UNIT-1

ECONOMICS: AN
INTRODUCTION

Achala Dadhichi

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 WHY STUDY ECONOMICS?

1. Choose your life’s occupation.

2. Explores the behavior of the financial
markets.
3. Examines the reasons of income
inequalities.
4. Studies business cycles.
5. Studies international trade and impact
of globalization.

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6.TO LEARN A PARTICULAR WAY OF THINKING
Developments in the country make
modern society more complex,
therefore increases the need for man
to study economics in order to
efficiently solve his own economic
problems brought by these
complexities.
7. Asks how government policies can be
used to pursue important goals such
as rapid economic growth, full
employment, price stability.

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8.TO BE AN INFORMED VOTER:
Economics helps us make wise
decisions especially in choosing
political figures who can efficiently
use taxes for the benefit of the
people.

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 MEANING OF ECONOMICS

The word "economics" is derived from a Greek word

”oikonomikos”or “oikonomia”, which means
"household management" or "management of
house affairs"
-i.e., how people earn income and resources and how they
spend them on their necessities, comforts and luxuries.
With the passage of time, the word "okionomia" was used
for an economy as whole in the sense that how a nation
takes steps to fulfill its desires and preferences with the
help of scarce means.

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 Stages & Definitions of
Economics

Wealth Welfare Scarcity Growth

Definition Definition Definition Oriented
(Adam (Alfred (L. Robbins) Definition
Smith) Marshall) (Samuelson)

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 1. WEALTH CONCEPT

Adam Smith, who is the father of

economics, defined economics as
“ a science which enquires into the nature
and cause of wealth of nation”. He
emphasized the production and growth
of wealth as the subject matter of
economics.
“Wealth of Nation “–is the first systematic book on
economics written by Adam Smith.

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2. WELFARE CONCEPT
According to Alfred Marshall

“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 material requisites of
well being. Thus, it is on one side a study of wealth;
and on other; and more important side, a part of the
study of man.”

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 3. SCARCITY CONCEPT

According to Lord Robbins:

“Economics is the science which
studies human behavior as a
relationship between ends and
scarce means which have
alternative uses”

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CHARACTERISTICS OF SCARCITY ORIENTED
DEFINITION
Economics is a positive science.

# Unlimited ends ( wants ).

# Scarce means.

# Alternative use of means.

# Choice – study of human behavior.

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4. GROWTH/DEVELOPMENT CONCEPT
According to Prof. Samuelson
“Economics is the study of how men and society
choose with or without the use of money, to
employ the scarce productive resources which
have alternative uses, to produce various
commodities over time and distribute them for
consumption now and in future among various
people and groups of society”.

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 KEY DEFINITIONS

Scarcity is a fundamental situation where

demand of any goods & services exceeds
its supply even at zero cost.

Scarcity is the difference between wants

and needs and available resources.
 RESOURCES

Labor Capital
Land Entrepreneurship

Product
 Resources, also called factors of
production, are all the inputs or things used
in producing goods and services. They fall
into four categories:

land
labor
capital
entrepreneurship
Slide 1 of 3
 Land refers to anything below & above
the earth provided by nature or Earth's
natural resources. It can be oil,
mineral,fishes,fossel,fuels,rivers,lakes,
air,forest etc.
Labor refers to all physical & mental
abilities made available for production
of goods & services, usually measured
by the time spent in working, during a
period of time.
Slide 2 of 3
Capital-Produced means of production. All man-
made aids which are used up in the process of
making other goods & services rather than being
consumed for their own sake are known as
capital. It includes all types of tools
machineries,equipments,factory-buildings;
infrastructure, such as roads, ports, sanitation
facilities, and utilities.
Entrepreneurship refers to the skills of people
who are willing to risk their time and money to
combine all factors of production & run a
business.
Slide 3 of 3
What Is an Economy?

An economy, or economic system,

is the way a nation makes economic
choices about how the nation will
use its resources to produce and
distribute goods and services.
How Does an Economy Work?

The way nations answer three basic

questions defines their economic systems.
1. What goods and services should be
produced?
2. How should the goods and services be
produced?
3. For whom should the goods and
services be produced?
 CENTRAL PROBLEMS OF AN ECONOMY
• What to produce and what quantities to produce ?
• Should the emphasis be on agriculture, manufacturing or services
• Should the economy produce public goods or
private goods
• How much of the chosen goods and services should be produced

• How to produce ?
• What technique of production should be used - Labor intensive or
capital intensive

• For whom to produce ?

• How should the output be distributed amongst different social
groups
 OTHER PROBLEMS

Problem of Fuller Utilization of Resources

• Resources should be used to full potential
• There should be no wastage
• Resources should be utilized efficiently
• An ‘efficient method of production’
• Least resources required for a given
output
• Maximum output obtained for given
resources
OTHER PROBLEMS

Growth of Resources
• Resources can increase if there is:
1. An increase in the quantum of resources

• Eg: New reserves of crude oil found

• Increase in labor

2. Improvement in productivity

• Training labor to improve skills

• Improvements and advancements in technology

• Opportunity cost is all about the most basic
of economic concepts: trade-offs. It's a notion
inherent in almost every decision of daily life and
of investing: if you make a choice, you forgo the
other options for now. And what's been given up
can sometimes turn out to have been the wiser
choice, which is why opportunity cost is best
measured in hindsight -- after all, it is impossible
to know the end outcome of any investment.
• Opportunity costs are a factor not only in
consumer decisions, but in production decisions,
capital allocation, time management, and lifestyle
choices.
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OPPORTUNITY COST STARTS WITH
BASIC ECONOMIC PROBLEM

• Unlimited wants

• Scarce resources
• Land

• Labor

• Capital

• Scarcity implies insufficient availability of

resources to meet all wants

• Scarcity leads to problem of choice

 PROBLEM OF CHOICE
• Which wants should be satisfied ?

• To which use should a resource be put ?

• Resources have alternate uses

• Eg: Tomatoes used- Juice

- Sandwich

Resource - Vegetables
Alternate uses
- Salad
 HOW DO PEOPLE CHOOSE ?
• Rank their choices based on the satisfaction
derived
• Prioritization of wants
Sheela’s ranking of the available uses for her pocket money
Uses Level of satisfaction
a. Buy gifts and cards Highest
b. Eat out with friends Just below (a)
c. Buy music cassettes Just below (b)
d. Purchase of shoes Just below (c)
e. Purchase of T-shirts Lowest

Sheela chooses option ‘a’ : buy gifts and cards

Highest level of satisfaction
 OPPORTUNITY COST
• Defined as the benefit lost in terms of the
next best alternative foregone when a
choice is made

• Helps view the true cost of decision making

• Highlights the economic principle:‘

• There is no such thing as a free

lunch’
MICROECONOMICS
VS
MACROECONOMICS
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Microeconomics and
Macroeconomics are the two major
branches of modern economic
theory.

These terms were originated or

coined by
Ragnar Frisch in 1933.
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MEANING OF MICROECONOMICS :

Micro has been derived from GREEK

word “MIKROS”which mean small .
It is a study of the individual units of
economic system .
In other words a small part of
economy & not the whole economy .

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 DEFINATION :

•Prof Boulding , “micro economics

seeks to explain the working of
individuals ,firms , households,
individual prices ,wages , particular
industries ”.

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SUBJECT-MATTER :

• It deals with determination

of
• Product pricing
• Factor pricing
• Theory of economic welfare .
• It also known as PRICE
THEORY .
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MACRO ECONOMICS :

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MEANING :

Macro is been derived from the Greek

word “MAKROS”which means LARGE.
Macro economic is the study of large
part of the economy i. e ., the whole
economy.
 It deals with aggregate behavior of the
economy as a whole.

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 DEFINATION :

• Prof. Boulding, “ Marco economics deals

not only with individual quantities but
with the aggregates of these quantities ,
not with the individual incomes , but
with national income , not with
individual prices , but with prices level ,
not with individual outputs but with the
national output ” .
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 SUBJECT MATTER :
• It deals with total consumption, total
savings , total investment , total output,
total consumption ..etc.
• National income.
• Price level , inflation & deflation.
• Economic growth.
• Public finance
• International trade.
• Monetary theory.
• Theory of income & employment .
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MACROECONOMICS VS. MICROECONOMICS

MICROECONOMIC MACROECONOMIC
QUESTION QUESTION
Go to business How many people are
school or take a job? employed in the
economy as a whole?
What determines the What determines the
salary offered by overall salary levels
Citibank to Aditya, a paid to workers in a
new Sharda Univ given year?
MBA?
 MICROECONOMICS AND MACROECONOMICS

Both are closely intertwined since

changes in the overall economy arise
from the decisions of millions of
individuals and it is impossible to
understand macroeconomic
developments without considering
the associated microeconomic
decisions.

Both has its own distinction because

they address different questions and
sometimes take different approaches
and are often taught in separate
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courses.
CONCLUSION :
Both the approaches are inter-
related, inter-dependent &
complementary to each other .
Both are necessary for a perfect
study of economics.

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POSITIVE
VS.
NORMATIVE
ECONOMICS
 “A positive science may be defined
as a body of systematized
knowledge concerning what it is;
normative science as a body of
systematized knowledge relating to
criteria of what ought to be; and
concerned with the ideal as
distinguished from the actual….
POSTIVE ECONOMICS

• Objective
• Fact based
• Deals with cause-effect
relationship that…
• Can be tested
• Can be proved or disproved
• The word positive here means-----
What is?
 NORMATIVE ECONOMICS
• Subjective
• Value-based
• Opinion-bases: cannot be proved or
disproved.
• Describes ‘what ought to be’
• Not testable
• Also known as POLICY ECONOMICS
• We express our judgement about what
is good or bad ;what is desirable or
undesirable; right or wrong.
Examples of positive statements-

1. The sky is blue.

2. More people will buy homes if price of homes
goes down.
3. Government provided healthcare increases
public expenditure.

Positive economic statements may be simple or

complex, but they are always about matters of
fact. You may like it, may not .It does not mean
something good or desirable.
Examples of Normative Economic
Statements----

1.Government should do more to help

eliminate poverty.
2. The economy should grow more than
2.2% a year.
3.It is too hot today. (it is an opinion ).
4.To be fair, minimum wages should go
up.
 POSITIVE AND NORMATIVE
STATEMENTS
• A key difference between positive and
normative statements is how we judge
their validity.
• Positive and normative statements may
also be related.
• Actually , positive & normative
economics complement each other.
• We cannot do a good normative
economic analysis unless we have first
done a good positive analysis.