Introduction to Economics

Introduction to Economics

• Economics is not like the science you think you already know.
• Microeconomics will be covered, detailing the entire syllabus.
• Chapter 1 serves as an introduction.

Economy Defined

• An economy is a system providing people with the means to work and earn a living.
• It involves business, money inflow and outflow, consumers, producers/firms, and government.
• The Indian economy includes agriculture, industry, transport, banking, and communication sectors.
• The economy is the source of production.

Economics Defined

• Economics is the study of an economy.
• This study includes demand, production, cost, producer & consumer behavior, and how markets behave.
• Economics involves making choices in scarcity, studying the relationship between resources and wants.

Scarcity Defined

• Scarcity occurs when demand exceeds supply.
• Scarcity is a universal occurrence.
• Scarcity requires economizing of resources, meaning the proper utilization of resources.
• Economizing involves optimum utilization of available resources.

Economic Problem Defined

• The economic problem is the problem of choice.
• As a producer, one must consider what to produce, how much to produce, and how to produce it.
• Decisions must be made about which technique to use and the target demographic.
• Because of limited resources and unlimited wants, choices must always be made.

Reasons for Economic Problems

• Scarcity causes economic problems.
• Unlimited wants exist.
• Resources have alternate uses.

Relationship Between Resources and Human Wants

• Resources are scarce.
• Human wants are unlimited.
• Alternative resource uses exist.
• Humans prioritize their needs.

Opportunity Cost Defined

• Opportunity cost is the cost of the next best alternative forgone.
• Choosing one option means sacrificing other options.
• Opportunity cost is the value of the next best alternative not chosen.
• Example:
  • Mr. X's bank job @ ₹40k/month vs. executive job @ ₹50k/month vs. journalist @ ₹35k/month.
  • Choosing the bank job means the opportunity cost is ₹35k (the next best forgone alternative).

Branches of Economics

• Microeconomics and macroeconomics are both branches of economics.
• Microeconomics focuses on the study of small economic behaviors, while macroeconomics studies large economic factors.

Microeconomics

• Microeconomics is derived from "mikros," meaning small.
• It studies individual behavior.
• Demand and supply are tools used.
• Aims to determine prices.
• Microeconomics involves limited aggregation.
• It assumes macro variables are constant.
• Microeconomics is also known as price theory.
• Examples include individual income and output.

Macroeconomics

• Macroeconomics is derived from "macros," meaning large.
• It studies aggregates (sums).
• Aggregate demand and supply are tools used.
• Aims to determine income and employment.
• Macroeconomics involves the highest degree of aggregation.
• It assumes micro variables are constant.
• Macroeconomics is also known as income and employment theory.
• Examples include national income and output.

Positive vs. Normative Economics

• Positive economics describes what is happening now in the economy.
• It studies production, savings, income, demand, and supply.
• The purpose is to describe the economy and solve issues.
• Positive statements can be verified with actual data.
• Value judgments are not made.
• Positive economics is based upon fact and is not suggestive.
• Examples: rising inequality, increasing production, rising prices.
• Normative economics concerns opinions on how to improve the economy.
• It addresses how problems should be solved.
• The aim is to determine ideal solutions.
• Normative statements cannot be verified with actual data and rely on value judgments.
• They are based on individual opinions and are suggestive.
• Examples: steps to reduce inequality, controlling rising prices.

Central Problems of an Economy

• All economies face issues regarding which output must occur.
• Central problems include deciding what, how, and for whom to produce.

Central Problem: What to Produce

• Involves selecting goods/services and their quantity.
• Because resources are limited, not all goods can be produced.
• Choosing to produce more of one good often means producing less of another.
• Decisions about consumer goods versus capital goods must be made.
• An economy has to choose between civil and war goods.

Central Problem: How to Produce

• This problem relates to technique selection.
• Techniques can be labor intensive (more labor) or capital intensive (more machines).
• A good technique depends on a nation’s unique supply.
• Labor intensive is favored in India, whereas capital intensive is used in countries like the United States.

Central Problem: For Whom to Produce

• This problem concerns the category of people who'll consume goods.
• Decisions on producing for the poor vs. rich, or a mix, have to be made.
• Goods are often produced for those with paying capacity, which depends on income levels.
• Economic problems are related to the distribution of income among production factors.

PPC introduction

• PPC is also known as the Production Possibility Curve, PPF, Transformation Curve, Transformation Boundary, and Transformation Frontier.
• Limited resources and unlimited wants make the PPC necessary.

PPC concept

• PPPC is a graph of possible output combinations with limited resources and technology.
• With available land for farming, the PPPC shows what combinations of grain versus vegetable output to expect.
• Extreme options would be the entire farm dedicated to either grain OR vegetables.

Defining Opportunity Cost, Delta & MOC

• Delta means change.
• MOC (Marginal Opportunity Cost) is defined as delta Sacrifice/ delta Gain.

Chart Example of guns vs butter: Sacrificing MOC & Gain

• Guns (war goods) vs butter (consumption goods).
• PPPC will need a good chart of output expectations.
• Guns are the delta sacrifice and the MOC.
• Butter is the delta gain.

Chart example Data

• Guns start at zero, and butter at max.
• The chart is arranged with butter slowly increasing, and guns decreasing because of resource dedication.
• Butter ranges from 0,1,2,3,4,5,6
• MOC increase example:
  • 21 guns , 0 butter (start).
  • 0 MOC, 1 butter ( +1) + sacrifice 1 gun.
  • 1 MOC, 2 butter ( +1) + sacrifice 2 gun.
  • all subsequent numbers MOC and sacrifice increase (3,4,5) because of scarcity.
  • MOC numbers are determined with:
    • top = start butter+ all subsequent additions, this becomes value for 0 Guns.
    • subsequent values become the delta you decrement from.

Plot Data Example (Curve)

• Data can be plotted with guns on one axis and butter on the other.
• This provides a range of options that represents the full use of economic output from a country.

PPC Chart Details, Utility, Inutility

• Full utilization occurs when all data points are proper and represent max utility.
• Points on the edges signify data points of best use.
• Utility = greatest output of resources AND output of what is considered to have value.
• Points inside of curve signify subpar output and badly handled resources (under utilization).
  • Analysis avoids stating output goals were not met because that refers to the future.
• Points outside of the curve = unachievable, with current tech, inputs, and methods.
  • Achieving these points requires more than what is available OR increased method efficacy (better tech).
  • External sources can support, like the ability to obtain raw goods inputs at lower cost, for better efficiency.
  • This is a new calculation that changes the current model.

PPC Notes & Caveats

• The goal is to get on to the curve and move the curve out.
• PPCs assume:
  • Resources are fully and efficiently utilized.
  • It models two outputs in the chart.
  • The amount of resources in the economy is fixed but can be allocated to either farming or manufacturing processes.
  • Resources are not equally efficient (labor can get tired).
  • When resources are transferred from one good to another, productivity decreases, the more one becomes dominant.

Property of PPC

• PPC typically slopes downward.
• PPC has an inverse slope, because production of A affects B's output.
• PPC typically has a concave form.
• It's curved shape due to the data.
• Curve Shape depends on MOC.
  • If MOC increases, then the shape is a cave PPC.
  • If MOC decreases, then a convex shape results.
  • If MOC stays the same, the data is a flat vertical line.

PPC Shift

• PPC can shift left or right.
• A leftward shift occurs when resources are lost.
• A rightward shift occurs when resources increase, but is limited depending on the kind of resource.

MRT vs MOC

• MRT is also known as the Marginal Rate of Transformation.
• MOC = Sacrifice/gain = next value to expect.
• MRT = Value for a combo (ratios for increase) - very detailed.
• PPPCs are attainable and unattainable.
• The PPPC exists because of the amount of goods and services its economy can actually produce.
• The PPPC moves by changes to production or its capabilities: example
  • If all goods and services increase production, then PPPC ships to right.

Does PPPC Shift (2)

• The PPPC can also rotate, where one output will increase more than another.
• Ensure output is not 0 on one side.

Additional Points

• PPPC is curved due to increasing MRT.
• Output depends on how resources are managed.
• The PPPC shows the best possible output with resources.

Intro to Consumer Basics - Goal

• Consumer definition, equilibrium, and utility.
• Welcome to consumer equilibrium, micro edition.
• The aim is to provide study info for the entire economics topic.
• You should be able to prep for microeconomics easily.
• This video will contain a thorough exam prep.

Consumer Terms

• A consumer is a person who consumes goods and services, based on needs and desires.
• The aim of a consumer is to consume products to reach the best level of satisfaction.

Utility overview

• Utility is the level of power that satisfies a user.
• People choose to find resources to satisfy their needs.

Utility Units

• No standard unit is used to measure utility.
• Therefore, the "Util" is imagined.
• It is both imaginary, as with monetary value.
• Util also involves level of utility for the price.

Kinds of economic Utility

• Total utility.
• Average utility.
• Marginal Utility.

Total Economic Utility

• This is the sum total of utils from a consumer.
• Total utils depends on the addition of output or service.
• Each product has utils for satisfaction.
• The total will come from products.

Average Economic Utility

• This is the per-unit set satisfaction.
• It is the average of all the utils from a range of consumptions.
• Average will not be static, with average = total values/total units.

Marginal Economic Utility

• Marginal means additional.
• Change in total utility/change in units = Marginal.
• It represents the set of additional utilities.

Intro Cardnial & Ordinal

• Consumer behavior in utility.
• The study of economic utility uses:
  • Cardinal approach.
  • Ordinal approach.

Approaches

• Cardinal and ordinal (Marshall Vs Hicks analysis).
• Cardinal is measurable.
• Ordinal is unmeasurable except for ranking.

Cardnial approach details

• Maximize util, find quantity, use consumer equilibrium using cardinal.
• Utils or units are how it's measured.
• Total = adding additional utils.

Cardinal caveats in context

• Total utility is 0 at the point of non-consumption; not using = 0.
• Total util starts low, increases to high, then plateaus to a degree.
• Marginal utility is all the extra utils.

Marginal Curve Detail

• Follow the above trend and is a - curve that goes to negative.
• The relationship is important.
• Will always be constant when most, MU 0.

The Important curve Detail

• Total begins low, increases, then plateaus.
• Marginal is the delta change, so if a plateau, nothing is happening.

Important Points

• The Total Curve:
  • When it increases, marginal is good.
  • Where total is max, marginal is 0.
  • "Point of Satiety" is important.
• The Marginal curve is inverted.
• Point of Satiety.

Law of DMR overview

• Law of "Diminishing Returns" to diminishing marginal utility.
• Diminishing returns means each subsequent thing of a set provides less utility.
• Universal application, every good and service has it.
• "Gossen's first law".
• Assumptions must be made to measure the DR effect.

Law of DMR Notes

• Cardinal Measurement; measure it.
• Money.
• Reasonable.
• Continuous.
• The above are most important.

What makes a good DMR test?

• Rationality, good judgement.
• Independent utility (no relations among subjects).

The DRM Curve

• Total first then Marginal.
• Results in an inverted J curve, as more output happens, the utility curve reduces.
  • Point of satiation occurs when marginal dips below 0.

Notes on DMR

• Effect is not linear for every commodity; some will spike at first.
• "The fundamental Law Of Satisfaction".

Intro to Cardinal

• The goal of Cardinal and the laws that apply.
• Two sides: Total vs marginal.
• Sides can be equal.

Equilibrium vs disequilibrium

• If M>T, you buy buy buy.
• If M Total.

Intro to 2 commodities, Gossens 2

• This means to like both items.
• The two now must be relative.

The important point of 2 products that equal needs

• Marginal / Price of each must be equal when buying.

More 2 product notes, with marginal not equalized

• What it means to like X but not Y, in chart.
• If M>T, increase X and decrease Y.
• The "law of equity" kicks in, and all things equalize again.
• If M T, increase MRT then high.

All Curve assumption

• The total curve has two sides.
• No intersections are important.
• M