Lecture on some Basic economic principles

1. LECTURE – 2
BASICS OF ECONOMICS

2. • This lecture will essentially introduce you to a few basic economic concepts to give
you a taste of the subject – which may also be handy while getting into finance.

3. What is economics?
Essentially a subject which deals with production, consumption and
management of wealth and resources.
One of its basic principles is that someone’s gain is someone else’s loss.

4. Some economic terminologies
Demand
• Demand –The willingness and ability to buy something at a particular price
and time.
• Law of Demand – Keeping everything else constant, price and demand share
an inverse relationship.
However, sometimes it gets violated – like in the case of Gold – you’d have
observed that as gold prices rise people buy more and more of it because they
expect the rise of price even further.

5. A demand curve

6. Supply
The willingness and ability to sell something at a particular price and time.
• Law of Supply - Keeping everything else constant, price and supply share a
direct relationship.
This too, sometimes gets violated – like in the case of agricultural goods,
where without proper storage facility, the goods will go stale so they’ll have to
be sold before they go stale.
A supply curve.

7. Other terms
• Scarcity – A condition when demand exceeds supply. Scarcity is the whole
reason behind trade. A product or a share in the stock market has a price
because there is only limited quantity of it.
• Opportunity cost –The cost of the next best alternative that is forgone to buy
a product. Example –The opportunity cost of buying shares worth X is
probably Government bonds worth X.
• Equilibrium – A condition in which trade/business is feasible. Here, the
producer and consumer agree to a price and desired quantity to be
bought/sold. When this happens, the producer gets the money and the
consumer gets the good.This is termed as a business transaction.

8. Equilibrium –When demand meets supply

9. But how does producer guess the price at
which he/she should sell the good?
• Here , a concept called price elasticity of demand is used.
• Basically, it shows how consumer demand responds to changes in price.
-> If demand does not change much with change in price, it is inelastic
-> If demand changes to a decent extent with change in price, it is elastic .Thus
the producer varies the price accordingly.

10. Income and Revenue
• Income – What is earned as a result of labour/efforts.
• Disposable Income – Income which you are free to spend after deducting tax
and other liabilities like EMI.
• Another source of income is dividends – which is a return earned when money
is invested in stocks. Companies as per their choice can declare dividend when
it earns profit
• Revenue – Money earned from sales of a product. When cesses like corporate
tax, property tax etc is removed then it is called income of a firm
In foreign countries, revenue is also called turnover.
Profit – the excess of revenue over costs incurred.

11. So…what’s really happening out there?

12. Controllers of money flow in an economy
• The Central Bank(RBI in India)
• The Government (Through finance ministry)

13. Role of RBI
->The major role of RBI is to mint currency notes and coins as per its wish.
-> Other than that its role is to control inflation rates.
Inflation is defined as a state of steady rise in prices. – one of its causes being
rise in disposable income. A mild inflation, however, is necessary for growth.
->To curb this, it instructs banks to increase interest rates so that people borrow
less – hence disposable income falls and inflation starts getting under control.
RBI adjusts interest rates in terms of basis points – 1/100 of a percent.
-> RBI also helps banks save themselves during financial turmoil so that the
banking system does not crash.

14. Basic types of market structures
• Perfect competition – One in which there are large number of buyers and
sellers, uniform price and no advertising costs. Firm is price taker.
• Monopoly – Single seller , who is the price maker. Can be regulated by Govt.
Indian Railways is one example of a Govt. monopoly
Monopolistic competition – Large number of buyers and sellers, product
differentiation and huge advertising cost.This type of market is what is
realistically seen.