economics

2. What are the things that you want most?
What is your order of preference?
 Love?
 Money?
 Security?
 Fame?
 Or, anything else?
Bottom line is: we all make choices about the
things that affect our lives... And while making
choices we use our rational mind.
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3. Therefore….
Our life is about:
 Making choices based on rational analysis
 Our behavior and reactions to the events
that occur around us.
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4. And Economics is about:
Making choices to use
resources for improving our
lives.
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5. Formal Definition of Economics
 The study that attempts to find out ways
through which scarce resources can be
used in the best possible way.
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6. What is the implication of “scarce resource”?
 We have finite ability of production
 If we want to produce more amount of one
good, we shall have to give up production of
another good. In economics we call this
phenomenon OPPORTUNITY COST
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7. Opportunity Cost
7
Rice
(MT)
Wheat
(MT)
10 0
9 5
8 10
7 15
6 20
5 25
4 30
3 35
2 40
1 45
0 50
0
10
20
30
40
50
60
0 2 4 6 8 10 12
Wheat(MT)
Rice (MT)
Production Possibility FrontierOpportunity cost of
producing every 5
units of wheat
1 unit of rice
2 units of rice
3 units of rice
4 units of rice
5 units of rice
6 units of rice
7 units of rice
8 units of rice
9 units of rice
10 units of rice

8. How do we know that we have used our
scarce resources in the best possible way?
 If we can maximize output and/or
 If we can minimize cost and/or
 If we can maximize welfare and/or
 If we can minimize inequality etc.
The best possible way, therefore, depends on the
objective that we have in mind.
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9. Determinants of the Best Use of
Resources
 Example 1: if we want to minimize cost, then we may
consider hiring factors of production from the cheapest
source. Therefore, availability of cheap SUPPLY of factors
of production is important.
 Example 2: if we want to buy something, then how strong is
the temptation for buying it, i.e. our DEMAND for that
thing, is important.
Demand and Supply are the foundation of all
economic analysis.
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10. Why do we call Demand and Supply the
Foundation?
 Because, their interaction determines the EQUILIBRIUM.
In an equilibrium we find a PRICE that satisfies everybody
concerned.
 In economics, we always try to find equilibrium solutions.
 An equilibrium is a state where nothings wants to change,
because change will only provide worse solutions.
 Viewed against time dimension equilibrium can be of two
types- static and dynamic.
 But viewed against the problem focus area, equilibrium can
be divided into another two categories: partial and general.
 When we do not have equilibrium, we have problems… and
we need to solve these problems.
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11. Solving problems…
in the eyes of Economics:
 Positive view: deals with reality and facts.
This view considers only
 What is the problem, and
 How the problem is actually solved in
reality
 Normative view: deals with what “ought
to be” the solution.
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12. Positive vs. Normative Economics
 A firm pollutes the air in the process of producing
output. If we study how much cleaning cost is imposed
on the community by this pollution, then we are
dealing with POSITIVE ECONOMICS.
 As the community leaders tries to force the firm to pay
penalty for the pollution, the firms threatens to close
its business and move away to some other location.
The community faces threat of unemployment. Given
this situation, if we study whether the community
SHOULD allow the firm to continue business or not,
then we are dealing with NORMATIVE ECONOMICS.
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13. When we try to solve problems, we may look at it:
 By dividing the problems in small parts, or
 By considering the whole problem at a time
Example 1: Price of soybean oil is rising rapidly. Why?
If we try to find out why the soybean oil supplier is charging
higher price, we focus on the demand and supply of soybean
oil along with other things.
Example 2: Overall price level of the country is increasing.
This means, inflation is rising. If we try to find out why the
price level is rising, we focus on the aggregate demand and
aggregate supply of all goods/services in the country.
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14. Depending on our problem focus area, Economics
is broadly divided into two categories:
 Microeconomics, and
 Macroeconomics
All other branches of economics have been
derived from these two broad areas.
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15. Microeconomics
 Deals with behavior of individual units of an economic
system
 Focus is principally on price, which is established in an
individual item’s MARKET through supply and
demand for that item
 Equilibrium for individual units is called partial
equilibrium.
 Example: When we perform an economic analysis of
only the readymade garments industry of Bangladesh
it will be a Microeconomic study.
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16. Macroeconomics
 Deals with the behavior of the economy as a whole.
 Focus is principally on aggregate demand and
aggregate supply through which an overall price level
is established for the whole system
 Equilibrium for a whole economic system is called
general equilibrium.
 Example: If we analyze the export performance of
Bangladesh for 2009, it will be a Macroeconomic study.
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17. Essentials for economic analysis
 Common sense
 Knowledge about economic system and
theories
 Mathematical and statistical tools
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18. Economic System
1818
Households Firms
Factor
Markets
Product
Markets
Goods and
services
Goods and
services
($) ($)
Factor Payments ($)
Economic resources
Income
($)
Economic
resources

19. Economic systems around us
 Capitalist system: free market, insignificant
government intervention,
survival of the fittest
 Socialist system: strong government intervention,
government controls market,
government ensures equity and
survival
 Mixed system: Market mostly free but government is
very active ensuring equity and welfare
 Autocratic system: government controls everything
 Islamic Eeonomics System
Which one do you like most? Why?
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20. Always try to relate your knowledge with
real life experiences. That is how we truly
learn economics.
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21. 1. Economics- Paul Samuelson
2. Introduction to Positive Economics- Richard G
Lipsey
3. Managerial Economics- Keat, Young and Banerjee
4. Principles of Macroeconomics- Gregory N Mankiw
5. Macroeconomics- Andrew B Abel and Ben S
Bernanke
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