Session 1

Introduction
Agenda Course Code: BM 112

•Why Economics?
Course Title: Macroeconomics
•Definition of Economics
•Problems of Economy
Learning Facilitator:
•Role of Assumptions
Dr. Jitendra Kumar Mishra
•Microeconomics &
Macroeconomics E-mail:
jitendra.mishra@jiit.ac.in
 Why To Study Economics?
• To answer questions like:
– Why do economies go through cycles?
– Why are some people unemployed while
others are able to find jobs?
– Why do some jobs pay so much more than
other jobs?
– Why do some businesses succeed and
others fail?
 Greek Roots

• For what it is worth, the word

"economics" comes from the Greek
roots oikos, the household or estate,
and
• nomos, laws, rules or guidelines.
• Thus the ancient Greek work oikonomia
was on "guidelines for estate
management."
 Definitions of Economics
• Wealth Definition (Adam Smith)

Economics is the study of factors which

determine the wealth of a country and its
growth.

Besides Adam Smith, the other classical

economists such as Richardo, J. B. Say,
F. A. Walker, J. S. Mill etc. regarded
Economics as the ‘science of wealth’.
 Welfare Definition (Marshall)
• Economics is the study of mankind in the
ordinary business of life.

• It examines that part of individual and

social action which is most closely
connected with the attainment and with the
use of the material requisites of well being.
 Scarcity Definition (Robbins)

• According to Robbins Economics is the

science which studies human behaviour
as a relationship between ends and
scarce means which have alternative
uses.
 Growth and Development
Definition
• Paul Samuelson has defined Economics
as the study of how men and society
choose, with or without the use of money,
to employ scarce productive resources
which could have alternative uses, to
produce various commodities over time
and distribute them for consumption now
and in future amongst various people and
groups of society.
 Why Economics…………

Society and Scarce Resources:

– The management of society’s resources is

important because resources are scarce.

– Scarcity. . . means that society has limited

resources and therefore cannot produce all the
goods and services people wish to have.
 Why Economics…………
• Economics examines how people use their
scarce resources to satisfy their unlimited
wants.
– How many hours should a student work or
study?
– How do firms decide how many works to
hire and what skill levels those workers
need?
– How should a local government decide
where stoplights are needed?
 Scarce Resources, Unlimited
Wants
• Resources are the inputs used to produce
the goods and services that people want.
– Labor
– Capital
– Natural resources
– Entrepreneurial ability

• Because resources are scarce, we must

make choices
 How people make decisions.
– People face tradeoffs.

– The cost of something is what you give up

to get it.

– Rational people think at the margin.

– People respond to incentives.

 Basic Problem of an Economy

• The economic problem arises on

account of the presence of three
interrelated factors which are –
• unlimited human wants
• Scarce resources and
• Alternative uses of the resources
Central problems of economy includes:

• What to produce – necessities Vs luxuries;

Consumer goods Vs capital goods and how
much to produce?

• How to produce – technology (labour

intensive Vs capital intensive)

• For whom to produce – allocation of

resources among the members of society
(class Vs mass)
 Central problems of economy includes:

• Full employment of resources – how to

achieve full utilization of resources
• How to maintain economic stability – to
manage cyclical fluctuations
• How much to save and hence invest
• Problem of foreign exchange –
interdependence, Balance of payments
position
 Thinking Like an Economist

• Economics trains you to. . . .

– Think in terms of alternatives.
– Evaluate the cost of individual and
social choices.
– Examine and understand how
certain events and issues are
related.
• The economic way of thinking . . .
– Involves thinking analytically and
objectively.
– Makes use of the scientific method.

• Uses abstract models to help explain how a

complex, real world operates.

• Develops theories, collects, and analyzes

data to evaluate the theories
 The Role of Assumptions
• Economists make assumptions in
order to make the world easier to
understand.

• The art in scientific thinking is deciding

which assumptions to make.

• Economists use different assumptions

to answer different questions.
POSITIVE VERSUS NORMATIVE
ANALYSIS
• Positive statements are statements that
attempt to describe the world and it is
Called descriptive analysis.

• Normative statements are statements

about how the world should be.
– Called prescriptive analysis
 POSITIVE VERSUS
NORMATIVE ANALYSIS
• Positive or Normative Statements?
– An increase in the minimum wage will cause a
?
decrease in employment among the least-
skilled.

? POSITIVE

– Higher federal budget deficits will cause

interest rates to increase.
POSITIVE ?
 POSITIVE VERSUS
NORMATIVE ANALYSIS
• Positive or Normative Statements? ?
– The income gains from a higher minimum
wage are worth more than any slight
reductions in employment.

? NORMATIVE
?
– State governments should be allowed to collect
from tobacco companies the costs of treating
smoking-related illnesses among the poor.
NORMATIVE
 Microeconomics and
Macroeconomics
• Microeconomics focuses on the individual
parts of the economy.
– How households and firms make decisions
and how they interact in specific markets
• Macroeconomics looks at the economy as
a whole.
– Economy-wide phenomena, including
inflation, unemployment, economic growth
etc.
THANK YOU