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INTRODUCTION TO ECONOMICS

AND INDIAN ECONOMY

By
Dr. JONARDAN KONER
SENIOR ASSOCIATE PROFESSOR

NATIONAL INSTITUTE OF CONSTRUCTION
MANAGEMENT AND RESEARCH, PUNE.

INTRODUCTION
• Economics is the study of how economic agents or societies
choose to use scarce productive resources that have
alternative uses to satisfy wants which are unlimited and of
varying degrees of importance.
• The main concern of economics is economic problem: its
identification, description, explanation and solution.
• The source of any economic problem is scarcity.
• Scarcity of resources forces economic agents to choose
among alternatives.
• Therefore, economic problem can be said to be a problem of
choice and valuation of alternatives.
• The problem of choice arises because limited resources with
alternative uses are to be utilized to satisfy unlimited wants,
which are of varying degrees of importance.

• Economics thus provides analytical tools and techniques that managers need to achieve the goals of the organization they manage. not necessarily a formal degree.. tools and techniques of making optimum use of the available resources to achieve the ends. INTRODUCTION • Scarcity is a relative concept.e. Inflation is essentially scarcity of goods. • The job of any efficient manager is of economic one. • Economics is essentially the study of logic. For example. i. unemployment is essentially the scarcity of jobs. . a working knowledge of economics. is essential for mangers. • Therefore. It can be define as excess demand. demand more than the supply.

• Many business decisions are taken under the condition of uncertainty and risk. • In performing his/her functions. • Decision-making involves evaluating various alternatives and choosing the best among them. • Managers are essentially practicing economists. a manager has to take a number of decisions in conformity with the goals of the firm. . a marketing manager is to allocate his / her advertising budget among various media in such a way so as to maximize the reach. • For example. INTRODUCTION • Decision-making is the main job of management.

the degree of uncertainty and risk can be greatly reduced if market conditions are predicted with a high degree of reality. . • The complexity of the modern business world adds complexity to business decision-making. emergence of complexity of the modern business world and social and political. INTRODUCTION • Uncertainty and risk arise mainly due to uncertain behavior of the market forces. • The prediction of the future course of business environment alone is not sufficient. external influence on the domestic market and social and political changes in the country. • However. changing business environment. It is important equally to take appropriate business decisions and to formulate a business strategy in conformity with the goals of the firm.

Pleasant Environment (Trees. etc. etc. Rivers. Socks. Lakes. TV.) Minerals.) And talent of Individual Human Beings) Pleasant Working Conditions More Productive Resources . Coats. Natural Resources ( Rivers.) Household Goods (Tables. Sugar. etc. Oceans. Eggs. Milk. Coffee. Machines and Other Human- Beds. Chairs. Sweaters.) Clothing (Shirts. Dressers. Land (Various Degrees of Fertility) Vegetables. Pants. Open Space. Shoes. Bread.A GENERAL LISTING OF DESIRED ECONOMIC GOODS & LIMITED RESOURCES Economic Goods (Wants) Limited Resources Food (Rice. etc. Trees. Tea.) Made Education Physical Resources National Defense Non-Human Animal Resources Recreation Technology (Physical and Scientific Leisure Time “Recipes” of History) Entertainment Clean Air Human Resources (Knowledge. etc. Rugs. Skill.

• Economics analyses how a society’s institutions and technology affect prices and the allocation of resources among different uses. DEFINITIONS OF ECONOMICS • Economics has been defined in many ways. • Economics studies the business cycle and examines how monetary policy can be used to moderate the swings in unemployment and inflation. • Economics explores the behavior of the financial markets. Samuelson summarized some of them and they are as follows. • Economics looks at growth in developing countries and proposes ways to encourage the efficient use of resources. • Economics Studies the patterns of trade among nations and analyses the impact of trade barriers. • Economics examines the distribution of income and suggests ways that the poor can be helped without harming the performance of the economy. including interest rates and stock prices. .

therefore. gained a wide range of application in the analysis of practical problems of business. . the usefulness of economic theory as a tool of analysis and its contribution to the process of decision-making has been widely recognized. • With the growing complexity of business environment. • Economic theories have. • Application of economic theories to explain and analyze the technical conditions and the business environment contributes a good deal to the rational decision-making process. NATURE OF MANAGERIAL ECONOMICS • Taking appropriate business decisions requires a clear understanding of the technical and environmental conditions under which business decisions are taken.

'one of the most important things which the economic theories can contribute to the management science' is building analytical models. • Secondly. which help to recognize the structure of managerial problems. • Thirdly. which enables the managers to avoid conceptual pitfalls. NATURE OF MANAGERIAL ECONOMICS • Baumol has pointed out three main contributions of economic theory to business economics. • First. . economic theories offer clarity to the various concepts used in business analysis. eliminate the minor details. but they do enhance the analytical capabilities of the business analyst. which might obstruct decision-making and help to concentrate on the main issue. economic theory contributes to the business analysis 'a set of analytical methods' which may not be applied directly to specific business problems.

These include production programming and problems of transportation. • Inventory and Queuing Problems: Inventory problems involve decisions about holding of optimal levels of stocks of raw materials and finished goods over a period. etc. against the cost of such machines or labor. . SCOPE OF MANAGERIAL ECONOMICS • The problems in business decision-making and forward planning can be grouped into four categories as follows: • Problems of Resource Allocation: Source resources are to be used with utmost efficiency to get the optimal results. • Queuing problems involve decisions about installation of additional machines or not hiring labor. These decisions have to be taken by considering demand and supply conditions.

• Investment Problems: It is related of allocating resources over time. These normally relate to investing new plants. SCOPE OF MANAGERIAL ECONOMICS • Pricing Problems: Fixing prices for the products of the firm are important decision-making problems. how much to invest. . Pricing problems involve decisions regarding various methods of pricing to be followed. expansion programs for the future. etc. sources of funds.

and capital. BRANCHES OF ECONOMICS • MICROECONOMICS • Adam Smith is the founder of the field of Microeconomics. studied the determination of price of land. Smith considered how individual prices are set. • He identified the most important efficiency properties of markets and saw that economic benefit comes from the self- interested actions of individuals. and enquired into the strengths and weakness of the market mechanism. • In ‘The Wealth of Nations’ (1776). the branch of economics which today is considered with the behavior of individual entities such as markets. . These remain important issues today also. firms and households. labor.

Interest and Money’ (1936). Keynes developed an analysis of what causes business cycles. what causes international financial crisis. and why some nations grow rapidly while others stagnate. • Now. with over one-quarter of the American labor force unemployed. macroeconomics examines a wide variety of areas. • At the time. BRANCHES OF ECONOMICS • MACROECONOMICS • Macroeconomics started its journey when John Maynard Keynes published his revolutionary ‘General Theory of Employment. • It studies of the overall performance of the economy. . how central banks manage money and interest rates. with alternative spells of high unemployment and high inflation. England and USA were still stuck in the Great Depression of the 1930s. such as how total investment and consumption are determined. • In his new theory.

. how the scarce resources are optimally allocated? • How the goods and services so produced are distributed among the households? • The nature of an economic system depends on how the above questions are resolved and who coordinates the decisions of millions of economic agents. • In between lies the widely prevalent Mixed Economy. BASIC CONCEPTS • Every economy faces three fundamental questions in its functioning.e. . which is a mixed of command and Market Economies. These are: • What goods and services are to produce and in what quantity? • How to produce those goods and services? i. • At the two extremes are the Market and Command Economies.

• Demand as given condition. . TYPES OF ECONOMY • Market Economy: • In a market economy. • Consumers are assumed to act in a rational manner so as to maximize their economic welfare. demand determines what goods and services are to be produced and how much of each good and services to be produced. the firms finalized that how the goods and services are distributed for resolving the ownership pattern of factor inputs and factor prices. the firms decide how to produce the required goods and services in a most efficient manner so as to maximize their profits. • After that. • They spend their income on various products in such a way so as to maximize their economic welfare. • This results in optimum allocation of scarce resources.

how. . • The examples of command economies are the former Soviet Union and the former communist nations of Eastern Europe. when. • Soldiers and mariners on the front line take the actions they are ordered. • A command economy differs from a market economy in two important ways. • The best example of a hierarchical organization structure is the military in India. TYPES OF ECONOMY • Command Economy: • A command mechanism is a method of determining what. using a hierarchical organization structure in which people carry out the instructions given to them. where and for whom goods and services are produced. • Commanders make decisions requiring actions that are passed down a chain of command.

in a command economy. retail stores. • A centrally planned economy is one in which politically appointed committees plan production by setting target outputs for factory and enterprise managers are manage the economy to achieve political objectives. authoritarian methods are used to determined resource use and prices. like land. factories. in a command economy the state owns all the productive resources. and the bulk of the housing stock. . • Government enterprises and government ownership of resources are the rule rather than the exception in a command economy. TYPES OF ECONOMY • Firstly. • Secondly. financial institutions.

. • Most of modern nations have a government firms as well as private enterprises to provide goods and services for the country. defense. • In modern mixed economies. • It is an economy that follows both the market and command mechanism. pensions and sometimes education. governments intervene the markets to control prices and correct the shortcomings of a system in which prices and the pursuit of personal gain influence resource use and incomes. • In most of the modern countries. government provides roads. governments control many resources and criteria other than personal gain and business profit are used to decide how resources will be employed. TYPES OF ECONOMY • Mixed Economy: • Most of the real world economies are mixed economy. • In such a country.

BASIC MICROECONOMICS BASIC CONCEPTS AND PRINCIPLES OF MICRO-ECONOMIC ANALYSIS • Managerial economics deals with firms. more especially with the environment in which firms operate. • The key economic concepts and principles that constitute the broad framework of managerial economics are explained in the next slides. the decisions they take and the effects of such decisions on themselves and their stakeholders like customers. . competitors. employees and the society in which they operate.

• In order to decide whether to use an additional unit of resource you need to know the additional output expected there from. • Marginalism concept will help to know the additional output expected from an additional unit of resource. So. BASIC MICROECONOMICS • MARGINALISM • The root cause of all economic problems is scarcity. marginal output of labor is the output produced by the last unit of labor. • Economists use the term marginal for such additional magnitude of output. . all should be careful about the utilization of each and every additional unit of resources. • Therefore.

. BASIC MICROECONOMICS • OPPORTUNITY COST • Economic decision is choosing the best alternative among available alternatives. • If the best alternative was not chosen then you could have chosen the second best alternative. • So. • This choice implies sacrificing the other alternatives. • Before choosing best alternative you rank them all based on their priority and probable return. This is called Opportunity Cost. the cost of this particular best choice is the benefit of the next best alternative foregone. • The cost of this choice can be evaluated in terms of the sacrificed alternatives.

Where PVF = present value of fund. it is necessary to discount future rupee to make it equivalent to current day rupee.) and r = rate of discount. whereas inflows occur only in future. the fact that the value of money depreciates with time. etc. The simple formula for discounting is: • PVF = 1 / (1+rn).. i. • The core discounting principle is that a rupee in hand today is worth more than a rupee received tomorrow. • Most outflows normally occur in the current period. most of the decisions relate to outflow and inflow of money and resources that take place at different point of time.e. i. • One rationale of discounting is uncertainty about tomorrow. in order to take the right decision it is necessary to “discount” future inflows to their present value level. Even if there is no uncertainty. therefore. . n= period (year. future. BASIC MICROECONOMICS • DISCOUNTING TIME PERSPECTIVE • Discounting principle refers to time value of money. • In business situations.e..

BASIC MICROECONOMICS • RISK AND UNCERTAINTY • The uncertainty is due to unpredictable changes in the business cycle. market-prices. the consequences of an action are not known immediately for certain. strategies of rivals. • This means that the management must assume the risk of making decisions for their organizations in uncertain and unknown economic conditions in the future. etc. . • Under uncertain situation. structure of the economy and government policies. • Economic theory generally assumes that the firm has perfect knowledge of its costs and demand relationships and its environment. • Firms may be uncertain about production.

BASIC MICROECONOMICS • Uncertainty is not allowed to affect the decisions. • The managerial economists have tried to take account of uncertainty with the help of subjective probability. • Dynamic changes are external to the firm and they are beyond the control of the firm. cost and revenue data of their firms with reasonable accuracy. • Uncertainty arises because producers simply cannot foresee the dynamic changes in the economy and hence. • The probabilistic treatment of uncertainty requires formulation of definite subjective expectations about cost. revenue and the environment. . • The result is that the risk from unexpected changes in a firm’s cost and revenue cannot be estimated and therefore the risk from such changes cannot be insured.