Industrial Economics

Chapter# 01

DZA
Professor of Managenet
CU.
 What is Economics?
• the branch of knowledge concerned with the
production, consumption, and transfer of wealth.
• Economics is the social science that studies how
people interact with things of value; in particular,
the production, distribution, and consumption of
goods and services.
• Economics focuses on the behaviour and
interactions of economic agents and how
economies work.
• The word 'economics' comes from two Greek
words, 'eco' meaning home and 'nomos'
meaning accounts. The subject has developed
from being about how to keep the family
accounts into the wide-ranging subject of
today.
• Economics is the study of the use of scarce
resources that have alternative use.
 The role of economics
• Economics has quite an extensive role to play
in a multitude of contexts, particularly in
solving agricultural and environmental
problems. For example, it has much to
contribute to improved policies for the
efficient targeting of agricultural subsidies, the
control of pollution and the depletion of
natural resources.
• A pervasive view of the role of economics for the environment is
that:
• 'The widespread concern over the current state of the environment
and the limited success of existing policy have generated renewed
interest in the effectiveness of alternative approaches to
environmental protection.
• It is our sense that a wider use of economic incentives can
significantly increase the effectiveness of measures for pollution
control both in terms of attaining our environmental targets and in
doing so with enormous cost-savings relative to current command-
and-control policies'

• Source: Baumol and Oates (1988) p. 3.

 Natrue of Economics –Science or Arts
• There is a great controversy among the
economists regarding the nature of
economics, whether the subject ‘economics’ is
considered as science or an art.
• If it is a science, then either positive science or
normative science.
• Economics as a Science:
• Before we start discussing whether economics is
science or not, it becomes necessary to have a
clear idea about science. Science is a systematic
study of knowledge and fact which develops the
correlation-ship between cause and effect.
Science is not only the collection of facts,
according to Prof. Poincare, in reality, all the facts
must be systematically collected, classified and
analyzed.
• There are following characteristics of any science
subject, such as;
• (i) It is based on systematic study of knowledge or
facts;
• (ii) It develops correlation-ship between cause and
effect;
• iii) All the laws are universally accepted
• (iv) All the laws are tested and based on experiments;
• (v) It can make future predictions;
• (vi) It has a scale of measurement.
• On the basis of all these characteristics, Prof.
Robbins,
• Prof Jordon,
• Prof. Robertson etc. claimed economics as one
of the subject of science like physics, chemistry
etc.
• According to all these economists, ‘economics’
has also several characteristics similar to other
science subjects.
• i) Economics is also a systematic study of
knowledge and facts. All the theories and facts
related with both micro and macro economics
are systematically collected, classified and
analyzed.
• (ii) Economics deals with the correlation-ship
between cause and effect. For example, supply
is a positive function of price, i.e., change in
price is cause but change in supply is effect.
• (iii) All the laws in economics are also
universally accepted, like, law of demand, law
of supply, law of diminishing marginal utility
etc.
• (iv) Theories and laws of economics are based
on experiments, like, mixed economy to is an
experimental outcome between capitalist and
socialist economies.
• (v) Economics has a scale of measurement.
According to Prof. Marshall, ‘money’ is used as the
measuring rod in economics. However, according
to Prof. A.K. Sen, Human Development Index (HDI)
is used to measure economic development of a
country.
• However, the most important question is whether
economics is a positive science or a normative
science? Positive science deals with all the real
things or activities.
• It gives the solution what is? What was? What
will be? It deals with all the practical things.
For example, poverty and unemployment are
the biggest problems in India. The life
expectancy of birth in India is gradually rising.
All these above statements are known as
positive statements. These statements are all
concerned with real facts and information.
• On the contrary, normative science deals with what
ought to be? What ought to have happened?
Normative science offers suggestions to the
problems. The statements dealing with these
suggestions are coming under normative statements.
• These statements give the ideas about both good
and bad effects of any particular problem or policy.
For example, illiteracy is a curse for Indian economy.
The backwardness of Indian economy is due to
‘population explosion’.
• Now an important question arises whether
economics is a positive science or a normative
science? The economists like Prof. Senior
(classical economist) and Prof. Robbins, Prof.
Freight-men (modern economists) claimed
that economics is a positive science. However,
Prof. Pigou (classical economist). Prof.
Marshall (neoclassical economist) etc. are of
opinion that economics is a normative science.
 Economics and Positive Science:

• The following statements can ensure economics as a positive

science, such as;
• (i) Logically based:
• The ideas of economics are based on absolute logical
clarifications and moreover, it develops relationship between
cause and effect.

• (ii) Labour Specialisation:

• Labour law is an important topic of economics. It is based on the

law of specialisation of labour Economists must concern with the
causes and effects of labour-division.
• iii) Not Neutral:
• Economics is not a neutral between positive
and normative sciences. According to most
economists, economics is merely positive
science rather than normative science.
 Economics and Normative Science:

• The following statements can ensure

economics as a normative science, such as,
• (i) Emotional View:
• A rational human being has not only logical
view but also has sentimental attachments
and emotional views regarding any activity.
These emotional attachments are all coming
under normative statements. Hence,
economics is a normative science.
• (ii) Welfare Activity:
• Economics is a science of human welfare, All the economic
forwarded their theories for the development of human
standard of living Hence, all the economic statements have
their respective normative views.

• (iii) Economic Planning:

• Economic planning is one of the main instruments of economic
development. Several economists have given their personal
views for the successful implementation of economic plan.
Hence, economics is coming under normative science.
• All these lead us to the conclusion that ‘Economics’
is both positive and normative science. It does not
only tell us why certain things happen however, it
also gives idea whether it is right thing to happen.
• Economics as an Art:
• According to Т.К. Mehta, ‘Knowledge is science,
action is art.’ According to Pigou, Marshall etc.,
economics is also considered as an art. In other way,
art is the practical application of knowledge for
achieving particular goals.
• Science gives us principles of any discipline however, art
turns all these principles into reality. Therefore,
considering the activities in economics, it can claimed
as an art also, because it gives guidance to the solutions
of all the economic problems.
• Therefore, from all the above discussions we can
conclude that economics is neither a science nor an art
only. However, it is a golden combination of both.
According to Cossa, science and art are complementary
to each other. Hence, economics is considered as both a
science as well as an art.
 Economics both a science and an arts
• Economics is both a science and an arts. Arts
can not be separated from science or
scinentific knowl;edge . Economices is the
science in its methodology and an arts in its
application. Semuelson stated that , “ Political
econoy can be descriped as the oldest of the
arts and the newest of the science --- indeed
the quen of social sciences.
 Branches of Economics
• Economics is the study of how people allocate
scarce resources for production, distribution,
and consumption, both individually and
collectively.
• Economics can generally be broken down into
macroeconomics, which concentrates on the
behavior of the economy as a whole, and
microeconomics, which focuses on individual
people and businesses.
• Economics is especially concerned with
efficiency in production and exchange and
uses models and assumptions to understand
how to create incentives and policies that will
maximize efficiency.
• Economists formulate and publish numerous
economic indicators, such as gross domestic
product (GDP) and the Consumer Price Index
(CPI).
 Understanding Economics

• One of the earliest recorded economic thinkers

was the 8th-century B.C. Greek farmer/poet
Hesiod, who wrote that labor, materials, and time
needed to be allocated efficiently to overcome
scarcity. But the founding of modern Western
economics occurred much later, generally
credited to the publication of Scottish
philosopher Adam Smith's 1776 book, An Inquiry
Into the Nature and Causes of the Wealth of
Nations.
• The principle (and problem) of economics is
that human beings have unlimited wants and
occupy a world of limited means. For this
reason, the concepts of efficiency and
productivity are held paramount by
economists. Increased productivity and a
more efficient use of resources, they argue,
could lead to a higher standard of living.
• Despite this view, economics has been pejoratively
known as the "dismal science," a term coined by
Scottish historian Thomas Carlyle in 1849.2 He
used it to criticize the liberal views on race and
social equality of contemporary economists like
John Stuart Mill, though some commentators
suggest Carlyle was actually describing the gloomy
predictions by Thomas Robert Malthus that
population growth would always outstrip the food
supply.
• Microeconomics focuses on how individual
consumers and firms make decisions; these
individual decision making units can be a single
person, a household, a business/organization,
or a government agency.
• Analyzing certain aspects of human behavior,
microeconomics tries to explain how they
respond to changes in price and why they
demand what they do at particular price levels.
• Microeconomics tries to explain how and why different
goods are valued differently, how individuals make
financial decisions, and how individuals best trade,
coordinate, and cooperate with one another.
• Microeconomics' topics range from the dynamics of
supply and demand to the efficiency and costs
associated with producing goods and services; they also
include how labor is divided and allocated; how
business firms are organized and function; and how
people approach uncertainty, risk, and strategic
game theory.
• Macroeconomics studies an overall economy
on both a national and international level,
using highly aggregated economic data and
variables to model the economy. Its focus can
include a distinct geographical region, a
country, a continent, or even the whole world.
Its primary areas of study are recurrent
economic cycles and broad economic growth
and development.
• Topics studied include foreign trade,
government fiscal and monetary policy,
unemployment rates, the level of inflation and
interest rates, the growth of total production
output as reflected by changes in the Gross
Domestic Product (GDP), and business cycles
that result in expansions, booms, recessions,
and depressions.
• Micro- and macroeconomics are intertwined.
Aggregate macroeconomic phenomena are
obviously and literally just the sum total of
microeconomic phenomena. However these two
branches of economics use very different theories,
models, and research methods, which sometimes
appear to conflict with each other. Integrating the
microeconomics foundations into macroeconomic
theory and research is a major area of study in
itself for many economists.
 Types of Economic Systems

• Societies have organized their resources in many

different ways through history, deciding how to use
available means to achieve individual and common
ends.
• Primitivism
• In primitive agrarian societies, people tend to self-
produce all of their needs and wants at the level of the
household or tribe. Families and tribes would build their
own dwellings, grow their own crops, hunt their own
game, fashion their own clothes, bake their own bread,
etc.
• This economic system is defined by very little
division of labor and resulting low productivity
, a high degree of vertical integration of
production processes within the household or
village for what goods are produced, and
relationship based reciprocal exchange within
and between families or tribes rather than
market transactions.
• In such a primitive society, the concepts of
private property and decision-making over
resources often apply at a more collective
level of familial or tribal ownership of
productive resources and wealth in common.
• Feudalism
• Later, as civilizations developed, economies
based on production by social class emerged,
such as feudalism and slavery. Slavery involved
production by enslaved individuals who lacked
personal freedom or rights and were treated
as the property of their owner.
• Feudalism was a system where a class of
nobility, known as lords, owned all of the
lands and leased out small parcels to peasants
to farm, with peasants handing over much of
their production to the lord. In return, the lord
offered the peasants relative safety and
security, including a place to live and food to
eat.
 Capitalism

• Capitalism emerged with the advent of industrialization.

Capitalism is defined as a system of production whereby
business owners (entrepreneurs) organize productive
resources including tools, workers, and raw materials to
produce goods for sale in order to make a profit and not for
personal consumption. In capitalism, workers are hired in
return for wages, owners of land and natural resources are
paid rents or royalties for the use of the resources, and the
owners of previously created wealth are paid interest to forgo
the use of some of their wealth so that the entrepreneurs can
borrow it to pay wages and rents and purchase tools for hired
workers to use
• This system of market prices, profit, and loss as the selection
mechanism as to who will decide how resources are allocated
for production is what defines a capitalist economy .
• These roles (workers, resource owners, capitalists, and
entrepreneurs) represent functions in the capitalist economy
and not separate or mutually exclusive classes of people.
Individuals typically fulfill different roles with respect to
different economic transactions, relationships, organizations,
and contracts which they are a party to.
• The United States and much of the developed world today
can be described as broadly capitalist market economies.
 Socialism

• Socialism, like feudalism, is a form of a

command economy.. Socialism is a system of
production where there is no private
ownership of the means of production (or
other property) and the system of prices,
profits, and losses is not used to determine
who will decide what to produce and how to
produce it.
• Socialism is similar to primitivism in that
collective notions of ownership and control
over resources are at least nominally
observed, though in practice it more closely
resembles a feudal or slave-based economy,
where those who can gain and maintain
control of political power act as a privileged
elite class over the workers.
• Communism is a variant of socialism that also
involves the violent overthrow of a capitalist
economy and the imposition of socialist
economic policy by force, and is particularly
prone to resemble a slave-based economy
where the leaders of the revolution become
the new overlords or slave masters.
 Industrial Economics _Definiation
• Generally speaking, the industrial economy
concerns those activities combining factors of
production (facilities, supplies, work, knowledge) to
produce material goods intended for the market.
• Industrial Economics is the study of firms,
industries, and markets. It looks at firms of all sizes
– from local corner shops to multinational giants
such as WalMart or Tesco. And it considers a whole
range of industries, such as electricity generation,
car production, and restaurants.
• Industrial Economics helps us understand such
issues as:
• the levels at which capacity, output, and prices
are set;
• the extent that products are differentiated from
each other;
• how much firms invest in research and
development (R&D)
• how and why firms advertise
• Industrial Economics also gives insights into
how firms organise their activities, as well as
considering their motivation. In many micro
courses, profit maximisation is taken as given,
but many industrial economics courses
examine alternative objectives, such as trying
to grow market share.
• One of the key issues in industrial economics
is assessing whether a market is competitive.
Competitive markets are normally good for
consumers (although they might not always be
feasible) so most industrial economics courses
include analysis of how to measure the extent
of competition in markets.
• Industrial Economics uses theoretical models to
understand firm and regulatory decision making,
and so students should expect to use diagrams
and maybe some basic mathematical models,
including game theory. In addition, researchers
often develop empirical statistical models to
identify relationships between variables of
interest: for example to understand the
relationship between product price, advertising,
and profits.
• Industrial Economists are also highly employable.
There is an entire industry of consultancies and
government agencies (such as the Office of Fair
Trading (OFT) and the Competition Commission
(CC)) concerned with competition policy. There is
an equally large set of consultancies and
regulators (such as Ofcom (the communication
sector regulator)) which are concerned with the
economics of regulation.
 What are the scope and importance of
industrial economics?
• Industrial Economics is the study of
firms, industries, and markets. It looks at firms
of all sizes – from local corner shops to
multinational giants such as WalMart or Tesco.
And it considers a whole range of industries,
such as electricity generation, car production,
and restaurants.
• Industrial economics is a distinctive branch of
economics which deals with the economic
problems of firms and industries, and their
relationship with society. In economic
literature it is known by several names with
marginal differences such as 'Economics of
Industries', 'Industry and Trade', 'Industrial
Organization and Policy', 'Commerce' and
'Business Economics' etc.
• The name 'Industrial Economics' was adopted
in the early fifties perhaps through the
writings of P.W.S. Andrews. Although this
name is becoming popular day by day some
authors, particularly in the American circle,
prefer 'Industrial Organization' as a title of the
subject.
• At present there is no clear-cut consensus on the
name of the subject. There are two broad
elements of industrial economics. The first one,
known as the descriptive element, is concerned
with the information content of the subject. It
aims at providing the industrialist or businessman
with a survey of the industrial and commercial
organizations of his own country and of the other
countries with which he might come in contact.
• There are two broad elements of industrial economics. The
first one, known as the descriptive element, is concerned
with the information content of the subject. It aims at
providing the industrialist or businessman with a survey of
the industrial and commercial organizations of his own
country and of the other countries with which he might come
in contact. It would give him full information regarding the
natural resources, industrial climate in the country, situation
of the infrastructure including lines of traffic, supplies of
factors of production, trade and commercial policies of the
governments and the degree of competition in the business
in which he operates.
• In short, it deals with the information about the
competitors, natural resources and factors of
production and government rules and regulations
related to the concerned industry. The second
element of the subject is concerned with the business
policy and decision-making. This is the analytical part
dealing with topics such as market analysis, pricing,
choice of techniques, location of plant, investment
planning, hiring and firing of labour, financial
decisions, product diversification and so on.
• It is a vital part of the subject and much of the
received theory of industrial economics is
concerned with this. However, this does not
mean that the first element, i.e. descriptive
industrial economics, is less important. The
two elements are interdependent, since
without adequate information no one can take
proper decision about any aspect of business.
• Recently, there has been considerable
emphasis on managerial economics in
business or industrial management. This
branch of economics deals with the concepts
and analysis of demand, cost, profit,
competition and so on, that are appropriate
for decision-making. Such topics are also
covered in industrial economics.
• Concluding this section, we may say that industrial
economics is predominantly an empirical discipline
having micro and macro aspects. It has a strong
theoretical base of microeconomics. It provides
useful applications for industrial management and
public policies and has acquired the status of a
specialist subject.
• It is concerned with the analysis of the markets for
which the traditional competitive models are
inadequate