nature of economics and basic economic concepts- block-1

8/8/2019 Nature of Economics and Basic Economic Concepts- Block-1

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Nature of Economics andNature of Economics andBasic Economic ConceptsBasic Economic ConceptsNature of Economics andNature of Economics andBasic Economic ConceptsBasic Economic Concepts


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Economics Economics is a behavioral science. It is all about, how people make choices. It is the study of how individuals and

societies chose to use scarce resourcesthat nature and previous generations haveprovided.

Economics is the study of how people

allocate their limited resources in anattempt to satisfy their unlimited wants.


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Production of Goods and ServicesLimited Supply

Households

Firms

Consumption of Goods and Services

Unlimited Demand


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Circulating Flow of

Goods & Income

HOUSEHOLDS

FIRMS

Wages,

Rent,

Dividends,

Interest

etc(rupees)

Consumer

Expenditure

(rupees)

Factors

of

Production

Goods

&

Services


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Reasons to study

Economics To learn a way of thinking.

To understand society.

To understand global affairs.

To be an informed citizen.


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Two major branches ofTwo major branches ofEconomicsEconomics

Two major branches ofTwo major branches ofEconomicsEconomics

MicroeconomicsMicroeconomics

MacroeconomicsMacroeconomics


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Microeconomics Concerns with behavior of Individual

entities like market, firms and

household. The study related to Land, Labor &

Capital.


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Macroeconomics deals

with Determination of total investment

and consumption

Management of money and interestrates by central bank.

Study of international financial

system etc. National growth, National Income etc


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Economic EvaluationEconomic EvaluationEconomic EvaluationEconomic Evaluation

Positive EconomicsPositive Economics

Normative EconomicsNormative Economics


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Positive Economics Positive Economics describes the fact of an

economy.

It is a positive approach to policy analysis, itfocuses on objectives, behavior, and interactionof individuals and groups who influence policydecisions.

Positive economics is concerned with what is,

with describing how the economy functions. It is Descriptive.

E.g what is the impact of computes onproductivity. Should the govt reduce the deficit

etc


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Basic Economic Concepts Resources & its Scarcity-Economics is the study of how societies

use scarce resources to produce valuable commodities anddistribute them among different people.

Scarcity and Choice- In each economy resources are scarce andwants are unlimited, and people chose the scarce resources

efficiently to satisfy unlimited wants. Opportunity cost and its uses-Opportunity cost of a decision is

the value of goods and services forgone. Production Possibility Frontier- It shows the maximum amount of

production that can be obtained by an economy, given itstechnological knowledge and quantity of inputs available. PPF showsthe menu of goods and services available to society.

Law of increasing cost and diminishing returns- Economic Efficiency and growth-Output of the society should

increase.Per Capita Income=National Output/Population.Efficiency means that the economys resources are being used aseffectively as possible to satisfy peoples needs and desires.


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Economic SystemEconomic SystemEconomic SystemEconomic SystemFree Market EconomyFree Market EconomyCommand or controlled market EconomyCommand or controlled market EconomyMixed Market Economy.Mixed Market Economy.Islamic Economic System.Islamic Economic System.


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Market Economy

(Capitalistic Economy) In which individuals and the private

firms make the decision about

production and consumption. Extreme case of market economy

where individual households and firms

pursue their own self interest,without any cetral direction orregulation is the Laissez-faireEconomy.


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Command Economy

(Socialistic economy) In which Govt make all important

decisions about production and

distribution. Govt owns most of the means of

production like land and capital.


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Mixed Economy Have all the characteristics of

Market and Command economies.

Most Economies are Mixed economiesI.e decisions are made by both Govtand people.


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Features of Capitalism Give incentives to people and they will

allocate their recourses.

Right of ownership and transfer. Freedom of choice by consumers.

Freedom of enterprise or businessactivity.

Profit motive & Self interest

Limited role of Govt.

Effective management role.


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Negative Impacts of

capitalism on economy Navigation of welfare aspects.

Class conflict

Increase in income inequalities.

Unnecessary expenditure regardingto popular activities.

Wastage of recourses due toeconomic fluctuations.


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Features of Socialism State ownership No private property and enterprise

Social welfare & social security ofthe society.

Central Planning system.

Economists allocate the resources. Political workers make the directionof the economy.


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Negative impacts of

socialism on the economy Lack of economic and consumption

freedom.

Lack of spirit of competition andinitiatives

Misuse and misallocation of

recourses. Large time interval in decision

making.

Political control over economic


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Features of Mixed

economic structure Coexistence of public and private

sectors having objective of profit

and welfare aspects. Price system with govt directions Right of ownership and transfer.

Control over monopolies. Reduction of economic inequalities. Human freedom, Flexible


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Objectives of the Mixed

economy Economic Growth Full Employment

Price level stability. Economic efficiency

Appropriate resources Economic freedom

An equitable distribution of income Exchange rate stability. Economic stability.


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Problems of economic

organization What commodities are produced?

How these commodities are made(

method of production, labor intensivetechniques or Capital Intensivetechniques)?

How much quantities are produced? For whom they are produced?

How to distribute these things?


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Classifying Economic Systems

Totally

Planned

Economy

TotallyFree

Market

Economy

N. Korea

N. Korea

China

China

France

Poland France

UK USA

UK USA

Hong Kong

Hong Kong

Poland

Mid 1970s

Mid 1990s


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Market Mechanism of exchanging goods and

services.

A place where goods and services areexchanged at a particular priceintervals.


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PEST AnalysisPEST AnalysisPEST AnalysisPEST Analysis

Factors affecting the firms in theFactors affecting the firms in the

External environment, Firms establishes aExternal environment, Firms establishes astrategic approaches to tackle theirstrategic approaches to tackle theirbusiness activities, by studying thisbusiness activities, by studying this

analysisanalysis..


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PEST Political Factors.

Economic Factors.

Social Factors. Technological factors.


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Political Actions of Govt.

1. Law Enforcement.

2. Tax Management.3. Product safety Standards.

4. Industrial Relations legislations.

5. Laws preventing firms to keepprices up.

6. Labor laws.


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Economic Factors Cost of Raw material.

Market entry of new rival.

Bargaining power of supplier. Bargaining power of buyers.

Threat of substitute product.

Degree of competition. International exchange rates.

Forth coming Budget


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Social & Cultural Factors Attitude towards working conditions.

Length of working days.

Equal opportunity for different groupof people.

Images portrayed in advertising.

Demographic trends. Ethical issues.


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Technological Factors The use of machinery.

Use of Robots.

Using organized software for datamanagement.

Quick decision making by organized

datas. Information technology revolution.

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