BASIC CONCEPTS IN ECONOMICS

SESSION 2
Dr. PRADEEP S.
 Learning Objectives
 The participants are from different courses; hence it is required
to provide a strong foundation to the subject “ECONOMICS”

 To discuss basic concepts and technical jargons used throughout

the conduct of the course “Managerial Economics”
 Basic Economic Activities
 Production – It is the process whereby man transforms the
resources available to him into a product which people want –
that is the conversion of inputs into output.

 Consumption –It is the process of using up the products and

services to satisfy needs and wants or the utilization of goods and
services.
 Basic Economic Activities
 Exchange – It is the transfer of goods and services for money –
the exchange of land, labour, capital and organization for rent,
wages, interest, and profit.

 Distribution – The process of distributing the income among

the various sections of the society – poor / rich, old / young and
among geographical areas.
 Basic Concepts in Economics…
 Utility – It is the want satisfying power of a commodity or a service.
By consuming goods and services people satisfy their various needs
and wants.

 Factors of Production
 Land – The broad term for both geographical area and natural
resources.

 Labour – The physical and mental effort of people applied during

periods of work - hours, weeks, months, and years.
 Factors of Production…
 Capital – The set of productive resources – buildings,
machinery, roads, and other tangible means of production – that
has been created by production and investment in the past.

 Organization / Enterprise – The basic units of production or

the individual business units. Maximization of profit is the
primary aim of a private enterprise.
 Basic Concepts in Economics…
 Inputs – The resources including natural resources, which satisfy a
need or a want.

 Output – The final product / service which satisfies a need or a want.

 Market – The term market has a precise economic meaning: A

grouping of buyers and sellers who exchange a specific good at a price
and at a given point of time. Their choices and exchanges determine
the good’s price and quantity.
 Basic Concepts in Economics…
 Value and Price – Value of a commodity or service when expressed in
terms of money is price (Value-in-Exchange). The value of a product is
itsValue-in-Use.

 Household – A household is any unit in which people live and make

decisions about work, consumption, and the disposal of the personal
property.
 Basic Concepts in Economics…

 Maximizing Behaviour – Economists consider the primary motive of

households and firms to be self-interest. The technical term for it is

maximizing. Households select the group of purchases that will
maximize their satisfaction within the limits of their incomes. On the
supply side, firms choose the combination of inputs and level of output
that will maximize their profits. Self-interest is the proper basis for
microeconomic analysis because almost all people and firms are guided
by it almost all the time
 Marginal Analysis
 Marginal Analysis – The economist expects things to change by

degrees. A little more here, or a little less there, will cause a degree of
change in other things. These small or “marginal” changes can often be
compared accurately. Such marginal analysis is crucial throughout
much of economics. Thus, the economists always compare small or
marginal changes, not extreme jumps from one condition to another.
Most economic choices involve marginal changes. Marginal means
adding just one more unit. A decision “at the margin” compares the
benefits and costs of small changes.
 Marginal Concepts…
 Marginal utility: The change in satisfaction gained from consuming one
more unit of a good. It is the addition to total utility caused by the
consumption of one more unit of a commodity or service.

 Marginal product: The change in output arising from the addition of one
more unit of an input, assuming that other inputs are held constant.

 Marginal cost: The change in cost resulting from the production of one
more unit of output.
 Marginal Concepts…
 Marginal revenue: The change in revenue resulting from the sale of one
more unit of output.

 Marginal propensity to spend: The proportion of a change in income that

will be spent.

 Marginal benefit: The economic gains (in utility, satisfaction, or other

values) obtained from having one more unit of a public or private
good.
 Efficiency & Optimization

 Efficiency in production: It is achieved when a given level of

output is produced using the least amount of inputs. Any switch
of inputs to other uses will reduce the total value of output.
Efficient production is also referred to as the least-cost method
of production. Efficiency is important because human wants
outrun what can be produced from the available resources. If the
resources can be used efficiently, then the maximum value of
production can be obtained. It has meaning and importance
because of scarcity. Efficient utilization of scarce resources is also
referred to as optimization
 CONCEPT OF ECONOMIC EQUILIBRIUM
 Equilibrium is a condition reached when all influences balance each
other out, so that there is no pressure for further change.

 It means a position from which there is no tendency to move.

 The concept of economic equilibrium forms the core of economic

theory. An economic equilibrium may exist for an individual
consumer, or firm, for a market, or for the entire economic system
 ECONOMIC EQUILIBRIUM…

 In economics, equilibrium is usually not a state of rest, with action

coming to a halt. Rather, it combines various forces in a way that keeps
the resulting outcome (such as price or quantity) the same.

 Example: An aircraft flying at its cruising speed. There is motion,

perhaps with sharply counter posed influences (the terrific forces
within the airplane’s jet engines) but the result is an unchanging level
of activity
 ECONOMIC EQUILIBRIUM…
 An individual consumer reaches equilibrium when he / she gets maximum level of
satisfaction that is possible.

 A Market is said to be in equilibrium when the supply meets demand.

 Similarly, a producer is said to be in equilibrium when he / she gains maximum

profit with the help of optimum allocation of resources at the least-cost method.

 The economic system as a whole also continually moves towards an equilibrium. In

this case, the balance must be between the total demand for all goods and services
and total supply. Not only are the total supply and demand balanced, but each and
every market must also be in equilibrium, for any disturbance in one part of the
economy will affect the whole system.