INTRODUCTION TO

ECONOMICS

Dr. A.K.Panigrahi
 What is Economics?

 Economics- study of how people use limited

resources to meet their unlimited wants

 Needs- basic survival needs for a person

 Wants- anything beyond survival needs

 Choices- people must make choices on what to

do with their resources
 WHAT IS ECONOMICS???
how individuals and societies make
decisions about ways to use scarce
resources to fulfill wants and needs.
BRANCHES OF ECONOMICS
Economic theory, as it stands today, has several branches. Of
these, two are most important. These are microeconomics and
macroeconomics.
Microeconomics
Microeconomics is that branch of economics which is
concerned with the decision-making of a single unit of an
economic system. How does an individual (or a family) decide
on how much of various commodities and services to
consume? How does a business firm decide how much of its
product (or products) to produce? These are the typical
questions discussed in microeconomics.
BRANCHES OF ECONOMICS
Macroeconomics
Macroeconomics is that branch of economics which
is concerned with the economic magnitudes relating
to the economic system as a whole, rather than to the
microeconomic units like individuals or firms. It has,
therefore, been called ‘aggregative economics’. It is
that branch of economics which deals with
aggregates and averages of the entire economy, e.g.,
aggregate output, national income, aggregate savings
and investment, etc.
 Macroeconomics and Microeconomics
Macroeconomics Microeconomics
analyzes the economy as  analyzes individual components
a whole; of the economy;
studies aggregate economic is concerned with the economic
behavior; behavior of individual decisions-
deals with the economic issues making units (individual firm or
individual household) and their
that affect the entire economy
interaction in the markets for
and most of society such as
particular goods and services (for
gross domestic product,
wheat,bicycles, oil, computers,etc)
national income, aggregate deals with such variables as the
demand, aggregate supply, amount of a firm’s output or of a
general price level, rate of consumer’s income, quantities
unemployment, public deficit, demanded and supplied of particu-
exchange rates, etc. lar goods and their prices, etc.
 Meaning of Industrial Economics
• Industrial economics is a distinctive branch of
economics which deals with the economic problems
of firms and industries, and their relationship with
society.
• It is concerned with the working, growth and
structures of the industrial sector (firms and
industries) of the country, management and
organization of the industries and problems and
prospects of industrial growth.
 Economic statements
There are two types of economic
statements
They are positive and normative
economic statements

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Positive economic statements
Deals with facts
Can be proved
Can be measured
Realistic
Objective
Quantitative
Ex; disposable income is the income that
is arrived after deducting taxes from
gross earnings
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 Normative economic
statements
Can not be measured
Is only a judgment
Subjective
Qualitative
Words such as aught to and should to
are used
Ex; minimum wage should be increased in
an effort to increase standards of living
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 The Study of Economics
Macroeconomics
– The big picture
– growth, employment, etc.

Microeconomics
– How individuals make
economic decisions
What gave birth to the subject
economics?
Scarcity

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 What is scarcity?
Amal wants to buy an iphone ..hmm a
macbook. .and…an.ipod…ipad..and ……….
What?
But has Amal got enough money to buy
them all?
No 

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 Scarcity……….
The gap between unlimited wants and
limited resources could be simply known
as scarcity
In the previous example Amal had lot of
wants but he didn’t have enough money
to buy them all
So he should make a choice
This is simply called economizing

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 What is “Economizing”?
Economizing simply means avoiding
wastes or reducing expenditures.
Economics teaches how to economize
To economize, we have to take rational
decisions

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 So u say to make a choice?
We cant have all what we want.
We have to make choice among
alternative options available
This is simply known as “choice”.

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 Fundamental Problem:
SCARCITY: unlimited wants and
needs but limited resources
 Choices, Choices

Because ALL resources, goods, and services

are limited – WE MUST MAKE CHOICES!!!!
 Don’t
take
Why Choices? notes.
Just
listen.

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?

 Wants and Needs,
Needs and Wants
NEEDS – “stuff” we must have to survive,
generally: food, shelter, clothing

WANTS – “stuff” we would really like to

have (Fancy food, a nice house, clothing,
big screen TVs, jewelry, conveniences . . .
Also known as LUXURIES
VS.
 TRADE-OFFS
You can’t have it all (remember
SCARCITY?) so you have to
choose how to spend your
money, time, and energy. These
decisions involve picking one
thing over all the other
possibilities – a TRADE-OFF!
 Trade-Offs
What COULD you have done instead of come
to school today?

Why did you make that trade-off?

So what about other options?
As mentioned before we cant have all
what we want.
Its due to scarcity.
So we have to make a choice
Choice involves an opportunity cost

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 Opportunity cost?
The cost of the next best alternative
forgone when making a choice can be
simply known as opportunity cost
Opportunity cost can be measured by
dividing forgone production by
increased production.

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 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
This is really IMPORTANT – 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?

 PRODUCTION
Production is making
something.

Production is how Goods – tangible (you

many goods and can touch it) products
services a business we can buy
makes.
Services – work that
is performed for
others
 Factors of Production
So, what do we need to make all of this stuff?

Factors of production are the parts necessary to

produce the finished product.
Factors of Production
 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
– 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
Which Factor of Production?
Which Factor 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”)
 Production Process

Land

Goods

Labor
Production/Manufacturing
“Factory” Consumers

Capital

Services
Entrepreneurship
 Capital Goods and Consumer
Goods
Capital Goods: are
used to produce other
goods

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

McDonalds makes
hamburgers, not
shoes!!

Nike makes shoes, not

hamburgers
CONCEPTS OF PRODUCTION

Division of Labor –
different people
perform different jobs
You do your
to achieve greater job, and I will
efficiency (assembly do my Job and
we will be
line). more
EFFICIENT
CONCEPTS OF PRODUCTION
Consumer: someone who buys a product or service.
Consumption: how much we buy

The DELL store is

empty because….

Everyone is at the
APPLE STORE!!!
CONCEPTS OF 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?
 Demand and Supply Cycle
Supply Market for Demand
Goods
Goods & Goods &
Services sold and Services
Services
bought

Firms Households

Inputs for Labor, land,

production Market for and capital
Factors
Demand Supply
of Production
 PRODUCTION
A measure of the production of an entire
country in one year is

GDP
The total market value of ALL final Goods
and Services produced in a country in a
year.
(GROSS DOMESTIC PRODUCT)
 Problems of Production
In their effort to minimize the cost of production, the fundamental
questions which managers are faced with are:
1. How can the use of production inputs be optimized or cost
minimized?
2. How does output behave when quantity of inputs is increased?
3. How does technology matter in reducing the cost of production?
4. How can the least-cost combination of inputs be achieved?
5. Given the technology, what happens to the rate of return when
production scale is increased or more plants are added to the
firm?
Economics provides a theoretical answer to the above questions.
 Economic Systems

An economic system is defined as country’s plan for

the allocation of the goods & services produced, and
the exact way in which its economic plan is carried
out. It is the organized way in which a state or nation
allocates its resources and apportions goods and
services in the national community.
In general, there are three major types of economic
systems prevailing around the world each with their
own drawbacks and benefits; the Market Economy,
the Planned Economy and the Mixed Economy.
 Market Economy
• In a market economy, national and state governments
play a minor role. Instead, consumers and their buying
decisions drive the economy.
• The absence of central planning is one of the major
features of this economic system.
• Market decisions are mainly dominated by supply and
demand.
• The role of the government in a market economy is to
simply make sure that the market is stable enough to
carry out its economic activities properly. This is also
called capitalist system.
 Market Economy
Free Enterprise economy/ Free Economy/ Capitalist Economy-
An economy where there is least interference by the Government or any
external force and where production and employment are controlled by
private entrepreneurs is a free economy or capitalist economy.

Characteristics-
Private Ownership-Means of production are privately owned by the people
with legal rights to acquire and possess them.
Private Gains as Motivating Force- Private gains are main motivating and
guiding force for carrying out economic activities.
Freedom of Choice- Consumers have the freedom of choice to consume
what they want and producers have freedom to produce what they want.
Freedom of Occupational Choice- Factor owners are free to use their
resources in any legal business or occupation of their choice.
Free Competition- There exists a high degree of competition in both
commodity, factor and product markets. Goods and services reach to those
who have purchasing power.
Least Interference by Government- There is least interference by
Government or any external force and primary role of Government is ensure
free working of economy by removing obstacles to free competition.
 Planned Economy
• A planned economy is also sometimes called a command
economy or Government economy.
• The most important aspect of this type of economy is that all
major decisions related to the production, distribution,
commodity and service prices, are all made by the
government.
• The planned economy is government directed, and market
forces have very little say in such an economy.
• This type of economy lacks the kind of flexibility that is
present a market economy, and because of this, the planned
economy reacts slower to changes in consumer needs and
fluctuating patterns of supply and demand.
• This is also called socialist system.
 Planned Economy
Government controlled /Command/Socialist economies
An economy where the Government is the owner of the means of
production and people are employed as per Government’s prescription is
called Socialist economy. Example- Cuba, Poland, Former USSR.
Characteristics-
Means of production are owned by Government and private ownership of
factors is not allowed.
Social welfare is made the guiding factor for economic activities and private
gains and motivations are eliminated.
Freedom of choice for consumers and society is curbed to what society can
afford for all.
The decision on what to produce and how to produce are taken by
Government.
The role of market forces and competition is eliminated by law.
Public Enterprise Centrally Planned Economy in which all property is
owned by the State and all key economic decisions are made centrally by
the State, e.g. the former Soviet Union
Communism . A system of government in which the state plans and
controls the economy and a single, often authoritarian party holds power,
claiming to make progress toward a higher social order in which all goods
are equally shared by the people. e.g. Soviet Union under Lenin and Stalin.
 Mixed Economy

• A mixed economy combines elements of both the planned and

the market economies in one cohesive system. This means that
certain features from both market and planned economic
systems are taken to form this type of economy.
• This system prevails in many countries where neither the
government nor the business entities control the economic
activities of that country - both sectors play an important role in
the economic decision-making of the country.
• In a mixed economy there is flexibility in some areas and
government control in others.
• In India mixed economy prevails.
 Mixed Economy
Mixed Economy-
An economy which is a mix of socialist and capitalist economies
characteristics is called Mixed Economy.
Most economies in the world today are Mixed economies and one
can hardly find many examples of pure free economies.
There are two different types of Mixed economies-
Mixed Capitalist Economies-Government plays a significant role in
preserving capitalist mode of production and ensuring competition in
factor and product markets. USA, UK, Germany, France & Japan.
Mixed Socialist Economies- Government control and regulate the
private sector eg. India, China
Characteristics-
In such economies the Government retains the ownership and
control over important basic industries which are essential for the
survival and growth of the economy and the rest of the industries are
open to private sector under the overall governance of the industrial
and trade policies of Government.
Both the Public and Private sector exist side by side so that win -win
situation emerges where in plus points of both kinds add up while
disadvantages are neutralized
Economic Systems - Examples
Countries using a Market Economy which have lower levels of
government ownership of industry or infrastructure: United
States, Canada, United Kingdom, South Africa, Mexico,
Germany.

Countries with a mid-level amount of government ownership

i.e. Mixed Economy: France, Spain, Italy, Russia, South Korea,
Brazil, India.

Countries with a higher level of government ownership i.e.

Command Economy: Cuba, Venezuela, People's Republic of
China, Vietnam.
Concepts of Economics
1.Utility: Utility refers to the amount of satisfaction which a consumer
gets by consuming the various units of commodity.

2.Marginal Utility: Addition made to the total utility by consuming 1

more unit of a commodity. MU= change in total utility/ change in
quantity of good X.

3.Law of Diminishing Marginal Utility: “For any individual consumer

the value that he attaches to successive units of a particular commodity
will diminish slowly as his total consumption of that commodity
increases, the consumption of all other goods being constant”.
Assumptions of the Law:
4.Various units of goods are homogeneous.
5.There is no time gap b/w consumption of different units. 3.Tastes,
preferences & fashion remain unchanged.
4.Consumer’s Equilibrium: The quantity of good X where
marginal utility of X equals price of good X.
Mu. Of X=Price of X.

5.Income Effect: Change in consumption of the good due to the

change in income of the consumer.

6.Price Effect: Change in the consumption of the good due to

change in the price of the good.

7.Micro Economics: Studies the behavior of individual decision

making units like consumers, firms( regulates under Company’s
Act). It includes i) Product Pricing which includes Theory of
Demand & Supply, ii) Factor Pricing which includes wages, rent,
interest & profit.
8. Macro Economics: Studies the aggregate of all economic
units. It includes theory of growth & employment, theory of
Inflation & Price Level, theory of Income & theory of
Distribution.
Eg- Automobile industry includes firms like Maruti Suzuki India
Ltd, Hindustan Motors, Hyundia Motors India Ltd, Tata Motors
etc.
GOALS OF THE ECONOMY
Full Employment – is a situation where people who are able and
willing to work can get jobs. Under full employment, all available
productive resources are fully utilized. When more people are
employed, more goods and services are produced. There will be an
increase in GDP (Gross Domestic Product) which is the total
market value of the final goods and services produced by citizens in
one year. GDP is also the barometer of economic growth of a
country from year to year.

Economic Growth – is the product of economic development. This

represents the goods and services produced in a certain year, such
as cars, houses, roads, schools, buildings, college graduates and
others. In other words, it represents the outputs. While economic
development refers to the inputs. The best input of economic growth
is people. People are developed through education and training.
Price Stability – is a situation where price fluctuations are smooth.

Balance of Payments and Exchange Rate Stability – Balance of

payment refers to the accounting record of a country’s financial
transactions with other countries. A country has Surplus balance
of payments when inflows (export of goods and services) are
greater than outflows (imports). Deficit balance of payments is
when outflows (imports) are greater than the inflows.

Economic Efficiency – Efficiency is productivity. The more you

produced, the more you are efficient. Rich countries which produce
more goods and services are considered efficient producers use
modern technology, depend largely on machines or the so-called
capital-intensive technology. Labour-intensive technology is a
technique of production which requires the use of more workers than
machines.

Equitable distribution of wealth and income – Equitable means

fair or just distribution of wealth and income.