Introduction to Economics Dr. Dnyandev C. Talule Professor Dept. of Economics, Shivaji University, Kolhapur Professor of Economics Yashwantrao Chavan Academy of Development Administration

INTRODUCTION TO ECONOMICS Economics refers to that branch of social science which studies the production, distribution and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Adam Smith, is considered to be the Father of Economics, who established the first modern economic theory in 1776.

Microeconomics Microeconomics studies the behaviour of basic elements in the economy, including individual agents and markets, their interactions, and the outcomes of interactions. Individual agents may include, for example, households, firms, buyers, and sellers.

Law of Demand The law of demand states that all other things remaining the same (ceteris paribus), as the price of a product increases (↑), quantity demanded decreases (↓); similarly, as the price of a product decreases (↓), quantity demanded increases (↑). In other words, it can be said that the law of demand establishes an inverse relationship between the price of a good and its quantity.

Law of Demand cont….. E.g. Price of Slice bread loaf is Rs. 20/- and at this price an individual buys 5 units of it (buying 5 loafs of slice bread at Rs.20/- each). Now the price of slice bread loaf increases from Rs. 20 to Rs. 25 (25-20=5, Rs. 5/- increase in price per unit) The individual reduces his consumption of the slice bread loaf to 4 units (5-4=1 unit reduction in consumption).

Now taking into account reduction in the price. Current price of slice bread loaf is Rs. 25/- Now the price of slice bread loaf decreases from Rs. 25 to Rs. 20 (25-20=5, Rs. 5/- decrease in price per unit). The individual increases his consumption of the slice bread loaf to 5 units (4+1=5, 1 unit increase in consumption). Law of Demand Cont…..

Hence, there is a negative relationship between the quantity demanded of a good and its price. The factors held constant in this relationship are the prices of other goods and the consumer's income. This is displayed through diagram in the following slide. Law of Demand cont…..

Demand Curve Demand Curve refers to a curve that displays the characteristics of Law of Demand. Due to the inverse relationship between price and quantity of demand, the demand curve slopes downward from left to right. This indicates the negative relationship between price and quantity of the product.

Demand Curve

In the above diagram “DD1” is the demand curve that slopes down from left to right. Quantity of goods (here Mango) is plotted on the horizontal X-axis in numerical units. Price of the good (Mango) is plotted on the vertical Y-axis also in numerical units.

The law of supply is a fundamental principle of economic theory which states that, all other things remaining the same, an increase in price results in an increase in quantity supplied and vice versa. In other words, there is a direct relationship between price and quantity: quantities respond in the same direction as price changes. Law of Supply

Budget Line Budget line displays the money constraint of an individual. It shows all the possible combinations of two goods which can be purchased with given income and prices. All combinations show same output but different combinations of the two goods.

Indifference Curve An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility.

Production Possibility Frontier (PPF) The production possibility frontier (PPF) is a curve depicting all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors. The PPF assumes that all inputs are used efficiently.

Macroeconomics Macroeconomics analyses the entire economy (meaning aggregate production, consumption, savings, and investment) and issues affecting it, including unemployment of resources (labour, capital, and land), inflation, economic growth, and the public policies that address these issues (monetary, fiscal, and other policies).

Per Capita Income Per capita income or average income measures the average income earned per person in a given area (city, region, country, etc.) in a specified year. It is calculated by dividing the area's total income by its total population.

National Income National income is the total value a country's final output of all new goods and services produced in one year. Real income is income of individuals or nations after adjusting for inflation. It is calculated by subtracting inflation from the nominal income. (Samuelson – GDP deflator) Nominal income is income expressed in money terms.

Gross Domestic Product (GDP) Gross domestic product (GDP) is defined as "the value of all final goods and services produced in a country in 1 year"

Gross National Product (GNP) Gross National Product (GNP) is defined as "the market value of all goods and services produced in one year by labour and property supplied by the residents of a country."

Net National Product (NNP) Net national product (NNP) refers to gross national product (GNP), i.e. the total market value of all final goods and services produced by the factors of production of a country or other polity during a given time period, minus depreciation.

Inflation Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services. Dosanomics (Balassa – Samuelson effect). The Balassa-Samuelson effect suggests that an increase in wages in the tradable goods sector of an emerging economy will also lead to higher wages in the non-tradable (service) sector of the economy.

International Trade International trade is the exchange of capital, goods, and services across international borders or territories, which could involve the activities of the government and individual. In most countries, such trade represents a significant share of gross domestic product (GDP).

Deficit Deficit refers to excess of expenditure over revenue. Three types of Deficits 1) Revenue deficit = Total revenue expenditure – Total revenue receipts. 2) Fiscal deficit = Total expenditure – Total receipts excluding borrowings. 3) Primary deficit = Fiscal deficit – Interest payments.