INTRODUCTION TO ECONOMICS

AND INDIAN ECONOMY

By
Dr. JONARDAN KONER
SENIOR ASSOCIATE PROFESSOR

NATIONAL INSTITUTE OF CONSTRUCTION

MANAGEMENT AND RESEARCH, PUNE.
 INTRODUCTION
Economics is the study of how economic agents or societies
choose to use scarce productive resources that have
alternative uses to satisfy wants which are unlimited and of
varying degrees of importance.
The main concern of economics is economic problem: its
identification, description, explanation and solution.
The source of any economic problem is scarcity.
Scarcity of resources forces economic agents to choose
among alternatives.
Therefore, economic problem can be said to be a problem of
choice and valuation of alternatives.
The problem of choice arises because limited resources with
alternative uses are to be utilized to satisfy unlimited wants,
which are of varying degrees of importance.
 INTRODUCTION
Scarcity is a relative concept. It can be define as excess
demand, i.e., demand more than the supply. For example,
unemployment is essentially the scarcity of jobs. Inflation is
essentially scarcity of goods.
Economics is essentially the study of logic, tools and
techniques of making optimum use of the available
resources to achieve the ends.
Economics thus provides analytical tools and techniques
that managers need to achieve the goals of the organization
they manage.
Therefore, a working knowledge of economics, not
necessarily a formal degree, is essential for mangers.
The job of any efficient manager is of economic one.
 INTRODUCTION
Decision-making is the main job of management.
Decision-making involves evaluating various alternatives
and choosing the best among them.
For example, a marketing manager is to allocate his / her
advertising budget among various media in such a way so
as to maximize the reach.
Managers are essentially practicing economists.
In performing his/her functions, a manager has to take a
number of decisions in conformity with the goals of the
firm.
Many business decisions are taken under the condition of
uncertainty and risk.
 INTRODUCTION
Uncertainty and risk arise mainly due to uncertain behavior
of the market forces, changing business environment,
emergence of complexity of the modern business world and
social and political, external influence on the domestic
market and social and political changes in the country.
The complexity of the modern business world adds
complexity to business decision-making.
However, the degree of uncertainty and risk can be greatly
reduced if market conditions are predicted with a high
degree of reality.
The prediction of the future course of business environment
alone is not sufficient. It is important equally to take
appropriate business decisions and to formulate a business
strategy in conformity with the goals of the firm.
A GENERAL LISTING OF DESIRED ECONOMIC GOODS & LIMITED RESOURCES

Economic Goods (Wants) Limited Resources

Food (Rice, Bread, Milk, Eggs,
Land (Various Degrees of Fertility)
Vegetables, Tea, Coffee, Sugar, etc.)
Clothing (Shirts, Pants, Shoes, Socks, Natural Resources ( Rivers, Trees,
Coats, Sweaters, etc.) Minerals, Oceans, etc.)
Household Goods (Tables, Chairs, Rugs, Machines and Other Human-
Beds, TV, Dressers, etc.) Made
Education Physical Resources
National Defense
Non-Human Animal Resources
Recreation
Technology (Physical and Scientific
Leisure Time
Recipes of History)
Entertainment
Clean Air Human Resources (Knowledge,
Pleasant Environment (Trees, Lakes, Skill,
Rivers, Open Space, etc.) And talent of Individual Human Beings)
Pleasant Working Conditions
More Productive Resources
 DEFINITIONS OF ECONOMICS
Economics has been defined in many ways. Samuelson
summarized some of them and they are as follows.
Economics analyses how a societys institutions and
technology affect prices and the allocation of resources
among different uses.
Economics explores the behavior of the financial markets,
including interest rates and stock prices.
Economics examines the distribution of income and suggests
ways that the poor can be helped without harming the
performance of the economy.
Economics studies the business cycle and examines how
monetary policy can be used to moderate the swings in
unemployment and inflation.
Economics Studies the patterns of trade among nations and
analyses the impact of trade barriers.
Economics looks at growth in developing countries and
proposes ways to encourage the efficient use of resources.
 NATURE OF MANAGERIAL ECONOMICS
Taking appropriate business decisions requires a clear
understanding of the technical and environmental conditions
under which business decisions are taken.
Application of economic theories to explain and analyze the
technical conditions and the business environment
contributes a good deal to the rational decision-making
process.
Economic theories have, therefore, gained a wide range of
application in the analysis of practical problems of business.
With the growing complexity of business environment, the
usefulness of economic theory as a tool of analysis and its
contribution to the process of decision-making has been
widely recognized.
 NATURE OF MANAGERIAL ECONOMICS
Baumol has pointed out three main contributions of
economic theory to business economics.
First, 'one of the most important things which the economic
theories can contribute to the management science' is
building analytical models, which help to recognize the
structure of managerial problems, eliminate the minor
details, which might obstruct decision-making and help to
concentrate on the main issue.
Secondly, economic theory contributes to the business
analysis 'a set of analytical methods' which may not be
applied directly to specific business problems, but they do
enhance the analytical capabilities of the business analyst.
Thirdly, economic theories offer clarity to the various
concepts used in business analysis, which enables the
managers to avoid conceptual pitfalls.
 SCOPE OF MANAGERIAL ECONOMICS
The problems in business decision-making and forward
planning can be grouped into four categories as follows:
Problems of Resource Allocation: Source resources are to
be used with utmost efficiency to get the optimal results.
These include production programming and problems of
transportation, etc.
Inventory and Queuing Problems: Inventory problems
involve decisions about holding of optimal levels of stocks of
raw materials and finished goods over a period. These
decisions have to be taken by considering demand and
supply conditions.
Queuing problems involve decisions about installation of
additional machines or not hiring labor, against the cost of
such machines or labor.
 SCOPE OF MANAGERIAL ECONOMICS

Pricing Problems: Fixing prices for the products of the

firm are important decision-making problems. Pricing
problems involve decisions regarding various methods of
pricing to be followed.
Investment Problems: It is related of allocating resources
over time. These normally relate to investing new plants,
how much to invest, expansion programs for the future,
sources of funds, etc.
 BRANCHES OF ECONOMICS
MICROECONOMICS
Adam Smith is the founder of the field of Microeconomics,
the branch of economics which today is considered with the
behavior of individual entities such as markets, firms and
households.
In The Wealth of Nations (1776), Smith considered how
individual prices are set, studied the determination of price
of land, labor, and capital, and enquired into the strengths
and weakness of the market mechanism.
He identified the most important efficiency properties of
markets and saw that economic benefit comes from the self-
interested actions of individuals. These remain important
issues today also.
 BRANCHES OF ECONOMICS
MACROECONOMICS
Macroeconomics started its journey when John Maynard
Keynes published his revolutionary General Theory of
Employment, Interest and Money (1936).
It studies of the overall performance of the economy.
At the time, England and USA were still stuck in the Great
Depression of the 1930s, with over one-quarter of the
American labor force unemployed.
In his new theory, Keynes developed an analysis of what
causes business cycles, with alternative spells of high
unemployment and high inflation.
Now, macroeconomics examines a wide variety of areas,
such as how total investment and consumption are
determined, how central banks manage money and interest
rates, what causes international financial crisis, and why
some nations grow rapidly while others stagnate.
 BASIC CONCEPTS
Every economy faces three fundamental questions in its
functioning. These are:
What goods and services are to produce and in what
quantity?
How to produce those goods and services? i.e., how the
scarce resources are optimally allocated?
How the goods and services so produced are distributed
among the households?
The nature of an economic system depends on how the
above questions are resolved and who coordinates the
decisions of millions of economic agents.
At the two extremes are the Market and Command
Economies.
In between lies the widely prevalent Mixed Economy,
which is a mixed of command and Market Economies.
 TYPES OF ECONOMY
Market Economy:
In a market economy, demand determines what goods and
services are to be produced and how much of each good and
services to be produced.
Consumers are assumed to act in a rational manner so as to
maximize their economic welfare.
They spend their income on various products in such a way
so as to maximize their economic welfare.
Demand as given condition, the firms decide how to
produce the required goods and services in a most efficient
manner so as to maximize their profits.
This results in optimum allocation of scarce resources.
After that, the firms finalized that how the goods and
services are distributed for resolving the ownership pattern
of factor inputs and factor prices.
 TYPES OF ECONOMY
Command Economy:
A command mechanism is a method of determining what,
how, when, where and for whom goods and services are
produced, using a hierarchical organization structure in
which people carry out the instructions given to them.
The best example of a hierarchical organization structure is
the military in India.
Commanders make decisions requiring actions that are
passed down a chain of command.
Soldiers and mariners on the front line take the actions they
are ordered.
The examples of command economies are the former Soviet
Union and the former communist nations of Eastern Europe.
A command economy differs from a market economy in two
important ways.
 TYPES OF ECONOMY
Firstly, in a command economy the state owns all the
productive resources, like land, factories, financial
institutions, retail stores, and the bulk of the housing stock.
Government enterprises and government ownership of
resources are the rule rather than the exception in a
command economy.
Secondly, in a command economy, authoritarian methods
are used to determined resource use and prices.
A centrally planned economy is one in which politically
appointed committees plan production by setting target
outputs for factory and enterprise managers are manage the
economy to achieve political objectives.
 TYPES OF ECONOMY
Mixed Economy:
Most of the real world economies are mixed economy.
It is an economy that follows both the market and command
mechanism.
In most of the modern countries, governments control many
resources and criteria other than personal gain and business
profit are used to decide how resources will be employed.
Most of modern nations have a government firms as well as
private enterprises to provide goods and services for the
country.
In such a country, government provides roads, defense,
pensions and sometimes education.
In modern mixed economies, governments intervene the
markets to control prices and correct the shortcomings of a
system in which prices and the pursuit of personal gain
influence resource use and incomes.
 BASIC MICROECONOMICS
BASIC CONCEPTS AND PRINCIPLES OF MICRO-ECONOMIC
ANALYSIS

Managerial economics deals with firms, more especially

with the environment in which firms operate, the decisions
they take and the effects of such decisions on themselves
and their stakeholders like customers, competitors,
employees and the society in which they operate.
The key economic concepts and principles that constitute
the broad framework of managerial economics are
explained in the next slides.
 BASIC MICROECONOMICS
MARGINALISM
The root cause of all economic problems is scarcity. So,
all should be careful about the utilization of each and
every additional unit of resources.
In order to decide whether to use an additional unit of
resource you need to know the additional output expected
there from.
Economists use the term marginal for such additional
magnitude of output.
Marginalism concept will help to know the additional
output expected from an additional unit of resource.
Therefore, marginal output of labor is the output produced
by the last unit of labor.
 BASIC MICROECONOMICS
OPPORTUNITY COST
Economic decision is choosing the best alternative among
available alternatives.
Before choosing best alternative you rank them all based
on their priority and probable return.
This choice implies sacrificing the other alternatives.
The cost of this choice can be evaluated in terms of the
sacrificed alternatives.
If the best alternative was not chosen then you could have
chosen the second best alternative.
So, the cost of this particular best choice is the benefit of
the next best alternative foregone. This is called
Opportunity Cost.
 BASIC MICROECONOMICS
DISCOUNTING TIME PERSPECTIVE
Discounting principle refers to time value of money, i.e., the fact
that the value of money depreciates with time.
The core discounting principle is that a rupee in hand today is
worth more than a rupee received tomorrow.
One rationale of discounting is uncertainty about tomorrow, i.e.,
future. Even if there is no uncertainty, it is necessary to discount
future rupee to make it equivalent to current day rupee.
In business situations, most of the decisions relate to outflow and
inflow of money and resources that take place at different point
of time.
Most outflows normally occur in the current period, whereas
inflows occur only in future, therefore, in order to take the right
decision it is necessary to discount future inflows to their
present value level. The simple formula for discounting is:
PVF = 1 / (1+rn), Where PVF = present value of fund, n= period
(year, etc.) and r = rate of discount.
 BASIC MICROECONOMICS
RISK AND UNCERTAINTY
The uncertainty is due to unpredictable changes in the
business cycle, structure of the economy and government
policies.
This means that the management must assume the risk of
making decisions for their organizations in uncertain and
unknown economic conditions in the future.
Firms may be uncertain about production, market-prices,
strategies of rivals, etc.
Under uncertain situation, the consequences of an action
are not known immediately for certain.
Economic theory generally assumes that the firm has
perfect knowledge of its costs and demand relationships
and its environment.
 BASIC MICROECONOMICS
Uncertainty is not allowed to affect the decisions.
Uncertainty arises because producers simply cannot foresee
the dynamic changes in the economy and hence, cost and
revenue data of their firms with reasonable accuracy.
Dynamic changes are external to the firm and they are
beyond the control of the firm.
The result is that the risk from unexpected changes in a
firms cost and revenue cannot be estimated and therefore
the risk from such changes cannot be insured.
The managerial economists have tried to take account of
uncertainty with the help of subjective probability.
The probabilistic treatment of uncertainty requires
formulation of definite subjective expectations about cost,
revenue and the environment.