Economics

1. Economics Rajesh Panda Associate Professor, SIBM, Pune. rajeshpanda@sibm.edu rajeshpanda.80@gmail.com

2. Various facets • Microeconomics • Macroeconomics • Managerial Economics

3. Key Concepts • Growth • Development • GDP • GNP • Inflation and deflation • Import and export • Exchange value and PPP • Capitalism and communism • Planning vs. execution • Political economy • Economics for managers • Changing Global Economic scenario

4. Economics definitions • Adam Smith • Economics enquires into the factors that determine wealth of the country • Marshall • Economics is the study of mankind in the ordinary business of life • Robbins • Economics is the science of scarcity • Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternate uses • Unlimited wants, scarce means, Alternative use of means

5. Economics ……..is the study of how scarce resources of a society are used to produce important commodities and distribute them among different people.

6. Subject matter • Economics studies the management of society’s scarce resources. • Management of resources is the central theme of economics because resources are scarce. Hence economics is also called the science of scarcity.

7. Why is Economics important? • To ensure proper allocation of scarce resources. • To ensure cost minimisation. • Improving one’s ability to understand business fluctuations and transactions with clarity.

8. Scarcity • Scarcity is unavailability of a resource or a good in abundance. • On account of limited resources society is unable to produce all the goods and services it wants to.

9. Economics Macro Economics Micro Economics Economic study

10. Micro Economics • Micro economics deals with minute aspects of the economy. • It deals with each economic unit on individual level. • It deals with how individuals and firms make decisions under different situations and how do they interact.

11. Macro Economics • ………….studies economy as a whole • It is a study of various economic variables in general. • It studies economy wide phenomena such as nation’s income, recession, economic growth, inflation, output etc.

12. Statements in Economics……. • We get to see two types of statements in economic theory. • They are: • Positive statements and • Normative statements

13. Positive statements…….. • These statements are also referred to as Positive and Normative economics. • Positive economics explains things, economic problems and variables as they are. • Positive economics explains, ‘what is…’

14. Normative Economics…….. • Normative economics explains how economic variables should be. • Normative economics explains ‘what should be…..’

15. Subject matter of Micro Economics • Micro economics deals with demand . supply and equilibrium in a market. • The forces of demand and supply are at the centre of micro economic theory. • These forces determine price fluctuations relating to any product.

16. Micro economic efficiency • Efficiency in production • Efficiency of distribution • Allocative efficiency

17. Subject matter of Macro Economics • Macro economics deals with issues that are aggregate in nature. • They include: National income – Employment- Inflation etc.. • It also studies the relationships between different aggregates.

18. Microeconomics • Product pricing • Theory of Demand • Theory of production cost • Factor pricing • Wages • Rents • Interest • Profit • Economic welfare

19. Macroeconomics • Income and employment • Consumption function • Investment • General price level and inflation • Economic Growth • Distribution( relative shares of wages and profits)

20. Central Problems of an Economy • What to Produce • How to produce • For Whom to produce • What provision be made for economic growth

21. Central problems are solved: • Market/price Mechanism • Economic Planning

22. Production Possibility Curve • Represents alternate production possibities facing an economy

23. Production Possibilities Frontier Cars Computers

24. Production Possibilities Frontier Cars Computers

25. Production Possibilities Frontier 1000 Cars Computers 3000

26. Production Possibilities Frontier 1000 700 Cars Computers 3000

27. Production Possibilities Frontier 1000 700 Cars Computers 2000 3000

28. Production Possibilities Frontier 1000 A 700 Efficient Resource Use Cars Computers 2000 3000

29. Principles of Economics Illustrated by the Production Possibilities Frontier . . . • Efficiency • Tradeoffs • Opportunity Cost • Economic Growth

30. Production Possibilities Frontier 1000 700 Cars Computers 2000 3000

31. Production Possibilities Frontier 1000 700 Cars Computers 2000 3000

32. Production Possibilities Frontier 1000 700 Cars Computers 2000 3000

33. Production Possibilities Frontier 1000 Tradeoffs 700 Cars Computers 2000 3000

34. Production Possibilities Frontier 1000 Cars Computers 3000

35. Production Possibilities Frontier 1000 Cars Computers 3000

36. Production Possibilities Frontier Growth 1000 Cars Computers 3000

37. Capitalism • Right to private property • Freedom of entreprise • Freedom of choice by customers • Profit Motive • Competition • Price system • Inequalities of income

38. Critical evaluation of capitalism • Free market doesn’t ensure maximum social satisfaction at minimum social cost • Consumer sovereignty may not be valid • Economic instability and unemployment • Doesn’t ensure rapid growth in developing countries • Concentration of wealth and income

39. Capitalism Vs Communism

40. Microeconomics • Product pricing • Theory of Demand • Theory of production cost • Factor pricing • Wages • Rents • Interest • Profit • Economic welfare

41. Theory of Demand • Law of Demand: states the functional relationship between price and quantity demanded • Why does the curve slope downward? • Income effect • Substitution effect • Exceptions • Veblin Effect • Giffin goods

42. Determinants of Demand • Taste and preference of consumers • Income of people • Changes in prices of the related Goods • Complementary goods • Substitutes • The number of consumers in the market • Changes in propensity to consume • Consumption led growth • Savings led growth • Consumer expectation with regard to future price • Income distribution • Marginal propensity to consume for the rich is much lesser than the poor

43. Contraction and extraction in demand • Increase and decrease in demand

44. Demand function • Demand function • Supply function • Equilibrium

45. Demand function • Qd= f ( P, I, p, T, A) • Considering price as the only independent variable • Qd= f ( P ) • Detremine Market demand function • Qa= 40- 2P • Qb= 34- .5p • Qc= 24.5-.3P • Demand function and supply function

46. A market consists of three consumers whose individual demand functions are as follows. • P= 35-.5 Qa • P= 50- .25Qb • P= 40- 2 Qc Find out the market demand function. If the supply function is given by Qs= 40 +.5P, determine the equilibrium quantity and price

47. So what should managers do? • Market share to wallet share

48. Demand : Marshall’s cardinal utility • Utilities are measurable and quantifiable • Law of DMU • The additional benefit a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he already has

49. Draw the graphs for Total utility and Marginal Utility

50. Principles of equi-marginal utility • Consumer will distribute his money income between the goods in such a way that the utility derived from the last rupee spent on each good is equal • Marginal utility of money expenditure= marginal utility of the product/price