601 6 @ Sas 8 Introduction of Select Chapter Economics- Basic Co concept and Principles. ~ What Economics is about the study of scarcity and choice by finding ways of reconciling unlimited wants with limited resources. ‘The economics of the individual agent's decisions about resources is referred to as microeconomics, while macroeconomics studies the interactions in the economy as a whole. Our focus here is on microeconomic theory. Economics? What is ‘Welfare Economics’? + Welfare economics is the study of how the structure of markets and the allocation of economic goods and resources determines the overall well-being of society. + Welfare economics seeks to evaluate the costs and benefits of changes to the economy and guide public policy toward increasing the total good of society, using tools such as cost-benefit analysis and social welfare functions. Basic Terminologies- + Demand is the quantity of a good (or service) the buyers are willing to purchase at a particular price. ‘+ Supply is the quantity of a good the sellers are willing to deliver at a particular price. Meanwhile price is a result of the constant tug- of-war between the demand and supply. 1. And all other random things kept constant for a good (brand, quality etc.); higher the price— lower will be the demand from the consumer (to save up for other purchases). 2. Higher the price, higher will be the supply from the manufacturers (make hay while the sun shines!). ‘The former is called the law of demand (1), and latter is called the law of supply (2). ‘Supply and demand ice p]| > ava CST = Oo cd]602 &@ Fae 8 Sul Elasticity refers to the responsiveness of one economic variable, such as quantity demanded, to a change in another variable, such as price. ‘There are 4 types of elasticity, each one measuring the relationship between 2 significant economic variables. They are: Price ela: ‘of demand, which measures the responsiveness of quantity demanded to a change in price. PED can be measured over a price range, called arc elasticity, or at one point, called point elasticity. Price elasticity of supply, which measures the responsiveness of quantity supplied to a change in price. Cross elasticity of demand, which measures responsiveness of the quantity demanded of one good, good X, to a change in the price of another good, good Y. Income elasticity of demand, which measures the responsiveness of quantity demanded to a change in consumer incomes. (Different types of elasticities based on the behaviour of supply and demand is dealt with in chapter 2 of the module.) Economic utility is a term used by economists to relate to the satisfaction received after utilization of an item. Upon measuring the economic utility of an item one can understand if it is accepted or not by the user, hence its impact on demand in the market. ‘The Four types of Economic Utility are as follows: Q > Form ~ Economic Utility: Different forms of a product may possess (or create) different levels of utility. A plain piece of cloth may be of little use to an individual, however, when the same piece of cloth is stitched into a dress or a shirt, may increase its utility manifold. In other cases, the same piece of, cloth may be attached to another piece to make something more ‘meaningful, thus creating additional utility. > Time - Economic Utility: Introducing a particular product at the time when a customer is in its need will increase its utility than at any other time. For example, a loan product may be the best in the market, however, only upon introducing it to a customer when he needs it will create its utility, else it may go waste. > Place ~ Economic Utility: A product's utility is maximum only at such place where its requirement is created. In other places, it may find a decent utility, but not the expected level. For example, a camping tent is extremely beneficial on the ‘mountains or at locations where housing is insufficient; while, such tent may not be used in cities and towns where ample better housing options are available. > Possession ~ Economic Utility: A product's utility increases only if the customer possesses a product. Books in a library do create utility for the readers, however, one cannot deny the fact that the reader is allowed to possess the book only for a short period of time. There may be a book which the reader may want to possess for a lifetime, but due to other constraints, he is dependent on the library. Message decide which good, service or resource to purchase or provide from = O qa6:03 Sass MB atl “Sl Choice: Choice refers to the ability of a consumer or producer to decide which good, service or resource to purchase or provide from a range of possible options. Being free to choose Is regarded as a fundamental indicator of economic wellbeing and development. + Needs: Need is something needed to survive. In economics, the idea of survival is real, meaning someone would die without their needs being met. This includes things like food, water, and shelter. * Wants: ‘Want’ in economics, is one step up in the order from needs and is simply something that people desire to have, that they may, or may not, be able to obtain. Economics deals with how we allocate scarce resources, and those scarce resources may be needed to ‘meet someone people's needs and other people's wants. + Resources: Natural resource economics focuses on the supply, demand, and allocation of the Earth’s natural resources. Any source of wealth that occurs naturally, especially minerals, fossil fuels, timber, etc. * Barter: A barter system is an old method of exchange. This system has been used for centuries and long before money was invented. People exchanged services and goods for other services and goods in return. What is ‘Social Economics’? Social economics is a branch of economics that focuses on the relationship between social behavior and economics. It examines how social norms, ethics, emerging popular sentiments, and other social philosophies influence consumer behavior and shape public buying trends Basic Terminology ‘+ Public & Private goods: Private goods are excludable and rival. Examples of private goods include food and clothes. Public goods are non-excludable and non-rival. They include public parks and the air we breathe. + Monopoly: A market structure characterized by a single seller, selling a unique product in the market. In a monopoly market, the seller faces no competition, as he is the sole seller of goods with no close substitute. ‘+ Supply: Supply is the willingness and ability of producers to create goods and services to take them to market. * Demand: Demand in economics is the consumer's desire and ability to purchase a good or service. + Interest: An interest rate is rate charged by a lender of money or credit to a borrower. In short, from the borrower's point of view it is the ‘cost’ of borrowing, and from the lender's point of view it is the reward for lending. + Wage: Wages are the most common earnings of people. Perceived by workers, clerks, managers, and employees in general, wages and salaries constitute the core element in income for the majority of active people. + Profit: Profit in an economic sense differs from profit in a business sense. In economics, profits are what is left-over after paying for land, labour and capital. Economic profit is the excess of total revenue of an enterprise over its total costs, which are the sum of the rent paid for land, wages paid to all employees and the interest paid for capital. Loss Tt6:03 Sard MB wal What is ‘Liberal Economics’? Liberal Economics: Concept that a government should not try to control prices, rents, and/or wages but instead let open competition and forces of demand and supply create an equilibrium between them that benefits the vast majority of citizens, Basic Terminology * Competition: Rivalry in which every seller tries to get what other sellers are seeking at the same time: sales, profit, and market share by offering the best practicable combination of price, quality, and service. Where the market information flows freely, competition plays a regulatory function in balancing demand and supply. * Price: Price is the monetary value of a good, service or resource established during a transaction. Price can be set by a seller or producer when they possess monopoly power, and are said to be price makers, or set through the market itself, when firms are price takers. Price can also be set by the buyer when they possess some monopsony power. + Market: A market is defined as the sum total of all the buyers and sellers in the area or region under consideration. The area may be the earth, or countries, regions, states, or cities. The value, cost and price of items traded are as per forces of supply and demand in a market. The market may be a physical entity or may be virtual. Tt may be local or global, perfect and imperfect. + Entrepreneur: The capacity and willingness to develop, organize and manage a business venture along with any of its risks in order to make a profit. The most obvious example of entrepreneurship is the starting of new businesses. In economics, entrepreneurship combined with land, labour, natural resources and capital can produce profit. + Planning: An economic plan is an outline of schemes designed to achieve certain pre-determined economic objectives, in a particular order of priorities within a specified period of time. This is the technique that a state follows to achieve economic development. + Economic efficiency: The fundamental economic problem is a scarcity of resources. Efficiency is concerned with the optimal production and distribution of these scarce resources. ‘+ Black market: A Black market is a sector of the economy where transactions occur without the knowledge of the government and usually involve the breaking of certain laws such as filing proper tax returns. + Surplus: Economic surplus, also known as total welfare, is the sum of the consumer surplus and the producer surplus in an economy. In other words, it's the benefit obtained by suppliers for selling a good or a service at a higher market price than they would be willing to sell, and the benefit obtained by consumers for paying a lower price for a good or service than the price they would be willing to pay. Types of Economic Models: Bird's eye view into the evolution of different market economies ‘Adam Smith (1723-1790) was a Scottish philosopher and economist who is best known as the author of An Inquiry into the Nature and Causes of the Wealth of Nations (1776). Smith had a radical, fresh understanding of how human societies actually work. He realised that social harmony would emerge naturally as human beings struggled to find ways to live and work with each other. Freedom not produce chaos, but ~ as If guided by an ‘invidlN/7IIESEEC concord. And as people struck bargains with eac resources.would.be. drawn. automatically.to.the.ends.and,purposes.that—. = O cd)