INTRODUCTION TO

ECONOMICS

By:-Nikhil MhatreManoj Pise

AGENDA

1) What is Economics?

2) Needs – Wants

3) Types of Economics

4) Factors of production

5) The Economic Problems

6) Utility

7) Production Possibility Frontier

IMAGINE HOW WOULD BE LIFE LIKE

10000 YEARS AGO?

A NORMAL DAY

FIND FOOD

FIGHT FOR

FOOD

PROTECT YOURSELF FROM OTHER ANIMALS

DO THE SAME THING

EVERYDAY.

WHAT IS ECONOMICS

A social science that studies andinfluences human behavior

Economics is the study of whatconstitutes rational human behavior inthe endeavor to fulfill needs and wants.

What is Economics?

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Adam Smith (1723 - 1790)◦ Author of the famous book "An Inquiry into the

Nature and Causes of the Wealth of Nations"

The Foundation of Economics

THE FOUNDATION OF ECONOMICS

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Economics◦ the science which studies human behavior as a

relationship between ends and scarce means whichhave alternative uses

- Robbins

NEEDS AND WANTS

Needs:- “STUFF” we must have to survive.

• E.g.:- Food, Clothing and Shelter

Wants:- “STUFF” we would really like to have.

• E.g. :- Fancy Food, big screen TV, jewelry.

These are also known as Luxuries.

People try to balance needs and wants.

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Economics

Micro Macro

Types of Economics

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Micro Economics• Micro Economics studies how the individual parts of the

economy make decisions to allocate limited resources

• Microeconomics studies:

– how individuals use limited resources to meet unlimitedneeds

– the consequences of their decisions

– the behavior of individual components like industries,firms and households.

– how individual prices are set

– what determines the price of land, labour and capital

– inquire into the strengths and weaknesses of the marketmechanism.

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Macro Economics• Macroeconomics studies about the functioning of the

economy as a whole

• It examines the economy through wide-lens.• Macroeconomics studies about

• the total output of a nation

• the way the nation allocates its limited resources of land,labor and capital

• the ways to maximize production levels

• the techniques to promote trade

• After observing the society as a whole, Adam Smith notedthat there was an "invisible hand" turning the wheels of theeconomy: a market force that keeps the economyfunctioning.

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The Factors of Production

Product

Land

Labour Capital

Organization

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The Factors of Production

Land includes the “gifts of nature,” or natural resources not created by

human effort.

Capital includes the tool,equipment,and factories used in

production.

Labour includes people with all their efforts and abilities.

Entrepreneurs are individuals who start a new business or bring a

product to market.

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Economy

Market Command Mixed

Types of ECONOMIC SYSTEMS

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In a pure market economythere is no governmentinvolvement in economicdecisions.

Market Economies

Contd….

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The Government lets the market answer thefollowing three basic economic questions:

1. What ?Consumers decide what should be produced in amarket economy through the purchases they make.

2. How ?

Production is left entirely up to businesses. Businessesmust be competitive in such an economy and producequality products at lower prices than their competitors.

3. For whom ?

In a market economy, the people who have more moneyare able to buy more goods and services.

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In a command economy theGovernment takes economicdecisions.

Command Economies

Contd….

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In a command economy the Government answersthe three basic economic questions.

1. What?

A central planning committee decides what productsare needed.

2. How?

Since the Government owns all means of production in acommand economy, it decides how goods and serviceswill be produced.

3. For Whom ?

The Government decides who will get what is produced

in a command economy.

Command Economies

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In the Mixed economies theGovernment and the Market worktogether in decision making

Mixed Economies

Contd…

THE ECONOMIC PROBLEM

Unlimited Wants

Scarce Resources – Land, Labour, Capital

Many Uses of Resources

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THE ECONOMIC PROBLEM

What goods and services should an economy produce?

– should the emphasis be on agriculture, manufacturingor services, should it be on sport and leisure or housing?

How should goods and services be produced?

– labour intensive, capital intensive?

Who should get the goods and services produced?

– Even distribution? More for the rich? For those whowork hard?

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WHAT IS UTILITY?

Satisfaction

Can not be measured

• Marshall – Utility can be measured in Utils

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OPPORTUNITY COST

Definition – the cost expressed in terms ofthe next best alternative sacrificed

The cost of anything in terms of other thingsgiven up or sacrificed.

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PRODUCTION POSSIBILITY FRONTIERS

PPF Shows the different combinations of goodsand 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 attainablewith the current level of resources

Useful to demonstrate economic growth andopportunity cost

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PRODUCTION POSSIBILITY FRONTIERS

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Capital Goods

Consumer Goods

Yo

Xo

A

BY1

X1

Assume a country can produce two types of goods with its resources –capital goods and consumer goods

If it devotes all resources to capital goods it could produce a maximum of Ym.

If it devotes all its resources to consumer goods it could produce a maximum of Xm

Ym

Xm

If the country is at point A on the PPF It can produce the combination of Yocapital goods and Xo consumer goods

If it reallocates its resources (moving round the PPF from A to B) it can produce more consumer goods but only at the expense of fewer capital goods. The opportunity cost of producing an extra Xo –X1 consumer goods is Yo – Y1 capital goods.

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Production Possibility Frontiers

Capital Goods

Consumer Goods

Yo

Xo

A

.B

CY1

X1

Production inside the PPF – e.g. point B means the country is not using all its resources

It can only produce at points outside the PPF if it finds a way of expanding its resources or improves the productivity of those resources it already has. This will push the PPF further outwards.