Basics of Economics PDF

Business Environment Dr. Pallavi Mody Email: [email protected] @SPJIMR Courage. Heart  Why should I study Economics? Economics helps us to make better choices @SPJIMR...

Business Environment Dr. Pallavi Mody Email: [email protected] @SPJIMR Courage. Heart  Why should I study Economics? Economics helps us to make better choices @SPJIMR Courage. Heart  We are seeking answers to…. How should I spend my Sunday? Work, study or relax? Should I buy an air-conditioner or TV? What should be my strategy as CEO to improve the profitability? Increase the top line? Lower the cost? Should I work for Pidlite or L&T? Should I rent out my vacant flat? @SPJIMR Courage. Heart  What is Micro Economics? Microeconomics is the study of how individuals and firms make decisions and how they interact. The individuals attempt to optimize their positions as Consumer (Buyer) Producer (Seller) Owner of resources The study of microeconomics provides optimizing techniques to make decisions. @SPJIMR Courage. Heart  We are also seeking answers to certain questions Will my company be able to meet the 30% growth in the top line in the current year? Should I buy the car outright or on EMI? Should I buy the car now or after the budget? Should I keep my foreign exchange earnings in US dollar terms or convert in Rupees? Should I buy or sell stocks at this point? @SPJIMR Courage. Heart  What is Macro Economics? Macroeconomics is the study of economic environment. What is GDP & how is it measured? How are Interest Rate and Exchange Rate determined? What are Monetary, Fiscal, External Sector Policies? The study of macroeconomics helps the individual to take a ‘view’ and strategize considering these exogenous factors. @SPJIMR Courage. Heart  How does the economy function? Market Mechanism Circular Flow @SPJIMR Courage. Heart  How does the Market Mechanism work? Demand and Supply determine prices of products and factors Prices give signal for resource allocation Demand & supply are the forces that make the market economies work To quote Adam Smith “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest”. “The oil of self-interest keeps the machinery of the economy well lubricated, that it functions almost automatically.” US, UK and Western Europe are champions of Market economy. @SPJIMR Courage. Heart  Circular Flow Revenue = GDP Spending = GDP Markets for goods Goods and and services Goods and services sold services bought Households Firms Labour land Capital Factors of Enterprise production Markets for factors of production Wages rent interest Income =GDP profit =GDP = Flow of inputs and outputs = Flow of money @SPJIMR Courage. Heart  Circular Flow Model The circular flow model demonstrates how money moves in an endless loop in the economy In a primary two sector model, there are Firms and Households. Money moves from Firms to Households as factor incomes for the services they render. The remuneration is determined in the factor market Money moves from Households to Firms as workers spend money on goods and services. The prices are determined in the markets for goods and services The National Income in this simple model is Total Factor Incomes = Total Spending = The value of total output @SPJIMR Courage. Heart  Circular Flow Model: Injection and Leakages Two sector model of Firms and Household Savings lead to leakage Three Sector model by adding Government. The government injects money into the cycle through government spending (G) Government taxes lead to leakage of money from the cycle Four Sector Model by adding Foreign Sector Export earnings inject money into the cycle Imports payments lead to leakage of money from the cycle Five-sector model by adding the Financial Sector Banks inject cash flow via lending services Savings lead to leakages @SPJIMR Courage. Heart  Calculating National Income Total Factor Income (Income Method) = Total Spending (Expenditure Method) = Value of Total Output (Output Method) @SPJIMR Courage. Heart  What is the take away? @SPJIMR Courage. Heart