10 Principles of Economics

1. INTRODUCTION
TO
ECONOMICS
Ms. Mital Thakkar
Assistant Professor
Department of Management
SVDU

2. WHAT IS ECONOMICS???
• Economics – the study of how individuals and societies
make decisions about ways to use scarce resources to
fulfill wants and needs.
• What does THAT mean?!!??!!

3. The Study of Economics
• Microeconomics
– How do individuals make
economic decisions
• Macroeconomics
– The big picture: growth,
employment, etc.
– Choices made by
large groups (like countries)

4. • Micro Economics studies how the individual parts of the
economy make decisions to allocate limited resources
• Microeconomics studies:
– how individuals use limited resources to meet
unlimited needs
– the consequences of their decisions
– the behaviour of individual components like
industries, firms and households.
– how individual prices are set
– what determines the price of land, labour and capital
– inquire into the strengths and weaknesses of the
market mechanism.

5. • Macroeconomics studies about the functioning of the
economy as a whole
• It examines the economy through wide-lens.
• Macroeconomics studies about
• the total output of a nation
• the way the nation allocates its limited resources of
land, labor and capital
• the ways to maximize production levels
• the techniques to promote trade
• After observing the society as a whole, Adam Smith
noted that there was an "invisible hand" turning the
wheels of the economy: a market force that keeps the
economy functioning.

6. ECONOMICS: 5 Economic
Questions
Society (we) must figure out
• WHAT to produce
(make)
• HOW MUCH to
produce (quantity)
• HOW to Produce
it (manufacture)
• FOR WHOM to
Produce (who gets what)
• WHO gets to
make these decisions?

7. What are resources?
• Definition: The things used to make other goods

8. THE FOUNDATION OF
ECONOMICS
• The “Father”
Adam Smith (1723 - 1790)
– Author of the famous book "An Inquiry into the
Nature and Causes of the Wealth of Nations"
•

9. THE FOUNDATION OF
ECONOMICS
• Scarcity
– Scarcity refers to our
limited resources and
our unlimited wants and
needs.
– For an individual,
resources include time,
money and skill.
– For a country, limited
resources include natural
resources, capital, labour
force and technology
- Robbins

10. There’s a
Fundamental Problem:
• SCARCITY: unlimited wants and needs but limited
resources

11. Choices, Choices
• Because ALL resources,
goods, and services are
limited – WE MUST MAKE
CHOICES!!!!

12. Why Choices?
• We make choices about how we spend our money, time,
and energy so we can fulfill our NEEDS and WANTS.
• What are NEEDS and WANTS?

13. Wants and Needs,
Needs and Wants
• NEEDS – “stuff” we must have to survive, generally:
food, shelter, clothing
• WANTS – “stuff” we would really like to have (Fancy
food, shelter, clothing, big screen TVs, jewelry,
conveniences . . .
Also known as LUXURIES

14. VS.

15. The Factor of Production

16. 16

17. Ten Principles of Economics
• There are ten fundamental principles of economics
These principles of economics have been divided under
the three categories as given below.
1 - • How People Make Decision
2 -
• How People Interact
3 -
• How the economy as a whole
works

18. How People make decision
Under this category, there are four
principle as given below.
1- People face trade-off
2- Cost of something is what you
give up to get some thing
3- Rational people think at the
margin
4- people respond to incentives

19. 1-People face trade offs
• Trade off means balancing
two things that we need or
want but which are opposite
to each other. In our real life
we always face trade off
while making decision about
some thing. It is because to
get one thing that we like, we
usually have to give up
another thing that we like. So
making decisions requires
trading off one goal against
another.

20. 2- Cost of something is what you
give up to get some thing
• People face tradeoffs, so
making decisions requires
comparing the costs and
benefits of alternative
courses of action. When you
spend a year listening to
lectures, reading textbooks,
and writing papers, you
cannot spend that time
working at a job. For you, the
wages given up to attend
school are the cost of your
education.

21. • The opportunity cost to attend school or having education
are the wages given up.
• So the opportunity cost of an item is what you give up to
get that item. When making any decision, decision makers
should be aware of the opportunity costs.

22. 3- Rational people think at the
margin
• In economics it is assumed that people are rational and
rational people make the best decisions by thinking at the
margin (edge)or comparing additional cost for extra
benefits.
• Supposeyouhavebeentomarketforshoppingfromyourhouseby
busbypayingRs.50bus-fare.Thereisalsocircus-showatonecorner
in the market. You like to watch it but whether to watch it today or
cometothenextdaytowatchit,todecideit,youcomparethecostfor
coming in next day Rs.50 bus-fare + Rs.20 circus charge against
benefitorutilityfromwatchingcircustodayorthenextday.

23. 4-People respond to incentives
• Incentive means something that encourages people to do
something. People make decisions by comparing costs and
benefits, their behavior may change when the costs or
benefits change. That is, people respond to incentives.
When the price of an apple rises, for instance, people
decide to eat more pears and fewer apples, because the
cost of buying an apple is higher. At the same time, apple
orchards decide to hire more workers and harvest more
apples, because the benefit of selling an apple is also
higher. Thus people respond to incentives.

24. How People interact
Under this category, there are three
principle as given below.
5- Trade can make every one better
off
6- markets are usually a good way
to organize economic activity
7- Government can sometimes
improve market outcomes

25. 5-Trade can make every one
better off
• Either we talk about individuals, society or countries, trade
can make everyone better off. If there were no trade, we
would make every thing that we need by ourselves.
Perhaps we would lack to get much that we require but it
is trade that allows individuals, firms or countries to
specialize in that what they do best and enjoy a wider
variety of goods. Therefore, trade is the one that can make
everyone better off.

26. 6-Markets are usually a good way
to organize economic activity.
• Markets are usually good way to organize economic
activity. Today, most countries that once had centrally
planned economies have abandoned this system and are
trying to develop market economies.
• In a market economy, the decisions of a central planner are
replaced by the decisions of millions of firms and
households. Firms decide whom to hire and what to make.
Households decide which firms to work for and what to
buy with their incomes. These firms and households
interact in the marketplace, where prices and self-interest
guide their decisions of making economic activities. Thus
markets are usually good way to organize economic
activities.

27. 7- Government can sometimes
improve market outcomes
• Markets are usually a good way to organize economic
activity. It is true if only govt. play a crucial role to settle
markets.
• Govt. provide legal safety to the economic agents i.e.
producers, firms and consumers. Importantly, markets
work only if property rights are enforced. For example, a
farmer won’t grow food if he expects his crops to be stolen,
a restaurant won’t serve meals unless it is assured that
customer will pay before they leave. We will rely on govt.
provided police & courts to enforce our rights over the
things we produce.

28. • And sometimes markets fail to work due to some external
effects. There is less efficiency, less equality, lack of
efficient allocation resources. In such a condition govt. can
intervene and improve market outcomes by its public
policy.

29. How the economy as a
whole works
Under this category, there are three
principle as given below.
8 - Country’s standard of living depends
on its ability to produce goods and
services
9 - Prices rise when government prints to
much money
10 - Society faces a short-run trade-off
between inflation and employment

30. 8- Country’s standard of living
depends on its ability to produce
goods and services.
• The living standard of a country or its people primarily
depends on its ability to produce goods and services. The
more the ability to produce goods and services, the more
the people can enjoy required goods and services and
maintain high standard of living. Conversely, where there
is low productivity, most of the people are compelled to
spend a miserly life.

31. 9- Prices rise when government
prints to much money
• The variation in prices of goods and services also depends
on the quantity of money supply in the economy. When the
govt. creates large amount of money and let them go in the
circulation, the value of money goes down and prices of
goods and services rises. The continuous and sustained
rise in price level in called inflation. If such a situation is
not timely checked, it brings an adverse effect in the
economy.

32. 10- Society faces a short-run
trade-off between inflation and
unemployment
• There is a short-run trade off between inflation and
unemployment. With the increase in quantity of money
supply, the demand for goods and services goes up. It is
because there is more amount of money in the hand of the
buyers. Consequently, there is an increase in price level
(inflation) and in the meantime it also encourages them to
increase the quantity of goods and services they produce.
So the producers employ more workers to produce those
goods and services. It is, employing more workers means
lower unemployment. Thus there is a short-run trade off
between inflation and unemployment.

33. CIRCULAR FLOW OF
MANAGERIAL ECONOMICS
• The circular flow diagram
represents the organization
of an economy in a simple
economic model. This diagram
contains households, firms,
markets for factors of
production, and markets
for goods and services.