Introduction To Economics


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this will give an idea about what economics is and is not

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Introduction To Economics

  1. 1. Introduction to Economics The Science of Economics is made for the benefit and development of the world.   - Kautilya Chanakya
  2. 2. P.Naresh Kumar MSc(Quan.Econ);MSc(Stat); Faculty In Economics, SIBER, Kolhapur
  3. 3. What is Economics? <ul><ul><li>Economics covers all kinds of topics. </li></ul></ul><ul><ul><li>At the core it is devoted to understanding how society allocates its scarce resources. </li></ul></ul><ul><ul><li>Along the way to studying the implication </li></ul></ul><ul><li>of scarcity, economics tries to figure out </li></ul><ul><li>the 1001 puzzles of everyday life. </li></ul>
  4. 4. Definitions of Economics <ul><ul><li>Economics asks what goods are produced, how </li></ul></ul><ul><li>these goods are produced, and whom they </li></ul><ul><li>are produced. </li></ul><ul><li>2) Economics analyzes movements in the overall economy </li></ul><ul><li>--- trends in prices, output, unemployment and foreign trade. </li></ul>
  5. 5. Once such trends are understood, economics helps to develop the policies by which Governments can improve the performance of the economy 3) Economics is the study of commerce among nations. It helps explain why nations export some goods and import others, and analyses the effects of putting economic barriers at national frontiers.
  6. 6. 4) Economics is the science of choice. It studies how people choose to use scarce or limited productive resources ( labour, equipment, technical knowledge) to produce various commodities and to distribute these goods for consumption 5) Economics is the study of money, banking, capital and wealth.
  7. 7. In a common theme Economics is the study of how societies use scarce resource to produce valuable commodities and distribute them among different people.
  8. 8. We distinguish two types of Economics
  9. 9. Micro Economics <ul><ul><li>It analyses the behaviour of individual </li></ul></ul><ul><li>components like industries, firms and </li></ul><ul><li>households. </li></ul><ul><ul><li>Micro Economics means economics </li></ul></ul><ul><li>through microscope. </li></ul><ul><ul><li>---How individual prices are set, consider what </li></ul></ul><ul><li>determines price of land, labour and capital, and </li></ul><ul><li>inquire in to the strengths and weaknesses of the </li></ul><ul><li>market mechanism. </li></ul>
  10. 10. Macro Economics <ul><ul><li>It studies the functioning of the economy as a </li></ul></ul><ul><li>whole. </li></ul><ul><ul><li>we examine the economy through wide-lens. </li></ul></ul><ul><ul><li>It examines how the level and growth of output </li></ul></ul><ul><li>are determined, analyzes inflation and </li></ul><ul><li>unemployment, asks about the total money supply </li></ul><ul><li>and investigates why some nations thrive while </li></ul><ul><li>others stagnate. </li></ul>
  11. 11. The scientific Approach <ul><ul><li>Economists have no monopoly on the truth about </li></ul></ul><ul><li>the important issues of the day. Indeed, many </li></ul><ul><li>phenomena are poorly understood and highly </li></ul><ul><li>controversial. But economists and other </li></ul><ul><li>scientists have developed techniques- called the </li></ul><ul><li>scientific approach- that give a head start in </li></ul><ul><li>understanding the complex forces that affect </li></ul><ul><li>economic growth, prices and wages, income </li></ul><ul><li>distribution and foreign trade. </li></ul>
  12. 13. Observation <ul><ul><li>One of the major sources of economic </li></ul></ul><ul><li>knowledge is observation of economic </li></ul><ul><li>affairs, especially drawing upon the </li></ul><ul><li>historical record. </li></ul><ul><li>E.g.: consider inflation- meaning a rise in the </li></ul><ul><li>general level of prices.citizens, bankers and </li></ul><ul><li>political leaders often worry about inflation and </li></ul><ul><li>take painful steps,contradicting output and </li></ul><ul><li>increasing unemployment, to prevent or slow a </li></ul><ul><li>threatening inflation. </li></ul>
  13. 14. Economic Analysis <ul><ul><li>This is an approach that starts with a set of </li></ul></ul><ul><li>assumptions and then deduces logically certain </li></ul><ul><li>predictions about the economic behavior of people, </li></ul><ul><li>firms or the overall economy. </li></ul><ul><li>E.g.: Attempts to restrict the import of foreign </li></ul><ul><li>goods in order to ‘protect’ domestic workers and </li></ul><ul><li>firms from foreign competition. </li></ul>
  14. 15. Statistical Analysis <ul><ul><li>A complete understanding of economic activity </li></ul></ul><ul><li>relies upon the use of economic data and statistical </li></ul><ul><li>analysis. </li></ul><ul><ul><li>Governments and businesses issue volumes of </li></ul></ul><ul><li>data that can help us to analyze economic behaviour </li></ul><ul><li>quantitatively. </li></ul><ul><ul><li>While the actual application of such information </li></ul></ul><ul><li>requires advanced tools in probability and </li></ul><ul><li>econometrics, understanding the results requires </li></ul><ul><li>only careful reading and common sense. </li></ul>
  15. 16. Experiments <ul><ul><li>The economic world is enormously </li></ul></ul><ul><li>complicated with millions people and billions </li></ul><ul><li>of prices. In an exciting new development, </li></ul><ul><li>economists are turning to laboratory and </li></ul><ul><li>other controlled experiments. </li></ul><ul><ul><li>It is more difficult to perform experiments in </li></ul></ul><ul><li>economies than in the laboratory sciences. To begin </li></ul><ul><li>with, economists cannot measure economic </li></ul>
  16. 17. <ul><li>Variables with precision that physical </li></ul><ul><li>scientists can apply in measuring mass, </li></ul><ul><li>velocity, or distance </li></ul><ul><ul><li>Moreover it is very difficult to replicate </li></ul></ul><ul><li>the economy in a laboratory. </li></ul>
  17. 18. Pitfalls in Economic Reasoning <ul><ul><li>In all areas of economics, old and new, certain pitfalls lie in the path of the serious economist. </li></ul></ul><ul><ul><li>Falling to keep “others Things Equal” </li></ul></ul><ul><ul><li>The Post Hoc Fallacy </li></ul></ul><ul><ul><li>Fallacy of Composition </li></ul></ul>
  18. 19. others Things Equal <ul><ul><li>Most of economic problems involve </li></ul></ul><ul><li>several forces interacting at the same. </li></ul><ul><li>E.g.: the number of cars bought in a given </li></ul><ul><li>year is determined by the price of cars, </li></ul><ul><li>consumer incomes, gasoline prices etc. </li></ul><ul><li>How can we isolate the impact on car sales </li></ul><ul><li>of a single variable such as the price of gasoline. </li></ul>
  19. 20. The Post Hoc Fallacy <ul><ul><li>A common mistake in studies of cause-and-effect </li></ul></ul><ul><li>relationships is the Post Hoc Fallacy. </li></ul><ul><li>E.g.: Dr.Optimist’s observation is that after the </li></ul><ul><li>Govt. has cut tax rates, the Govt.s total tax revenues </li></ul><ul><li>began to rise. Dr.Optimist then claims “Aha, if we </li></ul><ul><li>lower the tax rates, we will rise revenues and reduce </li></ul><ul><li>the budget deficit.” </li></ul>
  20. 21. Dr.Optimist fallacy was to assume that the tax cut was responsible for the increase in Govt.s revenues; overlooked was the fact that the growing economy was raising people’s income and might have increased tax revenues even more had taxes not been cut.
  21. 22. Fallacy of Composition <ul><ul><li>It is the misconception that what is true for </li></ul></ul><ul><li>a part is therefore true for the whole. </li></ul><ul><ul><li>One thing that is true for an individual is </li></ul></ul><ul><li>not necessarily true for everyone. </li></ul><ul><li>E.g: If all farmers produce a bog crop, total </li></ul><ul><li>farm income will probably fall. </li></ul>
  22. 24. The Law of Scarcity <ul><ul><li>Economics study the way goods are </li></ul></ul><ul><li>produced and consumed because people want </li></ul><ul><li>to consume far more than an economy can </li></ul><ul><li>produce. </li></ul><ul><ul><li>The law of scarcity states that goods are scarce </li></ul></ul><ul><li>because there are not enough resources to produce </li></ul><ul><li>all the goods that people want to consume. All of </li></ul><ul><li>economics flows from this central fact. </li></ul>
  23. 25. <ul><ul><li>No country has reaches utopia of limitless </li></ul></ul><ul><li>possibilities. Goods are limited while wants </li></ul><ul><li>seem infinite. Even in U.S., the most </li></ul><ul><li>productive economy ever known, production </li></ul><ul><li>is not high enough to meet everyone’s </li></ul><ul><li>desires. </li></ul>
  24. 26. The uses of Economics <ul><ul><li>Economic knowledge serves us in </li></ul></ul><ul><li>managing our personal lives, in </li></ul><ul><li>understanding society and in improving the </li></ul><ul><li>world around us. </li></ul><ul><ul><li>The ways that economics can help us </li></ul></ul><ul><li>individually will be as different as are our </li></ul><ul><li>personal lives. </li></ul>
  25. 27. <ul><ul><li>Learning about stock market may help </li></ul></ul><ul><li>people manage their own finances. </li></ul><ul><ul><li>Better awareness of the determinants of </li></ul></ul><ul><li>cost and revenue will produce better business </li></ul><ul><li>decisions. </li></ul><ul><ul><li>The doctor, the investor and the farmer all </li></ul></ul><ul><li>need to know about profit from their businesses. </li></ul>