Nature and Scope of Economics Definition of Economics 1.Definition of the Classical School of Thought led by Adam Smith 2.Definition of the NEO Classical School of Thought led by Alfard Marshall 3.Definition of Economics given by Loinel Robbin

Adam Smith’s Definition of Economics “Economics is a science of wealth” 1.Production of wealth Land Labor Capital Organization 2.Exchange of wealth 3.Distribution of wealth 4.Consumption of wealth

Alfard Marshall’s definition of Economics “Economics is a science which studies human behavior in the ordinary business of life, it examine that part of individual and social action which is most closely connected with the attainment and the use of material requisites of well being” Main Points of the definition 1.Ordinary business of life 2.Analysis of economic activities 3.Attainment and use of material requisites 4.Well being or welfare of the society

Criticism on Marshall’s definition 1.It limits the scope of Economics 2.Material requisites which don’t promote welfare are excluded 3.Welfare is not measurable concept 4.Problems in policy making

Robbins Definition of Economics “Economics is a science which studies human behavior as a relationship between multiple ends and scare means which have alternative uses” Main points of the definition 1.Multiple ends 2.All wants are not equally important 3.Scarce Resources 4.Alternative use of resources

Modern Definition of Economics Economics is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices.

Merits of Robbin’s definition of Economics 1.Comprehensiveness 2.Extension of the scope of Economics 3.Analytical in Nature

Micro economics vs Macro economics Micro -- study of how individuals make decisions and interact with others in society Macro -- study of aggregate behavior of the economy (inflation, unemployment, growth)

Basic Terms and Concepts in Economics Human Wants: 1.Non-economic wants 2.Economic wants Necessities Comforts Luxuries

Characteristics of Economic Wants Economic wants are: 1.Unlimited 2.Not equally important 3.Rise again and again 4.Can be satisfied by different means 5.Satisfiable

Goods and Services Economic goods can be divided into two categories 1.Consumer Goods 2.Capital Goods Raw material Semi-manufactured goods Fully manufactured goods

Utility “utility is the power of a good or service by which it can satisfy a human want”

Characteristics of Utility 1.Utility depends or Human wants 2.It depends on use 3.It depends on knowledge 4.It depends on ownership 5.It depends on number 6.It depends on form 7.It depends on place 8.It depend on time and seasons

Demand Quantity Demanded refers to the amount (quantity) of a good that buyers are willing to purchase at alternative prices for a given period. or Demand = Power to purchase + will to purchase Requisites: Desire for specific commodity. Sufficient resources to purchase the desired commodity. Willingness to spend the resources. Availability of the commodity at (i) Certain price (ii) Certain place (iii) Certain time.

Determinants of Demand What factors determine how much ice cream you will buy? 1.Product’s Own Price 2. Consumer Income 3. Prices of Related Goods 4. Tastes 5. Expectations 6. Number of Consumers etc

Kinds of Demand 1. Individual demand 2. Market demand 3. Income demand Demand for normal goods (price –ve, income +ve) Demand for inferior goods (eg., coarse grain) 4. Cross demand Demand for substitutes or competitive goods (eg.,tea & coffee, bread and rice) Demand for complementary goods (eg., pen & ink) 5. Direct demand (eg., ice-creams) 6. Derived demand (eg., TV & TV mechanics)

Factors Affecting Demand 1.Prices of Goods 2. Income of Consumer 3. Prices of Related Goods 4.Population 5.Tastes, Habit 6.Expectation about future prices 7.Climatic Factors 8. Demonstration Effect 9. Distribution of national income

Demand Schedule Demand Schedule: a tabular presentation showing different quantities of a commodity that would be demanded at different prices. Types of Demand Schedules Individual Demand scheduleMarket Demand Schedule PriceA Price ABCM.S

The Law of Demand Prof. Samuelson: “Law of demand states that people will buy more at lower price and buy less at higher prices, others thing remaining the same.” Ferguson: “According to the law of demand, the quantity demanded varies inversely with price”. Chief Characteristics: Inverse relationship. Price independent and demand dependent variable. Assumptions: No change in tastes and preference of the consumers. Consumer’s income must remain the same. The price of the related commodities should not change. The commodity should be a normal commodity

John's Demand Schedule Quantity of cones Demanded Price of Ice-cream Cone ($)

John’s Demand Curve Price of Ice- Cream Cone Quantity of Ice-Cream Cones $

Exceptions and Importance of Law of Demand Exceptions: Inferior goods Articles of snob appeal. (exception: Veblen goods, eg., diamonds) Expectation regarding future prices (shares, industrial materials) Emergencies Quality-price relationship Ignorance Change in fashion, habits, attitudes, etc.. Importance: Price determination. To Finance Minister To farmers In the field of Planning.

Shift of Demand Vs Movement Along a Demand Curve A change in demand is not the same as a change in quantity demanded. In this example, a higher price causes lower quantity demanded. Changes in determinants of demand, other than price, cause a change in demand, or a shift of the entire demand curve, from D A to D B.

A Change in Demand Versus a Change in Quantity Demanded When demand shifts to the right, demand increases. This causes quantity demanded to be greater than it was prior to the shift, for each and every price level.

A Change in Demand Versus a Change in Quantity Demanded To summarize : Change in price of a good or service leads to Change in quantity demanded (Movement along the curve). Change in income, preferences, or prices of other goods or services leads to Change in demand (Shift of curve).

The Impact of a Change in Income Higher income decreases the demand for an inferior good Higher income increases the demand for a normal good

The Impact of a Change in the Price of Related Goods Price of hamburger rises Demand for complement good (ketchup) shifts left Demand for substitute good (chicken) shifts right Quantity of hamburger demanded falls

From Household to Market Demand Demand for a good or service can be defined for an individual household, or for a group of households that make up a market. Market demand is the sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service.

From Household Demand to Market Demand Assuming there are only two households in the market, market demand is derived as follows: