INTRODUCTION TO ECONOMICS

AIMS & OBJECTIVES After studying this lesson you should be able to understand        What is economics? Concepts like scarcity & efficiency microeconomics Vs macroeconomics Basic problems of an economic organization Economic systems Society’s technological possibilities Economics & managerial decision making 2 .

WHAT IS ECONOMICS?  It is the study of how societies use scarce resources to produce valuable goods and services and distributes them among different individuals 3 .

Economic efficiency requires that an economy produce the highest combination of quantity & quality of goods & services given its technology & scarce resources  4 .SCARCITY & EFFICIENCY Two key ideas that run through all of economics: that goods are scarce & that society must use its resources efficiently.  Scarcity of goods refer to a situation in which goods are limited relative to desires Efficiency denotes the most effective use of a society’s resources in satisfying people’s wants & needs.

1936) is considered the founder of modern macroeconomics.  Note: the present course discusses microeconomics with focus on Firms. John Maynard Keynes (General Theory of Employment. Adam Smith (The Wealth of Nations. 1776) is considered the founder Macroeconomics – concerned with the overall performance of the economy. Markets & their behaviour 5 . Interest and Money. firms & markets.MICROECONOMICS & MACROECONOMICS Economics is divided into two major subfields –  Microeconomics – concerned with the behaviour of individual entities such as households.

THE THREE PROBLEMS OF ECONOMIC ORGANIZATION Three fundamental economic problems of an economy are:    What commodities are produced and in what quantities? How are goods produced? For whom goods are produced? The answers to these questions vary according to the type of economic system that is in place in a given country.  6 .

A system of prices. of markets. The two fundamentally different economic systems are: Market economy – one in which individuals & private firms make the major decisions about production and consumption. of profits and losses.ECONOMIC SYSTEMS  Economic systems: Different societies are organized through different economic systems and that organization determines the ways the three fundamentals questions are answered. of incentives & rewards determine the answer to the 3 fundamental questions Command economy – one in which the government makes all important decisions about production & distribution    Note:   Extreme form of market economy is laissez-faire economy Most economics of the world are mixed economies 7 .

the society has to decide how to allocate these limited resources among thousands of different possible commodities & services To summarize: given resources are scarce relative to wants. select from different techniques of production (the how) and decide in the end who will consume the goods ( the for whom) Given this problem facing the economy two concepts are very important: Inputs – commodities or services used to produce goods & services. technical knowledge. tools & machinery. Also called factors of production Outputs – various useful goods or services that result from the production process & are either consumed or used for further production     8 .SOCIETY’S TECHNOLOGICAL POSSIBILITIES  Problem facing a society is: given a stock of limited resources (labour. an economy must choose among different potential bundle of goods (the what). land etc).

THE PRODUCTION POSSIBILITY FRONTIER (PPF) PPF shows the maximum quantity of goods that can be efficiently produced by an economy. Economic growth shifts the PPF outward 9 . given its technological knowledge and quantity of available inputs.

The opportunity cost of producing additional Y is the amount of X foregone.PPF & OPPORTUNITY COST  In a world of scarcity. This is a very important concept in economics As we move up the PPF. choosing one thing means giving up something else. The opportunity cost of a decision is the value of the good or service foregone. good X is given up to have additional quantities of Y.  10 .

   Making the Best Decision  Economics. consumer.HOW IS ECONOMICS USEFUL IN MANAGERIAL DECISION MAKING?  Evaluating Choice Alternatives Identify ways to efficiently achieve goals.  Provide production and marketing rules to help maximize net profits. Specify pricing and production strategies.  Economics. 11 . can be used to understand logic of company. and government decisions. in particular managerial economics. in particular managerial economics. can be used to efficiently meet management objectives.

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