Introduction

An Introduction to
Economics
Introduction
• The word economy comes from the Greek word oikonomos, which
means “one who manages a household”.
• A household faces many decisions. In short, the household must
allocate its scarce resources among its various members, taking into
account each member’s abilities, efforts, and desires.
• Like a household, a society faces many decisions. A society must find
some way to decide what jobs will be done and who will do them. it
needs some people to grow food, some people for the safety of
nation, other people to make clothing, and still others to design
computer software.
Economists study individuals’ behaviour:
• how people make decisions:
• how much they work,
• what they buy,
• how much they save, and
• how they invest their savings.
Economists also study how people interact with one another: For instance, they
examine how the multitude of buyers and sellers of a good together determine
the price at which the good is sold and the quantity that is sold.
Finally, economists analyze forces and trends that affect the economy as a whole:
• the growth in national income,
• the fraction of the population that cannot find work, and
• the rate at which prices are rising
Why we are studying economics?
• To understand economic phenomenon.
• Apply principles of economics to understand/assess an Economic
Policy.
People face trade offs
There is no such thing as a free lunch.”
• Making decisions require trading of one goal against another.
• Essentially, making decisions requires comparing the costs and benefits of
alternative courses of action.
As a student, choice between taking a job or pursuing a higher degree.
As a family, choice between allocation of the family income.
Government’s decision of trading off between defence, infrastructure and
other resources.
EFFICIENCY AND EQUALITY:
• Getting maximum benefit from society’s resources is efficiency while,
distributing those resources uniformly is equality.
Opportunity costs
• The cost of sacrificing the second best alternatives → ‘Opportunity
Cost’
• For example, when you choose to pursue an MBA in place of a job,
your job package is the opportunity cost.
Rational people always think at the margin
Economists normally assume that people are “rational”.
• Rational people systematically and purposefully do the best they can
to achieve their objectives, given the available opportunities.
Economists use the term marginal changes to describe small
incremental adjustments to an existing plan of action. Keep in mind
that margin means “edge”, so marginal changes are adjustments
around the edges of what you are doing. Rational people often make
decisions by comparing marginal benefits and marginal costs.
People respond to incentives-Rewards or punishments
Trade can make everyone better off
Markets are usually a good way to organize economic activity- Adam
Smith’s notion of “Invisible Hand”
Government can sometimes improve market outcomes.
• Market failures occur when the market fails to allocate resources
efficiently.
• Governments can step in and intervene in order to promote efficiency
and equity.
A country’s standard of living depends on its ability to produce goods and
services.
• The more goods and services produced in a country, the higher the
standard of living.
• As people consume a larger quantity of goods and services, their standard
of living will increase.
Prices rise when government prints too much money
• When too much money is floating in the economy, there will be higher
demand for goods and services.
• This will cause firms to increase their price in the long run causing inflation
Society faces a short run trade-off between inflation and
unemployment
 In the short run, when prices increase, suppliers will want to increase
their production of goods and services.
 In order to achieve this, they need to hire more workers to produce
those goods and services.
Three basic questions of Economics
• What to Produce? → Allocation
• How to Produce? → Production
• For Whom to Produce? → Distribution
Circular Flow of Income
Production Possibility Frontier
Shifts in PPF
• The production possibilities frontier simplifies a complex economy to
highlight some basic but powerful ideas: scarcity, efficiency, trade-
offs, opportunity cost, and economic growth.
• As you study economics, these ideas will recur in various forms. The
production possibilities frontier offers one simple way of thinking
about them.

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