Chapter1 Introduction to Economics

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1. Origin of Economics1. Origin of Economics1. Origin of Economics1. Origin of EconomicsOur activities to generate income are termed asOur activities to generate income are termed aseconomiceconomicactivities, which are responsible for the origin andactivities, which are responsible for the origin anddevelopment of Economics as a subject.development of Economics as a subject.

Originated as aOriginated as a Science of Statecraft.Science of Statecraft. Emergence ofEmergence ofPolitical Economy.Political Economy.1776 : Adam Smith (Father of Economics)1776 : Adam Smith (Father of Economics) Science ofScience ofWealthWealth

Economy is concerned with the production,Economy is concerned with the production,consumption, distribution and investment of goods andconsumption, distribution and investment of goods andservices.services.


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Economic problems


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. Economic Problems. Economic Problems. Economic Problems. Economic Problems

The problem ofThe problem ofchoice makingchoice makingarising out of limited meansarising out of limited meansand unlimited wants is calledand unlimited wants is called economic problemeconomic problem..

Why do economic problems arise?Why do economic problems arise?

Unlimited wants Different priorities Limited means Means having alternative uses.

Multiplicity of wantMultiplicity of want


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Economizing problem


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Basic or Central ProblemsBasic or Central ProblemsBasic or Central ProblemsBasic or Central ProblemsThree Basic or Central Problems ofThree Basic or Central Problems of

EconomyEconomy

Allocationof Resources

Efficient use orfuller utilization of

Resources

Economic DevelopmentOr Growth of Resources

What toproduce? How toproduce?

For whom toproduce?


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The Twin theme around which EconomicsThe Twin theme around which EconomicsRevolve: Scarcity & EfficiencyRevolve: Scarcity & Efficiency

The Twin theme around which EconomicsThe Twin theme around which EconomicsRevolve: Scarcity & EfficiencyRevolve: Scarcity & Efficiency

ScarcityScarcity: Goods are limited and wants are limitless. Therefore: Goods are limited and wants are limitless. Thereforenot able to match limited goods with unlimited wants is what wenot able to match limited goods with unlimited wants is what wecall scarcity.call scarcity.

EfficiencyEfficiency: denotes the most effective use of a societys: denotes the most effective use of a societysresources in satisfying peoples wants and need. Iresources in satisfying peoples wants and need. It is said that an economy is considered to be producingt is said that an economy is considered to be producingefficiently when it cannot increase the economic welfare ofefficiently when it cannot increase the economic welfare ofanyone without making someone else worse off.anyone without making someone else worse off.Economizing ResourcesEconomizing Resources: means making the best use of: means making the best use of

resources (same as efficiency).resources (same as efficiency).

This is basically the axis on which the study of business economicsThis is basically the axis on which the study of business economicsis rotatingis rotating..


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Kinds of economiesKinds of economiesKinds of economiesKinds of economies

Market, Command and Mixed EconomiesMarket, Command and Mixed Economies::Market Economy:Market Economy: Where individuals and private firmsWhere individuals and private firmsmake the major decision about production & consumption.make the major decision about production & consumption.It may also be called laissezIt may also be called laissez--faire economy e.g. Americafaire economy e.g. Americaand other democratic countriesand other democratic countriesCommand EconomyCommand Economy: Where the Government makes all: Where the Government makes all

important decisions about production & distribution e.g.important decisions about production & distribution e.g.Soviet Union. It may be called as communistic economy asSoviet Union. It may be called as communistic economy aswell.well.Mixed Economy:Mixed Economy: Where the decision pertaining toWhere the decision pertaining toproduction, consumption & distribution are taken by theproduction, consumption & distribution are taken by the

Government as well as the individual such a market isGovernment as well as the individual such a market iscalled to have a mixed economy. There can not be a 100%called to have a mixed economy. There can not be a 100%Capitalist Economy but in the 19Capitalist Economy but in the 19thth century England camecentury England camemost close to it.most close to it.


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ProductionProductionProductionProduction

To match the limited resources with the unlimited wantTo match the limited resources with the unlimited wantevery society must make choices about the economyevery society must make choices about the economyinputs and outputsinputs and outputsInputs:Inputs: There are the commodities/services that areThere are the commodities/services that areused to produce goods and services.used to produce goods and services.Outputs:Outputs: These are the various useful goods orThese are the various useful goods orservices that results from the production process andservices that results from the production process andare either consumed or employed in furtherare either consumed or employed in further

production.production.Inputs can further be understood in terms of factors ofInputs can further be understood in terms of factors ofproduction. These can further be classified into threeproduction. These can further be classified into threebroad categories:broad categories:


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Production process


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ProductionProductionFactors of Production

Land(Passive)

Labour(Active)

Capital(Passive)

Unskilled

Semiskilled

Skilled


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ProductionProduction PossibilityPossibilityFrontierFrontier

ProductionProduction PossibilityPossibilityFrontierFrontier

This explains the number of possibilities for production keepThis explains the number of possibilities for production keepcertain factors as unchanged.certain factors as unchanged.

Assumptions:Assumptions:

Scarce input and technology

Considering an economy which produces only twoeconomic goods

Economy is having full employment

The production possibility frontier shows the maximum amountsThe production possibility frontier shows the maximum amountsof production that can be obtained by an economy, given itsof production that can be obtained by an economy, given itstechnological knowledge and quantity of inputs available. The PPFtechnological knowledge and quantity of inputs available. The PPFrepresents the menu of goods and services available to society.represents the menu of goods and services available to society.


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Production Possibility CurveProduction Possibility Curve

Shift

Origin

An increase in inputs or improved technological knowledgeenables a country to produce more of all goods and services,thereby shifting out the PPF.

Poor countries should devote more towards food productionwhile rich countries towards luxuries


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Utility/Benefits of PPFUtility/Benefits of PPFUtility/Benefits of PPFUtility/Benefits of PPF

# Helps in economys choice between current consumption# Helps in economys choice between current consumptiongoods and investment or capital goodsgoods and investment or capital goods# At times also shows the crucial economic notion of tradeoffs# At times also shows the crucial economic notion of tradeoffs

Productive Efficiency:Productive Efficiency: occurs when an economy cannotoccurs when an economy cannotproduce more of goods without producing less of anotherproduce more of goods without producing less of anothergood. This implies that an economy is on its PPFgood. This implies that an economy is on its PPF

Reasons for inside shift of PPFReasons for inside shift of PPF # Business cycle and depression# Business cycle and depression# Inefficiency and dislocation, strikes, political changes and# Inefficiency and dislocation, strikes, political changes andrevolutionrevolution


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. Microeconomics. Microeconomics. Microeconomics. Microeconomics Microeconomics is the study of individual units like

individual household, pricing of a firm, wages of aworker, profit of an entrepreneur and so on.

Definition: According to K.E. Boulding:Microeconomics is the study of particular firms,

particular households, individual prices, wages,incomes, individual industries, particularcommodities

Scope of Microeconomics:--Theory of DemandTheory of Demand

--Theory of Production and CostTheory of Production and Cost--Factor Pricing (Theory of Distribution)Factor Pricing (Theory of Distribution)--Theory of Economic WelfareTheory of Economic Welfare


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Complexity of modern

business

1.rapid technological change on innovation

in products and processes, as well as inmarketing and sales techniques.

2. increased globalization of themarketplace, there is more volatility inboth input and product prices.

3. The continuous changes in theeconomic and business environment make

it ever more difficult to accurately


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Nature of managerial

economics Decision making and forward planning. The term "best" in the decision-making context

primarily refers to achieving the goals in the mostefficient manner, with the minimum use of availableresourcesimplying there be no waste of resources.

Managerial economics helps the manager to make gooddecisions by providing information on waste associatedwith a proposed decision.

Forward planning What determines whether an aspiring business firm

should enter a particular industry or simply startproducing a new product or service?

Should a firm continue to be in business in an industryin which it is currently engaged or cut its losses and

exit the industry? Why do some professions pay handsome salaries,


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Application of managerial

economics Deciding the price of a product and the quantity of the commodity

to be produced Deciding whether to manufacture a product or to buy from

another manufacturer Choosing the production technique to be employed in the

production of a given product Deciding on the level of inventory a firm will maintain of a product

or raw material Deciding on the advertising media and the intensity of the

advertising campaign

Making employment and training decisions Making decisions regarding further business investment and themode of financing the investment .


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Scope of managerial

economics THETHEORYOF THE FIRM.

firm can be considered a

combination of people, physical andfinancial resources, and a varietyof information.

Firms use society's scarceresources, provide employment,and pay taxes. If economic

activities of society can be simply


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PROFITMAXIMIZATION

ANDTHE FIRM.

Profit maximization is also associated

with constraints such as scarcity ofresources, raw materials, energy,specialized machinery and equipment,warehouse space, and other resources.

managers often face constraints onplant capacity that are exacerbated bylimited investment funds available forexpansion or modernization.


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THETHEORYOF

CONSUMER BEHAVIOR

Consumers play an important role in

the economy since they spend mostof their incomes on goods andservices produced by firms. In

other words, they consume whatfirms produce.

Consumers are also subjected to

budget constraint.


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Analysis of market

conditions Perfect competition.

Monopolistic competition.

Monopoly.

Oligopoly


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Business strategy and managerialeconomics works with great efficacy

in the following aspects of economics:

It is especially useful in analyzing

the risk of a business decision andvarious uncertainty models, decisionrules and risk quantificationtechniques comes under its ambit.


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Production efficiency, optimum factor allocation,costs and economies of scale can be analyzed usingmicroeconomic techniques that come under its fold.

Microeconomic methods coming under the ambit of

business strategy and managerial economics can be usedto evaluate pricing decisions such as transfer pricing,joint product pricing, price discrimination practices andthe accounting for differences of price elasticity.

Investment theory which can be formulated bybusiness strategy and managerial economics can be

helpful to deal with capital budgeting used to examinethe capital purchasing and investment decisions of abusiness


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Nature of Managerial EconomicsNature of Managerial EconomicsNature of Managerial EconomicsNature of Managerial Economics

It is defined as application of economic theoryand methodology to decision making processby the management of the business firms.

In it economic theories and concepts are usedto solve practical business problem. It lies on the borderline of economic and

management. It helps in decision making under uncertainty

and improves effectiveness of theorganization.

The basic purpose of managerial economic isto show how economic analysis can be used

in formulating business plans

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Chapter1 Introduction to Economics