ECONOMICS AND ECONOMY

• A social science that studies how products and services

are produced, distributed and consumed.
• Studies how individuals, corporations, governments,
and nations allocated resources to meet their demands
and needs.
• How these entities should organize a coordinate their
activities to maximize output.
THE PRIME QUESTION
allocating the resources

resources are always in short supply

SCIENCE OF SCARCITY
The British economist Lionel Robbins in 1935
described the discipline
 BRANCHES
Macroeconomics
• which studies the behavior of the entire economy

Microeconomics
• which studies the behavior of individual customer
businesses
 Micro Economics Macro Economics
1. It Studies the individual unit. It studies the whole economy or large groups.

2. Laws related to Marginal analysis are included Problems related to whole economy like
in its scope. employment, public finance, national income
etc. are included in its scope

3. Micro Economics provides the information Macroeconomics provides the information

relating to the individual prices, individual relating to National Income, total output, total
consumption and production. consumption and general price level

4. Micro economics analysis is simple Macroeconomics is complex due to the study of

large groups.

5. Micro economics particularly focus on price Macro Economics particularly focus on income
analysis. analysis

6. Micro economics studies individual problems Macroeconomics studies the problems relating
and it is less important for comparative study to the economy and its importance is growing.
Hence, An economy

Huge collection of interconnected

production and consumption
activities

The production and consumption of

goods and services are utilised to
meet the requirements of those
living and operating within the
economy, which also known as an
economic system.
 Hence, An economy is a
• huge collection of interconnected production and consumption
activities

• The production and consumption of goods and services are utilised to

meet the requirements of those living and operating within the
economy, which also known as an economic system.
What is Economy

Economics at play in a certain region

Types of Economy

Market Economy

Non-market Economy

Mixed Economy
Types of Economy
Non-Market Economy

Non-market economics is the study of the trade, and

distribution of property (such as goods and services) in
a way other than that used by the market system (the
free price system, which relies on supply and demand
to reach mutually agreed prices between those buyers
and sellers)
Republic of Armenia (see 57 FR 23380)

Republic of Azerbaijan (see 57 FR 23380)

Republic of Belarus (see 57 FR 23380)

People’s Republic of China (see 82 FR 50858)

Georgia (see 57 FR 23380)

Kyrgyz Republic (see 57 FR 23380)

Republic of Moldova (see 57 FR 23380)

Republic of Tajikistan (see 57 FR 23380)

Turkmenistan (see 57 FR 23380)

Republic of Uzbekistan (see 57 FR 23380)

Socialist Republic of Vietnam (see 68 FR 37116)

India Rejects Market Economy Tag For China
Mixed economic system

protects private property and permits

economic freedom in capital allocation,

but it also allows governments to interfere in

activity to achieve social goals.
Circular Flow of Income
Circular Flow of Income
Mixed economic system

protects private property and permits

economic freedom in capital allocation,

but it also allows governments to interfere in

activity to achieve social goals.
The circular flow model demonstrates how money
moves through society.

Money flows from producers to workers as wages and

flows back to producers as payment for products.

In short, an economy is an endless circular flow of

money.
When all of these factors are totalled, the result is a
nation's gross domestic product (GDP) or the national
income.

Analysing the circular flow model and its current impact

on GDP can help governments and central banks adjust
monetary and fiscal policy to improve an economy.
Essential economic activities

The of a country are:

production

consumption

capital formation
 Scarcity

Scarcity means the limitation of supply for

a particular commodity and the central
purpose to study economics is to use the
scarce resources with optimum efficiency.
 Economic Agents

Economic agents refer to the institutions that are

responsible for taking economic decisions.

They are government, banks, consumers etc.

They decide the interest rate, tax rate, how much to

spend etc.
 Economic Agents
• Economic agents refer to the institutions that are responsible for
taking economic decisions.

• They are government, banks, consumers etc.

• They decide the interest rate, tax rate, how much to spend etc.
Great economic depression of 1929
 Great economic depression of 1929

• Macroeconomics emerged as a separate branch of economics when

• John Maynard Keynes;

 Normative economics
• deals with the opinion and suggestions of the economists and the
statements are derived from the ideological perspective about
different solutions of the economic problems.

• It cannot be verified with actual data.

CENTRAL PROBLEMS OF AN
ECONOMY
• What to Produce and in What Quantities?

• How to produce?

• For Whom to Produce?

 SECTORS OF ECONOMY
• Primary Sector
• Secondary Sector
• Tertiary Sector
• Quaternary Sector
• Quinary Sector
 Sectors & Types of Economies

Sectors

Primary Secondary Tertiary Quaternary Quinary

White
Red Collar Blue Collar Gold Collar
Collar
 Agriculture

Primary Sector
Fuels
Fishing
Forestry
Metals
Minerals
34
Secondary Sector
Manufacturing

Refining

Production

Food Processing

35
Tertiary Sector
Service Sector

Transportation

Communication

36
37

Quaternary Sector
Banking

IT Sector

Education

Knowledge Sector
Quinary Sector
R&D
CEOs
Scientist
Bureaucracy
38
 Production possibility frontier
• a curve illustrating the varying amounts of two products that can be
produced when both depend on the same finite resources.

• production of one commodity may increase only if the production of

the other commodity decreases.

• a decision-making tool for managers deciding on the optimum

product mix for the company.
• The Production Possibilities Frontier (PPF) is a graph that shows all the different
combinations of output of two goods that can be produced using available
resources and technology. The PPF captures the concepts of scarcity, choice, and
tradeoffs.
• The shape of the PPF depends on whether there are increasing, decreasing, or
constant costs.
• Points that lie on the PPF illustrate combinations of output that are productively
efficient. We cannot determine which points are allocatively efficient without
knowing preferences.
• The slope of the PPF indicates the opportunity cost of producing one good versus
the other good, and the opportunity cost can be compared to the opportunity
costs of another producer to determine comparative advantage.
 OPPORTUNITY COST
• Opportunity cost is the cost of missing out on an opportunity to get
higher (additional) returns on an alternative investment decision than
the one chosen.
 OPPORTUNITY COST

• Formula of Opportunity Cost

• Opportunity Cost = FO-CO

• where FO= Return on best forgone option

• CO= Return on chosen option

 INDIFFERENCE CURVE
• equal level of satisfaction and utility to the consumer,

• Indifference curves are heuristic devices used in contemporary

microeconomics to demonstrate consumer preference and the
limitations of a budget.
 Properties
• (1) Indifference curves are convex to the origin.

• (ii) The slope of the curve is called the Marginal Rate of Substitution.
(ii) Indifference curve slopes downward.

• (iv) Higher Indifference curve indicates higher level of satisfaction.

• (v) An Indifference curve never touches X or Y axis. (vi) Two

Indifference curves never intersect each other.
 BUDGET LINE or budget constraint

• Exhibits all the combinations of two commodities that a customer can

manage to afford at the provided market prices and within the
particular earning
 BUDGET LINE or budget constraint

• Budget line slopes downwards and it is a straight line,

• the slope of the Budget line is called

• Price Ratio which is constant

 MARKET STRUCTURES

• Market is a place where buyers and sellers meets

• purchase and sale of commodities takes place.

 Main determinants

• Number of buyers and sellers of commodities

• Freedom of entry and exit of firms

• nature of commodities

• knowledge

• mobility of goods etc

 Different Types of Market Structures

• Monopoly

• Oligopoly

• Monopolistic Competition

• Perfect Competition

• Monopsony
 Monopoly

• A monopoly exists when one supplier provides a particular good or

service to many consumers.

• or dominant company exerts control over the market

 Monopolistic Competition

• Monopolistic competition is a market structure which combines

elements of monopoly and competitive markets.

• Inelastic demand curve and so they can set prices.

• Monopolistic competition refers to a situation in which many firms sell

products which are similar but not perfect substitutes. Examples -
Markets of toothpaste, soap etc.
 Oligopoly

• competition among the few: Oligopolistic Competition

• Oligopolies occur when a small number of firms collude, either

explicitly or implicitly, to restrict output or fix prices, in order to
achieve above normal market returns.
 Perfect Competition

• Large number of buyers and sellers

• Sell identical products at a price fixed by the market.

CONCEPT OF DEMAND AND SUPPLY IN ECONOMY
• Law of Demand

• It states that there exists an inverse relationship between the price

and quantity demanded for goods.

• Higher the prices, lower will be the demand.

• Determinants of Demand

• Price of the commodity

• Price of the other related goods
• Elasticity: Elasticity is the measurement of change in the quantity of
goods in relation with the change in prices.

• Elastic Demand: If there is a change in quantity demanded with the

change in prices

• Inelastic Demand: If the quantity of demand of a good doesn't

change much with the change of its price, then the good is considered
Inelastic. (Like Petrol, Cooking Oil etc)
• Zero Price Elasticity of Demand: Whatever is the change in price,
there is absolutely no change in demand.
 Types of Goods

• Substitute Goods: If the price of the substitute goods increases, the

demand for the given commodity also increases. Example - Tea and
coffee.

• Complementary Goods: If the price of the complementary goods

increases, then the demand of the given commodity decreases.
• Normal Goods:

• a good that experiences an increase in its demand due to a rise in

consumers' income. Normal goods has a positive correlation between
income and demand. Examples of normal goods include food staples,
clothing, and household appliances.
• Inferior Goods: Their demand falls with the increase in income.
kerosene (negative income elasticity of demand)

• Giffen Goods: Demand for Giffen goods rises when the price rises and
falls when the price falls. Bread, wheat, and rice are examples of
Giffen goods.
• Veblen Goods: high-quality premium goods, the demand for which
increases along with its price.

• This is caused by the exclusive nature of these products. Examples

include sports cars, expensive accessories (diamond rings, watches,
necklaces), luxury couture clothing, etc
 Law of Supply

• Supply is the quantity of a commodity that a firm is willing and is able

to sell at a given price. Demand
• Equilibrium

• if price (If price increases, the producers want to maximise profits)

• Quantity

• Demand and Supply

 INVISIBLE HAND

• The concept of "invisible hand" was introduced by Adam Smith in his

book "The Theory of Moral Sentiments" (1759) and later in "An
Inquiry into the Nature and Causes of the Wealth of Nations."

• This is the unseen market force that maintains the equilibrium in the
demand and supply of goods
• Adam Smith was a proponent of laissez-faire economic

• Leave Alone
 Adam Smith's Four Canons of Taxation
• In his book "The Wealth of Nations", Adam Smith introduced four
canons of taxation, they are:
• (i) Canon of equality

• (ii) Canon of certainty

• (iii) Canon of convenience

• (iv) Canon of economy

 Canon of equality
• The canon of equality or equity implies that the burden of taxation
must be distributed equally or equitably in relation to the ability of
the tax payers.

• Equity or social justice demands that the rich people should bear a
heavier burden of tax and the poor a lesser burden.
 Canon of certainty
• The tax which an individual has to pay should be certain and not
arbitrary.

• According to A. Smith, the time of payment, the manner of payment,

the quantity to be paid, i.e., tax liability, ought all to be clear and plain
to the contributor and to everyone.
 Canon of convenience
• Taxes should be levied and collected in such a manner that it
provides the greatest convenience not only to the taxpayer but also
to the government
 Canon of economy
• This canon implies that the cost of collecting a tax should be as
minimum as possible. Any tax that involves high administrative cost
and unusual delay in assessment and high collection of taxes should
be avoided altogether.
 PARADOX OF THRIFT
• It states that individuals try to save more during an economic recession, which
essentially leads to a fall in aggregate demand and hence in economic growth. Such
a situation is harmful for everybody as investments give lower returns than normal.

• This theory was heavily criticized by non-Keynesian economists on the ground that
an increase in savings allows banks to lend more. This will make interest rates go
down and lead to an increase in lending and, therefore, spending.

• Critics of the theory state that it ignores Say's law, which calls for investment in
capital goods before any level of spending can be achieved, and does not take into
account inflation or deflation in prices.
 Say’s Law
• this law means that ‘supply always creates its own demand.’