3. Types of Industrial organisations /firms
• Private sector
• Public sector
• Corporations
• Non-profit organisations
4. Forms of ownership
• Private sector (Wholly owned by
people,individually or as a group)
• Public sector (owned,managed and
controlled by government),and
• Joint stock company (owned and
managed jointly by individuals and
government)
• Cooperative is a non profit,non political,non
religious,voluntary organisation formed with
an economic objective
5. Buzz words
• Opportunity Principle
• Discounting
• Time perspective
• Marginalism
• Incrementalism
6. Opportunity Principle
• Cost of next best alternative foregone
• Definition – the cost expressed in terms of the
next best alternative sacrificed
• Helps us view the true cost of decision making
• Implies valuing different choices
• Highest valued benefit that must be sacrificed as
a result of choosing an alternative
7. Opportunity cost
• Suppose a machine can produce
either X or Y .The opportunity cost for
producing a given quantity of X is the
quantity of Y,which the resource
would have produced.
• If the machine can produce 10units
of X and or 20 units of Y, the the
opportunity cost of 1x is 2Y.
8. Production Possibility Frontiers
• Show the different combinations of goods and services that
can be produced with a given amount of resources
• No ‘ideal’ point on the curve
• Any point inside the curve – suggests resources are not
being utilised efficiently
• Any point outside the curve – not attainable with the current
level of resources
• Useful to demonstrate economic growth and opportunity
cost
9. Production Possibility Frontiers
Capital Goods
If it devotes all
resources to capital
goods it could produce
a maximum of Ym.
If it devotes all its
resources to consumer
goods it could produce
a maximum of Xm
If it reallocates its resources
(moving round the PPF from A
to B) it can produce more
consumer goods but only at
the expense of fewer capital
goods. The opportunity cost of
producing an extra Xo – X1
consumer goods is Yo – Y1
If the country is at
point A on the PPF
It can produce the
combination of Yo
capital goods and
Xo consumer goods
Consumer Goods
Yo
Xo
A
Y1 B
X1
Assume a
country can
produce two
types of goods
with its
resources –
capital goods
and consumer
goods
Ym
Xm
capital goods.
10. Production Possibility Frontiers
Capital Goods
Consumer Goods
C Y1
Yo
A .B
Xo
X1
Production
inside the
PPF – e.g.
point B
means the
country is
not using all
its resources
It can only produce at
points outside the PPF if it
finds a way of expanding
its resources or improves
the productivity of those
resources it already has.
This will push the PPF
further outwards.
11. Discounting
• The concept of discounting is based
on the fact that a rupee now is worth
more than a rupee earned a year
after.
• Even if one is sure about future
income, yet it has to be discounted
because to wait for future implies a
sacrifice for the present
12. • Suppose a sum of Rs 100 is due after
one year. Let the rate of interest be 10
percent. Then we can determine the sum
to be invested now so as to produce the
return (R) of Rs 100 at the end of the
year. The present value or the discounted
values of Rs100 will then be
V1= R
(1+i)
13. Discounted value of money
V1
= 100
(1+.10)
= Rs.90.90
A present value of Rs100 due two years later would
be
(1+.10)2
V2 = Rs100
=82.64
(1+i)
14. Marginalism
• Marginal analysis is related to a unit
change in independent variable, say
increase in costs as a result of a unit
change in output.
– Marginal output of labour: output
produced by the last unit of labour
– Marginal cost of production: cost
incurred for producing the additional unit
of output
16. Incrementalism
• Incremental reasoning involves
estimating the impact of decision
alternatives.
• Usually, changes occur in “chunk”
rather than unit changes.
• Incrementalism is more general
whereas marginalism is more
specific.
17. Incrementalism..
• Incremental costs :change in total costs as a
result of change in the level of output, investment
etc.
• Incremental revenue is a change in total revenue
resulting from a change in the level of output,
price etc.
While taking a decision, always incremental revenue
should always be greater than incremental costs
18. Time perspective
• Short run Versus long run
– Very short run
– Short run
– Long run
• Fixed versus variable costs of production
21. Circular Flow - Simple
• Assumptions:
– Only two sectors - Consumers and Producers
– All production is sold to the consumers
– Producers provide all the Goods and Services
– Consumers spend all their Income on goods an services
– No government and no overseas sectors
– Consumers are the owners of productive resource - land, labour,
capital and enterprise
22. Circular Flow - Simple
Income
Resources
Consumers Producers
Goods and Services
Consumption Expenditure
23. Circular Flow - Savings and Investment
Income
Consumers Producers
Consumption Exp
Savings Capital Market Investment
24. Circular Flow - Government Sector
Income
Consumers TAXATION Producers
TAXATION GOVERNMENT
Consumption
SPENDING
SUBSIDIES
Savings CAPITAL MARKET Investment
25. Circular Flow - Four Sectors
Income
Consumers Producers
Savings CAPITAL MARKET Investment
Taxes GOVERNMENT
OVERSEAS SECTOR
Imports
Govt
subsidies
Exports
Capital Outflows
Capital Inflow
Consumption exp
26. Central problems of an economy
What to produce?
should the emphasis be on agriculture,
manufacturing or services, should it be on
health, manufacturing or housing?
How to produce?
labour intensive, land intensive, capital
intensive? Efficiency?
Whom to produce?
Should income distribution be :evenly
distributed? or more for the rich? Or for those
who work hard?
Editor's Notes
This is a key concept and one that often causes problems and misunderstanding but is central to students thinking like an economist. The crucial thing to knock out of students is their thinking that everything costs ‘money’. Because we have to make choices there are issues surrounding value judgements about what is important and what is not – it should not be difficult to stimulate discussion about what issues of government spending are important and what are not!
This slide introduces the key features about PPFs. The activity that accompanies this presentation seeks to apply PPFs in a slightly different way – focussing on using health resources. Going through the theory at this stage and then following it up with the activity will be useful in developing early understanding of the issues.
These slides introduce the diagrams and then have animation to show how points on the PPF relate to different resource use and allocation. Moving from point A to point B involves sacrificing some capital goods to gain more consumer goods and thus demonstrates the opportunity cost involved. Students doing history can be reminded about the resource allocation decisions taken by Stalin during the 1930s and the subsequent decisions by successive Soviet premiers since the war about what resources are important for a nation like the USSR! (you might of course have to explain a little bit about what the USSR was!)
The next slide allows the lecturer to demonstrate what happens when resources are not used efficiently and production takes place within the PPF. It then allows the expansion of the PPF and can be used to illustrate the issue of economic growth and where opportunity cost does not exist if the economy moves from point A to point C (in a simple context of course – there is always some form of sacrifice of using resources!).
