Economics

Introduction to ‘Economics’

Aditya Kalia
 Some Basic Concepts of Economics
The fundamental problem in Economics – Scarcity of Resources –
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Unlimited needs v/s Limited resources a il.c
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Leads to the basic questions:- u dh
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- How should the resources be used i.e. what is the bestl y f or way to use those resources?
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- Who decides how to use those resources i.e. the decision maker – Some authority? Elected or
dictatorial or some committee? Individuals themselves? What are individuals guided by?
- More commonly, these questions are posed as decisions w.r.t:
- What to produce?
- How much to produce? And at what price?
- For whom to produce?
Some questions are social, some political and other, economic. Economic questions are answered by
understanding the concepts of Budget and the Production Possibility Frontier (PPF)
 Understanding Economic questions
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• Limitations of resources – Budget constraint q@
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• How much can be produced in the given budget?q u
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• The frontier – the boundary of what can benly
O the maximum output if all resources are
efficiently utilised.
• We assume efficiency in production as a non-efficient production would be sub-optimal.
• Choosing amongst the given ‘best’ possible use of resources i.e. choosing that
output which is most preferred – depends on preferences.
 Production Possibility Frontier (PPF)
PPF
Scenario Deer Berries 12

0, 10
10 m
A 10 0 ail.
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200, 8aq@
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B 8 200 t9m
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q ura 380, 6
for

Deer
C 6 380 6
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530, 4
4
D 4 530
630, 2
2
E 2 630
700, 0
0
F 0 700 0 100 200 300 400 500 600 700 800
Berries
 Marginal Cost and Opportunity Costs
MC – Cost of producing one more unit
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Opportunity Cost - When we start to make value judgements – Which scenario is
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better or more desirable. Scenario Deer Berries
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q ura
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A 10 On
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B 8 200
C 6 380
D 4 530
E 2 630
F 0 700
PPF for a country PPF
60
Scenario Tables Chairs 0, 50
50

A 50 0 50, 40
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40 ail.
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B 40 50 hta 90, 30

Tables
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30 9 mu
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C 30 90 ly fo 120, 20
20 On

D 20 120 140, 10
10

E 10 140 150, 0
0
0 20 40 60 80 100 120 140 160
F 0 150 Chairs
Brief history of how Economic Decisions have been
made
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History of Economics →Evolution of the nature of State and the dominant
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economic thinking: rat
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Types of ‘States’- On
Till 1700s Fiscal Military State - Mercantalism

Mid 1700s
onwards Classical Economics – Laissez Faire State
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The Great ail.
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Depression Keynesian Economics d–htaInterventionist state
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1930s t9m
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Only
1960s Monetarism - Minimalist State

70s and 80s Welfarism - Maximum State

90s and
beyond Behavioral Economics & Internationalism
 Some Basic Concepts of Economics
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The concept of Market – A place where buyers and sellers interact to facilitate
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exchange of goods or services, usually but notrat9always,
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with money.
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Laws of Market:- Law of Demand & Law
On of Supply
 The law of Demand
Demand: Entire quantity of a good/service being demanded by the buyers at all possible prices
Factors determining demand: il.c
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- Price of the good q@
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- Prices of related goods 9 mu
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- Disposable income forq
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- Season On

- Tastes, preferences, expectations

- Population, etc.

Ceteris paribus, as the price of a good increases (↑), quantity demanded decreases (↓); conversely, as the
price of a good decreases (↓), quantity demanded increases (↑)”
 Demand Schedule

Movement along the curve v/s Shift of curve ail.

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(Independent variable)
Price
*Demand v/s Quantity Demanded
(When using the term quantity demanded, we refer to the specific qty
demanded at a specific price point, whereas when using the term demand we
mean entire demand curve)
Quantity Demanded (Dependent Variable)
 Special Cases
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• Case of Substitutes and complementary goods a q@
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• Case of normal and inferior goods
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• Exceptions to law of demand? Giffen Goods and Vebelen Goods
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 The law of Supply
Supply- All possible quantities of goods/services that producers are able and willing to produce at all possible prices that they
may be offered in the market
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Factors determining Supply: ail.
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- Price of the good in market ta q@
u dh
- Prices of related goods such as intermediates, raw materials
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- Availability of resources f or
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- Technology
- Expectation of consumers
- Regulations, etc.

Ceteris paribus, as the price of a good increases (↑), the quantity that the producers are willing to
produce increases (↑); conversely, as the price of a good decreases (↓), quantity that the producers are willing
to produce also decreases (↓)”
 Supply Schedule

Movement along the curve v/s Shift of curve ail.

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q@
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 Equilibrium and Market Clearance
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The price at which a good would be ail.
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exchanged is determined by demand q@
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and supply of that good. As discussed, dhta
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demand and supply themselves are rq
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dependent on multiple factors. ly fo
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Equilibrium price is when demand and
supply are in balance – the quantity
demanded at a given price point
becomes equal to quantity supplied at
that given price. At such a price, there
would be no unmet demand and no
unsold production – hence the market
is said to clear itself.
 Law of Markets
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Changes in Equilibrium Price: q@
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- Inward or outward shift of Demand Curve q ura
t9

l y for
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- Inward or outward shift of Supply Curve
- Both shifting simultaneously
 Types of Goods
- Based on Slope/Elasticity of Demand Curve
- Normal, Necessary, Luxury, Inferior
- Exceptional Goods:
a il.c
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- Giffen & Vebelen goods ta q @
u dh
- Based on Position in Production chain: q u rat
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f or
- Raw material, Intermediate, Final On
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- Based on Role in Production process:

- Capital goods, Consumer goods (including durables) – Trade off ?
- Based on their effects on society
- Merit and Demerit goods
- Based on Market behavior:
- Public and Private goods