Lesson 1

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Lesson-1Getting Started

What is coming to yourmind?



Thought/Fear No. 1

ECONOMICS- Oh No! Not Again

A full trimester/semester course- realhell………….



Thought/ Fear No. 2

Wasn't a three-year long association with

economics at graduate level enough of apain in the----------------------------------------------------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------neck?



Thought/ Fear No. 3

Once again those dreaded diagrams! Those

abstract laws! Those tricky equations! Thoseconfusing figures! Oh God! Help me.



Thought/ Fear No.4

I opted for a job-oriented, practical course;

why have they burdened me with this purelytheoretical, impractical and USELESScourse?



Thought/Fear No.5

Is it a compulsory course or an optional one?

Let me check the rules and regulations.There must be a way out to get rid of thislousy subject!



Thought/Fear No. 6

TINA approach

TINA- T here I s N o Alternative



Getting Started-2

What is the difference between a „manager‟

and a „supervisor‟?



Management involves DECISION MAKING



ACTIVITY

Choose any one of the followingbusinesses:

Potato chips manufacturing

TV manufacturing

IT software programming

Financial consultancy services



Choose your own scale at which you want to

start a new business in your selected field. Make a quick point-wise list of the manner in

which you shall proceed.

Identify the major areas of specific

DECISION MAKING



Why do we have to make decisions?

The genesis of ECONOMICS



What is ‘Economics’?

Knowledge/ Science can be broadly

classified into Physical Science and SocialScience



Physical Science

Experimentation under

controlled environment ispossible

Least interference of

„human‟ behaviour

Capable of reaching

universally acceptedconclusions

Physics; chemistry; biology;zoology ect.

Social Science

Controlled experimentation

is virtually not viable in mostcases

Involves „value‟ judgment‟.

Very few universallyaccepted laws. Huge scope

for difference of opinion

Political Science; History;Sociology; Psychology;ECONOMICS



An economic problem arises due to the fundamental„MISMATCH‟ between

WANTS or DESIRES and

Resources or Means

Wants are unlimited( infinite)

Resources are limited (finite) and can havealternative uses

Wants shall always be greater than Resources



How do we tackle the mismatch?

Increase Resources? Reduce Desires/Wants?



The Way out

Mismatch is eternal- it will stay. Wants will

always be more than means

Settle for „second-best‟ solution;

Fulfill some wants as per resources availableand leave the remaining



Concept of ‘TRADE OFF’

Which wants are to be fulfilled and which

ones are to be given up involves decision-making

Suppose out of two alternatives available- Aand B, you pick up A and forego B due to

resource constraint- then you have traded off B for the sake of A



Activity

You have opted for this institution and

course. Make a list of the various alternatives that

you have traded off for the present institutionand course

Write down three examples of the trade offsthat you made since morning today. Givereasons.



The Concept of OPPORTUNITY COST

Suppose Mr. Rajnish has four options to choose fromafter completing his software engineering degree:

1. Job in Wipro for Rs. 10 lac

2. Job in microsoft for Rs. 9.5 lac

3. Job in IBM for Rs. 9 lac

4. Own consulting firm earning Rs. 8 lac(example courtesy- Satya P. Das- Microeconomics for

business, sage publications)



Assuming that all other things remain constant;

that is, no consideration of future growth; orcompany brand or goodwill etc; Whichalternative will Rajnish pick up?

Quite naturally the first one- that is job at

Wipro- as it offers the highest reward/return



How many alternatives did Rajnish trade off

in order to pick up alternative 1? Which was the SECOND BEST alternative?

The reward/return associated with thesecond-best alternative is called the

OPPORTUNITY COST



Activity

Identify the opportunity cost of your present

course and institution



Summing up

Economics is that branch of social science

which deals in human behaviour related toinfinite materialistic wants and finiteresources available to satisfy them

Economic analysis helps us in making

consistent, logical and better decisions



Role of External Environment

Consider yourself heading a potato chipmaking plant in the following time andlocation zones:

1789- Paris

1936- Berlin

1950- Peking (now Beijing-China) 2008- New York

Will your course of action be identical?



What is an ECONOMY?

An economy is the playground of economics

The scale/ magnitude of the playground mayvary- household economy; village/towneconomy; provincial/state economy; nationaleconomy; continental economy; global

economy and (may be-in future) universaland galaxial economy



Why do we normally pick nation as a unit ofeconomic analysis?



ECONOMIC SYSTEMS

WHO WILL TAKE DECISIONS?

The „VISIBLE HAND‟ model, or

The „INVISIBLE HAND‟ model



Basic Features of the ‘Socialist’ Model

A socialist economy has a pyramid-likestructure;

Decision-making is confined to the top; whichis either a person or group of persons

All means are state-owned; no right to

private property

Limited/least economic or political freedom



The SOCIALIST Model

Why did it break down?

Is it gone for ever or will it rise again?



The ‘CAPITALIST’ Model

Least state/government interference

Decision-making is atomised- all economicagents are free to take their own decisions;subject to given rules and regulations

Means of production are privately owned

Right to property and civil freedoms



The Market Economy

Why are most of the countries switching tomarket system?

Do markets fail?

Which is more harmful- state failure ormarket failure?

Do you advocate „guided‟ capitalism?



Microeconomics and Macroeconomics

Microeconomics refers to the analysis ofscarcity and choice problems facing a singleeconomic unit such as a producer or aconsumer

Macroeconomics deals with the behaviour of

aggregates, such as gross domestic product(GDP), employment, interest rate and so on.



Activity

List three specific decisions that MukeshAmbani has to make for his form- RelianceIndustries Limited;

Repeat the same for P. Chidamberam,India‟s Finance Minister;

Compare the scale and consequences.



Stages in decision-making

1. Keep a close watch on human behaviourwith respect to wants and resources;

2. To start with let us have the microeconomicapproach

3. Make „causal‟ relationships from observed

behavior4. Present a HYPOTHESIS



Understanding Basic Concepts

Parameters and variables

Independent and Dependent Variables Exogenous and Endogenous variables

Functional Relationship among variables

Genuine and spurious relationship



Year China’s

Saving

Rate

China’s

growth

rate

1960 10% 2%

1970 18% 4%

1980 25% 8%

1990 30% 10%

2000 40% 12%

Postulate a causal relationship



Repeat the exercise for the following

Year Average length ofwomen tennis players’

skirts at Wimbledon

China’s

growthrate

1960 50 inches 2%

1970 40 4

1980 30 8

1990 20 10

2000 10 12



Understanding Basic Concepts

Deterministic and stochastic functionalrelationships

Direct and inverse functional relationships

General and specific functional relationship

Linear and non-linear functional relationships

Using equations, identities and diagrams toexpress causal relationships



Resource Constraint revisited-

Production Possibility Curve/Frontier

Suppose India has a given/limited amount ofthe following three resources:

Land

Labour

Specialized machines

Further suppose India produces only twogoods- wheat and computers



PPC continued

Wheat production requires mainly land andlabor

Computer manufacturing requires mainlyspecialized machines and labor

The following table gives a few combinations

of the two goods which could be producedusing all inputs



PPC

Wheat computers Marginalopportunity cost

100 0

90 1

70 240 3

0 4



Activity

Examine the impact of change in PPC if

1. All inputs increase2. Land alone increases

3. Specialized machines increase



Positive and Normative Analysis

President Harry Truman of US once said hewanted to find a „one-armed‟ economist.

Whenever he asked his economists foradvice, they always answered, “on the one

hand,…………On the other hand……….”

Case study



Key assumptions in economic analysis

Ceteris paribus- other things remainingconstant; partial equilibrium and generalequilibrium;

Stress on achieving equilibrium. Marketclearance.

Rationality- all economic agents behaverationally



Rationality cont.

Rationality means more is always preferredto less;

Caveat: Rational behavior is contextual; wedo not live in isolation

Suppose your boss calls you in his



Suppose your boss calls you in hisoffice and asks you to take any one ofthe following options. Which one will

you pick up and why?

Option-1

10% increasein your salaryand 100%increase in

yourcolleagues’salaries

Option-2

Nobody getsany increasein salary.



Key Assumptions- AXIUMS

Consistency- if out of the five optionsA,B,C,D,E- an economic entity picks up B; inno case will he pick up A,C,D or E if B is alsoavailable in any other set of options.

Transitivity: if A is preferred to B and B is

preferred to C; then A will always bepreferred to C



Time Value of Money

1. Incomes/returns received in

different time periods cannot beadded up straightaway.



Time value/ discounting rule

All „future‟ incomes have to be

discounted to find their present value; The higher the discount rate; the lower

will be the present value of a future

return; The more „distant‟ the return/income;

the lesser will be its present value.



Time value/ discounting

Discount formula

Case study and role of market rate of interest



Ten Principles of Economics

1. People face tradeoffs

2. The cost of something is what yougive up to get it

3. Rational people thick at the margin

4. People respond to incentives5. Trade can make everyone better off



Cont…

6. Markets are usually a good way toorganize economic activity

7. Governments can sometimes improvemarket outcomes

8. A country’s standard of living dependson its ability to produce goods and

services9. Prices rise when the government printstoo much money



10. Society faces a short-run

tradeoff between inflation andunemployment

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Lesson 1