1. Economics: An Orientation Sunitha.S Assistant Professor School of Management Studies, National Institute of Technology (NIT) Calicut Industrial Economics Lecture 01.01.2010

2. A quick glance about Eco Micro Economics Individual units: how a consumer gets satisfaction ? how a single producer maximizes profit? etc Macro Economics Aggregate units: national income, inflation, employment Monetary Economics How money, credit,banks, stock markets function? Public Finance Govt expenditure, budget, taxation, public debt International Economics Exchange rate, foreign trade, IMF, World Bank, WTO,GATT 2

3. Books for Reference Principles of Micro Economics, (Gregory. N. Mankiw) Principles of Macro Economics, (Gregory. N.Mankiw) Economics, Samuelson, P.A. and W.D. Nordhaus Books on Financial Management/Managerial Economics Additional books for reference would be informed later

4. 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? 4

5. Buzz words Marginalism Incrementalism Opportunity Principle Discounting Time perspective 5

6. 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 6

7. Profit of a firm using principle of marginalism Units of output (1) Total Revenue (Rs) (2) Marginal revenue (Rs) (3) Total costs (Rs) (4) Marginal cost (Rs) (5) Total profits (Rs) (6)=(2)- (4) Average profit (Rs) (7)=(6) / (1) Marginal profits (Rs) (8) 120-1555.0- 240202914115.56 360204212186.07 480205210287.010 5100206513357.07 6120208116396.54 71402010120395.60 81602012524354.4-4 7

8. 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. 8

9. 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 9

10. 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 10

11. 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 10 units of X and or 20 units of Y, the the opportunity cost of 1x is 2Y. 11

12. 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 12

13. Production Possibility Frontiers 13 Capital Goods Consumer Goods Yo Xo A B Y1 X1 Assume a country can produce two types of goods with its resources – capital goods and consumer 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 Ym Xm If the country is at point A on the PPF It can produce the combination of Yo capital goods and Xo consumer goods 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 capital goods.

14. Production Possibility Frontiers Capital Goods Consumer Goods Yo Xo A.B.B C Y1 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. 14

15. 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 15

16. 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 16 (1+i)

17. V 1 = R V 1 = 100 = Rs.90.90 A present value of Rs100 due two years later would be V 2 = Rs100 17 (1+.10) (1+.10) 2 =82.64 (1+i)

18. Time perspective Short run Versus long run Very short run Short run Long run Fixed versus variable costs of production 18

19. Circular Flow of Income Y = Income C = Consumption Expenditure S = Savings I = Investment T = Taxation G = Government Expenditure M = Imports X = Exports 19

20. 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 20

21. Circular Flow - Simple ConsumersProducers Resources Goods and Services Consumption Expenditure Income Resources Goods and Services

22. Circular Flow - Savings and Investment Income Consumption Exp Capital Market Savings Investment ConsumersProducers

23. Circular Flow - Government Sector Income GOVERNMENT TAXATION CAPITAL MARKET Savings Investment Consumption SPENDING SUBSIDIES TAXATION Consumers Producers

24. Circular Flow - Four Sectors Income CAPITAL MARKET SavingsInvestment OVERSEAS SECTOR GOVERNMENT Taxes Imports Govt subsidies Exports LEAKAGES INJECTIONS Consumption exp ConsumersProducers Thank You