Ten Principles of Economics and Concept of Demand and Supply by Prof. K K Krishnan, Area Head – Insurance and Business Management (PGDM-IBM), BIMTECH, Greater Noida

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Ten Principles of Economics and
Concept of Demand and Supply
Prof. K. K. Krishnan
Area Head – Insurance and Business
Management (PGDM-IBM)
BIMTECH, Greater Noida, India

2. Can You Connect?
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3. Economics – Immersion Programme
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Contents
 What is Economics?
 The Ten Principles of Economics
 Concept of Demand and Supply
 Concepts of Business, Firm, Market & Competition
 Circular Flow of Income & GDP
 Monetary & Fiscal Policy

4. Economics
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One of the most popular definitions of economics (L. Robbins)
 “Economics is a science which studies human behavior as a
relationship between ends and scarce means which have
alternative uses”.
 Economics
 Study of how society manages its scarce resources

5. The gamut of issues addressed by economics is traditionally
classified into the following three categories of questions:
•What to produce?
•How to produce?
•How to distribute?
Economics (Cont’d)
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6. Economics (Cont’d)
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Economics is concerned with
 Land
 Labour
 Capital
 Enterpreneurship

7. Economics (Cont’d)
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Areas of Study
 Micro Economics
 Macro Economics

8. Ten Principles
Principle 1: People face trade-offs
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-Individual student
 Job vs. Education
 Society
 Clean environment vs. high level of income

9. Principle 2: The cost of something is what you
give up to get it
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 People face trade-offs
 Opportunity cost
 Whatever must be given up to obtain one item
 Known as the decision making cost

10. Principle 3: Rational people think at the margin
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 Rational people
 do the best they can to achieve their objectives
 Rational people take action only if
marginal benefits/advantage > marginal costs

11. Principle 4: People Respond to Incentives
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Incentive
 Something that induces a person to act
 Higher price
 Buyers - buy less
 Sellers - sell more
 Public policy
 Changes people’s behaviour

12. People Respond to Incentives (Cont’d)
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Increased incentive to conserve gas
 Smaller cars, scooters, bicycles, mass transit
 New, more fuel-efficient aircraft

13. Principle 5: Trade can make everyone better
off
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Trade
 Allows each person to specialize in the activities he or she does
best
 Enjoy a greater variety of goods and services at lower cost

14. Principle 6: Markets are usually a good way to
organize economic activity
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Communist countries –
 Central Planning: Government officials (central planners) make all
decisions
Market economy –
 Allocates resources through decentralized decisions of many
firms and households as they interact in markets for goods and
services
 Guided by price mechanism
Immersion Bimtech Eco

15. Principle 7: Governments can sometimes
improve market outcomes
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We need governments to-
 Enforce rules and maintain institutions
 Promote efficiency
 Promote equality

16. Principle 8: A country’s standard of living depends on its ability to
produce goods and services
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Large differences in living standards
 among countries
 over time
are explained by differences in productivity

17. Principle 9: Prices rise when the Government
prints too much money
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Inflation
 An increase in the general level of prices in the economy
Causes for large / persistent inflation
 Growth in quantity of money
 Structural imbalances

18. Principle 10: Society faces a short-run trade-
off between inflation and unemployment
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 Inflation  Unemployment

19. Concept of Demand & Supply
• Demand
• Quantity Demanded refers to the amount (quantity) of a good
that buyers are willing & able to purchase at alternative prices
for a given period.
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20. The Market Forces of Supply and Demand
• Supply and Demand are terms that economists use most often.
• Supply and Demand are the forces that make market economies
work!
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21. Determinants of Demand
What factors determine how much ice cream you will buy?
1) Product’s Own Price
2) Consumer Income
3) Prices of Related Goods
4) Tastes
5) Expectations
6) Number of Consumers
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22. 1)Price Law of Demand
Law of Demand
 The law of demand states that, other things equal, the
quantity demanded of a good falls when the price of the
good rises.
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23. 2) Income
• As income increases the demand for a normal good will
increase.
• As income increases the demand for an inferior good will
decrease.
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24. 3) Prices of Related Goods
Prices of Related Goods
 When a fall in the price of one good reduces the demand
for another good, the two goods are called substitutes.
 When a fall in the price of one good increases the demand
for another good, the two goods are called complements.
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25. 4) Others
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• Tastes
• Expectations

26. The Demand Schedule and the Demand Curve
▪ The demand schedule
✓ shows the relationship between the price of the good and the
quantity demanded.
▪ The demand curve
✓ graph of the relationship between the price of a good and the
quantity demanded.
Ceteris Paribus: “Other thing being equal”
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27. Supply
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• Quantity Supplied refers to the amount (quantity) of a good that
sellers are willing to make available for sale at alternative prices
for a given period.

28. Determinants of Supply
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What factors determine how much ice cream you are willing to offer
or produce?
1) Product’s Own Price
2) Input prices
3) Technology
4) Expectations
5) Number of sellers

29. Price - Law of supply
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Law of Supply
 The law of supply states that, other things equal, the
quantity supplied of a good rises when the price of the
good rises.

30. The Supply Schedule and the Supply Curve
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▪ The supply schedule
✓ shows the relationship between the price of the good and the
quantity supplied.
▪ The supply curve
✓ graph of the relationship between the price of a good and the
quantity supplied.

31. Supply and Demand Together
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 Equilibrium refers to a situation in which the price has reached
the level where quantity supplied equals quantity demanded.

32. Equilibrium
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 Equilibrium Price
 The price that equates quantity supplied and quantity
demanded.
 it is the price at which the supply and demand curves
intersect.
 Equilibrium Quantity
 The quantity supplied and the quantity demanded at the
equilibrium price.
 it is the quantity at which the supply and demand curves
intersect.

33. Demand Schedule & Demand Curve
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34. Market Demand
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35. Supply Schedule and Supply Curve
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36. Market Supply as the Sum of Individual
Supplies
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37. The Equilibrium of Supply & Demand
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 Concept of Business, Firm, Market &
Competition

39. Concepts of Business, Firm, Market…
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 Business as a system is a combination of business, commerce,
occupations, and organizations that produces and distributes the
goods and services that create value for people in a society
 Firms (combine and organize resources with the objective to
maximize wealth or value of the Firm)
 Produce goods and services
 Use factors of production / inputs
 Households
 Own factors of production
 Consume goods and services

40. Markets and Competition
• A market is a group of buyers and sellers of a particular good or
service.
 Buyers determine demand...
 Sellers determine supply…
• The terms supply and demand refer to the behavior of people. .
.. . .as they interact with one another in markets.
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41. Competitive Markets
• A Competitive Market is a market with large no. of buyers and
sellers so that each has a negligible impact on the market price.
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42. Competition: Perfect or Otherwise
▪ Perfectly Competitive:
▪ Homogeneous Products
▪ Buyers and Sellers are Price Takers
▪ Monopoly:
▪ One Seller, controls price
▪ Oligopoly:
▪ Few Sellers, not aggressive competition
▪ Monopolistic Competition:
▪ Many Sellers, differentiated products
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43. National Income Concepts & GDP
Basic National Income Concepts
&
Circular Flow of Income (GDP)
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44. The Circular-Flow Diagram
Firms
Households
Market for
Factors
of Production
Market for
Goods
and Services
SpendingRevenue
Wages, rent, and
profit
Income
Goods &
Services sold
Goods &
Services bought
Labor, land, and
capital
Inputs for
production
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45. Income and Expenditure: Fundamental
Equality
Income must equal expenditure for an economy as a whole.
 Every transaction has a buyer and a seller.
 Every rupee of spending by some buyer is a rupee of income for
some seller.
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46. Gross Domestic Product(GDP)
To measure the output of any economy, GDP is the most
comprehensive estimate
GDP is a measure of the total income and total expenditure of an
economy.
GDP is the total market value of all final goods and services produced
within a country in a given period of time.
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47. Gross Domestic Product (Cont’d)
 Economic Growth is judged by the growth in GDP. It is the
percent rate of increase in real GDP
 Economic Growth can also be judged by growth of the ratio of
GDP to population (GDP per capita)
 Economic Growth is also estimated by the increase in the
productive capacity of the economy.
 Economic growth is used to make economic welfare comparisons &
Business cycle forecasts
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48. What to include and exclude in GDP
 GDP excludes production that takes place in the underground
economy or that does not pass through markets.
 It excludes services of housewives, work done by self etc
 It also excludes events such as damage done to environment etc.
 Excludes smuggled items and illegal drugs etc.
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49. Gross Domestic Product: Real vs Nominal and
Real GDP
 There are two variants in GDP: Nominal and Real
 Nominal GDP adjusted for inflation, gives real GDP
 Nominal GDP:
Value of total output of goods and services at current prices
 Real GDP:
Value of total output(production)of goods and services at constant
prices.
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50. More Measures of Income
 Gross National Product (GNP)
 GNP is the total value of all final goods and services produced
within a nation in a particular year, plus income earned by its
citizens (including income of those located abroad), minus
income of non-residents located in that country.
 GNP is a measure of a country's economic performance, or what
its citizens produced (i.e. goods and services) and whether they
produced these items within its borders.
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51. More Measures of Income (Cont’d)
 Personal Income(PI)
 Personal Income is the sum of all the income actually received
by all the individuals or household during a given period
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52. More Measures of Income (Cont’d)
 Personal Disposable Income(PI)
 Personal Disposable Income is the amount of personal income
an individual has after deducting for taxes and adding transfers
from the Government
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53. Goals of Macroeconomic Policy Making
 Rapid Economic Growth
 Full Employment
 Low Inflation Levels
 Reduction of Income Inequality
 Steady foreign exchange position
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54. Savings and Investment
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 Personal Savings is the amount of income that households have left
after paying their taxes and for their consumption.
 Investment spending is the sum of purchases of capital equipment,
inventories and purchase of new housing.
 National Savings & National Investment
 Capital Formation

55. What is Inflation?
 Inflation can be defined as a rise in the general price level of goods
and services and thus a fall in the purchasing power of money.
 Inflation is nothing but more than a sharp upward rise in price level.
 Too much money chasing too few goods.
 In most countries The Central Bank is tasked to control inflation along
with government.
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56. Impact of Inflation
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 High and persistent inflation imposes significant socio-economic
costs.
 High inflation distorts economic incentives by diverting resources
away from productive investment to speculative activities.
 Inflation reduces households saving as they try to maintain the real
value of their consumption.
 If domestic inflation remains persistently higher than those of the
trading partners, it affects external competitiveness.

57. Types of Inflation
 Demand Pull Inflation
 Cost Push Inflation
 Demand Pull inflation occurs when there is an increase in aggregate
demand categorised by the four sections of the economy ie household,
businesses, government and foreign buyers
 Cost push inflation is caused by substantial increase in the cost of
important goods or services ie it is supply side inflation
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58. How is Inflation Calculated?
 There are two methods to calculate inflation –
 1. Wholesale Price Index (WPI)
 2. Consumer Price Index (CPI)
 Wholesale Price Index (WPI) :
 WPI is the index that is used to measure the change in the average price
level of goods traded in wholesale market
 CPI is the measure estimating the average price of consumer goods and
services purchased by households.
 Most developed countries (UK, US, JAPAN and CHINA) use the
Consumer Price Index (CPI) to calculate inflation
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59. Unemployment
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 Unemployed includes those who are not employed and were available for work, and had
tried to find employment during the previous 4 weeks.
 Frictional unemployment
 Normal turnover in labor market
 Temporarily between jobs
 Moving / changing occupations
 Structural unemployment
 Displaced by automation
 Skills - no longer in demand
 Cyclical unemployment
 Decline in economy’s total production
 Rises during recessions
 Unemployment rate is the percentage of the labor force that Is unemployed.

60. Monetary & Fiscal Policy and Financial System
Monetary Policy
 Monetary policy refers to the use of instruments under the control of the
central bank to regulate the availability, cost and use of money and credit.-
Reserve Bank of India
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61. Monetary Policy Objectives
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 Maintaining price stability.
 Ensuring adequate flow of credit to the productive Sectors of the
economy to support economic growth
 Balance of payment equilibrium

62. Fiscal Policy
Meaning
 Fiscal policy deals with the taxation and expenditure decisions of
the government. These include, tax policy, expenditure policy,
investment or disinvestment strategies and debt or surplus
management.
- Kaushik Basu ( Former Chief Economic Adviser )
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63. Fiscal Policy Objectives
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 Increase in capital formation.
 To achieve desirable consumption level.
 To achieve desirable employment level.
 To achieve desirable income distribution.

64. Indian Financial System (F.S.)
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 Banking, insurance, financial institutions (FI), Asset
Management Companies (AMCs), Non – Banking Financial
Companies (NBFCs), Housing Finance Companies (HFCs)
etc.
 Regulators: Reserve Bank of India (RBI), Securities and
Exchange Board of India (SEBI), Insurance Regulatory and
Development Authority of India (IRDAI), Ministry of Corporate
Affairs (MCA), Forward Markets Commission (FMC), Pension
Fund Regulatory and Development Authority of India
(PFRDAI) etc.

65. Latest Important Policy and Other Rates in Indian Banking and
Economy - 2018
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Indicator Current rate
Inflation 3.36%
Bank rate 6.25%
CRR 4%
SLR 19.5%
Repo rate 6.0%
Reverse repo rate 5.75%
Marginal Standing facility rate 6.25%
Rupee Vs Dollar
Rs. 67.96 per $
as on May 29, 2018
Sensex 34959.33 (on May 29 2018)
Nifty 10629.85 (on May 29 2018)
Bond Yield 7.76 (on May 29 2018)

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