INTRODUCTION TO

ECONOMICS
Dr. A.K.Panigrahi
 What is Economics?
Economics is the social science that
aims to describe the factors which
determine the production, distribution
and consumption of goods and services

2
 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.
 Economic statements
There are two types of economic
statements
They are positive and normative
economic statements

5
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
6
 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
7
 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

9
 What is scarcity?
Amal wants to buy an iphone ..hmm a
macbook. .andan.ipodipad..and .
What?
But has Amal got enough money to buy
them all?
No

10
 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 didnt have enough money
to buy them all
So he should make a choice
This is simply called economizing

11
 What is Economizing?
Economizing simply means avoiding
wastes or reducing expenditures.
Economics teaches how to economize
To economize, we have to take rational
decisions

12
 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.

13
 Fundamental Problem:
SCARCITY: unlimited wants and
needs but limited resources
 Choices, Choices

Because ALL resources, goods, and services

are limited WE MUST MAKE CHOICES!!!!
 Dont
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 cant 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

21
 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.

22
 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 cant 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
CHANGES IN PRODUCTION
Specialization
dividing up production
so that Goods are
produced efficiently

McDonalds makes
hamburgers, not
shoes!!

Nike makes shoes, not

hamburgers
CHANGES IN 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
CHANGES IN 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!!!
CHANGES IN 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 $ value of ALL final Goods and
Services produced in a country in a year.
(GROSS DOMESTIC PRODUCT)
 Economic Systems

An economic system is defined as countrys 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.
 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.
 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.
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.
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.