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1 economics intro

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  • 1. Economics An introduction
  • 2. Economic activity
  • 3.  
  • 4.  
  • 5.  
  • 6.  
  • 7.  
  • 8. Why study economics
    • Why the world is what it is…..
    • Soviet Union collapsed …. setting countries throughout Eastern Europe and Asia free
    • The nations of Latin America are struggling with progress and development
    • General Motors loses $4 billion and millions of workers worry that their jobs and pension plans
    • Housing bubble burst in USA and thousands in India lose their jobs
  • 9. A true story
    • Spring 1996 – 19yr college sophomore, who had just finished taking introductory economics, was faced with a choice – to continue college education or to devote time to a job.
    • The job – become a professional golfer on the Pro Tour
    • Choice had to be made – time was scarce
    • Completing college had a great cost –
      • Two years of college expenses
      • Forgone tournament winnings
      • Advertising endorsements
    • The golfer made a choice – he became a pro.
  • 10.
    • Fall of 1996 – selected Sprotsman of the Year by Sports Illustrated
    • 1997 – record setting win of Masters Tournament
    • First player to hold all four major professional championships at the same time
    • 2005 – earned over $50 million in prizes worldwide + advertising & endorsements
  • 11. The central idea
    • People make purposeful choices with scarce resources and interact with other people when they make these choices.
    • Economics is the study of how people deal with scarcity .
    • It is the study of how scarce resources are allocated among unlimited wants.
  • 12.
    • Scarcity
    • The shortage that exists when less of something is available than is wanted at a zero price.
    • Choice
    • A selection among alternative goods, services or actions.
  • 13. Lord Lionel Robbins
    • 1898 – 1984
    • “ An Essay on the Nature and Significance of Economic Science ” (1932)
  • 14.
    • Economics is a Science which studies human behaviour as a relationship between ends and scarce means, which have alternative uses.
            • Lord Robbins
  • 15.
    • “ Economics is a social science which deals with human behaviour pertaining to production, exchange and consumption of goods and services (wealth)”
    Classical view
  • 16. Adam Smith
    • Scottish Economist and Philosopher
    • 1723 - 1790
    • “ Virtue is more to be feared than vice, because its excesses are not subject to the regulation of conscience.”
    • He became famous for his influential book " The Wealth of Nations " written in 1776 and launched the economic doctrine of free enterprise.
  • 17.
    • Economics is the study of the nature and causes of national wealth.
    • Adam Smith
  • 18. Alfred Marshall
    • 1842 – 1924
    • Professor of Political Economy at the University of Cambridge from 1884-1908
    • Founder of the Cambridge School of Economics
    • A.C. Pigou and J.M. Keynes were among his pupils.
    • Principles of Economics was his magnum opus and the most influential treatise of its era.
  • 19.
    • Economics is a study of man’s actions in the ordinary business of life; it enquires how he gets his income and how he uses it. Thus, it on the one side a study of wealth and on the other, and more important side, a part of the study of man.
    • Alfred Marshall
  • 20.
    • E conomics is a social science that seeks to understand how different societies allocate scarce resources to meet the unlimited wants and needs of its members
    Neoclassical
  • 21. Rational self-interest
    • People make choices that give them the greatest satisfaction given the information at that time
    • Measure and compare the costs and benefits of a decision
    • Individual’s perception of his/her best interest
  • 22. Some Recent Definitions
    • The study of how in a civilized society one obtains the share of what other people have produced and of how the total product of a society changes and is determined.
    • Henry Smith
  • 23.
    • Economics is what economists do.
    • Jacob Viner
  • 24. Cateris paribus
    • “ with other things (being) the same” or
    • “ all other things being equal”
    • Assumption applied to all economic analysis where causal relationship between two variables can be studied
  • 25. The economic approach
    • Positive and Normative Analysis
    • Positive – analysis of what is – analysis that does not impose the value judgments of one individual on the decision of others
    • Normative – analysis of what ought to be
  • 26. Central Problems of an Economy
    • What to produce
    • How to produce
    • For Whom to produce
    • What provision (if any) be made for economic growth.
  • 27. Micro & Macro
    • In the 1930s Ragnar Frisch classified economics into two branches.
    • The terms are derived from the Greek terms micros and macros , meaning small and large respectively.
  • 28. Microeconomics
    • Micro means a millionth part.
    • It deals with a small part or a small component of the national economy.
    • Studies economic actions of individual units and small groups like particular households , individual prices, wages , income , individual industry, particular commodities .
  • 29. Macroeconomics
    • Studies the economy as a whole and its large aggregates, such as total national output and income, total employment, total consumption, aggregate investment .
  • 30. John Maynard Keynes
    • 1883 – 1946
    • He revolutionized economics with his classic book, The General Theory of Employment, Interest and Money (1936). 
    • Probably the most influential social science treatise of the 20th Century.
    • It quickly and permanently changed the way the world looked at the economy and the role of government in society.
  • 31. Theory of Aggregation
    • Macro is the sum of micro
  • 32.
    • If an individual salary goes up, he is happy; if salaries of all go up proportionately, no one is happy.
    Fallacy of Composition
  • 33.
    • Increased savings by everyone may lead to decrease in total savings
    • Paradox of Thrift
  • 34. Kenneth E. Boulding
    • 1910 – 1993
    • 1944 – produced a paper on liquidity preference
    • 1950 – “ Reconstruction of Economics ” on stock-flow distinction.
  • 35.
    • Forest, though an aggregation of trees, exhibits characteristics and behaviour patters different from individual trees:
    • An individual tree germinates, grows and decays, but forests go on forever.
    • A tree may not burn easily, but forests often catch fire.
    • An individual tree cannot affect the climate of the vicinity in which it grows, but forests can and do affect the climate.
  • 36. Short-run and Long-run
    • Introduction of time periods in market analysis – Marshall’s contribution
    • Short-run : a time period not enough for consumers and producers to adjust completely to any new situation
    • Long-run : is the ‘planning horizon’ – consumers and producers can adjust to any new situation
  • 37. Opportunity Cost
    • The problem of choice makes it necessary to sacrifice some of the alternatives against the one selected.
    • Opportunity cost is the benefit foregone from the alternative that is not selected.
  • 38. Production Possibility Curve
    • Also called Transformation Curve
    • A graph that shows different combinations of the quantities of the two goods that can be produced (or consumed) in an economy, subject to limited resources.
    • It represents the Opportunity cost concept – if we want to have more of one good, we must have less of another good
    • Also measures the OC – slope of the curve
    • Applicable to an individual (microeconomics) – shows options of production or consumption
    • Used in macroeconomics – shows the production possibilities of a nation or economy as a whole.
  • 39. PPC for individual
    • Different combinations of 2 goods given
      • Resources (income)
      • Prices
    • AB – PPC of individual
    • F- food, C – clothing
    • Pt. P => Fp of food and Cp of clothing
    • More of clothing with same income => move to pt. Q
    • Any pt. to the right of AB, e.g. M is unattainable => income constraint
    • Any pt. below AB, e.g. N is undesirable => violation of rationality
    A B F p F q O C p C q P Q N M
  • 40. PPC for society
    • Assumptions:
      • Economy is operating at full employment
      • Factors of production are fixed in supply; they can however be reallocated among different uses
      • Technology remains the same
    • Economy must sacrifice some units of one product to obtain more units of another => trade-off
    • “ Substitution is the law of life in a full-employment economy. The PPC or frontier depicts the society’s menu of choices ” - Samuelson
  • 41.
    • Slopes downward – shows maximum feasible amount that can be produced given the factors of production and technology
    • It is concave to the origin – OC increases as more of one good is produced instead of another – shift specialised factors from food to clothing – cost will increase
    Food Clothing F p F q O C p C q Infeasible area Productively inefficient area P Q
  • 42. Types of Macroeconomics
    • Macrostatics
    • Comparative Macrostatics
    • Macrodynamics
  • 43. Macrostatics
    • Method to explain certain aggregative relations in a stationary state.
    • Does not explain the process by which the national economy reaches the final equilibrium. Deals with the final equilibrium at a particular point of time.
    • Provides a series of ‘still pictures’ at a point of time.
  • 44. Example
    • Y = C + I
    • (Y = total income, C = total consumption,
    • I = total investment)
    • Equation merely explains that Income is equal to aggregate Consumption and Investment
    • Does not throw light on the process by which the equality is reached.
  • 45. Comparative Macrostatics
    • Macro variables change with time
    • Economy reaches new level of equilibriums.
    • This method involves a comparative study of different equilibrium achieved
    • Does not detail the process by which economy moves from one equilibrium to another.
  • 46. Macrodynamics
    • Developed by Frisch, Hicks, Kalecki, Tinbergen and Samuelson.
    • Studies how the equilibrium is reached consequent upon changes in macro variables and aggregates.
    • Presents a full picture of all the developments taking place in the transitional period.
  • 47. Indian Economy
    • Per Capita Income (2004): Ranges from a low of US $ 90 for Burundi to a high of US $ 52,030 for Norway. India US $ 620; USA $ 41,400.
    • Ranges from Rs. 3557 in Bihar to Rs.33,047 for Chandigarh. India: Rs.11,799 (2003-04 at 93-94 prices)
    • Growth rate of real income: 1990-2001
    • – 3.7% Russian Federation, 10% China, India 5.9% (2005-06) (World average of 2.7%)
    • People Below poverty line: 2% Republic of Korea, 43% in Nigeria; India 28.6%
    • External Debt/GDP ratio: Sri Lanka 50%; India 20%