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Economic Way of Thinking

Economic Way of Thinking. Anjan Chakrabarti. Introduction. Wants: What people would like to buy if their resources are unlimited. Scarcity: A scenario is which the elements of producing the things that people desire are insufficient to satisfy all of their wants. Four points:

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Economic Way of Thinking

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  1. Economic Way of Thinking AnjanChakrabarti

  2. Introduction • Wants: What people would like to buy if their resources are unlimited. • Scarcity: A scenario is which the elements of producing the things that people desire are insufficient to satisfy all of their wants. Four points: • Scarcity is human and not a natural phenomenon. • Scarcity is always contextual. • Scarcity is not the same as shortage. • Scarcity is not the same thing as poverty.

  3. Economics goods… Scarcity…Choice…Trade off. Economics: social science that studies the choices decision units make in the face of scarcity of resources to satisfy their unlimited wants. Microeconomics: study the choice problem of individual units (no matter how large) – such as household, business firm and government – in the event of scarcity blocking their unlimited wants.

  4. Macroeconomics: study the behavior of the entire economy (no matter how small) focusing on aggregates such as inflation (increasing in the price level), unemployment and economic growth (increase in gross domestic product). • question of largeness and smallness • microfoundation of macroeconomics •  Aggregation: combination of many different elements into a single entity. This single entity is an abstract concept. Fundamental Questions in Microeconomics •  What goods and services to produce? • How these goods and services will be produced? • Who will produce those goods and services? • How the goods and services that are produced will be distributed?

  5. What goods and services to produce? • Resources/Factors of Production • Resources: Instruments produced by human beings or given by nature that are then used in making goods and services that human being wants. • Labor: Contribution to production made by people working with their muscles and minds. • Capital: Means of production that are created by people. This includes machines, buildings, and even computers. • Natural Resources: Elements that can be used in their natural state. This includes land, mineral deposits and forests. • Factors of production: Inputs of labor, capital and natural resources that are used in making all goods and services that human being wants.

  6. Entrepreneurship refers to the process of overcoming and extending those constraints by making use of new ways of doing things, being sensitive to new opportunities and possibilities, and overcoming old habits. Opportunity Cost: The highest value, next-best alternative that must be foregone (sacrificed) in order to pursue or attain one attain one activity with the same resource or time.

  7. How these goods and services will be produced? • Economic Efficiency: It reflects a state of affairs where it is impossible to bring any change in a situation that will make state A (state A may be a person or any other entity) better off without making state B to be worse off. • Distributive Efficiency • Production Efficiency: A situation where, given technology and productive resources, it is not possible to produce more of one good without sacrificing the opportunity to produce some of another good. • Problem: wastage of scarce resources • Production Possibility frontier Principle of increasing returns: As more and more of a good is produced, the opportunity cost of producing another unit of that increases, that is, more and more of the other goods have to be sacrificed in the process.

  8. How will goods and services be produced? Division of Labor: Cooperation •   Team Work • Learning by doing • Comparative Advantage Comparative Advantage: It signifies the capability to produce a good and service at a relatively lower opportunity cost than someone else does. Absolute Advantage: It signifies the ability to produce a good and service at an “absolutely” lower cost measured in either units of labor or resource unit required to produce a good.   Ram: 10 min to scrub and 5 min to paint Shyam: 5 min to scrub and 1 min to paint • Independent • Shyam scrubs and Ram paints iii. Ram scrubs while Shyam scrubs and paints

  9. How will the goods be distributed? • Distributive efficiency • Justice Normative and Positive Economics • Positive Economics: Economic analysis concerned with facts and the relations between them. ‘What is’ • Normative Economics: Economic analysis based on value judgment regarding the good or bad state of economic policies or economic conditions. ‘What ought to be’

  10. Coordinating the Choices • Spontaneous order: A form of coordination where individual acts independent of one another, without any exogenously given direction or directive, in response to a set of information and incentives prevailing in their immediate environment. • Hierarchical order: A form of coordination where the actions of individuals follow the directive of another, centralized party such as government, firm management, teachers, etc.

  11. THANK YOU

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