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Economics
The principal fact about Economics that we
must always remember is that it is a social
science.
If we forget this, we tend to get bogged down
with
questions
Economics.
that
are
not
relevant
to
MEANING OF ECONOMICS
The word Economics originates from the Greek
work Oikonomikos which can be divided into
two parts:
(a) Oikos, which means Home, and
(b) Nomos, which means Management.
Thus, Economics means Home Management.
MEANING OF ECONOMICS
Economics means the study of the way in which
mankind organizes itself to tackle the basic
problems of scarcity.
All societies have more wants than resources.
Hence, a system must be devised to allocate
these resources between competing ends.
DEFINITIONS OF
ECONOMICS
A general definition of Economics :
Economics is the social science that studies economic
activities.
Economic activities essentially mean production, exchange and
consumption of goods and services.
Economists at different times have emphasised different aspects of
economic activities, and have arrived at different definitions of
Economics.
DEFINITIONS OF
ECONOMICS
These definitions can be classified into four
groups:
1.
2.
3.
4.
Wealth definitions,
Material welfare definitions,
Scarcity definitions, and
Growth-centered definitions.
Adam Smith
Adam Smith, considered to be the founding
father
of
modern
Economics,
defined
Economics as
the study of the nature and causes of nations
wealth or simply as the study of wealth.
Adam Smith
The central point in Smiths definition is wealth creation.
Implicitly, Smith identified wealth with welfare.
He assumed that, the wealthier a nation becomes the
happier are its citizens.
Thus, it is important to find out, how a nation can be wealthy.
Economics is the subject that tells us how to make a nation
wealthy.
Adam Smiths definition is a wealth-centred definition of
Economics.
Alfred Marshall
definition is considered to be
material-welfare
to
Robbins,
Economics
is
scarce
relationship
means
between
which
have
ends
and
alternative
uses.
It is a scarcity-based definition of Economics.
Professor Samuelson
Professor Samuelson writes,
Economics is the study of how people and society end up
choosing, with or without the use of money, to employ scarce
productive resources that could have alternative uses to
produce various commodities over time and distributing
them for consumption, now or in the future, among various
persons or groups in society. It analyses costs and benefits
of improving patterns of resource allocation.
A large number of modern economists subscribe to this broad
definition of Economics.
Economics as a Science
"Economics is the science which studies human
behavior as a relationship between given ends
and scarce means which have alternative
uses." (Robbins, 1932).
sciences
has
been
described
as
economic
is
customarily
divided
into
Microeconomics and
Macroeconomics
Microeconomics is the branch of economics which is
is
concerned
with
the
overall
Basic economics
concepts
Internal factors
The internal factors include:
the
types
of
resources
businesses
use,
their
External factors
Externally, businesses face constraints from the types of
market in which they operate:
how competitive are they, for example, and hence how
Business outputs
Goods
Businesses, also known as producers,
manufacture goods and services.
Goods are classified by economists under two
main headings, consumer goods and producer
goods.
Services
Services consist of the provision of nonphysical items.
Business outputs
Ideas
An idea is intellectual property which can also be bought and sold.
Externalities
The production process of a business also creates another type of
output which accrues to society as a whole but whose effect may not
be reflected in a companys accounts, whereas the wages of the
workforce, for example, will be.
Pollution caused by a factory is the obvious example of an externality
D
Q
Demand
A relation between the price of a good and
curve
relation
price
of
quantity
showing
the
between
the
good
and
demanded
pizza.
Price of Quantity
Good
Demand
ed
$3
$4
$5
$6
200
150
100
75
$7
50
Law of Demand
States that a quantity of a good demanded
increases
Quantity
Demanded
Quantity
demanded
decreases
Price
decreases
increases
Creates a downward sloping demand curve
Why?
Substitution Effect
Unlimited wants/scarce resources
When the price of a good falls, consumers
Why?
Income Effect
Money income: is simply the number of dollars received
per period
Real income: your income measured in terms of what it
can buy.
A fall in the price of a good increases consumers real
Demand Curve
A curve showing the relation
between the price of a good and
the quantity demanded.
Price
$6
$5
$4
$3
0
50
75 100 150
Demand
Quantity
200
graph
Called a
Change in quantity demanded.
$6
$5
Demand
0
75
100
Quantity
Demand
Individual demand
The demand of an individual consumer
Market demand
Sum of individual demands of all consumers in
the market
Determinants of Demand
Changes in consumer income
Changes in prices of related goods
Changes in consumer expectations
Changes in the number or composition of
consumers
Changes in consumer tastes
Changes in determinants
Results
in
changes
to
the
RELATIONSHIP
demanded.
Results in a shift in the demand curve
New curve must be drawn
Changes in Demand
Increase in demand
At each and every
Qd1 Qd2
$4 150
Price
$5
B
D2
200
$5 100
150
$6 75
100
D1
100
150
Quantity
Causes of Increase in
Demand
Increase
in
consumer
income
Causes consumers to buy
Change in consumer
income
Normal goods
A good for which
demand increases as
consumer income rise
Inferior goods
A good which demand
increases as consumer
income falls
jointly
Goods that are related in such
leads
to
increase
in
$1
D1
75
100
D2
such
way
that
an
goods
that
are
consumed jointly.
An decrease in the price
of
one
will
increase
decrease
in
the
$20
Suppose
players
price
that
decrease
from
$145
DVD
in
to
D2
D
750
900
spend
how
their
consumers
money
and
their demand
If product cheaper today
than
tomorrow,
increase in demand
then
Changes in consumer
tastes
Consumer preferences likes and
curve
assumed
quantities
are
Changes in taste
Consumers
prefer
platform
$50
shoes.
At $50, demand
increases
100 to 200.
from
D
100
200
D2
Changes in Demand
Decrease
in
demand
At each and every
Price
Qd1 Qd2
$4 150
$5
D1
110
$5 100
90
$6 75
60
D2
90
100
Quantity
Causes of Decrease in
Demand
Decrease in
consumer income
Causes consumers
jointly
Goods that are related in such
leads
to
Decrease
in
$1
D2
75
100
such
way
that
an
goods
that
are
consumed jointly.
An increase in the price
of
one
will
decrease
decrease
in
the
$20
Suppose
players
price
that
increase
from
$100
DVD
in
D2
to
750
900
D1
their
money
and
their
demand
If product more expensive
today
than
tomorrow,
Changes in consumer
tastes
Consumer
preferences likes
given
assumed
demand
constant
curve
along
quantities
are
Review of Demand
A change in quantity demanded is not a change in demand
Change in quantity demanded is caused by a change in
price
Change in quantity demanded is a movement along the
demand curve
Change is demand is caused by
a change in the
determinants
Change in demand shifts the demand curve
Supply
Producers side
A relation between the price of a good and
Law of Supply
The quantity of a good supplied during a
supplied
Decrease
in
price
leads
to
decrease
quantity supplied.
Creates upward sloping supply curve
in
Supply Curve
Price of
Good
Quantity
Demanded
Price
6
$3
50
$4
75
$5
100
$6
150
$7
200
Supply
Quantity
Quantity Supplied
Supply
$6
B
$4
100
150
Supply
Individual supply
The supply of an individual producer
Market supply
The sum of individual supplies of all producers
in the market
Changes in Supply
Caused by changes in the determinants to
each
and
every
price
quantity is supplied
New supply curve - shift in supply
different
Increase in Supply
At each and every price more of the good
is supplied
S1
$6
300
400
S2
Causes of increase in
Supply
Improvements in Technology
Changes in relevant resources
Decrease in the price of resources
Lowers costs
Changes in technology
Technology is the economys stock of
Changes in Technology
Improvements in technology
Causes an increase in supply
More of the product is available at all prices
S1
$6
300
400
S2
Changes in Relevant
Resources
Decrease
in
resource prices
Increases
supply
S1
the
of
the
$6
300
400
S2
goods
that
use
Price
S1
S2
$6
question
Beef and leather.
thus
increasing
supply of leather.
the
300
Q Leather
400
Decrease in Supply
At each and every price LESS of the good is
supplied
S2
400 600
S1
Causes of Decrease in
Supply
Backward movement in Technology
Changes in relevant resources
Increase in the price of resources
Raises costs
Changes in Relevant
Resources
Are those
$9
S2
500 600
S1
employed in the
production of the
good in question
Increase in price of
resources
Results in decrease
in supply
Less of the good is
available at all
prices
Price
S1
$6
300
Q Leather
400
Producers Expectation
Nationalization
Expropriation
Supply Review
Change in Quantity Supplied
Caused by a change in the price of the product
Movement along the supply curve
Change in Supply
Caused by change in the determinants
Results in a shift in the supply curve
Market Equilibrium
Market
Includes all the
arrangements used to
buy and sell
Reduce transaction
costs
The place where
buyers and sellers
meet to determine
price and quantity
Equilibrium
At specific price where:
Equilibrium quantity
D = S
Equilibrium
At specific price
where:
Quantity
demanded
Equals
Quantity
Supplied
P
S
$5
Equilibrium
D
Q
150
Reaching Equilibrium
P
If market price is
Surplus
ABOVE equilibrium
Qs > QD
S
$6
Economy is at a
SURPLUS
Market price will fall
$5
10
0
15 200
0
Reaching Equilibrium
If the market
price is BELOW
the equilibrium
price
QD > Qs
Shortage exists
Market price
rises to
equilibrium
P
S
$5
$4
D
Shortage
10
0
15 200
0
Shifts in Demand
Demand
increases
Equilibrium price
increases
Equilibrium
quantity increases
$6
$4
A
D1
D
10
0
15 200
0
Shifts in Demand
P
Decrease in demand
decrease in price
decrease in equilibrium
S
$6
$5
A
D1
D
200
10
0
Shifts in Supply
Price
S1
S2
$6
$5
300400
Q Leather
Increase in supply
Decrease in
equilibrium price
Increase in quantity
Shifts in Supply
Decrease in supply
Price increases
Quantity decreases
S1
A
B
D
200
300
D1
Simultaneous Changes
Change in
Supply
Change in
Demand
Effect on
Equilibrium
Price
Effect on
Equilibrium
Quantity
Increase
Decrease
Increase
Decrease
Increase
Increase
Decrease
Increase
Indeterminate
Indeterminate
Indeterminate
Increase
Decrease
Decrease
Indeterminate
Decrease
Government Intervention
Government enters
the economy
Price Setting
Subsidies
Government
payments to reduce
the cost of product or
to limit production.
Price Floors
A minimum
legal price
below which
a good or
service
cannot be
sold
If above
equilibrium
causes
surplus
Surplus
S
$7
$6
10
15 200
0
Price Ceilings
A maximum legal
$5
D
Shortage
10
0
15 200
0