INTRODUCTION TO

ECONOMICS
Choices, Choices, Choices, . . .
Part 1: The
Basics
 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?!!??!!
 The Study of Economics
Macroeconomics
– The big picture: growth,
employment, etc.
– Choices made by large
groups (like countries)

Microeconomics
– How do individuals make
economic decisions
 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?
 What are resources?
Definition: The things used to make other
goods
 BUT, there’s a
Fundamental Problem:
SCARCITY: unlimited wants and
needs but limited resources
Choices, Choices

Because ALL resources,

goods, and services are
limited – WE MUST MAKE
CHOICES!!!!
 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?

 Wants and Needs,
Needs and Wants
NEEDS – “things” we must have to
survive, generally: food, shelter, clothing

WANTS – “things” we would really like

to have (Fancy food, shelter, clothing,
big screen TVs, jewelry, conveniences
. . . Also known as LUXURIES
VS.
 TRADE-OFFS
You can’t have everything(SCARCITY –
remember?) so you have to
choose how to spend your money,
time, and energy. These decisions
involve picking one thing over all the
other possibilities – a
TRADE-OFF!
 Trade-Offs, cont.
What COULD you have done instead of
coming to class today?
 A special kind of Trade-Off is an

OPPORTUNITY COST =

The Value of the Next Best Choice

(Ex: Sleeping is the opportunity cost of studying for a test)

 Opportunity Costs
This is really IMPORTANT – when you choose to do
ONE thing, its value (how much it is worth) is
measured by the value of the NEXT BEST CHOICE.
– This can be in time, energy, or even MONEY

If I buy a Then I
pizza… can’t afford
the
movies…

Q: What is the opportunity cost of buying pizza?

 Production
So how do we get all
this “stuff” that we
have to decide about?
Decisions, decisions
…
 PRODUCTION, cont.
Production is how STUFF – Goods and
much stuff an Services.
individual, business,
country, even the
Goods – tangible (you
WORLD makes.
can touch it) products
we can buy
But what is “STUFF”?
Services – work that
is performed for
others
 Factors of Production
So, what do we need to make all of this Stuff?
 4 Factors of Production
LAND – Natural Resources
– Water, natural gas, oil, trees (all the stuff we find on,
in, and under the land)
LABOR – Physical and Intellectual
– Labor is manpower
CAPITAL - Tools, Machinery, Factories
– The things we use to make things
– Human capital is brainpower, ideas, innovation
ENTREPRENEURSHIP – Investment $$$
– Investing time, natural resources, labor and capital
are all risks associated with production
Which Factor of Production?
Which Factor of Production?
Which Factor of Production?
Which Factor of production?
 THREE parts to the Production
Process
Factors of Production – what we need to make
goods and services

Producer – company that makes goods and/or

delivers services

Consumer – people who buy goods and services

(formerly known as “stuff”)

Which Came First?

 Production Process

Land

Goods

Labor
Production/Manufacturing
“Factory” Consumers

Capital

Services

Entrepreneurship
 Capital Goods and Consumer
Goods
Capital Goods: are
used to make other
goods

Consumer Goods:
final products that are
purchased directly by
the consumer
CHANGES IN PRODUCTION
Specialization –
dividing up production
so that Goods are
produced efficiently

Hardee’s makes
hamburgers, not
shoes!!

Nike makes shoes, not

hamburgers
CHANGES IN PRODUCTION

Division of Labor –
different people
perform different jobs
You do your
to achieve greater job, and I will
efficiency (assembly do my Job and
we will be more
line). EFFICIENT
CHANGES IN PRODUCTION
Consumption – how
much we buy
(Consumer
Sovereignty)
The DELL store is
empty because….

Everyone is at the
APPLE STORE!!!
CHANGES IN PRODUCTION
If we INCREASE land, labor, capital we
INCREASE production
– Many entrepreneurs invest profit back into production

If we DECREASE land, labor, capital we

DECREASE production

BUT WHY would we ever DECREASE

production?
The Circular Flow Model
 PRODUCTION, cont. again
A measure of the production of an entire
country in one year is

GDP
The total value of ALL final Goods and
Services
produced in a country in a year.
(GROSS DOMESTIC PRODUCT)
 World GDP
Total GDP 2005 11 Korea, Rep. 787,624
(millions of US dollars) 12 India 785,468
1 United States 12,455,068 13 Mexico 768,438
2 Japan 4,505,912 14 Russian Federation
3 Germany 2,781,900 763,720
4 China 2,228,862 15 Australia 700,672
5 United Kingdom 2,192,553 16 Netherlands 594,755
6 France 2,110,185 a 17 Switzerland 365,937
7 Italy 1,723,044 18 Belgium 364,735
8 Spain 1,123,691 19 Turkey 363,300
9 Canada 1,115,192 20 Sweden 354,115
10 Brazil 794,098 21 Saudi Arabia 309,778
Part 2: Costs and Revenues
 Costs and Revenues
Cost – the total
amount of money it
takes to produce an
item (to pay for ALL
Factors of
Production).
 Costs and Revenues
Fixed Costs – the
amount of money a
business MUST pay each
month or year (like rent
and Capital expenses).
 Costs and Revenues
Variable Costs – the
amount of money a
business pays that
changes over time (Labor
and Raw Materials).
 Costs and Revenues
Total Costs = Fixed +
Variable Costs.
 Costs and Revenues - Chart
Marginal Costs – the
additional Cost of the
NEXT UNIT produced.

Margin=Extra
Space
 Costs and Revenues
Profit – the difference
between Total Costs
and Revenues. This
is WHY you’re in
BUSINESS (Profit
Motive!)
– Profit=Revenues-Total cost

– Profit Motive=why you are

in business---to make
MONEY
(principles of Capitalism)
 Costs and Revenues
Cost Benefit Analysis
– weighing the
Marginal Costs vs.
the Marginal Benefits
of producing an item Marginal
or making any Marginal Costs
economic decision. If Benefits
the Benefit is
GREATER than the
Cost, then business
does it.
 Cost-Benefit Analysis
Immediate or short term satisfaction can
lead to missing the long-term benefits.#7

For Example

Immediate spending on cheap stuff

instead of long-term savings will lead to
lower economic prosperity.
Part 3: Comparative
Economics
 Traditional Economies
Def: Economic
Questions answered by
custom
Predominately
Agricultural
Developing or “3rd
World”
Trade and barter
oriented
Low GDP & PCI (per
capita income = avg.
inc.)
 Command Economies
Def: Economic
questions answered by
the government
Very little economic
choice
No private ownership
Communism
Old Soviet Union, old
Communist China,
Cuba and North Korea
 Karl Marx
19th century German
economist
Author of “Communist
Manifesto” and “ Das
Kapital”
– Government should
control economy and
distribute goods and
services to the people
Founder of
revolutionary
socialism and
communism
 Communism Falls
Market reforms in China in the
mid 1970s.

Fall of the Berlin Wall in 1989.

Collapse of the Soviet Union

1991.

Free Market Capitalism (w/

some Mixed Economies) the
only show in town.
Free Market (Capitalist) Economies
Economic questions
answered by
producers and
consumers
Limited government
involvement
Private property rights
Wide variety of
choices and products
U.S., Japan
 Adam Smith
18th century Scottish
economist
Published “The Wealth of
Nations” in 1776
Explained the workings of
the free market within
capitalist economies
Invisible hand of the
market
 Adam Smith (cont.)
Laissez-faire - Government stays out of
business practices “hands off” to let the
market place determine production,
consumption and distribution.

Individual freedom and choice

emphasized.
 Principles of Capitalism
Competition – more
businesses means
lower prices and
higher quality
products for
consumers (US!) to
buy.
 Principles of Capitalism
Voluntary Exchange –
businesses and
consumers MUST be
free to buy or sell
what and when they
want.
 Principles of Capitalism
Private Property –
Individuals and
businesses MUST be
able to get the
benefits of owning
their OWN property.
Government doesn’t
control it.
 Principles of Capitalism
Consumer
Sovereignty –
consumers get to
make free choices
about what to buy
and this helps drive
production
(Demand drives
Supply).
Principles of Capitalism
Profit Motive – people
want to make or save
$$$$. Their “Self
Interest” motivates
Capitalism.
 Principles of Capitalism
Social Safety Net –
“Mixed Economy” idea
that says the government
should NOT allow people
to suffer in economic
crisis (natural part of
Capitalism’s “Business
Cycle”), but provide
security instead – Social
Security, Unemployment
Insurance, etc.
 Mixed Economy/Socialism
Government involvement
and ownership and control
of property, of decision
making, and companies.
Government control of
business
Social “safety net” for
people
Socialism
Common in Europe, Latin
America, and Africa
 John Maynard Keynes
The Invisible Hand
doesn’t always work.

“The long run is a

misleading guide to
current affairs. In the
long run we are all
dead.” or . . . the
trouble is people eat
in the short run.
Keynesian Economics (cont.)
Government should intervene in economic
emergencies through tax and spending
(Fiscal Policy) and changing the money
supply (Monetary Policy).
This is done to smooth out the business
cycle (expansion and recession) and keep
inflation low.
Part 4: Labor Issues
 LABOR
Wages – what companies Salary – the amount of
pay employees for their pay a person gets over a
labor (usually based upon year (especially for
an hourly rate). “professional” jobs).

Blue Collar White Collar

Manufacturing, work with ‘Office’ jobs
hands Usually control production
Usually the ‘labor’ in
production
When Production Decreases
Downsizing – laying off employees to save costs.

Outsourcing – sending jobs and manufacturing overseas

or contracting to outside companies to save money.

Bankruptcy – government allows business to restructure

it’s debt, but now all profits go to paying off debt rather
than to the owners/investors.

Out of Business – lose all your business, money, and

profits.

The current trend in the U.S. is that manufacturing jobs

are declining
How does ‘Labor’ protect itself?
Labor Unions: organization of workers
who have banded together to achieve
common goals
– Wage protection
– Workplace safety
– Benefits
– Job protection
Collective Bargaining and Strikes
Collective
Bargaining
– Representatives of
the Union and the
company negotiate
a contract for the
workers; usually
they rely on
compromise
Strikes
– When an agreement
can’t be reached,
workers stop
working to try to
force the hand of the
company
Important terms in Economics

Inflation- an increase in the overall level of

prices in the economy

Law of demand - the quantity demanded of

a good falls when the price of the good rises
and vice versa

Law of supply - other things equal, the

quantity supplied of a good rises when the
price of the good rises
Important terms in Economics
Equilibrium - price level at which quantity
demanded equals quantity supplied

Surplus - a situation in which quantity

supplied is greater than quantity demanded

Shortage - a situation in which quantity

demanded is greater than quantity supplied
Important terms in Economics
Price elasticity of demand - the degree to
which the number of products sold changes
when the product's price changes

Investment : The act of putting money into a

business to buy new stock, machines, etc.,
or a sum of money that is invested in a
business in this way:
Important terms in Economics
Production : the amount of goods or
products that are made or grown by a
company or country

Consumption : the process of buying and

using goods, or the amount that is bought
and used
Important terms in Economics
Savings : a situation in which total income is
greater than money spent by a person,
company, government, etc. over particular
period of time

Capital : wealth, esp. money used to

produce more wealth through investment or
a new business
Important terms in Economics
Demand : a need for goods or services that
customers want to buy or use

Supply : to provide something that is wanted

or needed, often in large quantities and over
a long period of time
Important terms in Economics
law of diminishing returns : the principle that
after a certain point more work, investment, etc.
produces smaller and smaller improvements or
results

Demand Forecasting : In modern business,

production is carried out in anticipation of future
demand . There is a time gap between production
and marketing. So production is done on the basis
of demand forecasting
Important terms in Economics
Fiscal policy refers to the policies framed by the
government in order to regulate taxation and for
allocation of budgets to various departments for
their functioning. The annual economic survey
and the annual budget list out these policies
of the government. From paying the income tax,
to our demand for better roads and infrastructure,
everything is affected by the government’s fiscal
policies.
Important terms in Economics
Monetary policy on the other hand is a term
used to refer to the actions of our central bank i.e.
the Reserve Bank of India (RBI). Besides
printing money, the RBI through the use of
monetary policy tools monitors and
influences the movement of a number of
macroeconomic indicators including interest
rates, inflation rate, money supply and
Gross Domestic Product (GDP)
Important terms in Economics
Stock Market Returns: Stock market returns are
a leading economic indicator and draw attention to
the state of the economy.

The stock market usually begins to decline

before the economy declines and begins to
improve before the economy begins to pull
out of a recession.
 Important terms in Economics
Foreign Institutional Investors (FIIs): FIIs are
foreign entities which are allowed to invest in the Indian
share markets and are a major source of liquidity for the
stock markets. When FIIs invest large amounts in
the Indian share markets, it is seen as a seal of
approval by sophisticated investors who back
themselves with detailed diligence and study of the
future prospects of the economy. For this reason
FII buying often indicates a positive
economic outlook and vice-versa.
Important terms in Economics
Foreign Direct Investment (FDI): FDI which
is a direct investment into the country from an
entity in another country, either by setting up a
new company or by way of a merger, acquisition
etc., indicates the positive sentiment of overseas
investors on the future business environment of
the country.
 Important terms in Economics
Monopoly: (an organization or group that has) complete
control of something, especially an area of business, so
that others have no share

The government of India has a monopoly on rail

travel.
Oligopoly: a situation in which only a small number of
companies are involved in producing a particular type of
goods or in providing a particular type of service. The group
of companies itself is also referred to as an oligopoly
For example, market for cars in India is dominated by few
firms (Maruti, Tata, Hyundai, Ford, Honda, etc.).
GDP vs GNP
GDP measures the value of commodities(goods+services)
produced within the country, no matter whether produced
by Residents or non-residents (country concept).

GNP measures the value of commodities produced by all

the RESIDENTS, no matter whether produced within the
country or abroad (resident concept). National Income is
another name of GNP

Example - An Indian national, say Mr Roy is working in

France for less than 1 year:
He contributes to French GDP as he is working in France.
But he also contributes to Indian GNP as he is an Indian
Resident, working abroad.
 GST
Goods and Services Tax (GST) is an indirect tax (or
consumption tax) levied on the supply of goods and
services.
It subsumed central indirect taxes like excise duty,
countervailing duty and service tax, as also state levies
like value added tax, octroi and entry tax, luxury tax.

Input tax is the tax that is added to goods and

services that a business buys to make its own goods
or provide its own services
 Indian Economy
The economy of India is a developing mixed economy.

It is the world's sixth-largest economy by GDP.

The country ranks 139th in per capita GDP.

After the 1991 economic liberalisation, India achieved 6-7% average

GDP growth annually.

In FY 2015 and 2018 India's economy became the world's fastest

growing major economy, surpassing China.

The long-term growth prospective of the Indian economy is positive due

to its young population

India has one of the fastest growing service sectors in the world
 Credit Creation
It is a situation in which banks provide more loans to consumers and
businesses, with the result that the amount of money in circulating
(being passed from one person to another) increases.

Creation of credit is one of the most important function of a commercial

banks.

Let us understand this by a simple example, Mr A puts deposit worth

Rs. 1000 in X bank. For simplicity assume that there us reserve
requirement of 10%. X bank can lend Rs 900. Suppose Mr B gets this
loan and deposits in his bank account with Bank Y. Now it forms part of
deposits of Y who can lend Rs 810 from the deposit. This chain
continues till the time money remains in banking system. This process
is called credit creation where deposit of Rs 1000 has created credit
more than that.
 Global Economy
The whole idea of Global economy came into picture when countries started
relaxing the restrictions on trade with the people who do not belong to that
particular country.

It functions based on the regulations each country's Government has in place

and the relationships of the each country with others.

Had there been no restrictions and dividing people based on their geographic
location , there wouldn't have been any sort of concept called Global economy
because there wouldn't have been any restrictions on with whom you can
exchange goods or services.