Introduction To Business Economics

Lecture-1

Introduction to Economics
Session Outline
• What is an Economy and Economics
• Definitions of Economics
• The concept of the Invisible Hand
• Decentralized Vs Centralized Economy
• Types of Economic Analysis
• 12 Principles of Economic Analysis
What is an Economy?
• An economy reflect a system for coordinating
productive activities—the activities that create
the goods and services people want and get
them to the people who want them
What is Economics?
• The term Economics comes from the Greek
word oikos (House) and nomos (Custom or law)
• Economics is the social science that studies the
production, distribution, and consumption of
goods and services.
• A body of knowledge that discusses how a
society tries to solve the human problems of
unlimited wants and scarce resources.
Some Definitions…
• An enquiry into the nature and causes of the
wealth of nations. Adam Smith
• The study of mankind in the everyday business
of life. Alfred Marshal
• “The science which studies human behaviour
as a relationship between ends and scarce
means which have alternative uses” (Robbins,
1935, p. 16).
• “ 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”. (Paul E Samuelson, 1948)
Classification of Economy
• The economy can be classified in 2 ways, Centralized
and Decentralized or Command vs Market Economy
• In the centralized economy a central authority
making decisions about production and
consumption whereas In a decentralized economy
production and consumption are the result of
decentralized decisions by many firms and
individuals.
• The examples could be of USA vs USSR
Reflections!!

Take a minute and think how does the canteen

inside the university campus is keeping a steady
supply of food to the residents and others?
The Invisible hand
• Written by the Scottish economist Adam Smith
in a passage in his book “The Wealth of the
Nation”.
• The invisible hand refers to the way in which
the individual pursuit of self-interest can lead
to good results for society as a whole.
Reflections!
• Take a minute and think Whether the power
of the Invisible hand is always productive
Factors of Production
The Four factors of production are;
• Land
• Labor
• Capital
• Entrepreneurship
https://youtu.be/-IvwoqPh1_I
Types of Economic Analysis
• Micro and Macro Economic Analysis
• Theoretical and Empirical
• Positive and Normative
• Short and Long run
• Partial and general Equillibrium
Micro and Macro Economics
• There are two broad classification for
Economic Analysis; Micro and Macro
• Microeconomics is the branch of economics
that studies how people make decisions and
how these decisions interact.
• Macroeconomics is the branch of economics
that is concerned with overall ups and downs
in the economy.
MICRO ECO N O M I C S
 Deals with individual behaviour

 Consumer behaviour (utility maximisation)
 Producer behaviour (profit maximisation)
 Single commodity price determination
 Equilibrium prices of factors of production
 Quantity of factors of production
MACRO ECONOMICS
 Deals with macro picture or aggregate picture
 However summation of micro is not macro
 Aggregate output (GDP/GNP/GVA)
 Aggregate employment
 General price level (inflation/deflation)
 Monetary policy
 Fiscal Policy
 Balance of payment
Theoretical and Empirical
• Theoretical Economics seek to • Empirical Economics aim to
derive verifiable implications verify the qualitative
about economic behavior predictions of theoretical
under the assumption that models and convert these
agents maximize specific predictions to precise,
objectives subject to numerical outcomes
constraints that are well
defined in the model • Example- Testing the
• Example- Explaining theoretical model by assign a
Consumption behavior by numerical value to the average
drawing a relationship amount expenditure increases
between Income and when income increases
Expenditure
Positive and Normative
• Tells How it is or was • Tells how it should or
• Seeks to understand ought to be
behavior without • Analyzes outcomes of
making economic behavior,
judgments/opinions evaluates them as good
• Establishes a or bad and sometimes
relationship between prescribes a course of
cause and Effect action
• Objective • Subjective
Reflections!
Which among the following statements reflect
either Normative or Positive
• Disposable income reduced by 10 percent in
last 3 years.
• Higher education should be free
• Higher Interest rates will reduce purchasing of
homes
• Fuel should be subsidized
Short and Long run
• Short run refers to a time • Long run refers to a
period(Usually less than a
time period long
year) not enough for both
consumers and producers to enough for consumers
adjust completely to any new and producers to adjust
situation. to any new situation.
• Refers to a period when it may
• It is possible to change
not be possible to change all
the inputs all inputs
• Usually in short run among the • Almost all factors of
factor of productions Capital is production are variable
fixed and labor is variable
Partial and General Equilibrium
• Developed by Augustin • The general equilibrium
Cournout and Alfred explains economic
Marshall Partial phenomena like
Equillibrium analysis production,
studies the internal consumption and prices
outcome of any policy in a economy as a
action in a single market whole
only.
One must Choose…
12 Principles of Economics
• Choices are necessary because resources are scarce

• The true cost of something is Its opportunity cost
• “How much” decisions require trade-off at the
margin
• People usually respond to incentives, exploiting
opportunities to make themselves better off
• Trade can make everyone better off and because
people respond to incentives, markets move toward
equilibrium.
• Resources should be used as efficiently as possible to
achieve society’s goals.
• Because people usually exploit gains from trade,
markets usually lead to efficiency.
• When markets don’t achieve efficiency, government
intervention can improve society’s welfare.
• One person’s spending is another person’s income.
• Overall spending sometimes gets out of line with the
economy’s productive capacity.
• Government policies can change spending.
Opportunity Cost
• How do you measure the value of a road or a park?

• Even the allocation of student time can be
explained using opportunity cost. How?
Example
• The notion of opportunity cost explains why students watch
more TV the week after exams than the week before exams.
• Watching TV right before an exam has a high opportunity
cost, for the alternative use of time (studying) has high
value in improving grade performance and getting a good
job.
• After exams, time has a lower opportunity cost.
Example
• Take the case of a proposal to drill for oil off the

Maharastra coast. A defender of the program states,
“We need that oil to protect us from insecure foreign
imports which are costly. We have plenty of seawater.
This is just good economics for the nation.”
• In fact, it might be poor economics because of the
opportunity cost. If drilling leads to oil spills that spoil
the beaches, it might reduce the recreational value of
the ocean.
• That opportunity cost might not be easily measured,
but it is every bit as real as the value of oil under the
waters.
Production Possibility Curve
• PPC is a graph that shows the different
combinations of the quantities of two goods
that can be produced or consumed in an
economy, subject to limited availability of
resources.
• The PPC suggest that if we want to have more
of one good then we must have less of the
other good due to limited availability of
resources.
Reflections!
• What are the situations which may lead the in
Production Possibility Curve(PPC) to either
move outward or inward.
Concept of margin

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Lecture-1

Take a minute and think how does the canteen

 Deals with individual behaviour

• Choices are necessary because resources are scarce

• How do you measure the value of a road or a park?

• Take the case of a proposal to drill for oil off the

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