Introduction to

Economics
The word economics is derived from
Greek word
Oikos Nemein or Oikonomos
Household Management
Desire Want Demand
Essence of Economics-
Scarcity and Choice
Limited Resources Unlimited Want

Wants - motive force economic

activities
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Definitions of Economics
Wealth definition Adam
Smith
Welfare definition Marshall
Scarcity definition Robbins
Growth definition
Samuelson

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Wealth and Welfare definition
Father of Economics Adam
Smith in his book Wealth of
Nations (1776) defined,
Economics is the study of
wealth of nations.
Welfare definition Marshall -
Principles of Economics (1890)
defined, It is the study of
mankind in the ordinary
business of life

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 Scarcity definition Robbins

Scarcity definition
Robbins in his book, Nature
and Significance of
Economic Science (1932),
defined, economics is the
science which studies
human behavior as a
relationship between ends
and scarce means which
have alternative uses.
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 Growth Definition
Paul Samuelson in his book, Economics
(1948) defined, economics is the study of
how people end up choosing scarce
productive resources that could have
alternative uses to produce various
commodities and distribute them for
consumers.
In nutshell we can say that Economics is the
study of how human beings make choices
to allocate scarce resources to satisfy their
unlimited wants in such a manner that
consumer can maximize their satisfaction,
producers can maximize their profits and
society can maximize its social welfare.
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Micro and Macro Economics
Ragner Frisch 1933
Micro- Greek word mikros small
Study eco. Problems and policies at individual level a
consumer, a producer or a firm etc.
Popularized by David Ricardo, Marshall, J. B. Say, J. S. Mill
etc.
-called price theory
Macro Economics Greek word makros large
Study eco. Problems and policies at aggregate level
N.Y., full emp., inflation, population problems,
international trade
Called income and employment theory
Popularized by J.M. Keynes
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The Scope of Economics
Examples of microeconomic and macroeconomic concerns
Production Prices Income Employment

Microeconomics Production/Output Price of Individual Distribution of Employment by

in Individual Goods and Income and Wealth Individual
Industries and Services Businesses &
Businesses Wages in the auto Industries
Price of medical industry Jobs in the steel
How much steel care Minimum wages industry
How many offices Price of gasoline Executive salaries Number of
How many cars Food prices Poverty employees in a
Apartment rents firm

Macroeconomics National Aggregate Price National Income Employment and

Production/Output Level Total wages and Unemployment in
salaries the Economy
Total Industrial Consumer prices
Output Producer Prices Total corporate Total number of
Gross Domestic Rate of Inflation profits jobs
Product Unemployment
Growth of Output rate

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 Nature of Economics
Science or Art
Science is a systematic body of knowledge
concerning the relationship between causes
and effects of a particular phenomenon.
Collection of data
Measurement
Explanation
Verification
Art is the practical application of knowledge for
achieving definite goals.

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Positive economics studies economic
behavior without making judgments. It
describes what exists and how it works.
accurate description of phenomenon
what, how and why etc.

Normative economics, also called policy

economics, analyzes outcomes of economic
behavior, evaluates them as good or bad, and
may prescribe courses of action.
- what out to be
Determination of ideals

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Criteria for judging economic outcomes
Efficiency, or allocative efficiency.
An efficient economy is one that
produces what people want at the
least possible cost.
Equity, or fairness of economic
outcomes.

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Economic growth, or an increase
in the total output of an economy.
Economic stability, or the
condition in which output is steady
or growing, with low inflation and
full employment of resources.

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How to Read and Understand Graphs

A graph is a
two-dimensional
representation of
a set of numbers
or data.

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How to Read and Understand Graphs
Total Disposable Personal Income in
the United States: 1975-2002 (in
A time series
billions of dollars)
graph shows
8000
7500 how a single
Total disposable personal income

variable
7000
6500
6000

changes over
5500
5000
4500
4000
3500
3000
time.
2500
2000
1500
1000
1975 1980 1985 1990 1995 2000
Year

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How to Read and Understand Graphs
The Cartesian coordinate system is
the most common method of showing
the relationship between variables.

The horizontal line is

the X-axis and the
vertical line the Y-
axis. The point at
which the horizontal
and vertical axes
intersect is called the
origin. 15
How to Read and Understand Graphs
The point at which the line
intersects the Y-axis (point a) is
called the Y-intercept.

The Y-intercept, is the value of Y

when X = 0.

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How to Read and Understand Graphs
The slope of the line indicates
whether the relationship
between the variables is positive
or negative.
The slope of the line is
computed as follows:

Y Y1 Y0
b =
X X 1 X 0

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How to Read and Understand Graphs
This line slopes
upward, indicating
that there seems to
be a positive
relationship between
income and
spending.
Points A and B, above
the 45 line, show
that consumption can
be greater than
income. 18
How to Read and Understand Graphs
An upward-sloping line A downward-sloping line
describes a positive describes a negative
relationship between X and relationship between X and Y.
Y.

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How to Read and Understand
Graphs
5 7
b 0 .5 b 0 .7
10 10

0 10
b 0 b
10 0

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How to Read and Understand Graphs

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Why Study Economics?
An important reason for
studying economics is to
learn a way of thinking.
Three fundamental concepts:
Opportunity cost
Marginalism, and
Efficient markets

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Opportunity Cost
Opportunity cost is the
best alternative that we
forgo, or give up, when we
make a choice or a decision.
Nearly all decisions involve
trade-offs.

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Marginalism
In weighing the costs and
benefits of a decision, it is
important to weigh only the
costs and benefits that arise
from the decision.

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Marginalism
For example, when a firm decides
whether to produce additional
output, it considers only the
additional (or marginal cost), not
the sunk cost.
Sunk costs are costs that cannot
be avoided, regardless of what is
done in the future, because they
have already been incurred.

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Efficient Markets
An efficient market is one in
which profit opportunities are
eliminated.
Profit opportunities are rare
because, at any one time, there are
many people searching for them.

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Other reasons to study Economics
Eco. activities are humans predominant
and essential activities
To understand the relationship between
different economic variables
To make better decisions
To understand business process and trade
cycles
To understand the working of goods market,
factors market and capital market
How to get optimization in consumption,
production and exchange
Project selection
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For planned development
To compare different sectors development
To understand the working of the economy
Basic economic problems
Understanding of global affairs.
For international comparison etc.
Voting decisions also require a basic
understanding of economics.

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Any question.

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