It is a presentation of about Economics and its principles.This ppt will teach you economics from basic level to advanced level. Studying economics helps us to compare our country economy to different countries in the world.

1. Indian Institute of Information Technology Dharwad
ECONOMICS

2.  What is Economics?
 The word Economic is derived from the Greek word oikonomos,
which means “one who manages a household.”
 For example: The head of the family faces the problem of
managing the unlimited wants of the family members
within the limited income of the family. The same applies
to the society
 Society faces the problem of tackling unlimited wants of
the members of the society with the limited resources
available in that society.
Introduction

3.  Thus, Economics means the study of the way in which
individual or society or economy tackle the basic problem
of scarcity.
 Scarcity means that society has limited resources and therefore
cannot produce all the goods and services people wish to have.
 In other words, scarcity means it is the excess of human wants
over what can actually be produced.
 The reason for the scarcity: human wants are virtually unlimited, whereas
the resources available to satisfy these wants are limited.

4.  Therefore, Economics is the study of how society manages its
scare resources to satisfy human wants.
 Further, economic also study the production, distribution, and
consumption of goods and services in a particular economy.

5.  Economics is traditionally divided into two main
branches – Microeconomics and Macroeconomics.
 Where ‘micro’ means small, and ‘macro’ means big.
 Microeconomics studies individual units: e.g.
households, firms, and industries.
 How do households choose what to buy and how much to
buy? How do firms choose what to produce and how much to
produce? What determines that who will get the output so
produced?
Branches Of Economics

6.  Macroeconomics deals with economy as a whole.
 It examines the factors that determine national consumption,
national output, general price level, aggregate employment and
unemployment, etc.
 In essence, microeconomics looks at the individual part of the
economic system, while macroeconomics looks at the system as a
whole.
 In simple, microeconomics sees and examines “trees”, while
macroeconomics sees and analyse the “forests”.

7.  Gregory Mankiw in his Principles of Economics outlines Ten
Principles of Economics and they are:
1. People face trade-offs
2. The cost of something is what you give up to get it
3. Rational people think at the margin
4. People respond to incentives
5. Trade can make everyone better off
Basic Principles Of Economics

8. 6. Markets are usually a good way to organize economic activity
7. Governments can sometimes improve market outcomes
8. A country’s standard of living depends on its ability to produce
goods and services
9. Prices rise when the government prints too much money
10. Society faces a short-run trade off between inflation and
unemployment
Figure 1_Principles of Economics.pdf

9. Principles of How People Make
Decisions

10.  To get something that we like, we usually have to give up
something else that we also like. (Due to scare resources)
 Making decisions requires trading off one goal against another.
 E.g.: a student must decide how to spend his/her valuable
resources i.e., time
 The more time spend on studying, leaves less time for watching
TV, napping, bike riding, or working at the part-time job for extra
money.
P1: People face trade-offs

11.  Parents deciding how to spend their family income.
 They can buy food, clothing or family vacation.
 They can save some of the family income for retirement or the
children’s education.
 If the family spend a rupee on children’s education, then they have
one less rupee to save for retirement.
 One classic Trade-off at economy level: “guns and butter”
 Guns: National defense and Butter: Consumer Goods

12.  Because of trade-offs
 Making decisions requires comparing the costs and benefits of
alternative choice.
 A choice of better alternative is made hence more beneficial.
 For example: decision to go to college or to work.
 Going to college for a year is not just the tuition, books, and fees,
but also the foregone wages.
 Watching a movie is not just the price of the ticket, but the value
of the time you spend in the theatre.
P2: The cost of something is what you give up to
get it (Opportunity Cost)

13.  Therefore, when making any decision, decision makers should be
aware of the opportunity costs that accompany each possible
action.
 Opportunity Cost: whatever must be given up to obtain some
item.

14.  Rational people: People who systematically and purposefully do
the best they can to achieve their objectives.
 Rational people often make decisions by comparing costs and
benefits of marginal changes.
 Marginal changes: a small incremental adjustments to an existing
plan. (margin means “edge”).
 Therefore, a rational decision maker taken an action if and only if
the marginal benefit of the action exceeds the marginal cost.
 Example:
P3: Rational people think at the margin

15.  When a manager considers whether to increase output, he compares
the cost of the needed labor and materials to the extra revenue.
 Consider an airline deciding how much to charge passengers who fly
standby. Suppose that flying a 200-seat plane across the United
States costs the airline $100,000. In this case, the average cost of
each seat is $100,000/200, which is $500. Now, Imagine that a plane
is about to take off with 10 empty seats and a standby passenger
waiting at the gate is willing to pay $300 for a seat. Should the
airline sell the ticket?

16.  Incentive: is something (can be punishment or reward) that
induces a person to act.
 Incentives can be in the form of price and quantity discounts,
freebies, etc.,
 As people make decisions by comparing costs and benefits, they
respond to incentives.
 A simple example can be that the government decides that people
need to smoke less. So, the government imposes tax on smoking
cigarettes. This causes the amount of smoking comes down.
P4: People respond to incentives

17.  Another example, when the price of an apple rises, people decide
to eat fewer apples. At the same time, apple orchards decide to
hire more workers and harvest more apples. In other words, a
higher price in a market provides an incentive for buyers to
consume less and an incentive for sellers to produce more. As we
will see, the influence of prices on the behavior of consumers and
producers is crucial for how a market economy allocates scarce
resources.

18.  Incentive in the case of government level:
 Public policymakers should never forget about incentives. Because
many policies change the costs or benefits that people face and, as a
result, alter their behavior.
 For instance: a tax on petrol encourage people to drive smaller, more
fuel-efficient cars, carpool, take public transportation, or live closer
to where they work.
 Classic example: Auto safety – seat belt
 Therefore, the government must consider both direct effects and
indirect effects of a particular policy that work through incentives.

19.  Quiz Questions:
 Describe an important trade-off you recently faced.
 Describe an incentive your parents offered to you in an effort to
influence your behaviour.

20. Principles of How People Interact

21.  Trade between two countries can make each country better off.
 For example: Trade between India and China (Second biggest
trading partner)
 India export machinery, fish, electronic equipment, salt, cement etc.,
to China. Similarly, China exports personal computer like laptops,
Iron and steel, fertilizers, furniture, etc., to India.
 Consider an example of trade between families in a society.
 Families might compete against one another when they go shopping
because each family wants to buy the best goods at the lowest
prices.
P5: Trade can maker everyone better off

22.  So, just because families are competing, it does not mean that a family isolate
itself from other families. If it does so, then that particular family has to grow its
own food, make its own clothes, and build its own home. This increases the costs.
 So, if the family trade with other families, people can buy greater variety of
goods and services at lower cost. People can specialize in producing one good or
service and exchange it for other goods.
 Similar to families, countries also benefit from the ability to trade with
one another.
 Eg: India exports Petroleum products, Gems And Jewellery,
Pharmaceutical Products. Similarly, China export telephones,
computers, electric batteries.
 Therefore, trade allows countries to specialize in what they do best and
enjoy a greater variety of goods and services.

23.  Market: a group of buyers and sellers. (need not be a single
location)
 Organize economic activity:
 What goods to produce
 How to produce them
 How much each products to produce
 Who gets them (who consume the products)
 Earlier many countries used to have centrally planned economy,
however at present most of the countries follows market economy
instead of centrally planned economy.
P6: Markets are usually a good way to
organize economic activity

24.  Centrally planned economy: Government decides what to produce,
how to produce, how much to produce, who produced and consumed.
 Market economy: the decisions of organizing economic activities
influenced by the decisions of millions of firms (seller) and
households (individuals/buyers)
 An individual (buyer) goes to market with his demand and
willingness to pay certain price for a particular good.
 A firm (seller) decide whether it can produce that particular product
and sell in the market.

25.  In a market economy, no one is looking out for the economic well-
being of society as a whole.
 The buyer try to satisfy his demand and seller try to maximize his
profits.
 Adam Smith: Buyers and sellers interacting in the markets act as if
they are guided by an “invisible hand” that leads them to desirable
market outcomes.
 Invisible hand: basically tries to convey that without any
intervention, if all individuals in the economy act in their best self-
interest, the result is automatically in the best interests of the
economy.

26.  Markets are usually a good way to organize economic activities but
not always.
 In such a scenario, government can enter the market to improve
market outcomes.
 So, when can government enter the market?
 Market failure: a situation in which a market fails to allocate
resources efficiently.
 Causes of market failure: externalities
P7: Government can sometimes improve
market outcomes

27.  Externalities: the impact of one person’s actions on the well-being of a
bystander.
 Eg: Pollution, a chemical factory pollutes the air and creates health
problem for those who live near the factories.
 Here, Govt. can raise economic well-being through environmental
regulation.
 Eg: A tannery which manufacture tanning leather is polluting the nearby
water stream.
 This may or may not be causing pollution to the manufacturer or buyer
but it is polluting the nearby people who are not at all involved in this
economic activity.

28.  That means, tannery production affecting the people who are not
either producing the leather or consuming the leather.
 It may be affecting the people living nearby who are using water
from the stream.
 So, here government enter and inform the manufacturer to clean the
water stream or it may the ask manufacturer to pay extra taxes to
government to clean the polluted to water stream.

29.  Quiz questions: Why is country better off not isolating itself from
all other countries?
 Why do we have markets, and according to economists, what roles
should government play in them?

30. Principles of How the Economy as a
Whole Works

31.  Standard of living: Standard of living refers to the quantity and quality
of material goods and services available to a given population.
 Generally, there is a huge variation in living standard across countries.
 Ex: the average income in rich countries is more than the average
income in poor countries.
 Average income: the total income of the country divided by its
population.
 Or the average income of USA can be greater than China.
 Why there is a huge variation in living standard across countries?
 Productivity: the quantity of goods and services produced from each
unit of input (labor, capital, or any other resources).
P8: A country’s standard of living depends
on its ability to produce goods and services

32.  In nations where workers can produce a large quantity of goods and
services per hour, most people enjoy a high standard of living; in
nations where workers are less productive, most people have to bear
lower standard of living.
 Therefore, the growth rate of a nation’s productivity determines the
growth rate of its average income. Which influences the living
standard.

33.  The relationship between productivity and living standards also has
profound implications for public policy. To boost living standards,
policy makers need to raise productivity by ensuring that workers are
well educated, have the tools needed to produce goods and services,
and have access to the best available technology.
 Therefore, the country’s standard of living depends on how
efficiently a country produces goods and services to its population by
utilising its scare resources.

34.  Price rise is basically inflation.
 Inflation: an increase in the overall level of prices in the economy.
 Inflation occurs when government prints too much money. (tax
deduction, increased wages, increase in aggregate demand).
 There is too much money in the economy which is chasing too little
goods.
 The economy is not producing enough goods or products but the
government has printed lot of money.
 When there is too much money in the economy, people demand for a
good increases but the supply of good is not sufficient to fulfil these
demand and hence price rises.
P9: Prices rise when the government prints
too much money

35.  The primary effect of increasing the quantity of money, in the long-
run is a higher level of prices i.e., inflation.
 But, in the case of short-run the effect of monetary injections
(increased money supply) as follows:
 Increasing the amount of money in the economy stimulates the overall level
of spending and thus the demand for goods and services.
 Higher demand may over time cause firms to raise their prices, but in the
meantime, it also encourages them to hire more workers and produce a larger
quantity of goods and services.
 More hiring means lower unemployment.
P10: Society faces a short-run trade-off
between inflation and unemployment

36.  Therefore, society faces a short-run trade-off between inflation
and unemployment.
 This simply means that, over a period of a year or two, many
economic policies push inflation and unemployment in opposite
directions.
 This trade-off between inflation and unemployment can be
explained using Philips curve which explains a negative
statistical relationship between rate of inflation and
unemployment.

37.  Quiz question:
 List and briefly explain the three principles that describe how the
economy as a whole works.