of the other forgone
– Slope of the curve in absolute terms
 Basic Questions in Economics
• What to Produce

• How to Produce

• For Whom to Produce