A QUICK REVISION –
MICRO ECONOMICS
DR. PARAMASIVAN S VELLALA
FELLOW, NITIE – MUMBAI
DEPARTMENT OF MATHEMATICS AND HUMANITIES,
INSTITUTE OF TECHNOLOGY,
NIRMA UNIVERSITY
By Dr. Paramasivan S Vellala, Fellow, NITIE - Mumbai 8/13/2020
2 LECTURE -1 INTRODUCTION TO ECONOMICS
ORIGIN: Economics has been originated from Greek Words - “iko” “nomo” which means
Rule of Household or Law of Household - how a household manages its given
resources
MEANING: Economics is the study of how societies choose to use productive resources
that have alternate uses, to produce goods and services that are needed
By Dr. Paramasivan S Vellala, Fellow, NITIE - Mumbai 8/13/2020
3 INTRODUCTION………..
• The subject matter of economics evolves around the core problem of “Rational
Management of Resources so as to maximise the social welfare”
• BASIC PREMISE:
“HUMAN WANTS ARE UNLIMITED
BUT
RESOURCES ARE LIMITED (SCARCE)
By Dr. Paramasivan S Vellala, Fellow, NITIE - Mumbai 8/13/2020
4 TYPES OF RESOURCES
• I - Natural Resources
• II - Financial Resources
• III - Human Resources
• IV - Technology
• V - TIME
By Dr. Paramasivan S Vellala, Fellow, NITIE - Mumbai 8/13/2020
5 ECONOMICS IS CALLED SCIENCE OF CHOICES
• 1 ECONOMICS IS THE STUDY OF MANKIND – HUMAN WELFARE
• 2 RESOURCES ARE LIMITED/SCARCE
• 3 RESOURCES CAN BE PUT TO ALTERNATE USES
• 4 SINCE REOURCES CAN BE PUT TO ALTERNATE USES MAN HAS TO MAKE A
CHOICE
• 5 THEREFORE, ECONOMICS IS CALLED THE SCIENCE OF CHOICES
By Dr. Paramasivan S Vellala, Fellow, NITIE - Mumbai 8/13/2020
6 WHY ENGINEERS NEED TO LEARN ECONOMICS?
- ECONOMIC EFFICIENCY
Upstream Midstream Downstream
Industrie Industries Industries
• Oil, Petrolium • Processing • Transportation
• Power • Refining • Banking
Generation • Insurance
By Dr. Paramasivan S Vellala, Fellow, NITIE - Mumbai 8/13/2020
7 FUNCTIONS OF ECONOMICS
• Economics explore the behaviour of financial market
• It examines why some countries are developed, why some countries are underdeveloped
• It studies business cycles – economic fluctuations – unemployment, poverty, inflation
• It studies international trade and finance – GLOBALISATION
(1) Free Flow of Goods and Services (3) Free Flow of Labour/Skill/Knowkledge
(2) Free Flow of Capital (4) Free Flow of Technology
• It helps government to achieve macro economic objectives –
(1) Rapid Economic Growth (2) Price Stability (3) Full Employment (4) Social Inclusion
By Dr. Paramasivan S Vellala, Fellow, NITIE - Mumbai 8/13/2020
8 ECONOMIC SYSTEM
Capitalism
• All Factors of Production are owned by private individuals - USA
• Price Determination is done by market forces-demand/supply
Command/Socialism
• All Factors of Production are owned by Government/State – CHINA/RUSSIA
• Price Determination is done by Government owned Public Sectors
• It combines the best features of Capitalism and Socialism – with both Public Sector and Private Sector
Mixed Economy co-exist - INDIA
• Price Determination in Public Sectors determined by Government/Regulatory Agencies and in
Private Sectors are determined by MARKET FORCES - Demand and Supply
By Dr. Paramasivan S Vellala, Fellow, NITIE - Mumbai 8/13/2020
9 MICRO ECONOMICS VS MACRO ECONOMICS
MICRO ECONOMICS MACRO ECONOMICS
• Origin: The word Micro is originated from • Origin The word Macro is originated from
Greek word “Mikros” which means small Greek word “Makros” which means large
• Meaning: • Meaning
Micro Economics deals with the study of Macro Economics deals with the study of
individual economic units – the individual aggregate economic behaviour – the national
behaviour, Firm’s behaviour income, employment
By Dr. Paramasivan S Vellala, Fellow, NITIE - Mumbai 8/13/2020
10 MICRO ECONOMICS VS MACRO ECONOMICS
MICRO ECONOMICS MACRO ECONOMICS
• Study Topics: • Study Topics
1. Consumer Behaviour 1. National Income – GDP –Gross Domestic Product
2. Firm’s Study – Reliance, Nirma,Adani 2. Money, Income and Employment
3. Factor Pricing 3. Banking Commercial Banks/ Central Bank (RBI)
4. Demand Theory 4. Policies – Fiscal (Union Budget) Vs. Monetary (RBI Policy)
5. Production Theory 5. Aggregate Demand, [Link], [Link] [Link]
6. Pricing Theory 6. Business Cycle – International Trade
7. Capital Budgeting 7. Agriculture/Industry
By Dr. Paramasivan S Vellala, Fellow, NITIE - Mumbai 8/13/2020
11 LECTURE -2 SCOPE OF ECONOMICS
• I PRODUCTION
• 2 CONSUMPTION
• 3 EXCHANGE
• 4 DISTRIBUTION
• 5 PUBLIC FINANCE
By Dr. Paramasivan S Vellala, Fellow, NITIE - Mumbai 8/13/2020
12 PRODUCTION
• Production means transforming inputs into output. In other words, it is the process of
converting raw-materials into finished goods. Factors of Production -
(1) Land
(2) Labour
(3) Capital
(4) Entrepreneur
PRODUCTION IS THE FUNCTION OF INVESTMENT(Domestic and Foreign Investment)
Domestic Investment – SAVINGS Foreign Investment – FDI and FII
By Dr. Paramasivan S Vellala, Fellow, NITIE - Mumbai 8/13/2020
13 PRODUCTION………..
FACTOR PRICING
Land-Rent
Factor
Entreprnuer Labour-
PROFIT Pricin Wages
g
Capital -
Interest
By Dr. Paramasivan S Vellala, Fellow, NITIE - Mumbai 8/13/2020
14 2. CONSUMPTION
• Consumption is the process through which people satisfy their wants – effective desires
• UTILITY – The want satisfying power of a commodity is called utility
• Consumption is the function of Income
Y = β1 + β2X
• Y = Consumption
• β1 = Constant
• β2 = Coefficient
• X = Income Y = C + S. Therefore if MPC is 0.8 then MPS is 0.2
• MPC = Marginal Propensity to Consume * MPS = Marginal Propensity to Save
By Dr. Paramasivan S Vellala, Fellow, NITIE - Mumbai 8/13/2020
15 3. EXCHANGE
• Exchange is the process through which the title to goods (ownership) is transferred from seller to the
buyer
• BARTER EXCHANGE: It is also called direct exchange system where people exchanged goods for
goods. This was the earliest form of exchange.
• MONEY EXCHANGE: This is the modern exchange which has effectively substituted the
inconveniences of barter exchange system like
• Money is the medium of exchange and measurement of value
• Money has store value and facilitate differential payment which makes the economy very
dynamic
By Dr. Paramasivan S Vellala, Fellow, NITIE - Mumbai 8/13/2020
16 4. DISTRIBUTION
Factor • Factors of Production-Land Labour Capital and
Entrepreneur
• Factor pricing – Land-Rent/Labour-
Distribution Wages/Capital-Interest/Entrepreneur - PROFIT
Commodity • Physical Flow of Goods and Services
• Wholesalers-Retailers – Intermediaries
Distribution
• Supply Chain Management (SCM) and
Marketing Logistics
By Dr. Paramasivan S Vellala, Fellow, NITIE - Mumbai 8/13/2020
17 5. PUBLIC FINANCE
Public • Public Utility – water/food/road/rail/port/airport
Expenditure • Defence/Electricity/Telecommunication
• Direct Tax – Income Tax/Gift Tax/Wealth Tax
Public Revenue • Indirect Tax - GST
• Internal Debt: Public, PFIs, SBI, RBI
Public Debt • External Debt: IMF, WB(IBRD), ADB
By Dr. Paramasivan S Vellala, Fellow, NITIE - Mumbai 8/13/2020
18 LECTURE 3 FUNDAMENTAL PRINCIPLES OF
ECONOMICS
• I - MARGINAL PRINCIPLE
• 2. – THE PRINCIPLE OF OPPORTUNITY COST
• 3 - TRADE – OFF
• 4 – RATIONALITY
• 5- INCENTIVE SYSTEM
• 6- MARKET
• 7- EXTERNALITIES
By Dr. Paramasivan S Vellala, Fellow, NITIE - Mumbai 8/13/2020
19 1. MARGINAL PRINCIPLE
• Marginal means unit study. Every unit produced, and sold are very crucial to decision makers-
firm/individual/government to make decision like economic efficiency.
• MP additional unit of product produced MP = d(TP)/d(q)
• MC additional cost of producing the additional unit MC = d(TC)/d(q)
• MR additional revenue of selling that unit in the market MR = d(TR)/d(q)
• When MR > MC its unit profit and when MC > MR its unit loss BUT
• ECONOMIC EFFICIENCY IS ACHIEVED WHEN
MR = MC
Marginal here, marginal there, the marginal way of thinking is the economic way of thinking
By Dr. Paramasivan S Vellala, Fellow, NITIE - Mumbai 8/13/2020
20 2. OPPORTUNITY COST
• Opportunity Cost is the cost/revenue of alternative choice/next best choice
• Opportunity Cost arises only when there are alternatives
• If there is no alternative, there is no opportunity cost
• Opportunity cost is not actual cost – its imaginary but important for INVESTMENT
ANALYSIS Some Examples –
• The opportunity cost of higher education is what the parents forego the interest income had they
invest the funds in bank fixed deposits.
• The opportunity cost of the proposed Mumbai-Ahmedabad Bullet Train project is the benefits
foregone had the whopping 1 lac crore is invested in improving all the railway stations in India.
By Dr. Paramasivan S Vellala, Fellow, NITIE - Mumbai 8/13/2020
21 3. TRADE OFF
• Trade-off is the balance achieved when the decision maker (Firm/Individual/Government)
faces two competing objective with given outlay/investment.
• In other words, it is the opportunity cost of a particular choice which is the loss of the most
preferred alternative given up.
• Examples (1) Efficiency Vs. Equity (3) Urban Development vs. Rural Development
(2) Gun Vs. Bread (4) Agriculture vs. Industries
By Dr. Paramasivan S Vellala, Fellow, NITIE - Mumbai 8/13/2020
22 4. RATIONALITY
• Rationality means value based judgement
• The fundamental economic assumption is that “Man is Rational”
• The decision maker (The Firm/Individual/Government) should apply the principle of
rationality while allocating the scarce resources so that economic efficiency can be
achieved.
• Rationality deals with “What ought to be”
By Dr. Paramasivan S Vellala, Fellow, NITIE - Mumbai 8/13/2020
23 5. INCENTIVE SYSTEM
Land-Rent
Factor
Entreprnuer Labour-
PROFIT Pricin Wages
g
Capital -
Interest
By Dr. Paramasivan S Vellala, Fellow, NITIE - Mumbai 8/13/2020
24 6 - MARKET
• Market is the market place where the market forces – the demand force and supply
force interact for price determinations without Government interference.
• Market assures economic efficiency in the resources allocation and mostly employed by
the capitalistic economies like USA and other western countries
• India opened up her economy in the year 1991 when [Link] Singh the then
Finance Minister of India presented the game-changing Budget for 1991-92 which
has changed the way we live today. It has brought massive investment to India
By Dr. Paramasivan S Vellala, Fellow, NITIE - Mumbai 8/13/2020
25 7. EXTERNALITIES
• Externalities emanate from market failures caused by monopolies or restrictive trade
practices.
• Externalities may be Positive or Negative
• POSITIVE EXTERNALITIES: when the third party gains who is directly not involved
in the transaction/exchange – both production as well as consumption
• NEGATIVE EXTERNALITIES: when the third part incurs loss who is directly not
involved in the transaction/exchange – both production as well as consumption
By Dr. Paramasivan S Vellala, Fellow, NITIE - Mumbai 8/13/2020
26 EXAMPLES OF TYPES OF EXTERNALITIES
• Organic Farming • Pollution
Positive Negative
Production Production
Externalities Externalities
Positive Negative
Consumption Consumption
Externalities Externalities
• Gardening by • Domestic
Neighbour Animal by
Neighbour
By Dr. Paramasivan S Vellala, Fellow, NITIE - Mumbai 8/13/2020
27
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Thank You
