Nature

Nature of
of Economics
Economics and
and
Basic
Basic Economic
Economic Concepts
Concepts
 Economics
• Economics is a behavioral science.
• It is all about, how people make choices.
• It is the study of how individuals and
societies chose to use scarce resources
that nature and previous generations have
provided.
• Economics is the study of how people
allocate their limited resources in an
attempt to satisfy their unlimited wants.
 We The People

Households Firms Government

Consumption of Goods and Services

Firms
Production of Goods and Services
Limited Supply
 Circulating Flow of
Goods & Income
Factors Goods
of &
Production FIRMS
FIRMS Services

Wages,
Rent, Consumer
Dividends, Expenditure
Interest (rupees)
etc
(rupees)

HOUSEHOLDS
HOUSEHOLDS
 Reasons to study
Economics
• To learn a way of thinking.
• To understand society.
• To understand global affairs.
• To be an informed citizen.
Two
Two major
major branches
branches of
of
Economics
Economics
Microeconomics
Macroeconomics
 Microeconomics
• Concerns with behavior of Individual
entities like market, firms and
household.
• The study related to Land, Labor &
Capital.
 Macroeconomics deals
with
• Determination of total investment and
consumption
• Management of money and interest
rates by central bank.
• Study of international financial system
etc.
• National growth, National Income etc
Economic
Economic Evaluation
Evaluation
•Positive Economics
•Normative Economics
 Positive Economics
• Positive Economics describes the fact of an economy.
• It is a positive approach to policy analysis, it focuses
on objectives, behavior, and interaction of individuals
and groups who influence policy decisions.
• Positive economics is concerned with what is, with
describing how the economy functions.
• It is Descriptive.
• E.g what is the impact of computes on productivity.
Should the govt reduce the deficit etc
 Normative Economics
• It deals with what should be…..with making
judgments about the desirability of various course
of actions.
• It involves value judgments rather than facts.
• It involves ethical precepts and norms of fairness.
• It is Prescriptive.
• E.g Should poor people be required to work, if
they are to get Govt assistance?
 Basic Economic Concepts
• Resources & its Scarcity-Economics is the study of how societies use scarce
resources to produce valuable commodities and distribute them among
different people.
• Scarcity and Choice- In each economy resources are scarce and wants are
unlimited, and people chose the scarce resources efficiently to satisfy
unlimited wants.
• Opportunity cost and its uses-Opportunity cost of a decision is the value of
goods and services forgone.
• Production Possibility Frontier- It shows the maximum amount of production
that can be obtained by an economy, given its technological knowledge and
quantity of inputs available. PPF shows the menu of goods and services
available to society.
• Law of increasing cost and diminishing returns-
• Economic Efficiency and growth-Output of the society should increase.
Per Capita Income=National Output/Population.
Efficiency means that the economy’s resources are being used as effectively
as possible to satisfy people’s needs and desires.
 Economic
Economic System
System
•Free Market Economy
•Command or controlled market Economy
•Mixed Market Economy.
•Islamic Economic System.
 Market Economy
(Capitalistic Economy)
• In which individuals and the private firms
make the decision about production and
consumption.
• Extreme case of market economy where
individual households and firms pursue
their own self interest, without any cetral
direction or regulation is the Laissez-
faire Economy.
 Command Economy
(Socialistic economy)
• In which Govt make all important
decisions about production and
distribution.
• Govt owns most of the means of
production like land and capital.
 Mixed Economy
• Have all the characteristics of
Market and Command economies.
• Most Economies are Mixed economies
I.e decisions are made by both Govt
and people.
 Features of Capitalism
• Give incentives to people and they will allocate
their recourses.
• Right of ownership and transfer.
• Freedom of choice by consumers.
• Freedom of enterprise or business activity.
• Profit motive & Self interest
• Limited role of Govt.
• Effective management role.
 Negative Impacts of
capitalism on economy
• Navigation of welfare aspects.
• Class conflict
• Increase in income inequalities.
• Unnecessary expenditure regarding to
popular activities.
• Wastage of recourses due to economic
fluctuations.
 Features of Socialism
• State ownership
• No private property and enterprise
• Social welfare & social security of the
society.
• Central Planning system.
• Economists allocate the resources.
• Political workers make the direction of the
economy.
 Negative impacts of
socialism on the economy
• Lack of economic and consumption freedom.
• Lack of spirit of competition and initiatives
• Misuse and misallocation of recourses.
• Large time interval in decision making.
• Political control over economic aspects.
 Features of Mixed
economic structure
• Coexistence of public and private sectors
having objective of profit and welfare
aspects.
• Price system with govt directions
• Right of ownership and transfer.
• Control over monopolies.
• Reduction of economic inequalities.
• Human freedom, Flexible
Objectives of the Mixed
economy
• Economic Growth
• Full Employment
• Price level stability.
• Economic efficiency
• Appropriate resources
• Economic freedom
• An equitable distribution of income
• Exchange rate stability.
• Economic stability.
 Problems of economic
organization
• What commodities are produced?
• How these commodities are made( method
of production, labor intensive techniques
or Capital Intensive techniques)?
• How much quantities are produced?
• For whom they are produced?
• How to distribute these things?
 Classifying Economic Systems

Mid 1970s
Totally
Totally
N. Korea China Poland France UK USA Hong Kong Free
Planned
N. Korea China Poland France UK USA Market
Economy Hong Kong
Economy

Mid 1990s
 Market
• Mechanism of exchanging goods and
services.
• A place where goods and services are
exchanged at a particular price
intervals.
 PEST
PEST Analysis
Analysis
Factors affecting the firms in the
External environment, Firms establishes a
strategic approaches to tackle their
business activities, by studying this
analysis.
 PEST
• Political Factors.
• Economic Factors.
• Social Factors.
• Technological factors.
 Political
• Actions of Govt.
1. Law Enforcement.
2. Tax Management.
3. Product safety Standards.
4. Industrial Relations legislations.
5. Laws preventing firms to keep prices up.
6. Labor laws.
 Economic Factors
• Cost of Raw material.
• Market entry of new rival.
• Bargaining power of supplier.
• Bargaining power of buyers.
• Threat of substitute product.
• Degree of competition.
• International exchange rates.
• Forth coming Budget
Social & Cultural Factors
• Attitude towards working conditions.
• Length of working days.
• Equal opportunity for different group of
people.
• Images portrayed in advertising.
• Demographic trends.
• Ethical issues.
 Technological Factors
• The use of machinery.
• Use of Robots.
• Using organized software for data
management.
• Quick decision making by organized
datas.
• Information technology revolution.