INTRODUCTION

TO
ECONOMICS

SBI targets existing customers for second home loans

Are cricket matches justifed even at the cost of

productivity loss?

Toyotas Liva to take on Swift, Polo, Micra.

Turbulent fight: Can Air India Survive?

Ambanis, Birlas, actors earn in multi crores: is it

justifable?

Markets can digest only one more rate hike by RBI.

Fuel price hike to push infation into double digit.

Chinas products to be expansive due to wage rise.

Emphasis Signifcant Contribution
Wealth Adam Smith
Welfare Alfred Marshall
Scarcity Lionel Robbins
Growth Paul Samuelson
What is Economics?
The word economy comes from a Greek word for
one who manages a household.
WEALTH DEFINITION
Adam smith (1723 - 1790), Father of
Economics

Book An Inquiry into Nature and Causes

of Wealth of Nations (1776)

Defned economics as the practical science

of production and distribution of wealth.
WELFARE DEFINITION
Alfred Marshall (1842 - 1924)
Book Principles of Economics (1890)

Defned Political Economy or Economics is a

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
Lionel Robbins (Scarcity defnition)
book An Essay on the Nature and Signifcance of
Economic Science in 1932.

According to him, economics is a science which

studies human behaviour as a relationship
between ends and scarce means which have
alternative uses

Ends human wants

Means resources with which wants are fulflled

defned 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 the future
among various people and groups of society
GROWTH DEFINITION
contd..

Thus economics is a social science that studies

human behaviour and institutional arrangements
in societies that infuence the processes by which
relatively scarce resources are allocated to
alternative uses.

It covers the actions of individuals and groups of

individuals in the process of producing,
exchanging and consuming of goods and services
to achieve optimization of resource use

social science and decision science

components of economics
Economics as a Social
Science
Human behavior is infuenced by a matrix of
complex forces

Psychology

Sociology

Anthropology

Economics

Political Science

Religion, ...
Scarcity

A situation in which the amount

of something actually available
would not be sufcient to satisfy
the desire for it, if it were
provided free of charge.
Factors of Production

There are 4 factors that must all be

used to produce anything

Natural Resources (also referred to as

land)

There are 4 factors that must all be

used to produce anything

Labor efort of a person for which they

are paid

Capital human-made resources used to

create other goods

Kinds of Capital

Physical Capital Also called Capital

Goods, objects that are used to produce
other goods

Kinds of Capital

Human Capital knowledge or skills

workers get from education and
experience

There are 4 factors that must all be

used to produce anything

Entrepreneurship person who takes a

risk in combining the other 3 factors to
create a new good
Physical Environment:Engineers produce products
and services depending on physical laws (e.g. Ohm's
law; Newton's law). Physical efciency takes the form:
system output(s)
Physical (efciency ) = ----------------------------
system input(s)
Economic Environment:Much less of a
quantitative nature is known about economic
environments -- this is due to economics being
involved with the actions of people, and the structure
of organizations.

Satisfaction of the physical and economic

environments is linked through production and
construction processes.
Why To Study Economics?

Engineers need to manipulate systems to

achieve a balance in attributes in both the
physical and economic environments, and
within the bounds of limited resources.

Following are some examples where engineering

economy plays a crucial role:

Choosing the best design for a high-efciency gas

furnace

Selecting the most suitable robot for a welding

operation on an automotive assembly line

Making a recommendation about whether jet

airplanes for an overnight delivery service should
be purchased or leased

Considering the choice between reusable and

disposable bottles for high-demand beverages
19
Engineering Economic
Decisions
Planning
Investment
Marketing
Profit
Manufacturing
Making Economic Decisions

Every decision we make involves trade-ofs

alternatives that we must give up when
we make a choice

So while making an economic decision

1
st
Place is what we would choose to do

2
nd
Place is our opportunity cost (we give it up
to do option 1)
Xs Decision-making Grid
Alternatives
Sleep late Wake up early to study
Benefts
Enjoy more sleep
Have more energy
during the day
Better grade on test
Teacher and parental
approval
Personal satisfaction
Decision Sleep late Wake up early to
study for test
Opportunity
cost
Extra study time Extra sleep time
Benefts
forgone
Better grade on test
Teacher and parental
approval
Personal satisfaction
Enjoy more sleep
Have more energy
during the day
Opportunity Cost

Defnition the cost expressed in terms of the

next best alternative sacrifced

Helps us view the true cost of decision making

Implies valuing diferent choices

Few appealing VACATION Destinations

Individuals may try to maximize utility given

the constraints of income, time, prices, etc.

Firms may have objectives such as the

maximization of profts, sales, market share,
etc. or the minimization of costs per unit

Social objective, maximize the well being of the

members of society
Objectives
The Economic Problem

Production Decisions

Exchange Decisions

Consumption Decisions

What goods and services should an economy

produce? should the emphasis be on
agriculture, manufacturing or services, should it
be on sport and leisure or housing?

How should goods and services be produced?

labour intensive, land intensive, capital intensive?
Efciency?

Who should get the goods and services

produced? even distribution? more for the
rich? for those who work hard?
contd.........
Capital Goods and Consumer Goods

Consumer Goods

Goods produced for present consumption.

Investment

The process of using resources to produce new

capital.
Because resources are scarce, the opportunity cost
of every investment in capital is forgone present
consumption.

Every resource is best suited for

certain types of goods

Farmland and cows make butter

Metals and factories make guns

Butter v/s Guns: To convert butter

production to guns, you must sell the cows
and build new factories on the land
Production Possibility Frontiers
Watermelons
(m.t.)
Shoes
(millions of pairs)
S
h
o
e
s

(
m
i
l
l
i
o
n
s

o
f

p
a
i
r
s
)25
20
15
10
5
0
25 20 15 10 5
Production Possibilities Graph
Watermelons (millions of tons)
0
a (0,15)
15
b (8,14)
14
18
20
21
12
9
5
0
A production
possibilities frontier
c (14,12)
d (18,9)
e (20,5)
f (21,0)
8 14

PPF shows the diferent combinations of goods

and services that can be produced with a given
amount of resources

No ideal point on the curve

Any point inside the curve suggests resources

are not being utilised efciently

Any point outside the curve not attainable with

the current level of resources

Useful to demonstrate economic growth and

opportunity cost
contd.......
Efciency
Efciency means
using resources in
such a way as to
maximize the
production of goods
and services.
An economy producing
output levels on the
PPF is operating
efciently.
S
h
o
e
s

(
m
i
l
l
i
o
n
s

o
f

p
a
i
r
s
)
25
20
15
10
5
0
25 20 15 10 5
Watermelons (millions of tons)
Production Possibilities Graph
g (5,8)
A point of
underutilization
c (14,12)
d (18,9)
e (20,5)
f (21,0)
a (0,15)
b (8,14)
S
Growth
Growth If more resources
become available, or if
technology improves, an
economy can increase its
level of output and grow.
When this happens, the
entire production
possibilities curve shifts
to the right.
S
h
o
e
s

(
m
i
l
l
i
o
n
s

o
f

p
a
i
r
s
)
25
20
15
10
5
0
25 20 15 10 5
Watermelons (millions of tons)
Production Possibilities Graph
T
Future production
Possibilities frontier
c (14,12)
d (18,9)
e (20,5)
f (21,0)
a (0,15)
b (8,14)
S
Positive & Normative Economics

Health care can be

improved with more
tax funding

Pollution control is
efective through a
system of fnes

Society ought to
provide homes for all

Any strategy aimed at

reducing factory
closures in deprived
areas would be helpful

Positive Statements:

Capable of being
verifed or refuted by
resorting to fact or
further investigation

Normative Statements:

Contains a value
judgement which
cannot be verifed by
resort to
investigation or
research
Micro & Macro Economics
Microeconomics The study of how
households and businesses make choices,
how they interact in markets, and how the
government attempts to infuence their
choices.
Macroeconomics The study of the
economy as a whole, including topics such
as infation, unemployment, economic
growth National income etc.
QUIZ TIME

Which of the following are factors of production?

a. Capital and Land
b. Scarcity and shortages
c. Technology and productivity
d. economics and business decisions
a. capital and land

Which of the following is an example of using

physical capital to save time and money?
a. hiring more workers to do a job?
b. building extra space in a factory to simplify
production
c. switching from oil to coal to make production
cheaper
d. lowering workers wages to increase profts
b. building extra space in a factory to simplify
production

To what part of an industry does a workers

education contribute?
a. technology
b. physical capital
c. human capital
d. scarce resources
c. human capital

Which of the following is an entrepreneur?

a. person who earns a lot of money as a singer
or dancer
b. person who creates a game and sells it to a
game manufacturer
c. person who starts an all-organic cleaning
supplies business that employs others
d. person who works as a highly paid computer
programmer
c. person who starts an all-organic cleaning
supplies business that employs others

What is the diference between a shortage and

scarcity?
a. A shortage can be temporary or long-term,
but scarcity always exists.
b. A shortage results from rising prices; scarcity
results from falling prices.
c. A shortage is a lack of all goods and services;
scarcity concerns a single item.
d. There is no real diference between a shortage
and scarcity
a. A shortage can be temporary or long-term,
but scarcity always exists!

What does an economist mean by the term

LAND?
a. farmland only
b. food crops grown on farmland as well as the
farmland itself
c. goods and services that are produced form
the land
d. all natural resources used to produce goods
and services
d. all natural resources used to produce goods
and services!

The economic concept of guns or butter means

that
a. a person can spend extra money either on sports
equipment or food.
b. a company must decide whether to manufacture
guns or butter
c. a government must decide whether to produce
more or less military or consumer goods
d. a government can buy unlimited military and
civilian goods if it is rich enough
c. a government must decide whether to produce
more or less military or consumer goods
trade of . due to scarcity!

If a person who wants to buy a compact disc (CD)

has just enough money to buy one, and chooses
CD A instead of CD B, then CD B is the
a. trade-of
b. opportunity cost
c. decision at the margin
d. opportunity at the margin
b. opportunity cost

A decision-making grid is a visual way of:

a. examining opportunity costs
b. selling goods or services
c. making marginal decisions
d. identifying shortages
a. examining opportunity costs!

A decision is made at the margin when each

alternative considers
a. a diferent trade-of than the others
b. where the most costly alternative will be.
c. what the all or nothing alternative will be.
d. cost and beneft ranked in progressive units.
d. cost and beneft ranked in progressive units

A production possibilities curve shows the

relationship between the production of:
a. farm goods and factory goods
b. two types of farm goods
c. two types of factory goods
d. any two categories of goods
d. any two categories of goods.

The line on a production possibilities curve

showing the relative amounts of two types of
goods produced using all resources is called the
a. production possibilities frontier
b. opportunity cost line
c. utilization of resources
d. maximum possible production line
a. production possibilities frontier

The law of increasing costs means that as

production shifts from one item to another,
a.the cost of production gets cheaper and cheaper.
b.the cost of producing an item stays the same no
matter how many are produced.
c.more and more resources are necessary to
increase production of the second item
d.the land costs of increasing production rise
much more steeply than do the labor costs
c. more and more resources are necessary to
increase production of the second item
and last question

The curve usually seen in a production

possibilities frontier can be explained by:
a. growth in the economy
b. underutilization of resources
c. increasing an economys efciency
d. the law of increasing costs
d. the law of increasing costs!