1 Fundamental Concepts

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Fundamental Concepts


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Scarcity & Choice

Macro and Micro economicsEconomic Agents

Fundamental problems

Market


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SCARCITY AND CHOICE

Scarcity is a situation when demand exceeds supply.

A commodity is scarce if somebody has to sacricesomething (pay money, time, etc) to obtain it.

Not necessary that sacrice have to be made by personwho obtained it or used it.

Almost everything is scarce except sunlight, air etc.

he more you have to sacrice more scarcer it is.

!herever there is scarcity there is choice.

"ost of our activities are nothing but manifestation ofsome choice decisions # the decisions that have theirroots in the con$ict between our unmet need andscarcity of resources


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he resource base of society%

Natural &esources% land, water, air,

minerals, forest etc'uman &esources% silled and unsilled

labour

apital &esources% machines, buildings,

e*uipment, etc+ntrepreneurial &esources% the organisers

who combine the above resources maeproduction decisions, and tae riss.


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Economics: studies the production, consumption anddistribution of goods and services, with an aim to

explain, how economic agents interact, how consumersand producers react to changing conditions. +conomicsprovide powerful guidance and in$uence to policy-maing at the national level. +conomics analysis andprovides decisions to how a nation approaches taxation,

regulation, and government spending.

Finance: Study of prices, interest rates, money $owsand the nancial marets. t is concerned with value

of money, rates of return, cost of capital, optimalnancial structures and the *uantication of ris. t isthe science of managing funds eeping in mind thetime, cash at hand and the ris involved i.e. e/cientand productive management of assets and liabilities

based on existing information.

http://www.investopedia.com/terms/f/financial-market.asphttp://www.investopedia.com/terms/t/timevalueofmoney.asphttp://www.investopedia.com/terms/t/timevalueofmoney.asphttp://www.investopedia.com/terms/t/timevalueofmoney.asphttp://www.investopedia.com/terms/t/timevalueofmoney.asphttp://www.investopedia.com/terms/f/financial-market.asp


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Economics

+conomics is the study of the use of limitedresources for the achievement ofalternative ends.

A social science that covers the behavioursand actions of individuals in the process ofproducing, exchanging and consuminggoods and services.

t analysis how choice decisions are madeby an individual unit (consumer2 producer)and society as a whole.

he ultimate goal of analysis is to helpresolve the con$ict between scarcity and


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Microeconomics andMacroeconomics

Microeconomics tools% lie demand, cost and maret analysis.

t focuses on choices and decision maing process of anindividual unit.

t concentrates on the analysis of individual prices and

marets and allocation of specic resources to particularuses.

Macroeconomics:

Study of broad aggregates such as total employment,

national income and in$ation.+xample% study of hospital cost is a microeconomic analysis

but the analysis of state expenditure on healthcare re*uiresaggregation over individual choices without much attentionhow these choices are made.


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Economic Agents

+conomic Agents are decision maing units dividedas Consumers, Producers and Goernment!

+conomic agent is one who can tae economic

decisions independently.+xample% A consumer can independently decide

whether he would see medical care to cure adisease, it is responsibility of provider to decide onhow they would provide it, and the governmentmay decide to intervene by imposing price controlon the provider or by establishing a parallelsystem of healthcare provision.


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nteraction between these economic agents forms thebasis of an economic system.

he consumers and producers interact to each other ina set-up called Market!

"aret has 3 forces% "emand & Supply# operatingagainst each other.

he consumers demand goods and services in theoutput maret.

4roducers supply them, but need resources to produce

goods. So they place their demand for resources lieland, labour, capital, raw material etc in this maret.

onsumers supply input to demand output, whileproducers demand input to supply output.


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Fundamental problems

!hat is to be produced5

'ow is to be produced56or whom is to be produced5


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!hat is to be produced 5

onsumers decide, through their preference.

f all of us wish to wear 7eans, why the producer willcontinue producing urta5

+conomics tries to analyse and predict the consumer8s

decision maing process in an ob7ective way throughits heory of onsumer 1ehaviour and 9emand.

t attempts to answer why in a particular situationconsumers decides to buy :, not ; 5

!hy and when they will decide for more mango andless banana 5

!hy they would buy a *uac8s service when a *ualieddoctor is readily available 5


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'ow is to be produced5

4roducers have to nd out the cheapestway to produce the good or to sell it in themaret with highest level of prot.

'ow will they do that 5

f cheeseburger is decided, should they useless labour and more machines to produce

it 5!hen they will produce more and when

less 5

!ho will produce, who will not 5

+conomics answer it by heory of


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6or whom to be produced 5

!ho will get how much share of these goods 5

+g. f producers come up with 3 types of vehicle, carsand bicycle.

!ho will drive cars!ho will ride bicycles 5

!ho will have none 5

!hat determines this distribution 5

!hy rich are rich and poor are poor 5 he government distributes health in egalitarian way. ;ou get what others get irrespective of whether youdeserve more or not 5


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Market

he usual outcome of an uncontrolled interactionbetween interests is chaos.

+very day millions of people are interacting witheach other to full their needs for consumption 2production of goods 2 services. hese needs crosseach other and people end up meeting their needs

according to their capacity or resources.

he invisible hand which maes it possible is called

Free Market mechanism!4rimary condition for establishing a maret is a

contractual relationship (explicit 2 implicit)betweenbuyers and sellers.


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E$plicit Contracts: are made when a buyer and aseller operate on the basis of a written agreement.

'ere, 1oth accept a mutually agreed price, *uantity,terms 0 conditions.

%mplicit Contract: No written agreement is necessary.1uyers now how much they have to pay for a certaingood.

"aret allows 3 opposite forces play freely againsteach other to determine a price of good at which bothbuyer and seller reach a mutually satisfactory situation% 9emand 0 supply.


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6ollowing conditions re*uired for this automaticsituation%

• he good is scarce (buyers can have it only by sacricingother scarce thing)

•


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n case of maret imbalance, price starts moving, agentchange their decision until balance is restored.

+xample% At a &s = buyers are willing to buy 3>> units of electricity.

Suppliers nd it too low to cover their production costs

and are willing to sell only ?>> units. 'ence, only @> of *uantity demanded is met, creating

maret imbalance and an upward pressure on price. 4rice will increase to &s @ when few buyers will opt out of

maret or will reduce their demand, leading to reduction

in total demand, say ?@> units. !hile at &s @ supplied amount is liely to increase, since

suppliers would be willing to supply. 'ence e*uilibrium would reach at &s @.

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