Introduction To Economics: Unit 1

Introduction to
Economics
Unit 1
Meaning
→The word ‘economics ’ has been derived from an
ancient Greek word ‘Oikonomia’ (management
of a house hold) which is a a combination of two
words ‘oikos’ (a house) & ‘Nomos’ (customs or
law). Hence, economics means rules of the
house (hold).
→Economics means managing a household with
the limited funds available in an economical
manner.
→Economics is the study of how society chooses
to use its limited resources to produce, exchange
and consume goods and services.
Definition
Adam Smith
“Economics inquires into the factors that
determine wealth of the country and its
growth”
This definition emphasizes production &
expansion of wealth
Definition
Lionel Robbins
“Economics is the science which studies
human behavior as a relationship between
ends and scarce means which have
alternative uses”.
The three components in Robbins’
definition are: ends, scarce means and
alternative uses.
Features of Robbins’
definition
1.Multiplicity of ends:
 Ends means human wants.
 They are unlimited.
 This is a fundamental fact of economic
life.
 When one want gets satisfied, another
want crops up.
Features con…..
 Wants are of different intensity; some are
more intense than other
 People have to choose which want
satisfaction they desire the most.
2. Scarcity of means
 Resources are scarce in relation to wants,
i.e., resources are limited and wants are
unlimited.
Features con……
 All wants cannot be satisfied.
 Human beings have to decide for the satisfaction
of which wants the resources should be used.
3. Alternative uses of resources
 Resources are not only scarce but they have
alternative uses.
E.g. Coal can be used as fuel in production of
industrial goods or for running trains or for
domestic cooking.
Nature of Economics
Economics as a science
Science can be defined as a systematic
body of knowledge that explains the
relationships between causes and effects
In economics, relevant facts are
systematically collected, classified and
analyzed.
Nature of Economics con…
In science the results are easily
measurable.
In economics money is used as a
‘measuring rod’ for organizational and
individual economic activities.
A science must be capable of formulating
laws explaining the circumstances under
which a particular result can be achieved.
Economics often fails to predict future
course of events due to complex and
variable forces involved such as
unemployment and price fluctuations.
Science is quantifiable where as economics
often has to deal with human attitudes and
emotions which are difficult to predict.
We cannot predict how an individual is
going to react to a particular situation. This
is the case with economy also.
For e.g., a shortage in the supply of an
agricultural product, say tomatoes, can lead
to an increase in its price.
But we cannot assume that this will always
happen.
If people decide to stop buying tomatoes
because of their high price, and buy other
vegetables instead, prices of tomatoes may
remain stable, or even fall.
Nature of economics con….
Economics as an art
Art is defined set of rules for the
achievement of a given objective.
It provides specific solutions to specific
problems.
Economics is an art in the sense that it has
several branches which gives practical
direction to solve economic problems of the
society.
Economics as a positive science.
Positive economics deals with what is or
how an economic problem can be solved.
It explains economic phenomena according
to their causes and effects.
In positive economics, we study human
decisions as facts which can be verified
with actual data.
E.g.
a) India is an over populated country
b) An increase in real per capita income
increases the standard of living of people
Economics as a normative science
Normative economics deals with what
ought to be or how an economic problem
should be solved.
It prescribes that course of action which is
desirable and necessary to achieve social
goals.
E.g.
a) Government should guarantee a minimum
wage for every worker.
b) Free education should be given to the
poor.
Scope of Economics
Before 1930 there was only one economics
Ragnar Frisch coined the words ‘micro’ &
‘macro’ in 1933 to denote the two branches
of economic theory, namely, micro
economics & macroeconomics.
Microeconomics
Meaning
 The word micro is derived from the Greek
word ‘mikros’ which means ‘small’
Microeconomics deals with small segments
of the society.
 Microeconomics is defined as ‘the study of
human behaviour of individual decision
making units, such as consumers, resource
owners & firms’.
Microeconomics
 It is also known as Price Theory since its
major subject matter deals with the
determination of price of commodities and
factors
Scope of Microeconomics
 Micro economics has both theoretical &
practical importance
 It solves three central problems of the
economy, i.e.,
a) What to produce?
b) How to produce? & for
c) Whom to produce?
Microeconomics
Product Pricing Factor pricing Welfare Economics
Theory of Theory of
Demand Supply
Wages Rent Interest Profit
Macroeconomics
 The word macro is derived from the Greek word
‘makros’ which means large.
 Macroeconomics deals with aggregative
economics
 Macroeconomics is defined as ‘the study of
overall economic phenomena such as problem of
full employment, GNP, savings, investment,
aggregate consumption, aggregate investment,
economic growth, etc.
Macroeconomics
 It is also known as Theory of Income &
Employment since its major subject matter
deals with the determination of income &
employment
Scope of Macroeconomics
 The study of macroeconomics is used to
solve many problems of an economy like,
monetary problems, economic fluctuations,
general unemployment, inflation,
disequilibrium in the balance of payments
position, etc.
Macroeconomics
Theory Theory Theory Theory

of of of of
Income Price Level Economic Distribution
& & Growth
Employment Inflation
Economic Systems
 Economic system is defined as an
arrangement by which the central problems
of the economy can be solved.
Economic system
Capitalist Socialist Mixed

Economy Economy Economy
Socialist/Command Economy
 This system is based on public ownership of property & social
welfare motive.
 All economic decisions are taken by the government – what to
produce, how to produce & whom to produce
 Prices are determined by central planning authority.
 Consumers are not independent to decide what to consume.
They can consume only those goods produced are produced
by the economy.
 Social welfare is the only basis of production activities. Since
there is no profit motive, there is no incentive to compete.
E.g. Poland, Hungary, etc.
Capitalist /Market Economy
 It is an economic system based on private property and
private profit.
 Consumers are free to buy goods & services of their
choice and producers allocate their resources based on
the demand.
 In this system, prices are determined by the market forces
of demand and supply.
 It is also called Laissez faire or free market economy
 Price plays a major role .
 The role of the government is negligible.
E.g. United States, Australia etc.
Mixed Economy
 It is a combination of a free market economy and
a command economy
 Ownership of property is both by both private &
public sector
 There is freedom of enterprise in the private
sector but no freedom in the public sector
 Private sector produces with profit motive &
public sector with welfare motive
 Government controls the price fluctuations to
reduce unemployment and high level of inflation
E.g. India
Economics & Business
 As the economic, political and social environment
changes constantly, the success of a business
depends how managers anticipate changes and
cope with these changes.
 To have a better understanding of the changing
environment, managers have to analyze
problems at two levels – microeconomic level &
macroeconomic level.
Economics & Business con..
 Business economics deals with the application of
economic theory to analyze problems faced by a
firm while making decisions.
 Even at a basic level of business, firms face
problems such as the selection of a product to
manufacture and sell.
 After a product is selected , there is problem of
deciding the quantity to be produced & price to be
charged to the customers
 To find an answer to this problem, the firm
can look at the demand for the product,
and its cost of production.
 Economics explains how economic forces
affect a firms working, and also identifies
the possible consequences of the
decisions taken by the firm.
 Managers use their knowledge of micro
economic environment to analyze the
operations of the firm in its immediate
market, including the factors influencing its
prices, revenues, costs etc.
 Knowledge of macroeconomic environment
allows a manager to analyze the impact of
external environment on his business.
 The external environment includes political,
legal and economic decisions at national &
international levels .
 Thus to make effective decisions,
managers should be aware of the factors
that affect business decisions.

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Introduction to

Theory Theory Theory Theory

Capitalist Socialist Mixed

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