Day to Day Economics

Dr. SHIKTA SINGH

Professor in Economics & Area Chair

KSOM,KIIT University
Bhubaneswar
 Teaching Experience- since past 8 years in -Utkal
University, Abhinav Institute of Management &
Research, Pune, Visiting to Symbiosis School of
Economics, Pune, & XIMB.
Key areas of Research- Industrial Economics,
Various macroeconomic and economic development
issues viz. paradigm shift in monetary and exchange
rate issue- pre& post reforms, MDGs & SDGs, CSR
& Development &Financial Market.
Dr. Shikta Singh
Authored around 10 research papers of national
M.Phil, Ph.D and international repute and has published 3 book
chapters and one book which is very recently going
to be published.
Paper presented in International Conference – Abu
Dhabi & Belgrade.
Worked for Projects in RBI Chair.
Working on a Project on- “Estimating Health and
Wellness of the Potential Users of Online Medical
Service - A Case Study of Cuttack District”.
INTRODUCTION TO
ECONOMICS
Scarcity, Choices, Choices, . . .
The Basics
"The basic problems of economics are
simple ;the hard part is to recognize
simplicity when you see it. The next
hardest part is to present simplicity as
common sense rather than ivory tower
insensitivity. Theory needs to teach more
of both"
 WHAT IS ECONOMICS???
Economics – the study of how individuals
and societies make decisions about ways
to use scarce resources to fulfill wants and
needs.
What does THAT mean?!!??!!
 Economics
Economics is derived from two Greek
words
Oikos- a house
Nemein- to manage
Means “managing a household”
Emphasis Significant contribution
Wealth Adam Smith
Welfare Alfred Marshall
Scarcity Lionel Robbins
growth Paul Samuelson
 What Economics is All About?
(From the eye of Economists)
The concept of Economics has been changing during different stages
of developing Economics as subject:
1.Wealth concept-Adam Smith
“Economics is the study of Wealth”
the great object of Political Economy of every country is to increase
the riches and power of that country
2. Welfare concept-Alfred Marshall
“Political Economy or economics is the study of mankind in the
ordinary business of life, it examines that part of individuals
and social action which is most closely connected with the
attainment and with the use of the material requisites of well
being”
3. Scarcity concept-Lionel Robbins
“Economics is the science which studies human behavior as a
relationship between ends and scarce means which have
alternative uses”
4. Development concept-Paul Samuelson
 What Economics is All About ?
According to Prof Paul Samuelson
‘‘Economics is the study of how man and
society choose, with or without the use of
money to employ scarce productive
resources, which would have alternative
uses, to produce various commodities
over time and distribute them for
consumption now and in the future among
various people and groups of society”.
 The Study of Economics
Macroeconomics
– The big picture: growth,
employment, etc.
– Choices made by large
groups (like countries)

Microeconomics
– How do individuals make
economic decisions
Managerial Economics Defined
The application of economic theory and
the tools of decision science to examine
how an organization can achieve its aims
or objectives most efficiently.
– applications of economic theory
– quantitative methods
– statistical methods
– computational methods
Managerialeconomics is a science that deals with the application
of various economic theories, principles, concepts and techniques
to business management in order to solve business
and management problems.
It deals with the practical application of economic theory and
methodology for decision making problems faced by private, public
and non-profit making organizations.
The same idea has been expressed by Spencer and Seigelman in the
following words.
“Managerial Economics is the integration of economic theory with
business practice for the purpose of facilitating decision making and
forward planning by the management”.
According to Mc Nair and Meriam,
“Managerial economics is the use of economic modes of thought to
analyze business situation”.
Brighman and Pappas define managerial economics as,” the
application of economic theory and methodology to business
administration practice”.
Joel dean is of the opinion that use of economic analysis in
formulating business and management policies is known as
managerial economics.
Economics vs. Managerial Economics
Managerial Economics has been described as economics applied to
decision-making. It may be viewed as a special branch of
Economics. However, the main points of differences are the
following:
1.Economics deals with micro, macro, money banking ,trade etc.
while ME deals with not only the micro but macro aspect also. Its
applied microeconomics though it draws extensively from macro.
2. Economics is both positive and normative science but the
Managerial Economics is essentially normative in nature.
3. Economics deals mainly with the theoretical aspect only whereas
Managerial Economics deals with the practical aspect.
4. Economics studies human behaviour on the basis of certain
assumptions but these assumptions sometimes do not hold good in
Managerial Economics as it concerns mainly with practical problems.
5. Under Economics we study only the economic aspect of the
problems but under Managerial Economics we have to study both
the economic and non-economic aspects of the problems.
 Nature of firm and its goal
A business concern, especially one involving a
partnership of two or more people.
They transform available input into desirable
output.
They are by legal entities
They are characterized by employers and
employees.
Profit maximization

Profit
GOAL optimization

Cost minimization
MANAGERIAL ECONOMICS IS ALL
ABOUT RATIONAL DECISION MAKING
EXAMPLES OF SOME DECISIONS
ECONOMISTS HAVE ANALYZED
Whether to buy a car this week.
Whether to have pizza for dinner tonight,
or something else.
How hard to study for this course.
Whether to join a B-school, and if so,
which one.
Whether to invest money in mutual funds,
if so , which one should be reaping.
 Economic Theory
Microeconomics
– Study of the economic behavior of individual
decision-making units.
– Relevance to Managerial Economics.
Macroeconomics
– Study of the total or aggregate level of output,
income, employment, consumption,
investment, and prices for the economy
viewed as a whole.
 Decision Sciences
Mathematical Economics
– Expresses and analyzes economic models
using the tools of mathematics.
Econometrics
– Employs statistical methods to estimate and
test economic models using empirical data.
 Economic Methodology
Economic Models
– Abstract from details
– Focus on most important determinants of
economic behavior – cause and effect
Evaluating Economic Models
– A model is accepted if it predicts accurately
and if the predictions follow logically from the
assumptions.
In economics, a model
is a theoretical construct
representing economic processes by a
set of variables and a set of logical and/or
quantitative relationships between them.
The economic model is a simplified
framework designed to illustrate complex
processes, often but not always using
mathematical techniques.
 ECONOMICS: 5 Economic
Questions
Society (we) must figure out

WHAT to produce (make)

HOW MUCH to produce
(quantity)
HOW to Produce it
(manufacture)
FOR WHOM to Produce
(who gets what)
WHO gets to make these
decisions?
 What are resources?
Definition: The things that are used to
make other goods which in turn has
economic benefits.
 BUT, there’s a
Fundamental Problem:
SCARCITY: unlimited wants and
needs but limited resources
 Choices, Choices
I have money BUT
What I will do with it

Because ALL resources,

goods, and services are
limited – WE MUST MAKE
CHOICES!!!!
 Why Choices?

We make choices about how we spend our

money, time, and energy so we can fulfill
our NEEDS and WANTS.
What are NEEDS and WANTS?
 Needs and Wants
NEEDS – “stuff” we must have to survive,
generally: food, shelter, clothing
WANTS – “stuff” we would really like to have or
desire (Fancy food, shelter, clothing, big screen
TVs, jewellery, conveniences . . . Also known as
LUXURIES
VS.
 TRADE-OFFS
You can’t have it all (SCARCITY –
remember?) so you have to
choose how to spend your
money, time, and energy and
other resources. These decisions
involve picking one thing over all
the other possibilities – a TRADE-
OFF!
 SCARCITY, CHOICES AND
OPPORTUNITY COST
Scarcity:
The core problem
Sunny has Rs15 and he would like to
buy two things; a book and a pen
which cost Rs15 each (unlimited wants
and limited resources). Sunny has to
Choice choose either to purchase book or a
pen which would satisfy his needs
(choices). If Sunny choose the book,
then the pen is the opportunity cost.

Opportunity
cost
32
 Scarcity means that choices are
necessary.
When you can’t have all you want of
everything, you must make choices.

Microeconomics is the study of how to make

the best possible ( or the optimal) choice
under the constraint of limited resources.
 Trade-Offs, cont.
What COULD you have done instead of
coming to KSOM today?

These are all Trade-Offs! Thanks for being

here!
 A special kind of Trade-Off is an

OPPORTUNITY COST =

The Value of the Next Best Choice

(Ex: Sleeping is the opportunity cost of studying for a test)

 Opportunity Costs
When you choose to do ONE thing, its value (how
much it is worth) is measured by the value of the
NEXT BEST CHOICE.
– This can be in time, energy, or even MONEY

If I buy a Then I
pizza… can’t afford
the
movies…

Q: What is the opportunity cost of buying pizza?

 OPPORTUNITY COST
DEFINED
 The opportunity cost of doing something is what
you must give up in order to do it.
 The cost of a pizza is what you must give up to
consume it, which in this case is easily computed in
money.
 The cost of a college education includes both money
and other foregone alternatives. For example, the
cost of a year at KSOM includes not only tuition and
books, but the income you could have earned working
on a full/part time job.
 The cost of attending a FIFA football game includes
the value of the time you could have spent studying
economics.
 Tradeoffs and the Production
Possibility Frontier
Economists would want to develop a more precise
model of the tradeoffs involved –

And that model can be represented graphically by

a “Production Possibility Frontier”, showing the
choices which are
-- possible (on or within the frontier)
-- efficient (exactly on the frontier)
-- inefficient (within the frontier)
-- impossible (beyond the frontier)
 The PPC can show opportunity cost
Suppose you are at some point on a PPC.
Then you want to consume one more good say
pizza.
E.g. The opportunity cost of one more pizza is the
amount of spaghetti you must give up in order to get
it.
 Production
So how do we get all
this “stuff” that we
have to decide about?
Decisions, decisions
…
 PRODUCTION, cont.
Production is how STUFF – Goods and
much stuff an Services.
individual, business,
country, even the Goods – tangible (you
WORLD makes. can touch it) products
we can buy
But what is “STUFF”?
Services – Intangible-
work that is
performed for others
 Factors of Production
So, what do we need to make all of this Stuff?
 4 Factors of Production
LAND – Natural Resources
– Water, natural gas, oil, trees (all the stuff we find on,
in, and under the land)
LABOR – Physical and Intellectual
– Labor is manpower
CAPITAL - Tools, Machinery, Factories, Finance
– The things we use to make things
– Human capital is brainpower, ideas, innovation
ENTREPRENEURSHIP – Investment $$$
– Investing time, natural resources, labor and capital
are all risks associated with production
Factors of Production
 THREE parts to the Production
Process
Factors of Production – what we need to make
goods and services

Producer – company that makes goods and/or

delivers services

Consumer – people who buy goods and

services (formerly known as “stuff”)

Which Came First?

 Market Place
Market Place brings the producer and consumer on a
common platform
At the end both are better off, but there are other side
effect also.
Any modern city is full of gas stations, and the owners
are happy to sell petrol/diesel and the owners of
car/truck/bikes are happy too happy to get fuel
The transaction make both of them better off, but
consider the pollution level and quality of air and it effect
on human health and productivity.
Economics studies these kinds of problem as well.
 Production Process

Land

Goods

Labor
Production/Manufacturing
“Factory” Consumers

Capital

Services

Entrepreneurship
 Capital Goods and Consumer
Goods
Capital Goods: are
used to make other
goods

Consumer Goods:
final products that are
purchased directly by
the consumer
CHANGES IN PRODUCTION
Specialization –
dividing up production
so that Goods are
produced efficiently

Hardee’s makes
hamburgers, not
shoes!!

Nike makes shoes, not

hamburgers
CHANGES IN PRODUCTION

Division of Labor –
different people You do your
perform different jobs job, and I
will do my
to achieve greater Job and we
efficiency (assembly will be more
EFFICIENT
line).
CHANGES IN PRODUCTION
Consumption – how
much we buy
(Consumer
Sovereignty)
The DELL store is
empty because….

Everyone is at the
APPLE STORE!!!
CHANGES IN PRODUCTION
If we INCREASE land, labor, capital we
INCREASE production
– Many entrepreneurs invest profit back into production

If we DECREASE land, labor, capital we

DECREASE production

BUT WHY would we ever DECREASE

production?
 Decision Problems faced by firms

What should be the price of the product?

What should be the size of the plant to be
installed?
How many workers should be employed?
What is the optimal level of inventories of
finished products, raw material, spare parts,
etc.?
What should be the cost structure?
What would be the expected rate of return?
 ECONOMICS IS ALL ABOUT
DECIDING

Important agents in the economic system for

decision making
Producers
Consumers
EDM
EDM Workers
Savers
Investors
The Circular Flow Model
Comparative Economics
 Adam Smith
18th century Scottish
economist
Published “The Wealth of
Nations” in 1776
Explained the workings of
the free market within
capitalist economies
Invisible hand of the
market
 Adam Smith (cont.)
Laissez-faire - Government stays out of
business practices “hands off” to let the
market place determine production,
consumption and distribution.

Individual freedom and choice

emphasized.
 Principles of Capitalism
Competition – more
businesses means
lower prices and
higher quality
products for
consumers (US!) to
buy.
 Principles of Capitalism
Voluntary Exchange –
businesses and
consumers MUST be
free to buy or sell
what and when they
want.
 Principles of Capitalism
Private Property –
Individuals and
businesses MUST be
able to get the
benefits of owning
their OWN property.
Government doesn’t
control it.
 Principles of Capitalism
Consumer
Sovereignty –
consumers get to
make free choices
about what to buy
and this helps drive
production
(Demand drives
Supply).
Principles of Capitalism
Profit Motive – people
want to make or save
$$$$. Their “Self
Interest” motivates
Capitalism.
 Principles of Capitalism
Social Safety Net –
“Mixed Economy” idea
that says the government
should NOT allow people
to suffer in economic
crisis (natural part of
Capitalism’s “Business
Cycle”), but provide
security instead – Social
Security, Unemployment
Insurance, etc.
 Socialism
Government involvement
and ownership and control
of property, of decision
making, and companies.
Government control of
business
Social “safety net” for
people
Common in Europe, Latin
America, and Africa
 John Maynard Keynes
The Invisible Hand
doesn’t always work.

“The long run is a

misleading guide to
current affairs. In the
long run we are all
dead.” or . . . the
trouble is people eat
in the short run.
Keynesian Economics (cont.)
Government should intervene in economic
emergencies through tax and spending
(Fiscal Policy) and changing the money
supply (Monetary Policy).
This is done to smooth out the business
cycle (expansion and recession) and keep
inflation low.
Amartya Sen
Behavioral Economics-
studies the effects of psychological,
cognitive, emotional, cultural and social
factors on the economic decisions of individuals and
institutions and how those decisions vary from those
implied by classical theory.
The three prevalent themes in behavioral economics are:
Heuristics: Humans make 95% of their decisions using
mental shortcuts or rules of thumb.
Framing:
The collection of anecdotes and stereotypes that make
up the mental filters individuals rely on to understand
and respond to events.
Market inefficiencies: These include mis-pricing and non-
rational decision making.
Thank you for your patient