1. 1. Unit-1
2. 2. Economics Dictionary meaning : The science that deals with the production, distribution, and consumption of goods and services, or the material welfare of humankind. A science concerned with the process or system by which goods and services are produced, sold, and bought.
3. 3. Definition : Economics is the study of how people choose to use resources. Resources include the time and talent people have available, the land, buildings, equipment, and other tools on hand, and the knowledge of how to combine them to create useful products and services.
4. 4. A social science that studies how individuals, governments, firms and nations make choices on allocating scarce resources to satisfy their unlimited wants. Economics is the study of the production and consumption of goods and the transfer of wealth to produce and obtain those goods. Economics explains how people interact within markets to get what they want or accomplish certain goals
5. 5. Scarcity and choice Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses a) Here ends refer to wants. Human beings have wants which are unlimited in number. If one want is satisfied another crops up . since human wants are unlimited, one is compelled to choose between the more urgent and the less urgent wants. That is why economics is called a science of choice.
6. 6. b) Although wants are unlimited yet the means to satisfy them are strictly limited. No doubt there are certain free goods which also satisfy human wants. Yet most of the things that we want are scarce. c)The scarce means are capable of alternative uses. These alternative uses are of varying importance; some are more urgent and others less urgent.
7. 7. Economic activity lies in mans utilization of scarce means having alternative uses, for the satisfaction of multiple ends. Means refer to time, money or any other form of property. They are all limited. But since the ends are unlimited, choice-making is essential . That is why economics has been called a science of choice
8. 8. The logic of Economic Economic life is very complicated. It involves people buying, selling , burgaining , investing and persuading. Economics aims at understanding those complex undertakings. Economists use the scientific approach to understand economic life. This involves observing economic affairs and drawing upon statistics and the historical record. Economics relies upon analysis and theorie s. theoritical approaches all economists to make broad generalizations. Such as those concerning the advantages of international trade and socialization and the disadvantages of tariffs and quotas.
9. 9. Economists have developed a specialized technique known as econometrics, which applies the tools of statistics to economic problems. Using econometrics, economists can sift through mountains of data to exact simple relationships. Young economists must also be alert to common fallacies in economic reasoning . because economic relationships are often complex, involving many different variables, it is easy to become confused about the exact reason behind events or the impact of policies on the economy.
10. 10. Micro economics Micro economics: The branch of economics that analyzes the market behavior of individual consumers and firms in an attempt to understand the decision-making process of firms and households. Micro economics : Microeconomics (from Greek prefix mikro - meaning "small" and economics) is a branch of economics that studies the behavior of individuals and small impacting players in making decisions on the allocation of limited resources.
11. 11. Microeconomics is the study of the economic actions of individuals and well defined groups of individuals. Microeconomics is the study of the economic actions of individuals and well defined groups of individuals.
12. 12. Macroeconomics (from the Greek prefix makro- meaning "large" and economics) is the study of the macroeconomy. It is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole, rather than individual markets.
13. 13. "Macroeconomics is the branch of economics concerned with aggregates, such as national income, consumption, and investment The Economist's Dictionary of Economics defines Macroeconomics as "The study of whole economic systems aggregating over the functioning of individual economic units.
14. 14. Macroeconomics : The word Macro comes from a Greek word Makros which means large. Macroeconomics is concerned with aggregates and averages of the entire economy, such as national income, savings and investments, aggregate demand and supply
15. 15. Microeconomics vs macro economics 1.Microeconomics is the study of particular markets, and segments of the economy. Macro economics is the study of the whole economy. 2. Micro economics looks at issues such as consumer behaviour, individual labour markets, and the theory of firms. Macro economics looks at aggregate variables, such as aggregate demand, national output and inflation.
16. 16. 3. The word Micro has come from a Greek word Mikros which means millions of parts. The word Macro comes from a Greek word Makros which means large. 4. Microeconomics is also called price theory. macro economics is called income theory. 5. Micro economics provides a microscopic view . Macro economics provides a bird view of the whole economy.
17. 17. 6. Micro economics is concerned with: Supply and demand in individual markets Individual consumer behaviour . e.g. Consumer choice theory. Individual labour markets e.g. demand for labour , wage determination. Externalities arising from production and consumption.
18. 18. Macro economics is concerned with Monetary / fiscal policy. e.g. what effect does interest rates have on whole economy? Reasons for inflation, and unemployment Economic Growth International trade and globalisation Reasons for differences in living standards and economic growth between countries.
19. 19. Interactions between Micro and Macro Economics Microeconomics and macroeconomics are inter-related because their fields of interest are bound together and cannot be separated. The decisions of individuals make up the economies studied in macroeconomics
20. 20. A microeconomist cannot possibly study the investment policies of businesses without understanding the impact of macroeconomic trends such as economic growth and taxation policies. Similarly, a macroeconomist cannot study the components of output in a nations economy without understanding the demand of individual households and firms.
21. 21. Functions of economic system Economic system refers to the means by which decisions involving economic variables are made in a society. In this light, a societys economic system determines how the society answers its fundamental economic questions of what to be produce, how the output is to be produced, who is to get this output and how future growth will be facilitated, if at all.
22. 22. Economic systems everywhere may perform similar functions. These functions may be traditional or non- traditional. The traditional functions include the following: a. What to produce b. How to produce i.e. what method of factor combination to adopt in order to maximize the use of the resources c. For whom to produce d. How to distribute the goods and services produced.
23. 23. Traditional functions The traditional functions of every economic system include the following: a. In deciding on what goods to produce, an economic system also decides in what not to produce. For example, if the system wants to provide roads and recreational facilities, it may have problems since it may lack enough resources to do so at the same time. It will be necessary that it chooses between the two. It may for instance have to choose roads.
24. 24. b. Economic systems also function to decide on the particular technique to be used in production. Here, the economic system decides what method of factor combination to be employed in order to maximize the use of the scarce resources, by minimizing cost and increasing productivity. The decision may involve whether to employ labor- intensive or capital-intensive methods of production. In a free exchange economy , its choice will depend on relative factor endowment and factor prices. In developing countries for instance, labor is more abundant and cheap. A labor-intensive method may be preferred.
25. 25. c. Another problem the economic system is faced with is for whom to produce. To get maximum use from the scarce resources, the commodity must be produced in an area where it would be demanded and where costs will be minimized. The production unit may be sited near the source of raw material or the market center depending on the nature of the product.
26. 26. Non-traditional functions d. Economic systems must ensure economic growth. Owing to scarcity of resources, the society must know whether its capacity to produce goods and services is expanding or decreasing. Some of the major ways to promote economic growth are ensuring adequate rate of growth of per capita income; improvement in technology through the adoption of superior techniques of production; better and more extensive education and training of the labor force and others.
27. 27. e. Society must also ensure full employment. It is the task of economic systems to ensure that resources are not idle or unemployed, since resources are scarce. In the market economy, full employment is achieved by stimulating demand.
28. 28. Societys Technological Possibilities Every economy has a stock of limited resources- labor, technical knowledge , factories and tools , land , energy . In deciding what and how things should be produced, the economy is deciding how to allocate its resources among the thousands of different possible commodities and services. Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed .. President Dwight D. Eisenhower ( 34th President of United States, Term- January 20,1954 January 20, 1961) Contents : 1.Input and out put 2.The production possibility frontier 3. Opportunity cost
29. 29. Input and Output In economics, factors of production are the inputs to the production process. Finished goods are the output. Inputs : are commodities or services that are used to produce goods and services. An economy uses its existing technology to combine inputs to produce outputs. Outputs: are the various useful goods or services that result from the production process and are either consumed or employed in further production. Consider the production of pizza. The eggs , flour , heat, pizza oven and chefs labor are the inputs. The tasty pizza is the output.
30. 30. Inputs are factors of production (land, labour, capital and entreprenuership) Factors of production : Resources required for generation of goods or services, generally classified into four major groups: Land (including all natural resources), Land includes not only the site of production but natural resources above or below the soil. Labor (including all human resources), Capital (including all man-made resources), and Enterprise (which brings all the previous resources together for production).
31. 31. Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function. Factors of production may also refer specifically to the primary factors, which are stocks including land, labor (the ability to work), and capital goods applied to production. Materials and energy are considered as secondary factors in classical economics because they are obtained from land, labour and capital.
32. 32. The primary factors facilitate production but neither become part of the product (as with raw materials) nor become significantly transformed by the production process (as with fuel used to power machinery). Output is the final good or service produced using the factors of production through a production process.
33. 33. To build a McDonald's requires land to build it on, labor (because somebody has to build it), and capital (because the restaurant will require technology, such as grills, fryers, and other cooking devices to be successful). Therefore, the input of land, labor, and capital into this project will produce the output of a new McDonald's. Now, suppose someone walks into the McDonald's and orders a cheeseburger. When he places the order, the restuarant must input labor (from the person who makes the burger) and capital (the grill that is required to make it). By inputting labor and capital into this project, they will produce the output of a cheeseburger. The restaurant can then sell this cheeseburger to the customer and, assuming that the price charged is higher than the price of making the burger, will make a profit
34. 34. Production Possibility Frontier A productionpossibility frontier (PPF), sometimes called a productionpossibility curve, production- possibility boundary or product transformation curve, is a graph that shows the various combinations of amounts that two commodities could produce using the same fixed total amount of each of the factors of production.
35. 35. PPF A curve depicting all maximum output possibilities for two or more goods given a set of inputs (resources, labor, etc.). A production possibility frontier (PPF) is a curve or a boundary which shows the combinations of two or more goods and services that can be produced by using all of the available factor resources efficiently. An economy that is operating on the PPF is said to be efficient, meaning that it would be impossible to produce more of one good without decreasing production of the other good.
36. 36. A diagram showing the production possibilities frontier (PPF) curve for producing "Gun" and "butter". Point "A" lies below the curve, denoting underutilized production capacity. Points "B", "C", and "D" lie on the curve, denoting efficient utilization of production. Point "X" lies outside the curve, representing an impossible output for existing capital and/or technology. Shift of PPF to point "X", will change if their improvement of factors of production (Capital and/or technology) A PPF typically takes the form of the curve on the right.
37. 37. Shifts in the Production Possibility Frontier The production possibility frontier will shift when: There are improvements in productivity and efficiency perhaps because of the introduction of new technology or advances in the techniques of production More factor resources are exploited perhaps due to an increase in the size of the workforce or a rise in the amount of capital equipment available for businesses
38. 38. Opportunity cost The opportunity cost is the value of the best alternative forgone, in a situation in which a choice needs to be made between several mutually exclusive alternatives given limited resources. .
39. 39. The cost of an economic decision. The classic example is "guns or butter." What should a nation produce; butter or guns . If we choose the guns the cost is the butter. If we choose butter, the cost is the guns
40. 40. Increasing butter from A to B carries little opportunity cost, but for C to D the cost is great.
41. 41. Theory of Demand & Supply Demand : An economic concept that describes a consumer's desire and willingness to pay a price for a specific good or service. Holding all other factors constant, the price of a good or service increases as its demand increases and vice versa.
42. 42. Demand Demand is a buyer's willingness and ability to pay a price for a specific quantity of a good or service. Demand refers to how much (quantity) of a product or service is desired by buyers at various prices. A person is said to have demand , if he has the followings- 1.Willingness to purchase 2. Ability to purchase 3.Intention to pay
43. 43. The Law of Demand The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded.
44. 44. A, B and C are points on the demand curve. Each point on the curve reflects a direct correlation between quantity demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on. The demand relationship curve illustrates the negative relationship between price and quantity demanded. The higher the price of a good the lower the quantity demanded (A), and the lower the price, the more the good will be in demand (C).
45. 45. Demand schedule : In economics, the demand schedule is a table of the quantity demanded of a good at different price levels. Thus, given the price level, it is easy to determine the expected quantity demanded. This demand schedule can be graphed as a continuous demand curve on a chart having the Y-axis representing price and the X-axis representing quantity.
46. 46. Demand curve : In economics, the demand curve is the graph depicting the relationship between the price of a certain commodity and the amount of it that consumers are willing and able to purchase at that given price. It is a graphic representation of a demand schedule
47. 47. Price per unit Quantity of demand Achieved point 4 2 a 3 4 b 2 6 c 1 8 d Demand schedule
48. 48. Drawing a demand curve from demand schedule D D a b c d 4 3 2 1 0 2 4 6 8 y x
49. 49. supply Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. In economics, supply refers to the amount of a product that producers and firms are willing to sell at a given price all other factors being held constant.
50. 50. Factors affecting supply Good's own price: The basic supply relationship is between the price of a good and the quantity supplied. Prices of other goods: if the price of substitute goods increases ,supply of concerned goods will increase. Conditions of production: The most significant factor here is the state of technology. If there is a technological advancement in one good's production, the supply increases.
51. 51. Expectations: If the seller believes that the demand for his product will sharply increase in future the firm owner may immediately increase production in anticipation of future price increases. The supply curve would shift out. Price of inputs: Inputs include land, labor, energy and raw materials. If the price of inputs increases the supply curve will shift left as sellers are less willing or able to sell goods at any given price. For example, if the price of electricity increased a seller may reduce his supply of his product because of the increased costs of production. Number of suppliers: As more firms enter the industry the market supply curve will shift out driving down prices.
52. 52. Government policies and regulations: Government intervention can have a significant effect on supply. Government intervention can take many forms including environmental and health regulations, hour and wage laws, taxes, electrical and natural gas rates and zoning and land use regulations. Other factors-- 1.Tax and subsidy 2.weather 3.joint product ( raw hide and beef)
53. 53. Supply Curve Supply Curve is a graphic representation of the relationship between product price and quantity of product that a seller is willing and able to supply. Product price is measured on the vertical axis of the graph and quantity of product supplied on the horizontal axis
54. 54. Supply schedule Price per unit Quantity of supply Achieved point 1 5 a 2 10 b 3 15 c 4 20 d
55. 55. Y 1 2 3 4 0 5 10 15 20 X s s p r i c e Quantity
56. 56. Supply and Demand Relationship The relationship is an inverse one. When demand increases, supply decreases. When supply decreases, demand increases .
57. 57. Equilibrium When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium . At this point, the allocation of goods is most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding.
58. 58. Equilibrium occurs at the intersection of the demand and supply curve, which indicates no allocative inefficiency. At this point, the price of the goods will be P* and the quantity will be Q*. These figures are referred to as equilibrium price and quantity. In the real market place equilibrium can only ever be reached in theory, so the prices of goods and services are constantly changing in relation to fluctuations in demand and supply.
59. 59. Shifts vs. Movement 1. Movements A movement refers to a change along a curve. On the demand curve, a movement denotes a change in both price and quantity demanded from one point to another on the curve. The movement implies that the demand relationship remains consistent. Therefore, a movement along the demand curve will occur when the price of the good changes and the quantity demanded changes in accordance to the original demand relationship. In other words, a movement occurs when a change in the quantity demanded is caused only by a change in price, and vice versa.
60. 60. Like a movement along the demand curve, a movement along the supply curve means that the supply relationship remains consistent. Therefore, a movement along the supply curve will occur when the price of the good changes and the quantity supplied changes in accordance to the original supply relationship. In other words, a movement occurs when a change in quantity supplied is caused only by a change in price, and vice versa.
61. 61. 2. Shifts A shift in a demand or supply curve occurs when a good's quantity demanded or supplied changes even though price remains the same.
62. 62. For instance, if the price for a bottle of beer was $2 and the quantity of beer demanded increased from Q1 to Q2, then there would be a shift in the demand for beer. Shifts in the demand curve imply that the original demand relationship has changed, meaning that quantity demand is affected by a factor other than price. A shift in the demand relationship would occur if, for instance, beer suddenly became the only type of alcohol available for consumption
63. 63. Conversely, if the price for a bottle of beer was $2 and the quantity supplied decreased from Q1 to Q2, then there would be a shift in the supply of beer. Like a shift in the demand curve, a shift in the supply curve implies that the original supply curve has changed, meaning that the quantity supplied is effected by a factor other than price. A shift in the supply curve would occur if, for instance, a natural disaster caused a mass shortage of hops; beer manufacturers would be forced to supply less beer for the same price.
64. 64. Demand shifters: 1.Changes in disposable income, the magnitude of the shift also being related to the income elasticity of demand. 2.Changes in tastes and preferences - tastes and preferences are assumed to be fixed in the short-run. This assumption of fixed preferences is a necessary condition for aggregation of individual demand curves to derive market demand. 3.Changes in expectations. 4.Changes in the prices of related goods (substitutes and complements) 5.Population size and composition.