INTRODUCTION TO ECONOMICS

MICROECONOMICS-SESSION 1- 3 B.Com
CHANDAN ADHIKARI
Life is a creation of your thoughts. Beautiful
thoughts transform your life into a beautiful reality
The Basics
 Learning outcomes
• At the end of the session, you must learn what is
economics and what economic issues the economy
deals with?
•Why study economics?( Pre-requite Ten principles of
economics)
•What are basic concepts of economics and how are
they useful in decision making process?
 Polling
Q1.What is your academic background?
• Commerce
• Science
• Arts
• Others

Q.2. How many of you have studied economics in your

previous studies?
Discussion: Note on Intro.to Economics

• Why do you study economics as a student of B.Sc.

fin?
• What are your expectations from this course?
• What is an economy? Who are the major players in
conducting economic activities?
Learning objectives
At the end of the course, you must learn the following:
- What is economics and why should we study
economics?
- What kind of basic problems (What, How, How
Much and for whom to produce) it deals with?
- What branches of economics study these problems:
Micro and Macro economics, Normative and
Positive economics.
- What is the genesis of these basic problems?
- What concepts of economics (scarcity, choice and
opportunity cost) are there at the root of these
problems?
- What do we mean by production possibility frontier?
 WHAT IS ECONOMICS?
• Paul Samuelson has termed eco. as Queen of
Social Sciences
• Economics – the study of how individuals and
societies make economic decisions about ways
to use scarce resources which have alternative
uses to fulfill unlimited wants and needs.
• Economics is the study of economic behaviour
of individuals, HHs, Firms, Govt.and RoW in
allocating limited scarce resources in order to
fulfil unlimited needs and wants

.
Contd..
Key words: Scarce Resources, Unlimited
Needs/wants, Alternative uses, Economic
behaviour.
Implications: Choice making, trade offs, Opportunity
costs, economic activities
- It is a study of economic activities(SEA) involving
(PDC)- Production, Distribution and Consumption
- Scarcity, Efficiency, Rationality and Optimization
are the corner stones of economics.
What are businesses/economic activities?

1. Tell us some stories about these businesses.

2. Why do they do business?
3. What are major contrasts btn. Logo wale
businesses and other
businesses?(organised/unorganised)
4. What concepts of economics are involved in
these businesses?
 Quiz
1.Which of the following is one of the major causes of
economic problems?
1. One of the major causes of economic problems is unlimited
human wants
2. One of the major causes of economic problems is the
alternative usage of resources
3. One of the major causes of economic problems is the scarcity
of economic resources
4. All of the above

2.Which of the following statements about the economy is

correct?
1. An economy is a system that helps in the production of goods and also
enables people to earn a living
2. An economy is a system that helps in the production of services and also
enables people to earn a living
3. Both a and b are correct
 Contd…
1.Which of the following statements is the actual
meaning of scarcity?
1. The actual meaning of scarcity is that there is an increase in
the resources
2. The actual meaning of scarcity is that there is a shortage in
the resources
3. The actual meaning of scarcity is that there is no change in
the resources
4. None of the above

2.Which of the following is a part of microeconomics?

1. Factor pricing
2. National income
3. Both a and b are correct
4. Both a and b are incorrect
Why study Economics(explain)
1. To Learn a Way of Thinking
- How people make economic decisions?
ii. People face tradeoffs.(limited resources Vs
Wants/needs)
ii. The cost of something is what you give up to get it.
(opportunity cost/trade offs)
iii. Rational people think at the margin.(cost benefit
analysis) When you buy provisions in DMart, you
join a shortest line to exit and minimise time cost
of obtaining provisions.
iv. People respond to incentives.
 Contd…
2.How people interact with each other?
v.Trade can make everyone better off.
vi. Markets are usually a good way to organize
economic activity.
vii. Govts. can sometimes improve economic
outcomes(Externality and market power)
3. To understand Society and Economy
4. To understand Global Affairs
5. To be an informed citizen
Trade off/scarcity
- People face trade offs because resources are
scarce in relation to the needs and wants of the
people.
- I have Rs. 500/ I can buy a shirt, a book and a
dinner. I want all the three. Can I fulfil my want of
all three? No, I fulfil one and give up other two.
This is trade off.
- Desires/needs and wants are unlimited
- Resources such as money, time, skilled labour,
land, natural resources, technology, efficient
management are scarce
 Contd..
•
Scarcity occurs when people want more of
something than is readily available or when D > S.
Hence it is relative.

•
In economics, scarcity forces people to make
choices, as everyone cannot have everything.

•
Without scarcity, an economy cannot exist.
•
Scarcity leads to prioritization and this is called as
economic behaviour.

•
Efficiency is an outcome of scarcity.
- List some resources or goods which are scarce
and not scarce.
 Contd..
•There is a scarcity of resources, hence choice
making and hence trade off and hence opportunity
cost and hence priortisation and hence efficiency.

•Guns Vs Schools
•Investment Vs Consumption
•Hydro power Vs Solar power
•Manual Vs Digitalisation
•Direct Transfer of food subsidies Vs. Ration shop
distribution of food items.
 Contd…
- Resources have alternative uses.
- Land can be used for various purposes.
What are those?
- Money have multiple uses.
- Time has multiple uses.
- Electricity, water, forests have multiple
uses.
- How will you interpret this concept of
alternative uses in economic decision
making.
Needs and wants

- Desires/needs and wants are unlimited.

- Desires are subjective having no end
- Needs refer to basic requirements
without which survival becomes difficult
- Wants are higher version of needs and
they improve the quality of life.
- List some needs and wants of a student.
Needs and wants
NEEDS – “stuff” we must have to survive,
generally: food, shelter, clothing

WANTS – “stuff” we would really like to have

(Fancy food, shelter, clothing, big screen TVs,
jewelry, conveniences . . . Also known as
LUXURIES
Economic activities: PDC/Primary/Secondary/Tertiary
- Primary activities refer to all extractive activities in
agriculture, horticulture, forestry, mining, fisheries and
animal husbandry.
- Secondary activities refer to all manufacturing and
processing activities.
- Tertiary activities refer to all aids which help carry
out the primary and secondary activities.
- Non economic activities are carried out with an
objective to derive satisfaction, love and affection,
religious obligations, social obligations, recreation
etc.
Choice making and opportunity cost
- Scarcity of resources give rise to the problem of
choice making.
- You had Rs. 500 and you had three wants and you
could only buy a book at a given point of time.
- You made a choice, is n’t it?
- You chose one want over the remaining two. It
means you sacrificed the other two choice.
- What is the interpretation behind choice making:
i.There is no free lunch
- Ii. The cost of something is what you pay to get it
- The opportunity cost of the book, you bought is
the cost of the best alternative sacrificed i.e. shirt.
Examples of O.C.
- You chose B.Com. Course and sacrificed B.Sc.
Finance, BBA, B.Sc. Eco. Etc. where you could
have got admission.
- You have invested 10 lacs in your own business
rather than investing it into FD. What you have
sacrificed is interest rate and that is OC of your
investment
- You preferred to be a business man rather than
taking up a job. The OC of being a business man
is the salary you sacrificed.
- You are running your business from home. The
rent of the home sacrificed is the OC of your
home.
- Define opportunity Cost
OC and Cost and benefit
- When we make a decision, we do cost benefit
analysis and make a choice
- We bought book and gave up shirt bcos book was
more important
- I chose to be a business man rather than take up a
job becos business I thought will give be more
benefit than cost
- HDFC bank decided to set up a branch in London
becos it thought the benefit of this decision will be
more than its cost.
- You chose B.Com. Over other courses as you
thought it will offer you better employment
opportunities than other courses and it interests
you.
Rationality/Optimisation
• When we make economic choices/decisions, we
assume that people behave rationally
• Rationality refers to the economic behaviour when
we want to maximise our utility
• It is subjective. A rational decision of mine may not
be rational to you.
• It assumes, we know what are various alternatives
and their outcomes and choose the best one.
• When I buy a good, I do some kind of a mental
calculation that it will give me utility and the price is
worth of it.
 Optimisation
• Since resources are scarce, we need to optimally
utilize scarce resources to achieve objectives.
• Businesses face various constraints and cannot
maximise or minimize a decision variable and
hence optimize.
• Maximizing or minimizing some function relative to
some set, often representing a range of choices
available in a certain situation.
• The function allows comparison of the different
choices for determining which might be “best.”
• Common applications: Minimal cost, maximal profit,
minimal error, optimal design, optimal
management, variational principles.
Activity: Applying the Principles
You are selling your 1996 Safari. You have already
spent $1000 on repairs.
At the last minute, the transmission dies. You can pay
$600 to have it repaired, or sell the car “as it is.”
In each of the following scenarios, should you have the
transmission repaired? Explain.
A. Blue book value (what you could get for the car) is $6500 if
transmission works, $5700 if it doesn’t
B. Blue book value is $6000 if transmission works,
$5500 if it doesn’t.
 The Study of Economics
Macroeconomics
– The big picture: growth,
employment, etc.
– Choices made by large
groups (like countries)
– SEA(Study of Economic
Aggregates
Microeconomics
– How do individuals,
Households and firms make
economic decisions
Positive and Normative economics
Positive economics: an approach to economics that
seeks to understand behavior and the operation of
systems without making judgments.
• It describes what exists and how it works. It is
descriptive. Information can be verified and is factual
• House prices have fallen by 15% over the last year…
• RBI expects the rate of growth of India to be 1% in
2021-22

• After demonitisation, 91 lacs new tax payers have

been added.
 Normative Economics
Normative economics: An approach to economics
that analyzes outcomes of economic behavior,
evaluates them as good or bad, and may prescribe
courses of action. Also called policy economics.

Ex: The inheritance tax should be repealed because it

is unfair.
• The first priority of the government should be
increase aggregate demand in the economy and
open up employment creating economic activities.

• The recent fall in house prices is unfair to the rich

 Practice Activity: Polling
Which of these statements are “positive” and which are
“normative”? How can you tell the difference?
a. Prices rise when the government increases the
quantity of money. (Positive/Normative)
b. The government should print money to overcome
recession in the economy. (Positive/Normative)
c. A tax cut and huge govt. spending is needed to
stimulate the economy. (Positive/Normative)
d. An increase in the price of petrol will cause an
decrease in consumer demand for cars.
(Positive/Normative)
Practice Activity
• Five Examples of microeconomic variables
• Five examples of macroeconomic variables
• Three statements of normative economics
• Three statements of positive economics
• Two examples suggesting that you are an
informed citizen
• Two examples of trade offs that you faced
• Opportunity cost of choosing MBA program
 4 fundamental Economic Questions
Society (we) must figure out

• WHAT to produce (make)

• HOW MUCH to produce
(quantity)
• HOW to Produce it
(manufacture/technol
ogy/Iabour/Captal
Intensive)
• FOR WHOM to Produce
(who gets what/Target
consumer)
Production possibility Frontier
A PPF shows all the possible combinations of two
goods, or two options available at one point in time.
Mythica, which is a hypothetical economy, produces
only two goods - textbooks and computers. When it
uses all of its resources, it can produce five million
computers and fifty five million textbooks. In fact, it can
produce all the following combinations of computers
and books.
COMPUTERS (m) TEXTBOOKS (m)
0 70
1 69
2 68
3 65
4 60
5 55
6 48
Interpreting PPF
Production Possibilities in the India: Exercise
•India has 50,000 hours of labour available for
production per month.
•Producing one computer requires 100 hours of
labour.
•Producing one ton of wheat requires 10 hours of
labour.
Draw a graph based on this. Computers on X axis
and Wheat on Y axis.
 Increasing Opportunity costs
•Opportunity cost can be of how decisions to
increase the production of an extra, marginal, unit of
one good leads to a decrease in the production of
another good.
•According to economic theory, successive
increases in the production of one good will lead to
an increasing sacrifice in terms of a reduction in the
other good.
•For example, as an economy tries to increase the
production of good X , such as cameras, it must
sacrifice more of the other good, Y, such as mobile
phones.