Introduction to Economics - Final

8/11/2019 Introduction to Economics - Final

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INTRODUCTION

TOECONOMICS





SBI targets existing customers for second home loans Are cricket matches justified even at the cost ofproductivity loss? Toyota’s Liva to take on Swift, Polo, Micra.

Turbulent flight: Can Air India Survive? Ambanis, Birlas, actors earn in multi crores: is itjustifiable?Markets can digest only one more rate hike by RBI.

Fuel price hike to push inflation into double digit.China’s products to be expansive due to wage rise.



Emphasis Significant Contribution

Wealth Adam Smith

Welfare Alfred Marshall

Scarcity Lionel Robbins

Growth Paul Samuelson

What is Economics?

The wordeconomy comes from a Greek word for“one who manages a household.”



WEALTH DEFINITION

Adam smith (1723 - 1790), Father ofEconomics

Book “An Inquiry into Nature and Causes

of Wealth of Nations” (1776)

Defined economics as the practical science

of production and distribution of wealth.



WELFARE DEFINITION

Alfred Marshall (1842 - 1924)Book “Principles of Economics” (1890)

Defined “Political Economy” or Economics is a

study of mankind in the ordinary business of life;

it examines that part of individual and social

action which is most closely connected with the

attainment and with the use of the material

requisites of well being”.



SCARCITY DEFINITION

Lionel Robbins (Scarcity definition)book “An Essay on the Nature and Significance ofEconomic Science” in 1932.

According to him, “economics is a science whichstudies human behaviour as a relationship

between ends and scarce means which have

alternative uses”

Ends – human wants

Means – resources with which wants are fulfilled



defined economics as “the study of how men and

society choose, with or without the use of

money, to employ scarce productive resources

which could have alternative uses, to produce

various commodities over time, and distribute

them for consumption, now and in the future

among various people and groups of society”

GROWTH DEFINITION



contd….. Thus economics is a social science that studies

human behaviour and institutional arrangementsin societies that influence the processes by whichrelatively scarce resources are allocated toalternative uses.

It covers the actions of individuals and groups ofindividuals in the process of producing,

exchanging and consuming of goods and servicesto achieve optimization of resource use”

social science and decision science

components of economics



Economics as a Social

Science

Human behavior is influenced by a matrix of

complex forcesPsychologySociology Anthropology

EconomicsPolitical ScienceReligion, ...



Scarcity

A situation in which the amountof something actually available

would not be sufficient to satisfythe desire for it, if it wereprovided free of charge.



Factors of Production

There are 4 factors that must all be

used to produce anythingNatural Resources (also referred to as“land”)





Capital – human-made resources used to

create other goods Kinds of Capital Physical Capital – Also called CapitalGoods, objects that are used to produce

other goods



Kinds of Capital

Human Capital – knowledge or skills workers get from education andexperience



There are 4 factors that must all be

used to produce anythingEntrepreneurship – person who takes arisk in combining the other 3 factors to

create a new good





Engineers need to manipulate systems toachieve a balance in attributes in both the

physical and economic environments, and within the bounds of limited resources. Following are some examples where engineeringeconomy plays a crucial role: Choosing the best design for a high-efficiency gasfurnace

Selecting the most suitable robot for a weldingoperation on an automotive assembly line

Making a recommendation about whether jetairplanes for an overnight delivery service should be purchased or leased Considering the choice between reusable anddisposable bottles for high-demand beverages



19

Engineering Economic

Decisions

Planning Investment

Marketing

ProfitManufacturing



Making Economic DecisionsEvery decision we make involvestrade-offs–alternatives that we must give up whenwe make a choice

So while making an economic decision 1st Place is what we would choose to do

2nd Place is our opportunity cost (we give it upto do option 1)



X’s Decision-making Grid

Alternatives

Sleep late Wake up early to study

Benefits

• Enjoy more sleep

• Have more energyduring the day

• Better grade on test Teacher and parentalapproval

• Personal satisfaction

Decision Sleep late Wake up early tostudy for test

Opportunity

cost Extra study time Extra sleep time

Benefitsforgone

• Better grade on test

• Teacher and parentalapproval

• Personal satisfaction

• Enjoy more sleep

• Have more energy

during the day



Opportunity Cost

Definition – the cost expressed in terms of thenext best alternative sacrificed

Helps us view the true cost of decision making

Implies valuing different choices



Few appealing VACATIONDestinations



Individuals may try to maximize utility giventhe constraints of income, time, prices, etc.

Firms may have objectives such as themaximization of profits, sales, market share,etc. or the minimization of costs per unit

Social objective, maximize the well being of themembers of society

Objectives



The Economic ProblemProduction Decisions

Exchange Decisions

Consumption Decisions



What goods and services should an economy

produce? – should the emphasis be onagriculture, manufacturing or services, should it be on sport and leisure or housing?

How should goods and services be produced? –labour intensive, land intensive, capital intensive?Efficiency?

Who should get the goods and servicesproduced? – even distribution? more for the

rich? for those who work hard?

contd.........



•Capital Goods and Consumer Goods

Consumer Goods

Goods produced for present consumption.

Investment

The process of using resources to produce newcapital.

Because resources are scarce, the opportunity costof every investment in capital is forgone presentconsumption.



Every resource is best suited forcertain types of goods

Farmland and cows make butter

Metals and factories make guns

Butter v/s Guns: To convert butterproduction to guns, you must sell the cowsand build new factories on the land

Production Possibility Frontiers



Watermelons(m.t.)

Shoes(millions of pairs)

S h o e s ( m i l l i o n s o f

p a i r s ) 25

20

15

10

5

0252015105

Production Possibilities Graph

Watermelons (millions of tons)

0

a (0,15)

15

b (8,14)

14

18

20

21

12

9

5

0

A production

possibilities frontier

c (14,12)

d (18,9)

e (20,5)

f (21,0)

8 14



PPF shows the different combinations of goods

and services that can be produced with a givenamount of resources

No ‘ideal’ point on the curve

Any point inside the curve – suggests resourcesare not being utilised efficiently

Any point outside the curve – not attainable withthe current level of resources

Useful to demonstrate economic growth andopportunity cost

contd.......



Efficiency

Efficiency meansusing resources insuch a way as tomaximize the

production of goodsand services.

An economy producing

output levels on thePPF is operatingefficiently.

S h o e s ( m i l l i o n s

o f p a i r s )

25

20

15

10

5

0252015105



g (5,8)

A point of

underutilization

c (14,12)

d (18,9)

e (20,5)

f (21,0)

a (0,15)b (8,14)

S



Growth

Growth If more resources become available, or if

technology improves, an

economy can increase its

level of output and grow. When this happens, the

entire production

possibilities curve “shifts

to the right.”

S h o e s ( m i l l i o n s

o f p a i r s )

25

20

15

10

5

0252015105



TFuture production

Possibilities frontier

c (14,12)

d (18,9)

e (20,5)

f (21,0)

a (0,15)b (8,14)

S



Positive & Normative Economics

Health care can beimproved with moretax funding

Pollution control iseffective through asystem of fines

Society ought to

provide homes for all Any strategy aimed atreducing factoryclosures in deprived

areas would be helpful

Positive Statements:Capable of being verified or refuted byresorting to fact or

further investigationNormative Statements:

Contains a value judgement which

cannot be verified byresort toinvestigation orresearch



Micro & Macro Economics

Microeconomics The study of howhouseholds and businesses make choices,how they interact in markets, and how thegovernment attempts to influence their

choices.

Macroeconomics The study of the

economy as a whole, including topics suchas inflation, unemployment, economicgrowth National income etc.



QUIZ TIME



Which of the following are factors of production?a. Capital and Land

b. Scarcity and shortages

c. Technology and productivityd. economics and business decisions

a. capital and land



Which of the following is an example of usingphysical capital to save time and money?

a. hiring more workers to do a job? b. building extra space in a factory to simplifyproduction

c. switching from oil to coal to make productioncheaper

d. lowering workers’ wages to increase profits

b. building extra space in a factory to simplifyproduction



To what part of an industry does a worker’seducation contribute?

a. technology

b. physical capital

c. human capital

d. scarce resources

c. human capital



Which of the following is an entrepreneur?

a. person who earns a lot of money as a singer

or dancer b. person who creates a game and sells it to agame manufacturer

c. person who starts an all-organic cleaning

supplies business that employs othersd. person who works as a highly paid computerprogrammer

c. person who starts an all-organic cleaningsupplies business that employs others



What is the difference between a shortage andscarcity?

a. A shortage can be temporary or long-term, but scarcity always exists.

b. A shortage results from rising prices; scarcityresults from falling prices.

c. A shortage is a lack of all goods and services;scarcity concerns a single item.

d. There is no real difference between a shortageand scarcity

a. A shortage can be temporary or long-term, but scarcity always exists!



What does an economist mean by the termLAND?

a. farmland only b. food crops grown on farmland as well as thefarmland itself

c. goods and services that are produced formthe land

d. all natural resources used to produce goodsand services

d. all natural resources used to produce goodsand services!



The economic concept of guns or butter meansthat …

a. a person can spend extra money either on sportsequipment or food.

b. a company must decide whether to manufactureguns or butter

c. a government must decide whether to producemore or less military or consumer goodsd. a government can buy unlimited military andcivilian goods if it is rich enough

c. a government must decide whether to producemore or less military or consumer goods …trade off …. due to scarcity!



If a person who wants to buy a compact disc (CD)has just enough money to buy one, and chooses

CD A instead of CD B, then CD B is the

a. trade-off

b. opportunity costc. decision at the margin

d. opportunity at the margin

b. opportunity cost



A decision-making grid is a visual way of:

a. examining opportunity costs

b. selling goods or services

c. making marginal decisions

d. identifying shortages

a. examining opportunity costs!



A decision is made at the margin when eachalternative considers

a. a different trade-off than the others

b. where the most costly alternative will be.

c. what the “all or nothing” alternative will be.

d. cost and benefit ranked in progressive units.

d. cost and benefit ranked in progressive units



A production possibilities curve shows the

relationship between the production of:a. farm goods and factory goods

b. two types of farm goods

c. two types of factory goodsd. any two categories of goods

d. any two categories of goods.



The line on a production possibilities curve

showing the relative amounts of two types ofgoods produced using all resources is called the

a. production possibilities frontier

b. opportunity cost linec. utilization of resources

d. maximum possible production line

a. production possibilities frontier



The law of increasing costs means that asproduction shifts from one item to another,

a.the cost of production gets cheaper and cheaper.b.the cost of producing an item stays the same nomatter how many are produced.

c.more and more resources are necessary to

increase production of the second itemd.the land costs of increasing production risemuch more steeply than do the labor costs

c. more and more resources are necessary toincrease production of the second item



and last question …

The curve usually seen in a productionpossibilities frontier can be explained by:

a. growth in the economy

b. underutilization of resourcesc. increasing an economy’s efficiency

d. the law of increasing costs

d. the law of increasing costs!





Introduction to Economics - Final

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