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Economics : An Orientation

Dr.Sunitha. S
Assistant Professor
School of Management Studies,
National Institute of Technology (NIT) Calicut
EconomicSystem
Capitalism
Socialism
Mixedeconomy
TypesofIndustrialorganisations/firms
Privatesector
Publicsector
Corporations
Non-profitorganisations
Formsofownership
Privatesector(Whollyownedby
people,individuallyorasagroup)
Publicsector(owned,managedand
controlledbygovernment),and
Jointstockcompany(ownedandmanaged
jointlybyindividualsandgovernment)
Cooperativeisanonprofit,nonpolitical,non
religious,voluntaryorganisationformedwith
aneconomicobjective
Buzzwords
OpportunityPrinciple
Discounting
Timeperspective
Marginalism
Incrementalism

OpportunityPrinciple
Costofnextbestalternativeforegone
Definitionthecostexpressedintermsofthenext
bestalternativesacrificed
Helpsusviewthetruecostofdecisionmaking
Impliesvaluingdifferentchoices
Highestvaluedbenefitthatmustbesacrificedas
aresultofchoosinganalternative

Opportunitycost
Supposeamachinecanproduce
eitherXorY.Theopportunitycostfor
producingagivenquantityofXisthe
quantityofY,whichtheresource
wouldhaveproduced.

Ifthemachinecanproduce10units
ofXandor20unitsofY,thethe
opportunitycostof1xis2Y.
ProductionPossibilityFrontiers
Showthedifferentcombinationsofgoodsandservicesthat
canbeproducedwithagivenamountofresources

Noidealpointonthecurve

Anypointinsidethecurvesuggestsresourcesarenot
beingutilisedefficiently

Anypointoutsidethecurvenotattainablewiththecurrent
levelofresources

Usefultodemonstrateeconomicgrowthandopportunity
cost
ProductionPossibilityFrontiers
Capital Goods
Consumer Goods
Yo
Xo
A
B
Y1
X1
Assume a
country can
produce two
types of goods
with its
resources
capital goods
and consumer
goods
If it devotes all
resources to capital
goods it could produce
a maximum of Ym.
If it devotes all its
resources to consumer
goods it could produce
a maximum of Xm
Ym
Xm
If the country is at
point A on the PPF It
can produce the
combination of Yo
capital goods and
Xo consumer goods
If it reallocates its resources
(moving round the PPF from A
to B) it can produce more
consumer goods but only at
the expense of fewer capital
goods. The opportunity cost of
producing an extra Xo X1
consumer goods is Yo Y1
capital goods.
Production Possibility Frontiers
Capital Goods
Consumer Goods
Yo
Xo
A
.B
C
Y1
X1
Production
inside the
PPF e.g.
point B
means the
country is
not using all
its resources
It can only produce at
points outside the PPF if it
finds a way of expanding
its resources or improves
the productivity of those
resources it already has.
This will push the PPF
further outwards.
Discounting
Theconceptofdiscountingisbased
onthefactthatarupeenowisworth
morethanarupeeearnedayear
after.

Evenifoneissureaboutfuture
income,yetithastobediscounted
becausetowaitforfutureimpliesa
sacrificeforthepresent
SupposeasumofRs100isdueafterone
year.Lettherateofinterestbe10
percent.Thenwecandeterminethesum
tobeinvestednowsoastoproducethe
return(R)ofRs100attheendofthe
year.Thepresentvalueorthediscounted
valuesofRs100willthenbe

V1=R
(1+i)

Discountedvalueofmoney

V
1

=100

=Rs.90.90

ApresentvalueofRs100duetwoyearslaterwouldbe

V
2
= Rs100
(1+.10)
(1+.10)
2
=82.64
(1+i)
Marginalism
Marginalanalysisisrelatedtoaunit
changeinindependentvariable,say
increaseincostsasaresultofaunit
changeinoutput.
Marginaloutputoflabour:output
producedbythelastunitoflabour
Marginalcostofproduction:cost
incurredforproducingtheadditionalunit
ofoutput

Profitofafirmusingprincipleofmarginalism
Units
of
output
(1)
Total
Revenue
(Rs)
(2)
Marginal
revenue (Rs)
(3)
Total
costs
(Rs)

(4)
Marginal
cost (Rs)
(5)
Total
profits
(Rs)
(6)=(2)-
(4)

Average
profit (Rs)
(7)=(6) / (1)
Marginal
profits
(Rs)
(8)
1 20 - 15 5 5.0 -
2 40 20 29 14 11 5.5 6
3 60 20 42 13 18 6.0 7
4 80 20 52 10 28 7.0 10
5 100 20 65 13 35 7.0 7
6 120 20 81 16 39 6.5 4
7 140 20 101 20 39 5.6 0
8 160 20 125 24 35 4.4 -4
Incrementalism
Incrementalreasoninginvolves
estimatingtheimpactofdecision
alternatives.
Usually,changesoccurinchunk
ratherthanunitchanges.
Incrementalismismoregeneral
whereasmarginalismismore
specific.

Incrementalism..
Incrementalcosts:changeintotalcostsasa
resultofchangeinthelevelofoutput,investment
etc.
Incrementalrevenueisachangeintotalrevenue
resultingfromachangeinthelevelofoutput,
priceetc.

Whiletakingadecision,alwaysincrementalrevenue
shouldalwaysbegreaterthanincrementalcosts

Timeperspective
ShortrunVersuslongrun
Veryshortrun
Shortrun
Longrun

Fixedversusvariablecostsofproduction
MainEconomicActivities
Production
Consumption
Capitalformation
FactorsofProduction
Land
Labour
Capital
Entrepreneurship
CircularFlow-Simple
Assumptions:
Only two sectors - Consumers and Producers
All production is sold to the consumers
Producers provide all the Goods and Services
Consumers spend all their Income on goods an services
No government and no overseas sectors
Consumers are the owners of productive resource - land, labour,
capital and enterprise
CircularFlow-Simple
Consumers Producers
Resources
Goods and Services
Consumption Expenditure
Income
Resources
Goods and Services
CircularFlow-SavingsandInvestment
Income
Consumption Exp
Capital Market Savings
Investment
Consumers Producers
CircularFlow-GovernmentSector
Income
GOVERNMENT
TAXATION
CAPITAL MARKET
Savings
Investment
Consumption
SPENDING
SUBSIDIES
TAXATION
Consumers
Producers
CircularFlow-FourSectors
Income
CAPITAL MARKET
Savings Investment
OVERSEAS SECTOR
GOVERNMENT
Taxes
Imports
Govt
subsidies
Exports
C
a
p
i
t
a
l

O
u
t
f
l
o
w
s

C
a
p
i
t
a
l

I
n
f
l
o
w

Consumption exp
Consumers Producers
Centralproblemsofaneconomy
Whattoproduce?
shouldtheemphasisbeonagriculture,
manufacturingorservices,shoulditbeon
health,manufacturingorhousing?

Howtoproduce?
labourintensive,landintensive,capital
intensive?Efficiency?

Whomtoproduce?
Shouldincomedistributionbe:evenly
distributed?ormorefortherich?Orforthose
whoworkhard?