Introduction to Economics

Topics for Discussion Scarcity and Economics. Macroeconomics and Microeconomics. Resources. Production Possibility Frontier. Basics of Graphs.

Issues in our life: Why the prices of the apartments in the Metros are increasing? Why do professional players make so much money? Will higher taxes on cigarettes reduce the amount people smoke? Why do domestic producers like tariffs (taxes) on imported cars? Why prices of petroleum products are increasing? Why Inflation rate is increasing?

Economy. . . The word economy comes from a Greek word for “one who manages a household.” The study of how society manages its scarce resources.

Economics Wants, desires: unlimited Resources: scarce Economic choice How people use scarce resources to satisfy unlimited wants 5

Macroeconomics And Microeconomics Macroeconomics deals with the aggregate, or total economy. It looks at economic problems as they influence the whole of society, including the topics of inflation, unemployment, business cycles and economic growth.

Macroeconomics and Microeconomics Microeconomics deals with the smaller units within the economy. It attempts to understand the decision making behavior of firms and households and their interaction in markets for particular goods or services. Microeconomics looks at the trees while macroeconomics looks at the forest.

Resources Inputs; factors of production Used to produce goods and services Goods and services are scarce because resources are scarce Labor Capital Natural resources Entrepreneurial ability 8

Resources Labor - human effort Capital - human creations Time Physical effort Mental effort Time Payment: Wage Capital - human creations Physical capital Payment: Interest

Resources Natural resources - Gifts of nature Entrepreneurial ability Renewable Exhaustible Payment: Rent Entrepreneurial ability Talent, idea Risk of operation Payment: Profit

Goods and Services Good: see, feel, touch Service: intangible Scarce good/service The amount people desire exceeds the amount available at a zero price Choice Give up some goods and services

Efficiency and the PPF Production Possibilities Frontier (PPF) Assumptions Output: consumer and capital goods Production: 1 year Fixed resources (quantity, quality) Fixed technology Resources - scarce for the economy Economy’s production options

Efficiency and the PPF PPF Inefficient combinations Possible combinations of Consumer and Capital goods that Can be produced using All resources efficiently Inefficient combinations Unattainable combinations

The Economy’s Production Possibilities Frontier A 10 20 30 34 43 48 50 Consumer goods PPF (AF): Economy uses all resources and technology efficiently Inefficient: inside PPF Unattainable: outside PPF B C U Unattainable D I Inefficient E F 10 50 40 30 20 Capital goods

The Shape of the PPF Movement down along PPF Give up some consumer goods to get more capital goods

What Can Shift the PPF? Economic growth Expansion in the economy’s PPF Changes in resource availability Outward shift of PPF – increase in: Size, health of labor force Skills of labor force Availability of other resources Increases in capital stock More output; outward shift of PPF

What Can Shift the PPF? Technological change Employs resources more efficiently Outward shift of PPF Improvements in the rules of the game Formal and informal institutions Economic growth

Shifts of the economy’s PPF (a) Increase in available resources (b) Decrease in available resources Consumer goods Consumer goods A’ A A A’ Capital goods F F’ Capital goods F’ F Outward shift of PPF – increase in available resources; better technology - enhanced production of both capital and consumer goods (b) Inward shift of PPF – decrease in available resources - decreased production of both capital and consumer goods

Shifts of the economy’s PPF (c) Change in resources that benefits consumer goods (d) Change in resources, technology, or rules that benefits capital goods Consumer goods Consumer goods A’ A A Capital goods F Capital goods F F’

Understanding Graphs in Economics Dr. Alok Kumar Pandey

Understanding Graphs Origin Horizontal axis Vertical axis Graph Functional relation Dependent variable Independent variable

Basics of a graph Point a: - 5 units X - 15 units Y Point b: 10 5 20 y Vertical axis Point b: - 10 units X - 5 units Y a b Origin 20 15 10 5 x Horizontal axis

U.S. Unemployment rate since 1900

Drawing Graphs Dependent variable Types of relations between variables Depends on the independent variable Types of relations between variables Positive; direct Negative; inverse Independent; unrelated

Schedule and Graph relating distance traveled to hours driven per day Distance traveled per day (KM) a b c d e 1 2 3 4 5 50 100 150 200 250

Schedule and Graph relating distance traveled to hours driven 150 100 50 200 Distance traveled per day (KM) 250 a b c d e 4 3 2 1 Hours driven per day 5 Points a through e depict different combinations of hours driven per day and the corresponding distances traveled. Connecting these points graphs a line.

Slopes of Straight Lines Change in vertical variable For a given increase in horizontal variable Slope = Change in the vertical distance/ Increase in the horizontal distance Slope of a straight line The same value along the line

Alternative slopes for straight lines (a) Positive relation (b) Negative relation 10 15 20 y 10 3 20 y Slope = 5/10 = 0.5 5 Slope = - 7 /10 = - 0.7 10 -7 10 x 20 10 x 20 10

Alternative slopes for straight lines (c) No relation: zero slope (d) No relation: infinite slope 10 15 20 y 10 20 y Slope = 10 /0 = ∞ 10 Slope = 0/10 = 0 10 x 20 10 x 10