INTRODUCTION TO ECONOMICS

MEANING OF ECONOMICS

Economics is a social science that studies the production, distribution, and

consumption of goods and services. Economics focuses on the behaviour and
interactions of economic agents and how economies work.

MICRO ECONOMICS AND MACROECONOMICS

MICRO ECONOMICS

Focused on individual actions and behaviors, microeconomics determines how

people, their families (and the businesses they lead) make decisions amid scarce
resources or other constraints. These seemingly small-scale decisions often occur in
response to larger trends or concerns, such as the availability of new incentives or
developments regarding production. Through a close study of microeconomics, we
can better understand:

 Why specific goods are valued differently.

 How goods can be more efficiently produced and exchanged.
 What it takes for individuals to cooperate and collaborate.

The individual actors involved in microeconomics may be categorized as buyers,

sellers, or entrepreneurs. Their behaviors and actions may be closely observed and
contrasted against models to determine what might happen in the real world.

features of Microeconomics:

 Individual Behavior: Microeconomics focuses on the behavior of an individual

such as consumers, producers, and firms.
 Price Mechanism: It examines how prices are determined in markets through the
interaction of supply and demand.
 Resource Allocation: Microeconomics studies how resources are allocated
efficiently to maximize utility or profit.
 Market Structures: It analyzes different market structures like perfect
competition, monopoly, oligopoly, and monopolistic competition , and their
effects on prices and output.
 Consumer Choice: Microeconomics explores factors influencing consumer
choices, including preferences, income, and prices of goods and services.

MACROECONOMICS

Emphasizing the entire economy, macroeconomics delves into broad trends rather
than focusing on individual markets. This practice is crucial for government entities,
as it reveals how major decisions could play out not only in the immediate future but
also on a long-term basis. This branch aims to produce stable economic
growth through solid fiscal policies. Progress toward this objective is measured
based on key economic indicators, such as:

 Gross domestic product.

 Interest rates.
 Inflation.
 Unemployment.

Features of Macroeconomics:

 Aggregate Economic Variables: Macroeconomics deals with the economy as a

whole, studying aggregate variables like GDP, inflation, unemployment, and
national income.
 Economic Growth: It focuses on factors that influence long-term economic
growth and development, such as investment, technological progress, and
institutional factors.
 Stabilization Policies: Macroeconomics examines policies aimed at stabilizing
the economy, including monetary policy by the Reserve Bank of India and fiscal
policy by the government.
 International Trade and Finance: Macroeconomics analyzes factors affecting
India’s trade balance, exchange rates, and capital flows in the global economy.
 Income Distribution: It investigates how national income is distributed among
different groups in society, including issues of poverty, inequality, and social
welfare.

Microeconomics vs. macroeconomics: main differences

The key differences between macro and microeconomics are built right into these
descriptive terms. 'Macro' refers to the big picture — wide-scale economic concerns
that play out at the federal or even international level. From gross domestic product
(GDP) to inflation and unemployment, macroeconomics emphasizes the
broad trends that have global implications.

Micro, as its name implies, focuses on smaller (albeit just as important) concerns
that involve individual people, families, or entities. While microeconomics' focus
may go as broad as an entire industry, it typically does not rise to the level of
national policies — although these can drive the individual decisions that form the
basis of microeconomics.

While there are many significant differences between macro and microeconomics,
it's important to remember that both fields are equally important and have a huge
impact on one another. The individual decisions and practices that seem to play out
on a small scale with microeconomics can ultimately shape the broader economy.
Similarly, decisions made at the federal level will impact the individual consumer.

Difference between Microeconomics and Macroeconomics

 Basis Microeconomics Macroeconomics

Macroeconomics is a part of
Microeconomics is a branch of economics that focuses on how
economics studying the a general economy, the market,
Meaning
behaviour of an individual or different systems that
economic unit. operate on a large scale,
behaves.

Aggregate Demand and

Demand and Supply are the
Tools Aggregate Supply are the two
two tools of Microeconomics.
tools of Macroeconomics.

The basic assumption of

The basic assumption of
macroeconomics is that all the
microeconomics is that all the
micro variables are constant.
Basic macro variables are constant.
The micro variables include
Assumptions The macro variables include
decisions of firms and
income, savings, consumption,
households, prices of
etc.
individual products, etc.

The basic aim of The basic aim of

microeconomics is macroeconomics is
Basic
determination of the price of a determination of the income
Objective
commodity or factors of and employment level of the
production. economy.

Microeconomics involves a
limited aggregation Macroeconomics involves the
degree. For example, market highest aggregation
Degree of
demand is derived by the degree. For
Aggregation
aggregation of individual example, aggregate demand is
demands of all the buyers in a derived for the entire economy.
particular market.

As macroeconomics is
As microeconomics is
primarily concerned with
primarily concerned with price
determining income level and
Other Name determination of commodities
employment, it is also known
and factors of production, it is
as Income and Employment
also known as Price Theory.
Theory.

Individual Output, Individual National Output, National

Example
Income, etc. Income, etc.

CLASSICAL THEORY (ADAM SMITH)

Classical economics
Classical economics is often considered the foundation of modern
economics. Developed by Adam Smith, David Ricardo, and Jean-Baptiste
Say.
Based on:
 Operating a flea market. How the invisible hand and market mechanisms
enable efficient resource allocation.

 Classical economics suggests that the economy generally works most

efficiently when government intervention is minimal and concerned with
protecting private property, promoting free trade, and limiting
government spending. doing.

 Classical economics recognizes that governments need to provide public

goods such as defense, law and order, and education.

NEO CLASSICAL THEORY ( ALFRED MARSHAL)

What is Neoclassical Economics?

Neoclassical Economics is a theory concerning rational behaviour, utility
improvement, and the role of markets in resource allocation that emerged in
the late 1800s. It suggests that people act to increase their pleasure,
businesses act to maximise profits, and market systems correct themselves
to find a balance. It is closely related to marginal utility, demand and supply,
and rational choice theories.
Key Takeaways:
 According to the neoclassical economic model, people make
decisions about consumption, manufacturing, and capital
allocation based on the rational assumption that their
actions would maximise their enjoyment.
 Because the balance between supply and demand
establishes equilibrium prices and quantities, neoclassical
theory states that the process of allocating production
capacity in competitive markets is always effective.
 In their research on decision-making processes, neoclassical
economists apply marginal analysis, wherein slight
variations in output or consumption are expressed as
additional expenses or benefits at specific moments in time.
Difference between Neoclassical Economics and
Classical Economics
Basis Neoclassical Classical Economics
Economics

Meaning Neoclassical Classical Economics

Economics is a is a theory which
theory that first uses labour, capital,
appeared in the late and land as key
19th century and components to
places a strong examine how
emphasis on production,
markets’ ability to distribution, and
 Basis Neoclassical Classical Economics
Economics

allocate resources
effectively, rational trade shape
behaviour, and utility economic results.
maximisation.

Late 19th century Late 18th to early

Period
onwards. 19th century.

It focuses on
It focuses on
production,
individual behaviour,
Focus distribution,
markets, utility
exchange, factors of
maximization.
production.

Marginal utility, Labour theory of

Key Concept perfect competition, value, surplus value,
rational behaviour. capital accumulation.

It gives less
It emphasizes on
Market Structu emphasis on market
perfect competition,
re structure and focus
supply and demand.
on labour market.

Restricted position
Less interference and
Role of with an emphasis on
a focus on laissez-
Government safeguarding
faire principles.
property rights.

Efficiency is the main

Concerns about how
focus while
Distribution wealth and income
distribution is less
are distributed.
important.

It promotes
Economic growth is
innovation and
Innovation thought to be driven
technological
by innovation.
advancement.

Influence on Supporters of Varying degrees of

 Basis Neoclassical Classical Economics
Economics

privatisation, influence and

Policy deregulation, and support for
free markets. governmental action.

ECONOMIC PROBLEM
The Basic Economic Problem

The basic economic problem is often summed up as ‘unlimited wants yet limited
resources to satisfy these wants.’
Needs: these are things that are essential for us to thrive in life. These include: Food,
water, shelter, clothing.
Wants: these are things that we can manage without, but would like to have. They
make life easier, more enjoyable or more exciting.
In life people generally aspire to have more experiences and more possessions.
Advertising makes us aware of exotic and or exciting destinations that we would like
to visit. New inventions and technological progress ensure that there are always new
items that we desire for leisure (i-pads), to make our lives easier (dishwasher) or
maybe we just want a newer version of what we already have (new cars).
There is also the problem that overtime items break or wear out and will need
replacing. This has been taken a step further with the concept of planned obsolescence
(products are designed to have a certain life span and then need replacing).
These factors all lead to humans having unlimited wants and desires. When we satisfy
one, we move onto desiring something else or a newer version. All this stuff requires
resources to produce it and all the travelling needs fuel to move us. These resources
(coal, oil, gas, minerals and metals) are finite (limited). We call this concept scarcity.
This means that we can’t all have everything that we want. We have to make choices
about what is the most important to us. Firms respond to these choices by producing
the things that we want. This is the basic economic problem.

The Factors of Production

When we decide how to use the resources available to us, there are four factors that
need to be brought together to produce a good or service. The quantity and
importance of these factors will vary depending on the industry. We cannot make
anything without these factors of production.
1. Land
This represents the land we build on but also the resources that we extract from it.
Fossil fuel reserves, forests, fish stocks in lakes and oceans all fall under the title of
land. Land is generally considered as fixed in its supply since there is a certain
amount of it. On a more local scale the supply of land may vary though as some of it
is removed through erosion, or in certain cases new land is created by through land
reclamation. The resources the land contains may change considerably. Humans have
permanently reduced the supply of coal, oil, natural gas as well as minerals and metals
found in the land. Modern forestry and fishing techniques have depleted the fish and
wood stocks. The reward for land is rent.

2. Labour
This represents the physical and mental effort used by people to produce something.
Labour is variable in its supply in both the short and long term.
Short term changes in supply could be achieved by:
• Changing school leaving age: Raising the school leaving age would keep more
pupils in education and reduce the labour supply.
• Changing retirement age: Increasing the age which people can retire would keep
them working for more years and increase the labour supply.
• Changing working hours: Generally labour is expected to work for around 40 hours
per week.
Changing holiday entitlement: European countries generally receive 20 working days
of paid holiday a year as standard. In the US the standard is only 10 days; this
essentially represents a greater supply of labour
.Attracting or discouraging immigration of workers: Relaxing the immigration
regulations is a quick way to increase the supply of labour in a country. Governments
can target specically skilled immigrants to meet shortages of labour in certain
industries. The reward for labour is salaries or wages.

3. Capital
Capital refers to any man-made item that is used to produce another good rather than
being a product in itself. A hammer used by a carpenter to make chairs is considered
capital. An accounting office investing in computers used in an accounting office to
store records on would be classed as capital. Working capital refers to the capital that
is used up in the production process such as raw materials. For example, a mining
company extracting coal sells it as a product in itself (land) but the company that uses
it for power uses working capital. Fixed capital refers to the capital that does not need
replacing in the short-run such as machines, buildings and tools. Wear and tear,
breakage and machines becoming outdated means that capital has to be replaced. This
is known as investment. The value of capital depreciates over time due to the above
factors and this has to be accounted for in a company’s financial accounts. The reward
for capital is interest.

4. Enterprise To produce an item and establish a firm the other factors of production
need to be managed. Decisions need to be made about how much labour is needed,
the quantity and type of capital that is the most appropriate and how much land should
be bought or rented. There is also the need to take risk. Money needs to be invested in
the other factors of production before any profit is made. This may be funded by an
individual setting up a business, or through the wider population in the form of
company shares. Enterprise refers to the two aspects mentioned above: the decision
making and risk taking. The person who makes these decisions and establishes a
business is called an entrepreneur.The reward for enterprise is profit.

Opportunity Cost This is an important concept which will come up time and time
again in this course. This is the idea that for every decision that we make there was
another option that we had to forgo (or give up). This can be applied to the decisions
individuals, firms and governments make. We therefore define opportunity cost as the
cost of the next best alternative given up. It is important to remember that it relates to
the next best choice. For example, In our personal life we often have multiple options
for our time and money. When we decide to use our time playing sport we have given
up the option of using it in another way, maybe going to the cinema. When we spend
our money on a new laptop we have given up the other possible uses of that money. In
our working lives we also make important decisions. When we accept one job, we
have given up the opportunity to do another job. In making our decision about which
job to choose we often take various factors into consideration such as: Pay, holiday
entitlement and job satisfaction. We choose the one that best satisfies our wants. If the
conditions change, we may decide that this is no longer the best option and move to
the better job. Opportunity cost is an important consideration for firms. The choices
they make about what tasks their employees perform, which capital they invest in and
which location to open a factory in can all seriously affect their profits. On a much
larger scale governments must carefully choose how to spend their revenue. Increased
spending on healthcare may mean that less is available for education.

The Production Possibility Curve (PPC) The production possibility curve represents
the potential output of an economy if all factors of production are used efficiently.
Any point to the left of the curve indicates that the factors of production could be used
more effectively (unemployment of resources) and that the economy is not reaching
its potential. To move the curve further to the right there would need to be an increase
in factors of production(new discovery of a raw material, population growth), an
increase in the quality of factors of production, or advances in technology that
increased efficiency.

N.B: Draw a PPC curve!