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Dr.

M Manjunath Shettigar
MA (Econ), MBA, MPhil, PhD

Professor,
Department of Professional Studies,
Christ University,
Bangalore - 560029
Economics is a discipline/
subject / a field of study which
is concerned with
management of scarce
resources.
Economics is the study of how
scarce resources can be used
for different uses/purposes by
making rational/efficient
choices at the levels of
households, institutions and the
whole society.
Economics is the study of
how scarce resources can be used
for different uses/purposes by
making rational/efficient choices at
the levels of households, institutions
and the whole society
and how the process can be
managed so as to secure
maximum benefit
Scarcity
of resources is a universal
problem present everywhere, for all
of us and at all times.

Attributes/features of resources
A. Resources are scarce
B. Resources have alternative uses
Becauseresources are scarce and
they have alternative uses on the one
hand, &
Becausehuman needs, wants &
requirements are unlimited

We have to make rational decision


Decision making problem at all levels
So that maximization of benefit is possible

There are 3 categories of economic units,


which have to make decisions regarding
use of scarce resources. They are:
1. Households or individuals
2. Business units / firms
3. Whole society / community/ Government
Take decisions to derive maximize
benefits
Benefit defined differently at different
levels
Individuals/households maximization
of satisfaction/ welfare
Business entities maximization of profit
Society maximization of societal
welfare
Do this within the framework of rules and
regulations of the society
Economic actors act by what is known as
animal spirit need and greed
That is why we have rules to ensure fair
competition, level playing field and
minimize possible negative effects on public
welfare
The term Economics is derived from the Greek
word

-OIKONOMOS which means one


who manages a household

Adam Smith
is considered the father of Economics
Economics
Two essential problems involved in the use of resources
are:

Scarcity of resources (which have alternative uses), and


The problem of choice (of the uses for which resources
are to be used, or of the goods to be produced or of
the wants to be satisfied)
Economics

Economics is a science that deals with the two basic


problems, viz.,
1. Scarcity of resources, and
2. Choice.
Subject matter of
Economics
Production
Distribution
Exchange
Consumption
Public finance
International Trade
Economy/ Economic system

Economy is a geographical/ social/ political


framework consisting of institutions, and rules and
regulations that facilitate production, distribution
and consumption of goods and services.

e.g. Indian economy, US economy, Chinese


economy and so on
Economic systems

Capitalist economic system


market economy/ free enterprise economy

Socialist economic system


command economy/centrally planned
economy

Mixed economic system


Economics

Basic concepts
Production, consumption, Goods and services
Production
Making of goods and services required
to satisfy wants
With the application of human and natural energy

Making goods and services requires resources.


Resources are basically of 4 types
Land all natural resources
Labour human resource
Capital produced resources
Organization entrepreneurship

Production can also be defined as the technical relationship


between inputs and output
or as the process of creation of utility
Consumption

Using goods and


services to satisfy
wants
Level of consumption determines standard of
living
Goods and
services
Goods tangible products
capable of satisfying wants

Services intangible products


capable of satisfying
wants
Stock & Flow variables

Stock variables have only quantity dimension measured in


quantity at a given point of time

Flow variables have both quantity and time dimensions


measured in quantity per unit of time

Examples of Stock variables wealth, property, population,


capital, etc.,

Examples of Flow variable income, (rate of) investment,


(rate of) savings, population growth rate, etc.,
Utility

Want satisfying power of


goods and services
Alternatively, it is the expected satisfaction from goods and
services

- the law of Diminishing Marginal Utility


Law of Diminishing
Marginal Utility

As we have/ possess/ consume more and more of


any commodity, marginal (or additional) utility
derived from the successive units of the
commodity goes on diminishing.
Law of diminishing
marginal utility

Assumptions/ conditions
1. Identical units
2. No (inordinate) time gap
3. Consumer is rational/ normal
Law of diminishing
marginal utility
Units Total Utility Marginal Utility

1st glass 20 20
2nd glass 32 12
3rd glass 40 8
4th glass 42 2
5th glass 42 0
6th glass 39 -3
Law of diminishing
marginal utility
Trends in utility :
We can see the following trends in utility
1. Total utility goes on increasing at a diminishing rate with
the consumption of additional units.
2. Total utility is the highest when marginal utility is 0.
3. Total utility declines when marginal utility becomes
negative.
4. Marginal utility goes on diminishing with the consumption
of additional units.
Exceptions to the Law

collection of rare articles, hobbies,


music, and drinks.

It is also argued that the law does not


apply to money.

But these are not really exceptions !


Importance of the Law

1. The law of diminishing marginal utility is a basic law of


consumption. It forms the basis for the law of equi-marginal
utility, the doctrine of consumer surplus and the law of
demand.

2. The law has proved to be useful in solving the famous


water-diamond paradox (of Adam Smith)

3. The law is useful in framing policies for redistribution of


income.

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