Introduction to economics

1. UNIT 1

2. Introduction to Economics
Introduction to Economics – Wealth, Welfare and
Scarcity Views on Economics – Positive and Normative
Economics - Definition – Scope and Importance of Business
Economics - Concepts: Production Possibility frontiers –
Opportunity Cost – Accounting Profit and Economic Profit –
Incremental and Marginal Concepts – Time and Discounting
Principles – Concept of Efficiency- Business Cycle:-
Inflation, Depression, Recession, Recovery, Reflation and
Deflation

4. The term "economy" refers to the system by
which goods, services, and resources are produced,
distributed, and consumed within a particular region
or country.
It encompasses all the activities related to the
production, trade, and consumption of goods and
services.
The economy involves various factors, including
businesses, industries, individuals, governments,
financial institutions, and international trade.

6. Definition of Economics
Economics defined as the study of how societies use
scarce resources to produce and distribute goods and services
to satisfy unlimited human wants.
Scarcity Resources
Distribution
Production
Human
wants

9. Economic Concepts
Law of demand and supply
Opportunity cost

11. Factors contribute to the law of demand
1. Income Effect
2. Substitution Effects
2. Substitution Effect

14. Several factors contribute to the law of supply
Production Costs
Profit Motive
Technological Advancements:
Input Prices

17. OPPORTUNITY

20. Definition of Wealth
Wealth defined as the abundance of valuable
resources or possessions that have economic value.

22. Importance of Wealth in Economics
Drives Economic Growth
Enhances Standard of Living
Enhances Standard of Living
Drives Economic Growth
Wealth enables investment in capital goods,
research, and development, leading to increased
production and economic expansion

24. Enhances Standard of Living

25. Factors Affecting Wealth Creation
Education and Skills
Higher education and skills development lead to better
job opportunities and higher income.
Innovation and Entrepreneurship
New ideas and entrepreneurial ventures create wealth and
economic growth.
Access to Resources
Availability of natural resources and access to capital
play a crucial role in wealth creation.

26. Definition of Welfare
In economics, welfare refers to the overall
well-being and living standards of individuals,
households, or society as a whole.

27. Dimensions of Welfare
Economic Welfare
Income levels, employment opportunities, and economic
growth.
Access to goods and services that enhance the standard
of living.
Social Welfare
Education, healthcare, and social services.
Inclusivity, equality, and social cohesion.
Environmental Welfare
Sustainable use of natural resources.
Minimizing negative externalities on the environment.

28. The Role of Government
Social Safety Nets:
Unemployment benefits, welfare programs, and
food assistance to support vulnerable populations.
Healthcare and Education
Investments in healthcare and education improve
the workforce's productivity and well-being.
Regulation and Consumer Protection
Ensuring fair competition and safeguarding
consumer interests contribute to welfare.

31. Types of Resources
Natural Resources
Examples: Land, water, minerals, forests, and energy
sources.
Limitations: These resources are not unlimited and must
be used wisely.
Human Resources:
Examples: Labor, skills, knowledge, and creativity of
individuals.
Limitations: Population size and skill levels impact the
availability of human resources.
Capital Resources:
Examples: Machinery, equipment, infrastructure, and
tools.
Limitations: Capital resources require investment and
maintenance.

33. Meaning of positive economics
Most economists look at what has happened and
what is currently happening in a given economy to
form their basis of predictions for the future.
This investigative process is positive economics.

34. Pros
Is easily verifiable because it is based on objective data
Gives policymakers more power to make decisions
Allows individuals to make wiser choices with their economic
and financial lives

35. Cons
We can't always separate our emotions from
the facts
Economics isn't an exact science, so there are
no fool-proof solutions or conclusions
Policies and solutions that arise from positive
economics don't affect everyone the same way

41. Scope of Business Economics
The scope of business economics is
quite wide.
Business economics involves the
application of various economic tools,
theories, and methodologies for analyzing
solving different business problems.

52. MEANING
The production possibility frontier (PPF) is a curve on a
graph that illustrates the possible quantities that can be produced
of two products if both depend upon the same finite resource for
their manufacture. The PPF is also referred to as the production
possibility curve.
Production possibilities frontier (PPF) shows the
maximum attainable combinations of two products that may be
produced if we use our resources efficiently.

53. Understanding the Production Possibility Frontier (PPF)
The PPF is the area on a graph representing production
levels that cannot be obtained given the available resources; the
curve represents optimal levels. Here are the assumptions
involved:
A company/economy wants to produce two products
There are limited resources
Technology and techniques remain constant
All resources are fully and efficiently used

54. For a Business
As resources are taken from one product and allocated to
the other, another point can be plotted on the curve. When you
plot the points where more of X will be produced by taking
resources from Y or vice versa, a curve is generated representing
the maximum amount of each product that can be produced as
resources are reallocated.

55. For example,
if a non-profit agency provides a mix of
textbooks and computers, the curve may show that it
can provide either 48 textbooks and six computers or
72 textbooks and two computers. This results in a ratio
of about six textbooks to one computer.

56. Textbooks Computers
18 11
24 10
30 9
36 8
42 7
48 6
54 5
60 4
66 3
72 2
78 1
84 0

58. What Is the Importance of the Production Possibilities
Frontier?
The PPF demonstrates whether resources are being used
efficiently and fully when everything else remains constant.
Thus, the variables can be changed to see how the curve reacts,
letting you observe different outcomes.

59. What Is the Purpose of the Production Possibilities Frontier
in Economics?
Because the PPF is a curve based on the data of two
variables representing resources between two goods, the data can
be manipulated to observe how scarcity, growth, inefficiency,
efficiency, and other factors can affect production.

60. Economic Profit
Economic profit is a form of profit that is derived
from producing goods and services while factoring in
the alternative uses of a company's resources. It deducts
explicit costs from revenue and includes
the opportunity cost incurred during that period of
time. Implicit costs, which are typically the costs of a
company's resources, are also part of the equation.
Economic Profit = Total Revenue – (Explicit Costs +
Implicit Costs)

61. For example,
A company may choose Project A over Project B. The
profit from Project A after deducting expenses and costs would
be the accounting profit. The economic profit would include the
opportunity cost of choosing Project A versus Project B. In other
words; the economic profit would consider how much more
or less profit would have been generated (by using the
company's resources) had management chosen Project B.

62. Accounting Profit
Accounting profit is also known as a company's
earned profit, net income, or bottom line . Unlike
economic profit, accounting profit is reported on a
company's income statement. It's the profit earned after
various costs and expenses are subtracted from
total revenue or total sales, as stipulated by generally
accepted accounting principles (GAAP).

63. Those costs include:
Labor costs, such as wages and salaries
Any inventory needed for production
Raw materials
Transportation and storage costs
Production costs and overhead
Sales and marketing costs

64. Accounting profit is the amount of money left
over after deducting the explicit costs of running the
business.
Explicit costs are merely the specific amounts
that a company pays for those costs in that period—for
example, wages.
Typically, accounting profit or net income is
reported on a quarterly and annual basis and is used to
measure the financial performance of a company.
Accounting Profit = Total Revenue – Explicit Costs.

65. Major Differences Between Economic Profit and Accounting Profit
Economic Profit Accounting Profit
Earnings after deducting explicit
and implicit costs from total
revenue
Earnings after deducting explicit
costs of running a business
Derived from assumptions and
estimates
Measurable and calculated as per
GAAP
Not reported
Reported on corporate income
statements and to the IRS

66. What is a Business Cycle?
Income growth in any economy occurs by increasing the level
of production in the economy, i.e., real gross national product
(GNP).
It means that development necessitates greater growth, i.e.,
higher levels of economic activity.
The government of an economy strives to maintain a higher
level of economic activity by enacting appropriate economic
policies.

67. However, the economy frequently fails to achieve this goal. As
a result, economies fluctuate between the best and worst levels
of economic activity, referred to in economics as a boom and a
depression, respectively.
They can be categorized as different stages of an economy's
economic activities.
Economists refer to fluctuations in the level of economic
activity between depressions and booms as the business cycle or
trade cycle, with recession and recovery serving as the main
intermediate stages.
Stagnation and slowdown are also intermediate stages of the
business cycle.

69. Boom
A strong upward fluctuation in economic activity is referred to
as a boom.
As economies try to recover from the slowdown, recession,
and depression, the measures taken by governments and the
private sector may place economic activities in such a way that
the economic systems fail to digest. This is the peak period of the
boom.

70. The following are the major economic characteristics of a
boom:
An accelerated and prolonged increase in demand;
Demand peaks to levels that exceed sustainable
output/production levels;
The economy heats up and a demand-supply lag is visible;
Market forces mismatch (i.e., Demand and supply
disequilibrium) and tend to create a situation in which
inflation begins to rise.
The economy may face structural issues such as a lack of
investible capital, lower savings, a falling standard of living,
and the emergence of a sellers' market.

71. The recovery phase is beneficial to the economy, and it
progresses to the boom stage, which is preferable. However,
there are some drawbacks to the boom.
Typically, a boom is followed by a price increase. Because a
boom is characterized by a strong upward fluctuation in an
economy, the supply-side pattern of the economy begins to lag
behind the accelerated aggregate demand.

72. What Is Depression:
A depression is a severe and prolonged downturn
in economic activity. In economics, a depression is commonly
defined as an extreme recession that lasts three or more years or
which leads to a decline in real gross domestic product
(GDP) of at least 10%. in a given year. Depressions are
relatively less frequent than milder recessions, and tend to be
accompanied by high unemployment and low inflation.

73. DEPRESSION
Despite the fact that depression only visited the world
economy once, in 1929, economists have identified enough
characteristics to identify it.
The following are some of the major characteristics of depression:
An extremely low aggregate demand in the economy causes
activities to decelerate;
The inflation being comparatively lower;
The employment avenues start shrinking forcing
the unemployment rate to grow fast;

74. To keep the business going, production houses go for forced
labor cuts or retrenchment (to cut down production cost and
be competitive in the market,), etc.
RECOVERY
To survive, an economy attempts to break out of its low-
production phase.
When an economy is in a low-production phase, it may be
a depression, a recession, or a slowdown, with the latter being
the worst and most common.
Governments take many new fiscal and monetary measures to
boost demand and production, and eventually an economy
recovers.

75. The business cycle of recovery may exhibit the following
major economic characteristics:
An increase in aggregate (total) demand, which must be
accompanied by an increase in the level of production;
The production process expands and new investments
become appealing;
As demand rises, inflation rises as well, making
borrowing cheaper for investors;
With an increase in production, new employment avenues
are created and the unemployment rate begins to fall; and
so on.

76. Recession
This is similar to the 'depression' phase — and it is fatal
for economies because it can lead to depression if not handled
with care and in a timely manner
The financial crises that followed the US 'sub-prime
crisis' in almost the entire Euro-American economies have
essentially brought in 'severe recessionary' trends.

77. Major characteristics of recession, which are similar to those
of 'depression' can be summarised as follows:
There is a general decline in demand as economic activity
slows;
Inflation remains low or shows further signs of falling;
Employment falls/unemployment rises; and
Industries resort to 'price cuts' to maintain their business.

78. Stages of the Business Cycle
In the diagram above, the straight line in the middle is the
steady growth line. The business cycle moves about the line. Below is
a more detailed description of each stage in the business cycle:
1. Expansion
The first stage in the business cycle is expansion. In this stage,
there is an increase in positive economic indicators such as
employment, income, output, wages, profits, demand, and supply of
goods and services. Debtors are generally paying their debts on time,
the velocity of the money supply is high, and investment is high. This
process continues as long as economic conditions are favorable for
expansion.

79. 2. Peak
The economy then reaches a saturation point, or peak, which is
the second stage of the business cycle. The maximum limit of growth
is attained. The economic indicators do not grow further and are at
their highest. Prices are at their peak. This stage marks the reversal
point in the trend of economic growth.
3. Recession
The recession is the stage that follows the peak phase. The
demand for goods and services starts declining rapidly and steadily in
this phase. Producers do not notice the decrease in demand instantly
and go on producing, which creates a situation of excess supply in the
market. Prices tend to fall. All positive economic indicators such as
income, output, wages, etc., consequently start to fall.

80. 4. Depression
There is a commensurate rise in unemployment. The growth in the
economy continues to decline, and as this falls below the steady growth line,
the stage is called a depression.
5. Trough
In the depression stage, the economy’s growth rate becomes
negative. There is further decline until the prices of factors, as well as the
demand and supply of goods and services, contract to reach their lowest point.
The economy eventually reaches the trough. It is the negative saturation point
for an economy. There is extensive depletion of national income and
expenditure.

81. Recovery
After the trough, the economy moves to the stage of recovery.
In this phase, there is a turnaround in the economy, and it begins to
recover from the negative growth rate.
Demand starts to pick up due to low prices and, consequently,
supply begins to increase. The population develops a positive attitude
towards investment and employment and production starts increasing.
In this phase, depreciated capital is replaced, leading to new
investments in the production process. Recovery continues until the
economy returns to steady growth levels.
This completes one full business cycle of boom and
contraction. The extreme points are the peak and the trough.