Economics is about everything regarding economics

about economics

1. What is Economics? Dr. Mukta Mukherjee 7/19/2022 1

2. 1.1.1. S_N_Chapter01 1.1.2. S_N_Chapter02 1.2.1.P_R_Chapter01 1.3.1.Sal_Chapter01 7/19/2022 2 Reading

3. Economics: First Thoughts Macroeconomic Aspects Output Money Unemployment Inflation Markets Stock Goods & Services Forex Banking and Financial Institutions Government and Policy Fiscal Monetary International Trade and Finance Development and Growth 7/19/2022 3

4. Why Study Economics? I want to have everything!! You cannot have everything! Resources are Scarce. That is the distinguishing characteristic of any economic good. Doesn’t scarce mean rare? No!! Not Quite!! Then? 7/19/2022 4

5. What is Scarcity? A good is said to be scarce if it is limited with respect to the demand for the good Such goods are not freely available Rationed either by price or by some other means Is water scarce?? Depends on the type of water Approximately 71% of Earth’s surface is covered by water - water is neither rare nor scarce Water that can be utilized is scarce You have to pay a price for water – tax or price for bottled water Scarcity does not mean merely ‘limited’, but limited with respect to the demand for the good Scarcity 7/19/2022 5

6. Implications of Scarcity I have 3 hours at my disposal. I need 3 hours to prepare for the exam. But I also want to watch the new movie that is 3 hours long. I don’t know what I should do? You are facing a trade-off!!! 7/19/2022 6

7. Bollywood understands trade-off “ Kabhi kabhi jeetne keliye kuch haarna padta hai ” (Remember SRK in Baazigar !!!) Grades versus Satisfaction in the previous example as time is a scarce resource Agents are required to give up something in order to get something else as resources are scarce Trade-off is commonly expressed in terms of opportunity cost Implications of Scarcity – Trade-off 7/19/2022 7

8. Opportunity cost of a decision is the value of the next best alternative foregone Opportunity cost of watching the movie is the ‘value’ of the grades forgone The opportunity cost of choosing to attend college/university are the lost wages/salaries that would have been earned for the duration of the program Reflect on the following statement “Compute the cost of your decision to pursue college/university education”   Implications of Scarcity – Opportunity Cost 7/19/2022 8

9. Scarce resources – efficient use needed What is efficiency? Most effective use of society’s resources in satisfying people’s wants and needs No Shortage No Excess Highest quantity and quality of goods and services given technology and resources “ An economy is producing efficiently when no individual’s economic welfare can be improved unless someone else is made worse off ” Implications of Scarcity – Efficiency 7/19/2022 9

10. Production Possibility Frontier (PPF) Curve showing the maximum possible combinations of two goods that can be produced with the given amount of resources (inputs) and technology Application of Efficiency and Opportunity Cost - PPF 7/19/2022 10

11. PPF shows all efficient combinations of outputs Points A-F: Efficient Points Point U: Inefficient Point I : Infeasible PPF is downward sloping – efficient combination and scarce resources PPF is concave – slope increases as the level of production of food increases Application of Efficiency and Opportunity Cost - PPF M arginal rate of transformation (MRT) – Slope of PPF – Amount of a good that must be foregone in order to create one unit of another good – Opportunity cost 7/19/2022 11

12. “Study of how the societies allocates scarce resources to produce valuable good and services and distribute them among the different sections of the society” Economics: Formally Allocation Production Distribution Functions of Economics What to Produce? How to Produce? For Whom to Produce? Central Questions of Economics 7/19/2022 12

13. What to Produce? Pizza or Dosa or Shirts or Jeans or … High quality shirts or cheap quality shirts? Capital Goods or Consumption Goods “What to produce and in what quantity?” How to Produce? Who farms and who teaches? Should electricity be generated from coal, oil or renewable resources? Will factories be run by humans or by robots? “Who will do the production, with what resources and what production techniques?” For Whom to Produce? Poor or Rich Males or Females Adults or Children “Who gets to eat the fruit of economic activity?” Central Questions of Economics 7/19/2022 13

14. “Study of how the societies allocates scarce resources to produce valuable good and services and distribute them among the different sections of the society” Economics: Revisited Allocation Production Distribution What to Produce? How to Produce? For Whom to Produce? 7/19/2022 14

15. Types of Economic Systems Who Answers the Central Questions? Market Command Mixed Major decisions regarding production and consumption are taken by individuals and firms Major decisions regarding production and distribution are taken by Government Combination of Market and Command 7/19/2022 15

16. China, Cuba, North Korea, … Government plays a central role in making economic decisions Owns most of the means of production (land, labor and capital) and decides on how these should be used Own and directs the operations of enterprises in most the industries Command Economy 7/19/2022 16

17. Market is a mechanism through which buyers and sellers interact to determine prices and exchange goods and services Governed by price mechanism System where the forces of demand and supply determine the prices of goods and services Prices serve as signal If consumers demand more, price rises signaling the producer that more quantity is required. Prices coordinate decisions of consumers and producers Extreme form of market economy – government keeps its hands off economic decision – is called laissez-faire Market Economy 7/19/2022 17

18. Market Economy: Market Mechanism 7/19/2022 18

19. “ Every individual… neither intends to promote the public interest, nor knows how much he is promoting it… he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention ” Adam Smith (1783), The Wealth of Nations, Book IV, Chapter II Market Economy: Invisible Hand Principle 7/19/2022 19

20. Central Questions and Economic Systems Command Economy Market Economy What to produce? Government based on their assessment of resources and what the people should consume If the government feels that certain commodities should be consumed, then those would be produced Consumers and Producers decide Consumers want to maximize satisfaction Producers want to maximize profits – maximize revenue given cost ‘$’ vote How to produce? Government decides the input mix In case of excess labor, labor intensive techniques will be used Producers decide Input mix that will maximize profit by minimizing cost given revenues For whom to produce? Government decides who should get the goods and in what quantity Rationing Depends on supply and demand in factor market and factor incomes received Factor incomes determine who and how much will be consumed 7/19/2022 20

21. Command Economy Advantages Disadvantages Inequality may be low as government has control of the resources and factor incomes Promote low unemployment level Production is not profit driven and commodities essential societal welfare would be produced without regard to profits or losses Preferences of central planner may not be the same as that of people and may lead to resources being channelized in the wrong sectors Lack of competition may inhibit innovations which is essential for economic progress Bureaucracy and red- tapism creates inefficiencies in the economy 7/19/2022 21

22. Market Economy Advantages Disadvantages Brings about efficiency as competition forces firms to utilize resources optimally Increased productivity as factor inputs are motivated by performance-linked incentives Increased innovation as firms need to find ways to remain competitive Failure of Market Economy Inefficiencies Monopoly Externalities Public Goods Inequity Macroeconomic Issues Business Cycles Slow Economic Growth 7/19/2022 22

23. Market Economy: Market Failure and Government Interventions 7/19/2022 23

24. Command and Market Economies have limitations Economy organized with some free market elements and some command economy elements Maintain private ownership and control of most of the means of production, but often under government regulations Socialize select industries that are deemed essential or that produce public goods Mixed Economy 7/19/2022 24

25. Branches of Economic Analysis Positive Economics Normative Economics Describes facts of an economy Can be resolved by reference to analysis and empirical evidence Deals with ‘what is’ Questions/Statements like Why do doctors earn more than janitors? Do high interest rates lower inflation? Involves value judgements, ethics precepts and norms of fairness No right or wrong answer Deals with ‘what ought to be’ Questions/Statements like Should doctors earn more than janitors? Should unemployment be raised to reduce inflation? 7/19/2022 25

26. Post Hoc Fallacy “The post hoc fallacy occurs when we assume that, because one event occurred before another event, the first event caused the second event” Failure to hold other things constant Can lead to incorrect inference about a policy Fallacy of Composition “ When you assume that what is true for the part is also true for the whole, you are committing the fallacy of composition” Logic of Economics 7/19/2022 26

27. Managerial Economics 7/19/2022 27

28. The application of economic theory and the tools of decision science to examine how an organization can achieve its aims or objectives most efficiently. applications of economic theory quantitative methods statistical methods computational methods Managerial Economics 7/19/2022 28

29. Evaluating managerial policies Timely evaluation of policies which yield no return or are not important in altering market conditions and ensuring that policies do not pose obstacles in business decision-making and operational aspects Advantageous in business organization Beneficial in organizing and managing the tasks, events related to the smooth functioning of business Helps in taking the accurate decisions related to the business organization Recognizes the economic strength and weakness Defines the advantages and pitfalls of the business economy By exercising managerial economics the business managers can be sure of the effects of certain activities for growth of business Importance of Managerial Economics 7/19/2022 29

30. Computing the economic relationship Relationship among factors viz. income, profit, acquisitions, loss, demand elasticity etc. are estimated with the help of managerial economics Makes business planning much easier Helps in planning to achieve rewarding results and operations Business planning plays an important role in connecting the tools of production and systems of operation Helps in managing the cost Helps in deciding the correct and appropriate way for operating a business and controlling costs Importance of Managerial Economics 7/19/2022 30

31. Systemization of business activities Several business activities need to be coordinated and managed in a systematic manner Resolves problem related to business taxation Giant problem solving tool in various types of issues related to taxation in the business. Helps in computing firm’s efficiency Helps business managers to measure the ability and efficiency of the firm Importance of Managerial Economics 7/19/2022 31

32. Nature of Managerial Economics 7/19/2022 32

33. Microeconomics Study of the economic behavior of individual decision-making units. Relevance to Managerial Economics. Macroeconomics Study of the total or aggregate level of output, income, employment, consumption, investment, and prices for the economy viewed as a whole . Economic Theory 7/19/2022 33

34. Economic Models Abstract from details Focus on most important determinants of economic behavior – cause and effect Evaluating Economic Models A model is accepted if it predicts accurately and if the predictions follow logically from the assumptions. Economic Methodology 7/19/2022 34

35. Mathematical Economics Expresses and analyzes economic models using the tools of mathematics. Econometrics Employs statistical methods to estimate and test economic models using empirical data. Decision Sciences 7/19/2022 35

36. Basic Process of Decision Making 7/19/2022 36

37. Globalization of Economic Activity Goods and Services Capital Technology Skilled Labor Technological Change Telecommunications Advances The Internet and the World Wide Web The Changing Environment of Managerial Economics 7/19/2022 37

38. Managerial Economics: Meanings, Scope, Techniques, etc. https://www.yourarticlelibrary.com/managerial-economics/managerial-economics-meaning-scope-techniques-other-details/24730 7/19/2022 38 Further reading