Nature of Economics and Basic Economic Concepts- Block-1
Transcript of Nature of Economics and Basic Economic Concepts- Block-1
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Nature of Economics andNature of Economics andBasic Economic ConceptsBasic Economic ConceptsNature of Economics andNature of Economics andBasic Economic ConceptsBasic Economic Concepts
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Economics Economics is a behavioral science. It is all about, how people make choices. It is the study of how individuals and
societies chose to use scarce resourcesthat nature and previous generations haveprovided.
Economics is the study of how people
allocate their limited resources in anattempt to satisfy their unlimited wants.
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Production of Goods and ServicesLimited Supply
Households
Firms
Consumption of Goods and Services
Unlimited Demand
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Circulating Flow of
Goods & Income
HOUSEHOLDS
FIRMS
Wages,
Rent,
Dividends,
Interest
etc(rupees)
Consumer
Expenditure
(rupees)
Factors
of
Production
Goods
&
Services
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Reasons to study
Economics To learn a way of thinking.
To understand society.
To understand global affairs.
To be an informed citizen.
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Two major branches ofTwo major branches ofEconomicsEconomics
Two major branches ofTwo major branches ofEconomicsEconomics
MicroeconomicsMicroeconomics
MacroeconomicsMacroeconomics
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Microeconomics Concerns with behavior of Individual
entities like market, firms and
household. The study related to Land, Labor &
Capital.
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Macroeconomics deals
with Determination of total investment
and consumption
Management of money and interestrates by central bank.
Study of international financial
system etc. National growth, National Income etc
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Economic EvaluationEconomic EvaluationEconomic EvaluationEconomic Evaluation
Positive EconomicsPositive Economics
Normative EconomicsNormative Economics
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Positive Economics Positive Economics describes the fact of an
economy.
It is a positive approach to policy analysis, itfocuses on objectives, behavior, and interactionof individuals and groups who influence policydecisions.
Positive economics is concerned with what is,
with describing how the economy functions. It is Descriptive.
E.g what is the impact of computes onproductivity. Should the govt reduce the deficit
etc
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Basic Economic Concepts Resources & its Scarcity-Economics is the study of how societies
use scarce resources to produce valuable commodities anddistribute them among different people.
Scarcity and Choice- In each economy resources are scarce andwants are unlimited, and people chose the scarce resources
efficiently to satisfy unlimited wants. Opportunity cost and its uses-Opportunity cost of a decision is
the value of goods and services forgone. Production Possibility Frontier- It shows the maximum amount of
production that can be obtained by an economy, given itstechnological knowledge and quantity of inputs available. PPF showsthe menu of goods and services available to society.
Law of increasing cost and diminishing returns- Economic Efficiency and growth-Output of the society should
increase.Per Capita Income=National Output/Population.Efficiency means that the economys resources are being used aseffectively as possible to satisfy peoples needs and desires.
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Economic SystemEconomic SystemEconomic SystemEconomic SystemFree Market EconomyFree Market EconomyCommand or controlled market EconomyCommand or controlled market EconomyMixed Market Economy.Mixed Market Economy.Islamic Economic System.Islamic Economic System.
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Market Economy
(Capitalistic Economy) In which individuals and the private
firms make the decision about
production and consumption. Extreme case of market economy
where individual households and firms
pursue their own self interest,without any cetral direction orregulation is the Laissez-faireEconomy.
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Command Economy
(Socialistic economy) In which Govt make all important
decisions about production and
distribution. Govt owns most of the means of
production like land and capital.
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Mixed Economy Have all the characteristics of
Market and Command economies.
Most Economies are Mixed economiesI.e decisions are made by both Govtand people.
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Features of Capitalism Give incentives to people and they will
allocate their recourses.
Right of ownership and transfer. Freedom of choice by consumers.
Freedom of enterprise or businessactivity.
Profit motive & Self interest
Limited role of Govt.
Effective management role.
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Negative Impacts of
capitalism on economy Navigation of welfare aspects.
Class conflict
Increase in income inequalities.
Unnecessary expenditure regardingto popular activities.
Wastage of recourses due toeconomic fluctuations.
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Features of Socialism State ownership No private property and enterprise
Social welfare & social security ofthe society.
Central Planning system.
Economists allocate the resources. Political workers make the directionof the economy.
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Negative impacts of
socialism on the economy Lack of economic and consumption
freedom.
Lack of spirit of competition andinitiatives
Misuse and misallocation of
recourses. Large time interval in decision
making.
Political control over economic
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Features of Mixed
economic structure Coexistence of public and private
sectors having objective of profit
and welfare aspects. Price system with govt directions Right of ownership and transfer.
Control over monopolies. Reduction of economic inequalities. Human freedom, Flexible
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Objectives of the Mixed
economy Economic Growth Full Employment
Price level stability. Economic efficiency
Appropriate resources Economic freedom
An equitable distribution of income Exchange rate stability. Economic stability.
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Problems of economic
organization What commodities are produced?
How these commodities are made(
method of production, labor intensivetechniques or Capital Intensivetechniques)?
How much quantities are produced? For whom they are produced?
How to distribute these things?
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Classifying Economic Systems
Totally
Planned
Economy
TotallyFree
Market
Economy
N. Korea
N. Korea
China
China
France
Poland France
UK USA
UK USA
Hong Kong
Hong Kong
Poland
Mid 1970s
Mid 1990s
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Market Mechanism of exchanging goods and
services.
A place where goods and services areexchanged at a particular priceintervals.
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PEST AnalysisPEST AnalysisPEST AnalysisPEST Analysis
Factors affecting the firms in theFactors affecting the firms in the
External environment, Firms establishes aExternal environment, Firms establishes astrategic approaches to tackle theirstrategic approaches to tackle theirbusiness activities, by studying thisbusiness activities, by studying this
analysisanalysis..
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PEST Political Factors.
Economic Factors.
Social Factors. Technological factors.
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Political Actions of Govt.
1. Law Enforcement.
2. Tax Management.3. Product safety Standards.
4. Industrial Relations legislations.
5. Laws preventing firms to keepprices up.
6. Labor laws.
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Economic Factors Cost of Raw material.
Market entry of new rival.
Bargaining power of supplier. Bargaining power of buyers.
Threat of substitute product.
Degree of competition. International exchange rates.
Forth coming Budget
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Social & Cultural Factors Attitude towards working conditions.
Length of working days.
Equal opportunity for different groupof people.
Images portrayed in advertising.
Demographic trends. Ethical issues.
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Technological Factors The use of machinery.
Use of Robots.
Using organized software for datamanagement.
Quick decision making by organized
datas. Information technology revolution.