Economy-Introduction ( Final)

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Economics Meaning, Nature & Scope

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Define Economics What are 2 different types of Business Analysis Define two methods of economic methodology


Evolution In 1776, By Adam Smith’s Magnum Opus-”An enquiry into the nature and causes of wealth of nations.” Christened as Political Economy

Definitions of Economics:

Definitions of Economics Science of Wealth Science of Material Welfare Science of Scarcity Modern Definition

Science of Wealth:

Science of Wealth Adam Smith An enquiry into the nature and causes of wealth of nations. J.S Mill “ Practical science of the production and distribution of wealth”

Science of Material Welfare :

Science of Material Welfare Alfred Marshall Study of mankind in the ordinary business of life, it examines that part of individual and social action which is mostly closely connected with the attainment and with the use of the material requisites of well being

Science of Scarcity :

Science of Scarcity Robbins “Science which studies human behavior as a relationship between ends and scarce means which have alternative uses”

Modern Definition :

Modern Definition J M Keynes “Study of administration of scarce resources and the determinants of income and employment.” Samuelson “ 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 group of society”


Economics Study of the allocation of scarce resources (in relation to unlimited ends) and of determinates of income, output, employment and economic growth Social Science which studies human behavior in relation to optimizing allocation of available resources to achieve the given ends

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All societies are endowed by nature and by previous generations with scarce resources. Every society must decide how to use these inputs to satisfy human wants. Specifically, resources must be divided up among producers who transform them into goods and services that in turn must be allocated among households or members of society

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Scarcity……… Resources can only be used for one purpose at a time Scarcity requires that choices be made- we have to decide ( make a choice ) what we will have and what we will forgo The cost of any good, service, or activity is the value of what must be given up to obtain it (opportunity cost).

Consider This … Free for All?:

Consider This … Free for All? Products provided for “free” to an individual are not free for society because of the required use of scarce resources to produce them Companies provide “free” goods as a marketing strategy to promote brand awareness Products that are promoted as “free” to the individual may actually be bundled with another good for which the consumer must pay. Because a purchase is required to obtain them, these products are not really free to the buyer


Scope As a “Science” Systematized body of knowledge which traces the relationship between cause and effect Should be measureable As a “ Arts” Act as a guidance-proposes rules

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“ As a Pure ” Concern only with the facts & theory “As a Applied ” Application of theory into practical uses

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“ Positive ” Body of systematized knowledge concerning..”What is”- deals with the things as they are E.g.: Current unemployment rate is 9% “ Normative ” Body of systematized knowledge concerning..”What ought to be” Eg:Unemployment rate is quite high, government should encourage industrialization

Application of Economics:

Application of Economics Economics helps people to make sense of every day activity they observe around them Enable business managers to make more intelligent decisions. Enable individuals to make better buying decisions, better employment choices, and better financial investments Efficient employment of resources Understanding enterprise economy Development of International trade Basis of welfare theory Tools for formulating, executing evaluating economic policies Construction and use of economic models

Economics Analysis:

Micro Economics Studies the behavior of the individual unit, may be a person, a particular household, or a particular firm Macro Economics Studies the behavior of not one particular unit but of all the units combined together Economics Analysis

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Micro Study of particular unit rather than all units combined together Looks at a smaller picture Focus basically on supply and demand Determination of price and output quantity Analyze market behavior of individual consumer and firms Macro Study of aggregates Looks at a bigger picture Focus on national economy Study indicators such as GDP,unemployment rates Long run growth of income, output and employment


Economy Is an interdependent and inter related systems A system of mutual exchange between producers and consumers Activities related to the production and distribution of goods and services in a particular geographic region An economy consists of the economic systems of a country or other area; the labor, capital, and land resources; and the manufacturing, production, trade, distribution, and consumption of goods and services of that area.


Quadrants What to produce How to produce For whom to produce How to choose between the present and the future

Business Economics :

Business Economics Business Economics Branch of economics which applies microeconomics analysis for decision methods of business A field in applied economics uses economic theory and quantitative methods to analyze business enterprises and the factors contributing to the diversity of organizational structures and the relationships of firms with labour , Capital and product markets.

Application of Business Economics:

Application of Business Economics Concerned with economic issues and problems related to business organization, management, and strategy. An explanation of why firms emerge and exist; why they expand: horizontally, vertically The role of entrepreneurs and entrepreneurship The significance of organizational structure The relationship of firms with the employees The providers of capital, the customers, the government; The interactions between firms and the business environment.

Economic Methodology:

Economic Methodology Economists use the scientific method to establish theories, laws, and principles. The scientific method consists of: The observation of facts (real data) The formulations of explanations of cause and effect relationships (hypotheses) based upon the facts. The testing of the hypotheses. The acceptance, rejection, or modification of the hypotheses. The determination of a theory, law, principle, or model.

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Theoretical economics : The systematic arranging of facts, interpretation of the facts, making generalizations Principles : used to explain and/or predict the behavior of individuals and institutions Terminology : principles, laws, theories, and models are all terms that refer to generalizations about economic behavior Generalization : Economic principles are expressed as the tendencies of the typical or average consumer, worker, or business firm Other things equal: or ceteris paribus assumption

Methodology of Economics:

Methodology of Economics Deductive Method ( Analytical , abstract ) Descends from general to particular Reasoning or influence from general to particular or from universal to individual Start from the certain principles and carry down as a process of pure reasoning to the consequences which they implicitly contain Technique of an abstract approach to the problems of economic science E.g.: if we accept the general proposition that man is entirely motivated by self-interest. In applying the deductive method of economic analysis, we proceed from general to particular.

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Inductive Method (Historical, empirical) Ascends from particular to general Start from the observation of particular facts and then mount up to formulate laws and theorems It is an ascending process in which facts are collected, arranged and then general conclusions are drawn Technique of practical approach to the problems of economic science E.g. If we observe 200 persons in the market. We find that nearly 195 persons buy from the cheapest shops, From this observation, we can easily draw conclusions that people like to buy from a cheaper shop


Goods Free Goods Goods which are useful, but not scarce enough to have monetary value Eg :-Sunlight, Air Economic Goods Goods having monetary value Eg : Pen , Apple A good is something that is intended to satisfy some wants or needs of a consumer and thus has economic utility Tangible Goods Goods having actual physical appearance, can be felt Eg:Clothes, Jewellery, PCs Intangible Goods Intangible goods which are products that cannot be seen or touched E.g : Music download , services

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Types of Goods - Related to Income Inferior good : goods for which demand decreases as consumer income rises. Example: Inter-city bus service Normal good : goods for which demand increases as consumer income rises. Example: Daily consumption goods Superior good : goods that will tend to make up a larger proportion of consumption as income rises. Example: Luxary cars , jewelleries

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Types of Goods - Related to Price: Ordinary good : goods for which quantity demanded increases as the price for the good decreases Example: Giffen good: a good that will experience an increase in quantity demanded in response to an increase in price. In order to be a true Giffen good, price must be the only thing that changes to prompt a change in quantity demand Example:

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Costs Cost – the total amount of money it takes to produce an item (to pay for ALL Factors of Production). In business, cost is usually a monetary valuation of (1) effort, (2) material, (3) resources, (4) time and utilities consumed, (5) risks incurred, and (6) opportunity forgone in production and delivery of a good or service

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Fixed Costs – the amount of money a business MUST pay each month or year (like rent and Capital expenses ).

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Variable Costs – the amount of money a business pays that changes over time (Labor and Raw Materials).

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Marginal Costs – the additional Cost of the NEXT UNIT produced. Margin=Extra Space

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Total Costs = Fixed + Variable Costs

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Price I s the quantity of payment or compensation given by one party to another in return for goods or services. Pricing is the process of determining what a company will receive in exchange for its products. Pricing factors are manufacturing cost, market place, competition, market condition, and quality of product


Revenues Revenues – the total amount of Rs a company or the government takes in.

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Profit – the difference between Total Costs and Revenues. This is WHY you’re in BUSINESS (Profit Motive!) Profit=Revenues-Total cost Profit Motive=why you are in business---to make MONEY (principles of Capitalism)

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Cost Benefit Analysis – weighing the Marginal Costs vs. the Marginal Benefits of producing an item or making any economic decision. If the Benefit is GREATER than the Cost, then business does it. Marginal Benefits Marginal Costs

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Opportunity Cost The cost of any activity measured in terms of the value of the next best alternative forgone (that is not chosen) It is the sacrifice related to the second best choice Time Value of Money The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.

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Return The annual return on an investment, expressed as a percentage of the total amount invested. also called rate of return. It is calculate against investment. Profit P rofit is calculated against cost

Comparative Economics:

Comparative Economics

Traditional Economies:

Traditional Economies Def: Economic Questions answered by custom Predominately Agricultural Developing or “3 rd World” Trade and barter oriented Low GDP & PCI (per capita income = avg. inc.)

Command Economies:

Command Economies Def: Economic questions answered by the government Very little economic choice No private ownership Communism Old Soviet Union, old Communist China, Cuba and North Korea

Karl Marx:

Karl Marx 19 th century German economist Author of “Communist Manifesto” and “ Das Kapital ” Government should control economy and distribute goods and services to the people Founder of revolutionary socialism and communism

Communism Falls:

Communism Falls Market reforms in China in the mid 1970s. Fall of the Berlin Wall in 1989. Collapse of the Soviet Union 1991. Free Market Capitalism (w/ some Mixed Economies) the only show in town.

Free Market Economies:

Free Market Economies Economic questions answered by producers and consumers Limited government involvement Private property rights Capitalist Wide variety of choices and products U.S., Japan

Adam Smith:

Adam Smith 18 th century Scottish economist Published “The Wealth of Nations” in 1776 Explained the workings of the free market within capitalist economies Laissez-faire - Government stays out of business practices “hands off” to let the market place determine production, consumption and distribution. Individual freedom and choice emphasized

Principles of Capitalism:

Principles of Capitalism Competition – more businesses means lower prices and higher quality products for consumers (US!) to buy Voluntary Exchange – businesses and consumers MUST be free to buy or sell what and when they want.

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Private Property – Individuals and businesses MUST be able to get the benefits of owning their OWN property. Government doesn’t control it.

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Consumer Sovereignty – consumers get to make free choices about what to buy and this helps drive production (Demand drives Supply).

Mixed Economy:

Mixed Economy Government involvement and ownership and control of property, of decision making, and companies. Government control of business Social “safety net” for people Socialism Common in Europe, Latin America, and Africa

Principles of Socialism:

Principles of Socialism Social Safety Net – “Mixed Economy” idea, says that the government should NOT allow people to suffer in economic crisis (natural part of Capitalism’s “Business Cycle”), but provide security instead – Social Security, Unemployment Insurance, etc.

Keynesian Economics:

Keynesian Economics John Maynard Keynes Government should intervene in economic emergencies through tax and spending (Fiscal Policy) and changing the money supply (Monetary Policy). This is done to smooth out the business cycle (expansion and recession) and keep inflation low.

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