Introduction to economics

1. Economics
Introduction

2. Definition of economics
Economics is the study of how men and society choose, with or without the
use of money , to employ scarce productive resources , which could have
alternative uses, to produces various commodities over time and distribute
them for consumption , now or in near future , among different people and
groups in the society.

3. OLD Definitions
• Study of wealth- Adam Smith (Father of economics)
• Study of welfare- Alfred Marshall
• Definition of scarcity- Lionel Robbins
• Modern definition- Paul A. Samuelson

4. MacroeconomicsMicroeconomics

5. Basic Concepts:
• Scarcity: The fundamental economic problem is that human wants to exceed
the availability of resources
• Choice: Individuals and society can never have everything that they desire
and hence are forced to make choices
• Opportunity Cost: The second best option forgone for a chosen option.

6. PESTEL-Airlines
• Political-Treaties to open Markets, relating to the markets
• Economical- recession, prices, exchange rates
• Social- concerns for environment, willingness and desire to travel
• Technological-online booking
• Environmental-concerns over emission, concerns over take off/landing
• Legal- passenger safety, employment laws, Competitions laws

7. MICROECONOMICS
Branch of economics that studies single, individual unit of an economy like
individual, firm, household etc and their behaviour. Thus it is the study which
seeks to explain how a consumer uses his limited income in various goods and
services to maximise his satisfaction and how a firm decides its course of
production to attain maximum profit.

8. Microeconomics includes:
• Production: What to produce, How to produce, For whom to produce
• Consumption: The group of people/division of society that will consume
the produced good.
• Exchange: Goods and services in exchange of money or other goods and
services
• Distribution: Income distribution

9. Factors of production includes:
• Land: any natural resource. Most common land.
• Labour: Mental and physical capacity of workers to produce goods
• Capital: Financial help to put up and run a production unit
• Raw Materials: Materials to be transformed into finished goods
• Entrepreneurs: Creative ability of individuals to seek profits by combining
resources to produce innovative products

10. Importance of microeconomics
• Micro economics studies behaviour of individual consumer or producer in a
particular situation.
• Micro economics helps in proper allocation and utilization of resources to
produce various types of goods and services.
• Micro economics decides prices of various goods and services on the basis
of 'Demand-Supply Analysis'.
• t not only analyse economic conditions but also studies the social needs
under different market conditions like monopoly, oligopoly, etc.

11. Microeconomics answers following questions:
• How a firm determines the sale price of its products?
• What amount of output will maximise its profit?
• What is the ratio of individual income for consumption of particular good
or service?
• What is the relation between individual income and individual consumption?
• How individual factors of production are determined?

12. Limitations of microeconomics
• Unrealistic Assumptions: It assumes uniformity of taste, income,
expectations etc which is not possible in real world
• Inadequate Data: Micro economics is based on the information dealing
with individual behaviour, individual customers which is difficult to
determine accurately.
• Ceteris Paribus: It assumes that all other things being equal (same) but
actually it is not so.

13. MACROECONOMICS
Branch of economics that studies the working of an economy as a
whole. It applies to broad economic aggregates like level of
employment, general price level, investment, trade cycle etc.

14. Macroeconomics includes:
• GDP
• Inflation
• Employment
• Fiscal and monetary policies
• Trade cycle etc

15. Importance of Macroeconomics
• Macroeconomics is very essential for understanding the functioning of the
economic system.
• Macroeconomic analysis helps in proper formulations of economic policies.
• The estimates of national income can be used to measure the performance
of an economy in an aggregate sense and these allow us to compare the
performance with the past.
• Macroeconomics provides necessary information for international
comparisons.

16. Macroeconomics answers following questions:
• Why a country is facing unemployment and how can it be overcome?
• How national income is estimated and how it is affected by various variables
of the economy
• What are the causes of inflation?
• How internal economy is affected by changes in external economy?

17. Limitations of Macroeconomics
• False Generalizations: The main limitation of the aggregative approach is
that the logic and conclusions which may be true for individuals or small
units tend to be false when applied to the system as a whole. What is true at
the micro level need not be true at the macro level. We must, therefore, be
on our guard against generalizing too much from individual experience.
• Difficulties in Measuring the Aggregates: Macroeconomic analysis
cannot be very precise because of heterogeneous nature of different
elements constituting an aggregate.

18. Limitations of Macroeconomics
• Diversities: An aggregative tendency may not influence all the sectors of the
economy in the same manner. A general rise in prices, for example, may not
affect all the sectors of the economy in a similar manner. Some sections may
be affected adversely than others.

19. Parameters Microeconomics Macroeconomics
Production Production of individual units
E.g. How much steel is produced
by a single firm
Production of whole economy
(Gross Domestic Product/ Total
industrial output)
Prices Price of individual goods and
services
E.g. Food prices, house rents
Aggregate price Level
E.g. Consumer price, Producer price
Income Distribution of wealth: Wages in
particular industry/firm
National income: Total wages and
salaries
Employment Jobs in particular industry Employment and unemployment
issues in an economy

20. Macroeconomics and microeconomics
interlinked
There is an obvious relationship between microeconomics and
macroeconomics in that aggregate production and consumption levels are the
result of choices made by individual households and firms, and some
macroeconomic models explicitly make this connection. The study of
macroeconomics is indispensable even for the purpose of building and
developing microeconomics. For example, the law of diminishing marginal
utility could not have been formulated without the macro-investigation. Thus,
no microeconomic law can be formulated without a pre-study of the
aggregates bearing unit.