Principles of Economics: Case, Fair & Oster: Ms. Indrani Sengupta Auro University

Principles Of Economics:
Case , Fair & Oster
Ms. Indrani Sengupta

Auro University
Brief Profile
Educational Background
• Pursuing PhD. (Business Administration) from Department of Business and
Industrial Management, VNSGU in Econometrics
• Masters. in Business Administration (MBA-Finance) from IBS, Hyderabad
( 2008)
Ms. Indrani
• Masters in Economics (MA Economics)
Sengupta,
• Bachelors in Statistics, Mathematics and Economics (Stats Hons.)
Assistant
• UGC – NET (2012) and UP SLET ( 2012)
Professor, School
of Business &
Professional
School of Liberal
• 11 years of experience in academics and industry
Arts & Human
• Prior has worked with SMS Varanasi, Kotak Mahindra Bank & Bajaj Allianz
Sciences, AURO
• Specializes in Finance, Economics and Statistics with special focus on stock
University ,
markets and Indian Economy.
Surat
Others
• Author of a CBSE board book for class 12th on “ Logistics and Supply Chain
Management”.
• Active reviewer of reputed management journals
Chapter 1:
The Scope & Method Of Economics
PART I INTRODUCTION TO ECONOMICS
The Scope and Method

of Economics 1
Chapter Outline
Why Study Economics?
To Learn a Way of Thinking
To Understand Society
To Understand Global Affairs
To Be an Informed Voter
The Scope of Economics

Microeconomics and
Macroeconomics
The Diverse Fields of Economics
The Method of Economics

Theories and Models
Economic Policy
An Invitation
Appendix: How to Read

and Understand Graphs
THE SCOPE AND METHOD OF
ECONOMICS
•economics The study of how

individuals and societies
choose to use the scarce
resources that nature and
previous generations have
provided.
Economics is the study of how individuals and societies choose to use the scarce
resources that nature and previous generations have provided. The key word in this
definition is choose. Economics is a behavioral, or social, science. In large measure it is
the study of how people make choices. The choices that people make, when added up,
translate into societal choices.
WHY STUDY ECONOMICS?
•There are four main reasons to

study economics:
• to learn a way of thinking,
• to understand society,
• to understand global affairs, and
• to be an informed voter.
• TO LEARN A WAY OF THINKING
•Three fundamental concepts:
– Opportunity cost
– Marginalism, and
– Efficient markets
•opportunity cost The best
alternative that we forgo, or
give up, when we make a
choice or a decision.
Marginalism and Sunk Costs
marginalism : The process of analyzing the

additional or incremental costs or benefits
arising from a choice or decision.
sunk costs : Costs that cannot be avoided,

regardless of what is done in the future,
because they have already been incurred.
Efficient Markets—No Free Lunch
•efficient market A market

•in which profit opportunities are
•eliminated almost
instantaneously.
The study of economics teaches us a way of thinking and helps us make decisions.
TO UNDERSTAND SOCIETY
•Industrial Revolution The period in England
during the late eighteenth and early nineteenth
centuries in which new manufacturing
technologies and improved transportation gave
rise to the modern factory system and a massive
movement of the population from the
countryside to the cities.
The study of economics is an essential part of the study of society.

TO UNDERSTAND GLOBAL AFFAIRS
The events of September

11, 2001, dealt a blow to the
tourism industry and left
airlines in deep financial
trouble.
An understanding of economics is essential to an understanding of global affairs.

TO BE AN INFORMED VOTER
A knowledge of economics is
essential to be an informed voter.
When we participate in the political process, we are voting on issues that require a basic
understanding of economics.
MICROECONOMICS AND MACROECONOMICS
•microeconomics The branch of economics that examines the

THE functioning of individual industries and the behavior of
SCOPE individual decision-making units—that is, business firms
OF •and households.
ECONO
MICS
macroeconomics The branch of economics that examines the
economic behavior of aggregates—income, employment,
output, and so on—on a national scale.
Microeconomics looks at the individual unit—the household, the firm, the industry. It
sees and examines the “trees.” Macroeconomics looks at the whole, the aggregate. It
sees and analyzes the “forest.”
THE SCOPE OF ECONOMICS
THE DIVERSE FIELDS OF ECONOMICS
TABLE 1.1 Examples of Microeconomic and Macroeconomic Concerns
DIVISION OF
ECONOMICS PRODUCTION PRICES INCOME EMPLOYMENT
Microeconomics Production/output in Price of individual Distribution of Employment by

individual industries goods and services income and individual businesses
and businesses wealth and industries
How much steel Price of medical care Wages in the auto Jobs in the steel
How much office Price of gasoline industry industry
space Food prices Minimum wage Number of employees
How many cars Apartment rents Executive salaries in a firm
Poverty Number of
accountants
Macroeconomics National Aggregate price level National income Employment and

production/output unemployment in
the economy
Total industrial output Consumer prices Total wages and Total number of jobs
Gross domestic Producer prices salaries Unemployment rate
product Rate of inflation Total corporate
Growth of output profits
THE METHOD OF ECONOMICS
•positive economics An approach to
economics that seeks to understand
behavior and the operation of systems
without making judgments. It describes
•what exists and how it works.
normative economics An approach to

economics that analyzes outcomes of
economic behavior, evaluates them as
good or bad, and may prescribe courses
of action. Also called policy economics.
Descriptive Economics and Economic Theory
descriptive economics The compilation

of data that describe phenomena and
facts.
economic theory A statement or set of

related statements about cause and
effect, action and reaction.
THEORIES AND MODELS
model A formal statement of a theory,

usually a mathematical statement of a
presumed relationship between two or
more variables.
variable A measure that can change

from time to time or from observation to
observation.
Ockham’s razor The principle that
irrelevant detail should be cut away.
Maps are useful abstract

representations of reality.
All Else Equal: Ceteris Paribus
ceteris paribus, or all else equal A

device used to analyze the relationship
between two variables while the values
of other variables are held unchanged.
Using the device of ceteris paribus is one part of the process of abstraction. In formulating
economic theory, the concept helps us simplify reality to focus on the relationships
that interest us.
Expressing Models in Words, Graphs, and
Equations
The most common method of expressing

the quantitative relationship between two
variables is graphing that relationship on
a two-dimensional plane.
Cautions and Pitfalls
The Post Hoc Fallacy
post hoc, ergo propter hoc Literally,

“after this (in time), therefore because of
this.” A common error made in thinking
about causation: If Event A happens
before Event B, it is not necessarily true
that A caused B.
The Fallacy of Composition
fallacy of composition The erroneous

belief that what is true for a part is
necessarily true for the whole.
Testing Theories and Models: Empirical
Economics
empirical economics The

collection and use of data to test
economic theories.
ECONOMIC POLICY
Criteria for judging economic outcomes:

1. Efficiency
2. Equity
3. Growth
4. Stability
Efficiency
efficiency In economics, allocative

efficiency. An efficient
economy is one that produces
what people want at the least
possible cost.
Equity
equity Fairness.
Growth
economic growth An increase in

the total output of an economy.
Stability
stability A condition in which

national output is growing steadily,
with low inflation and full
employment of resources.
Appendix
HOW TO READ AND UNDERSTAND GRAPHS
•A graph is a two-
dimensional
representation of a set
of numbers, or data.
Appendix
TIME SERIES GRAPH
•A time series graph

shows how a single
variable changes over
time.
FIGURE 1A.1 Total Disposable Personal

Income in the United States: 1975–2005 (in
billions of dollars)
Appendix
GRAPHING TWO VARIABLES ON A CARTESIAN
COORDINATE SYSTEM
•The Cartesian coordinate

system is the most common
method of graphing two
variables. This system is
constructed by simply
drawing two perpendicular
lines: a horizontal line, or X-
axis, and a vertical line, or Y-
axis. The axes contain
measurement scales that
intersect at 0 (zero). This
point is called the origin.
FIGURE 1A.2 A Cartesian Coordinate System
Appendix
PLOTTING INCOME AND CONSUMPTION DATA
FOR HOUSEHOLDS
TABLE 1A.1 Total Disposable Personal Income in the United
States, 1975–2005 (in billions of dollars)
YEAR TOTAL DISPOSABLE YEAR TOTAL DISPOSABLE
PERSONAL INCOME PERSONAL INCOME
1975 1,181.4 1989 4,016.3
1976 1,299.9 1990 4,293.6
1977 1,436.0 1991 4,474.8
1978 1,614.8 1992 4,754.6
1979 1,808.2 1993 4,935.3
1980 2,019.8 1994 5,165.4
1981 2,247.9 1995 5,422.6
1982 2,406.8 1996 5,677.7
1983 2,586.0 1997 5,968.2
1984 2,887.6 1998 6,355.6
1985 3,086.5 1999 6,627.4
1986 3,262.5 2000 7,120.2
1987 3,459.5 2001 7,393.2
1988 3,752.4 2002 7,827.7
2003 8,159.9
2004 8,646.9
2005 8,945.6
Appendix
TABLE 1A.2 Consumption Expenditures
and Income, 2003
AVERAGE AVERAGE
INCOME CONSUMPTION
BEFORE TAXES EXPENDITURES
Bottom fifth $ 8,201 $ 18,492
2nd fifth 21,478 26,729
3rd fifth 37,542 36,213
4th fifth 61,132 50,468
Top fifth 127,146 81,731
This line slopes upward, indicating that

there seems to be a positive
relationship between income and
spending.
FIGURE 1A.3 Household Consumption
Points A and B, above the 45° line, and Income
show that consumption can be greater
than income.
Appendix
The slope of the line indicates whether the
relationship between the variables is positive or
negative.
Appendix
An upward-sloping line A downward-sloping line
describes a positive describes a negative
relationship between X relationship between X
and Y. and Y.
FIGURE 1A.4 A Curve with (a) Positive Slope and (b) Negative Slope
Appendix
FIGURE 1A.5 Changing Slopes Along Curves

Appendix
FIGURE 1A.6 National Income and Consumption

Chapter 2:
The Economic Problem: Scarcity & Choice
The Economic Problem:
Scarcity and Choice 2
Chapter Outline
Scarcity, Choice, and
Opportunity Cost
Scarcity and Choice in a
One-Person Economy
Scarcity and Choice in an
Economy of Two or More
The Production Possibility Frontier
Comparative Advantage
and the Gains from Trade
The Economic Problem
Economic Systems
Command Economies
Laissez-Faire Economies:
The Free Market
Mixed Systems, Markets,
and Governments
Looking Ahead
FIGURE 2.1 The Three Basic Questions
Three basic questions must be answered in

order to understand an economic system:
• What gets produced?
• How is it produced?
• Who gets what is produced?
THE ECONOMIC PROBLEM:
SCARCITY AND CHOICE
capital Things that are themselves produced and

that are then used in the production of other goods
and services.
factors of production (or factors) The inputs into

the process of production. Another word for
resources.
THE ECONOMIC PROBLEM: SCARCITY AND
CHOICE
•production The process that
transforms scarce resources into
useful goods and services.
inputs or resources Anything provided
by nature or previous generations that
can be used directly or indirectly to
satisfy human wants.
outputs Usable products.

SCARCITY, CHOICE, AND OPPORTUNITY COST
SCARCITY AND CHOICE IN A ONE-PERSON ECONOMY
•Nearly all the same basic decisions that

characterize complex economies must also be
made in a simple economy.
Opportunity Cost
The concepts of constrained choice and scarcity

are central to the discipline of economics.
opportunity costs The best alternative that we

give up, or forgo, when we make a choice or
decision.
SCARCITY AND CHOICE IN AN
ECONOMY OF TWO OR MORE
Education takes time. Time

spent in the classroom has
an opportunity cost.
Specialization, Exchange, and Comparative
Advantage
theory of comparative advantage

Ricardo’s theory that specialization and
free trade will benefit all trading parties,
even those that may be absolutely more
efficient producers.
absolute advantage A producer has an
absolute advantage over another in the
production of a good or service if it can
produce that product using fewer
resources.
comparative advantage A producer

has a comparative advantage over
another in the production of a good or
service if it can produce that product at a
lower opportunity cost.
SCARCITY,
CHOICE,
AND
OPPORTUNI
TY COST
FIGURE 2.2 Comparative Advantage and the Gains from Trade

Weighing Present and Expected Future Costs
and Benefits
We trade off present and future

benefits in small ways all the
time.
Capital Goods and Consumer Goods
consumer goods Goods produced for
present consumption.
investment The process of using

resources to produce new capital.
Because resources are scarce, the opportunity cost of every investment in capital is forgone
present consumption.
THE PRODUCTION POSSIBILITY FRONTIER
production possibility frontier (ppf) A
graph that shows all the combinations of
goods and services that can be
produced if all of society’s resources are
used efficiently.
FIGURE 2.3 Production Possibility Frontier
Unemployment
•During economic downturns or
recessions, industrial plants run at less
than their total capacity. When there is
unemployment of labor and capital,
we are not producing all that we can.
Inefficiency
•Waste and mismanagement are the results
of a firm’s operating below its potential.
•Sometimes, inefficiency results from

mismanagement of the economy instead of
mismanagement of individual private firms.
The Efficient Mix of Output
To be efficient, an economy must produce

what people want.
Negative Slope and Opportunity Cost
marginal rate of
transformation (MRT)
The slope of the production
possibility frontier (ppf).
FIGURE 2.4 Inefficiency from Misallocation

of Land in Farming
The Law of Increasing Opportunity Cost
TABLE 2.1 Production Possibility Schedule

for Total Corn and Wheat
Production in Ohio and Kansas
TOTAL TOTAL
CORN WHEAT
PRODUCTION PRODUCTION
POINT (MILLIONS OF (MILLIONS OF
ON BUSHELS PER BUSHELS PER
PPF YEAR) YEAR)
A 700 100
B 650 200
C 510 380
D 400 500
E 300 550
FIGURE 2.5 Corn and Wheat Production in

Ohio and Kansas
Economic Growth
economic growth An increase in the

total output of an economy. It occurs
when a society acquires new resources
or when it learns to produce more using
existing resources.
TABLE 2.2 Increasing Productivity in Corn and Wheat Production in the United States,
1935–2006
CORN WHEAT
Yield Per Acre Labor Hours Per Yield Per Acre Labor Hours
(Bushels) 100 Bushels (Bushels) Per 100 Bushels
1935–1939 26.1 108 13.2 67
1945–1949 36.1 53 16.9 34
1955–1959 48.7 20 22.3 17
1965–1969 78.5 7 27.5 11
1975–1979 96.3 4 31.3 9
1981–1985 107.2 3 36.9 7
1985–1990 112.8 NAa 38.0 NAa
1990–1995 120.6 NAa 38.1 NAa
1998 134.4 NAa 43.2 NAa
2001 138.2 NAa 43.5 NAa
2006 145.6 NAa 42.3 NAa
FIGURE 2.6 Economic Growth Shifts the ppf Up and to the Right
Sources of Growth and the Dilemma of the
Poor Countries
FIGURE 2.7 Capital Goods and Growth in Poor and Rich Countries
COMPARATIVE ADVANTAGE AND THE
GAINS FROM TRADE
FIGURE 2.8 Production Possibility Frontiers with No Trade

FIGURE 2.9 Colleen and Bill Gain from Trade
Although it exists only as an abstraction, the ppf illustrates a number of very important
concepts that we shall use throughout the rest of this book: scarcity, unemployment,
inefficiency, opportunity cost, the law of increasing opportunity cost, economic
growth, and the gains from trade.
THE ECONOMIC PROBLEM
Recall the three basic questions facing

all economic systems:
(1) What gets produced?
(2) How is it produced?
(3) Who gets it?
Given scarce resources, how exactly

do large, complex societies go about
answering the three basic economic
questions?
ECONOMIC SYSTEMS
COMMAND ECONOMIES
command economy An economy in

which a central government either
directly or indirectly sets output targets,
incomes, and prices.
ECONOMIC SYSTEMS
LAISSEZ-FAIRE ECONOMIES: THE FREE
MARKET
laissez-faire economy Literally from
the French: “allow [them] to do.” An
economy in which individual people and
firms pursue their own self-interests
without any central direction or
regulation.
market The institution through which

buyers and sellers interact and engage
in exchange.
ECONOMIC SYSTEMS
Consumer Sovereignty
consumer sovereignty The idea that

consumers ultimately dictate what will be
produced (or not produced) by choosing
what to purchase (and what not to
purchase).
ECONOMIC SYSTEMS
Individual Production Decisions: Free
Enterprise
free enterprise The freedom of

individuals to start and operate private
businesses in search of profits.
ECONOMIC SYSTEMS
Distribution of Output
The amount that any one household

gets depends on its income and wealth.
Income is the amount that a household

earns each year. It comes in a number of
forms: wages, salaries, interest, and the
like.
Wealth is the amount that households

have accumulated out of past income
through saving or inheritance.
ECONOMIC SYSTEMS
Price Theory
New businesses arise each

day and some go out of
business in response to
profit opportunities and
losses.
In a free market system, the basic economic questions are answered without the help of
a central government plan or directives. This is what the “free” in free market means—
the system is left to operate on its own, with no outside interference. Individuals pursuing
their own self-interest will go into business and produce the products and services
that people want. Others will decide whether to acquire skills; whether to work;
and whether to buy, sell, invest, or save the income that they earn. The basic coordinating
mechanism is price.
ECONOMIC SYSTEMS
MIXED SYSTEMS, MARKETS, AND
GOVERNMENTS
The differences between command

economies and laissez-faire economies in
their pure forms are enormous. In fact,
these pure forms do not exist in the world;
all real systems are in some sense
“mixed.”
Even staunch defenders of the free enterprise system recognize that market systems are not
perfect. First, they do not always produce what people want at lowest cost—there are
inefficiencies. Second, rewards (income) may be unfairly distributed, and some groups may
be left out. Third, periods of unemployment and inflation recur with some regularity.

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Principles Of Economics:

Case , Fair & Oster

Ms. Indrani Sengupta

The Scope and Method

The Scope of Economics

The Method of Economics

Appendix: How to Read

•economics The study of how

•There are four main reasons to

marginalism : The process of analyzing the

sunk costs : Costs that cannot be avoided,

•efficient market A market

The study of economics is an essential part of the study of society.

The events of September

An understanding of economics is essential to an understanding of global affairs.

•microeconomics The branch of economics that examines the

Microeconomics Production/output in Price of individual Distribution of Employment by

Macroeconomics National Aggregate price level National income Employment and

normative economics An approach to

descriptive economics The compilation

economic theory A statement or set of

model A formal statement of a theory,

variable A measure that can change

Maps are useful abstract

ceteris paribus, or all else equal A

The most common method of expressing

post hoc, ergo propter hoc Literally,

fallacy of composition The erroneous

empirical economics The

Criteria for judging economic outcomes:

efficiency In economics, allocative

economic growth An increase in

stability A condition in which

•A time series graph

FIGURE 1A.1 Total Disposable Personal

•The Cartesian coordinate

This line slopes upward, indicating that

FIGURE 1A.5 Changing Slopes Along Curves

FIGURE 1A.6 National Income and Consumption

Three basic questions must be answered in

capital Things that are themselves produced and

factors of production (or factors) The inputs into

outputs Usable products.

•Nearly all the same basic decisions that

The concepts of constrained choice and scarcity

opportunity costs The best alternative that we

Education takes time. Time

theory of comparative advantage

comparative advantage A producer

FIGURE 2.2 Comparative Advantage and the Gains from Trade

We trade off present and future

investment The process of using

•Sometimes, inefficiency results from

The Efficient Mix of Output

To be efficient, an economy must produce

FIGURE 2.4 Inefficiency from Misallocation

TABLE 2.1 Production Possibility Schedule