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Course code: 10MT12 Credits: 2.50 Total No. of sessions: 25 Course Objectives:
Introduce basic micro-economic concepts such as theories of demand, supply, pricing and costs etc. Build a conceptual foundation for courses in the functional areas of management such as marketing, finance etc. for understanding the behaviour of consumers, firms and markets.
Student of MBA/PGDM: Will I ever use this? Professor: Only if your career is successful.
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Course Content
Unit I: Basic Concepts in Economics Choice as an economic problem- Basic postulates- Economic concepts-Factors of production-The circular flow of economic activity-The nature of the firmEconomics and decision making-Economic models Unit II: Demand and Supply Demand theory and analysis- Supply theory and analysis- Application of price, income and cross elasticity of demand- The theory of consumer choice-Demand forecasting techniques Unit III: Theory of Production and Costs The production function-Economies of scale and scope- Cost analysis-Profit contribution analysis Unit IV: Market Structure Perfect competition-Monopoly-Monopolistic competition-Oligopoly-Game theory and strategic behaviour Unit V: Pricing Decisions and Other Issues Pricing of goods and services- Pricing of factors of production- Ethics and Economics
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Economic Mysteries
Why is airline food so bad? Why have paper towels replaced hot-air hand dryers in public restrooms? Why is CCD charging different than roadside shop Why is that you pay more for a first day movie show? Why do prices of some goods, like apples, go down during months of heaviest consumption Why cant I increase the price of bidi? Why is cricket making more money than hockey or other game? Why is petrol bunk mechanized in US and not in India Why do color photographs cost less than black and white photographs? Why are we not selling all the consumer items through PDS? Why is vegetable cheaper in Ooty? Why dont you pay for sand in the sea shore?
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Economics as a science
Choice making can be an art. Can also be viewed as a problem requiring a solution Scientific inquiry of a problem: This can take a form of first analyzing the situation by identifying all the relevant elements, variables, or factors; and then, investigating the inter-relationships between these variables. Investigator makes some postulates Positive science: concerned with what is Normative science: what is right and wrong or what ought to be
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He described the market mechanism as an "invisible hand" that leads all individuals, in pursuit of their own self-interests, to produce the greatest benefit for society as a whole.
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Divisions of Economics
Economics can be divided into two broad categories: MICRO Economics Concealed in the aggregate data are countless changes in the output levels of individual firms, the consumption decisions of individual consumers, and the prices of particular goods and services. It focuses on the behaviour of the individual actors on the economic stage, that is firms and individuals and their interaction in the markets.
MACRO Economics
Its a study of the economic system as a whole. It includes techniques for analyzing changes in total output, total employment, the consumer price index. The unemployment rate, and exports and imports. It addresses question about the effect of changes in investment, government spending, and tax policy on exports, output, employment, and prices.
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Divisions of Economics
Examples of microeconomic and macroeconomic concerns
Production Microeconomi cs Production/Outp ut in Individual Industries and Businesses How much steel How many offices How many cars Prices Price of Individual Goods and Services Income Distribution of Income and Wealth Employment Employment by Individual Businesses & Industries Jobs in the steel industry Number of employees in a firm
Macroeconomi cs
National Production/Outp ut
Aggregate Price Level Consumer price index Producer Price index Rate of Inflation
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Employment and Unemployment in the Economy Total number of jobs Unemployment 20 rate
Positive Economics
It is about what is e.g. It explains why great depression occurred.
Normative Economics
It is about what should be
e.g. It aims to develop and recommend policies that will prevent another great depression The statement a government deficit will reduce unemployment and cause an increase in prices or inflation is a positive hypothesis, while in setting policy, unemployment ought to matter more than inflation is a normative hypothesis.
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Basic postulates
Economic agent makes choice according to some rules. We do not deal with behaviour that is inconsistent, illogical and random He has clarity of purpose. A clear motive which drives him to make choices under different circumstances He is lively, intelligent, capable of assimilating whatever information is available to him from environment
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Economic Concepts
Economic Activity: Any activity which involves use of scarce resources to satisfy some human needs or wants is economic activity. Consumption activity: direct satisfaction of human wants Production activity: indirect satisfaction/ future use Exchange: intermediate activity between production and consumption Investment: The part of saving which is used for further production Utility: The degree of satisfaction derived from the consumption of goods and services is known as utility. It is person-time-place-consumption period specific Utility of sand near sea and in city Economic goods : utility, scarcity, and transferability Scarcity: is the central focus of economics. This scarcity gives rise to opportunity cost. The opportunity cost comes in at every level of economic activity
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Economic Concepts
Wealth: Its is a aggregation of all economic goods and services, and includes natural resources. Its a stock. Income: What a person earns by selling or providing services of the resources he owns. Its a flow
Price and Value: The price of a commodity is the value expressed in money terms, and is always expressed per unit of a commodity. The ratio of prices of commodities is known as the relative prices. Exchange value of a commodity is measured. If the price of rice is Rs.10/kg and price of wheat is Rs.5/kg then exchange value of rice in terms of wheat is 2
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Economic Concepts
Factors of production: P = f( land , labour, capital, enterprise) Opportunity Cost: Because of scarcity every action carries an opportunity cost Opportunity cost: True cost of any choice Cost of going to a movie Cost of ticket Cost of your time The opportunity cost of any choice is what we must forego when we make that choice. The opportunity cost of value of the next best alternative. Opportunity Cost of college: Fees (explicit costs) What is your next best alternative (implicit costs) Working? Average income for an 18 year old HS graduate who works full time is about $24000.
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Economic Concepts
Production The process by which resources are transformed into useful forms
Resources/ Inputs Anything provided by nature or previous generations that can be used directly or indirectly to satisfy human wants. Capital Things that have been already been produced that are in turn used to produce other goods and services Producers Those people or groups of people, whether private or public, who transform resources into usable products. Outputs Usable products
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The scope and subject-matter of economics can be better known by answering the following questions
What goods are to be produced and in what quantities? How are the different goods to be produced? i.e. what production methods are employed for the production of various goods and services? How the total output of goods and services of a society is being distributed among its people?
Whether all available productive resources with a society are being fully utilized?
Is the economys productive capacity increasing, declining or remaining static overtime?
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The scope and subject-matter of economics can be better known by answering the following questions
WHAT, HOW, AND FOR WHOM i.e. allocation of resources, methods of techniques, and distribution
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Economic profit refers to revenues minus all relevant costs, both explicit and implicit.
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Economic model
An economic model typically consists of several functional relationships, conditions, or constraints on one or all of these functions, and one or more equilibrium conditions. Generally, economic models are used to demonstrate an economic principle, to explain an economic phenomenon, or to predict the economic implications of some change affecting one or more of the functional relationships.
Models are the replica of the real case. It represents most of the features of the real life cases.
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