Introduction to Economics

by
Dr. K. Arun Vikram
Introduction to Economics
and Definitions

Classification of Economics

Engineering Economics and

Principles

Managerial Economics

Nature and Scope of

Economics

Scarcity and Efficiency

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Economics means…?
Economics studies how human should utilize the available resources and for doing it “Rules of Household”
is necessary for proper functioning. Hence, Economics is a Social Sciences which deals with human
activities for satisfying their needs by consuming their available wealth.

Other Definitions of “Economics”….

1. Adam Smith, defines Economics as “Study of Nature and uses of National Wealth”.

2. Economics defined as “ A social, positive and normative science and arts, which studies those
activities of social, real and normal beings, which are related to the consumption, production,
exchange and distribution of wealth”.

3. Economics is “A study of choices and decision making in a world with limited resources”.

4. Economics is “ A study of how societies use scarce resources to produce valuable commodities
and distribute them among different people”.

5. Economics is “ A study of the choices that people make to cope up with scarcity of resources”.

6. Economics is “A Social Science that analyze the Production, Distribution and Consumption of
goods and services”.

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RESOURCES
LAND
All that exists in nature, like air,
water, trees & plants, minerals
and land itself which is applied
CAPTIAL
in production process.
Financial capital,
LABOUR human capital and
The efforts, skills, and Physical Capital-
knowledge of people which Buildings & machinery
are applied to the production
process.
Classification of Economics…
Types of Economics

Micro Economics Macro Economics

Engineering Managerial
Economics Economics

Micro Economics
Micro Economics deals with rules set and used for decision making by individuals and households or
firms for the benefits such as better life living or for betterment in factors of production like prices, quality
and quantity etc, respectively. The goal of microeconomics is to explain the prices and quantities of
individual goods and services.

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Micro Economics Operational Issues Micro Economics Theories
 Choice of business, Choice of firm size  Theory of Demand
 Choice of the price  Theory of Production
 Choice of technology  Theory of Cost
 How to manage profit, How to manage  Marketing structure and Pricing theory
capital  Profit management, Theory of capital
Micro Economics Theories
1. Theory of Demand : This theory focus on demand, determination of demand , response of
demand with other factors and forecasting demand.
2. Theory of Production: This theory is concerned with the conversion of inputs to outputs,
achieving optimum efficiency with minimizing cost of production. It studies about technology, input
and output response.
It formulates production as function of Land, Labour, Capital, Material, Technology and Time.
3. Theory of Cost: This theory is concerned with the cost of production considering size, price of
output and input and technology.

Macro Economics
Macro Economics deals with rules set and used for decision making for smooth running of a nation by
focusing on analysis of major areas of concentration like Unemployment, Inflation, Agriculture, Industrial
production etc.
Macroeconomics - The study of the national economy and the global economy and the way that
economic aggregates grow and fluctuate. The goal of macroeconomics is to explain average
prices and the total employment, income, and production.
Engineering Economics…
 Deals with the concepts and techniques of analysis useful in evaluating the worth of systems, products,
and services in relation to their costs.
 It involves in all investment related decisions like in 1. Equipment and process selection for better quality,
quantity and cost reduction. 2. Service improvements like new products or product expansions. 3.
Engineering Projects (i.e. which projects are worthwhile to deal, design) etc.
 It is a “Systematic Evaluation of the Economic merits of proposed solutions to engineering
problems”.
 Engineering economics utilizes a collection of simple mathematical techniques to make rational
economic comparisons of various engineering alternatives. These mathematical techniques enable one
to account for the time value of money in making comparisons.

Engineering Economics:
Accounting: Evaluating past performance Evaluating and predicting future events
Fundamental Principles of Engineering Economics
 Principle 1: A nearby dollar is worth more than a distant dollar
(E.g: Invests today is worth than invest tomorrow, like in gold buying)
 Principle 2: All it counts is the differences among alternatives (E.g: Buy or lease)
 Principle 3: Marginal revenue must exceed marginal cost
 Principle 4: Additional risk is not taken without the expected additional return.

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Managerial Economics (Economics for Firms
or Business Economics)..
 Deals with Study of Economic theories, logics and methodologies for solving the practical problems in
business.
 It is Application of Economic concepts and Economic Analysis to the problems of formulating rational
decisions. (Mansfield)
 It is analysis of business problems for rational business decisions.

Operation
Micro & Research
Macro
Economics
Computer
Science

Managerial
Mathematics Economics

Management
Theory &
Accounting
Firm Operations
(Marketing, Production &
Finance)

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 Nature of Economics..
1. Close to Micro-Economics
 Finding solutions to the problems related to a particular firm.
2. Operative against backdrop of Micro-Economics
 Limits set by country policies should also be taken into consideration, like Taxes, Inflation etc.
3. Normative Statement
 They define activities like “Should”, like moral attitudes and expressions of what a team should
ought to do.
4. Offers scope to evaluate each alternatives
 Opportunity to evaluate each alternative in terms of cost and revenue to maximize profits for the
firm.
5. Interdisciplinary
 Should involve all the disciplines.
6. Perspective action
 Solutions shown must explain optimal solution concepts and its applications.
7. Applied in nature
 Model presentation for taking decision making, like inventory control, project management,
optimization etc.

Scope of Economics.. Managerial Decision Areas:

1. Production
Concepts and 2. Cost control
Techniques of Applied 3. Price Determination For Optimum
Managerial 4. Make or Buy decisions
To Solutions
Economics 5. Inventory Decisions
6. Capital Management.
7. Profit Planning and Management.
8. Investment Decisions

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Importance of Economics…..
1. To study how prices of Labour, Land and Capital are to be set and how these prices are used to
allocate the resources.
2. To study swings in unemployment, production and policies.
3. To study impact of government spending, taxes and budgeting.
4. To study patterns of trade among nations and analyze the impact of trade barriers.

Scarcity…..
If goods are produced in high quantity and given for free, then no one strive for goods, making no income
sharing and thereby leading no respect, no work etc and hence leads to no Economic rules.
Scarcity means, wants always exceed the resources available to satisfy them.
People facing scarcity, must make choices balancing the wants and available resources and so involve in
Economic activity to make it happen.
Economics is the study of the choices, people make to cope with scarcity.
Choosing more of one thing means having less of something else.
The opportunity cost of any action is the best alternative forgone.

Scarcity and efficiency…..

Every time there should be a Scarcity of goods, so that the existing goods are utilized efficiently, thereby
saving the natural resources.
To make it happen Economics is necessary.