HSIR13

INDUSTRIAL ECONOMICS AND

FOREIGN TRADE
Course Objectives
• To provide a thorough understanding of the principles of economics
that apply to the decisions of individuals and the application of these
principles to the world around them and a framework for consistent
reasoning about international flows of goods, factors of production,
and financial assets, and trade policy.
Course Content
• Demand Analysis and Forecasting
• Production, cost and Market Structure
• Types, Location, Efficiency and Finance
• Introduction to International Trade
• Terms of trade
• Free Trade, Protection and Tariffs, Balance of Payments
• Regional Economic Groupings and International Institutions
The Economic Way of Thinking
Contents
• What economics is about?
• What is managerial economics?
• Economic concepts, theories and tools that contribute managerial
economics
• How economics can be applied to managerial decision making?
• Nature and scope of managerial economics
What is Economics??

• The word economics comes from the Greek word ‘oikonomia’, which means “household
management”.
• Man is a bundle of desires. Goods and services satisfy these wants. But almost all the goods
are scarce.
• To produce goods, factors of production are needed and these are all scarce
• Economics – the study of how society manages its scarce resources. ie,.,the study of how
individuals and societies make decisions about ways to use scarce resources to fulfill wants
and needs.
• Economics is ‘an inquiry into the nature and causes of wealth of nations’ (Adam Smith,
1976)
• Economics is the social science that studies economic behavior of the people, the
individuals, households, firms and government.
Foundations of Economics- Major Economic Problem

Scarcity and Choice

• The excess of wants resulting from having limited resources (land, labor, capital
and entrepreneurs) in satisfying the endless wants of people.
• It is a universal problem for societies – it is not limited to poor countries.
• To the economist, all goods and services that have a price are relatively scarce.
This means that they are scarce relative to people’s demand for them.
The Economic Problem

• Because economic resources are limited, every society must answer 3

economic questions…..
What goods and services should be produced?

What to Produce?

• What should our society produce to satisfy our needs and wants?

• Because of our limited resources, each production decision that a society makes
comes at an opportunity cost.
How should these goods and services be produced?

How to Produce?

• All things produced require land labor and capital

• How should they be combined to produce different goods and services?

Who consumes these goods and services?

Whom to produce?

• Who gets to drive luxury cars and who can only afford to ride the bus?

• Societies must decide how to distribute the available goods and services.
Scope of Economics

• Microeconomics is the branch of economics that examines the functioning of

individual industries and the behavior of individual decision-making units—that
is, business firms and households.
• Macroeconomics is the branch of economics that examines the economic
behavior of aggregates— income, output, employment, and so on—on a
national scale
Diverse Fields of Economics
 The Factors of Production

Labour
Labour Capital
Capital
Land
Land Organization
Organization

Product
Product

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 Factors of Production

• Land
- natural resources available for production
- renewable resources: those that replenish
- non-renewable resources: cannot be replaced
• Labor
- physical and mental effort of people used in production
• Capital
- all non-natural (manufactured) resources that are used in the creation and production
of other products

• Enterprise (Entrepreneurship)
- refers to the management, organization and planning of the other three factors of
production
 Factors of Production

Payments
Land Labor Capital Enterprise
to factors
of
Productio
n

Rent Wages Interest Profit

INCOME
 Opportunity Cost

 Definition – the cost expressed in terms of the next best

alternative sacrificed
 The cost of anything in terms of other things given up or
sacrificed.

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Assumptions and Models
• Assumptions simplify the complex world, make it easier to understand.
• Example: To study international trade, assume two countries and two goods.
• Unrealistic, but simple to learn and gives useful insights about the real world.
• Model: a highly simplified representation of a more complicated reality.
Economists use models to study economic issues.
Circular Flow of Income
• Refers to a simple economic model which describes the reciprocal
circulation of income between producers and consumers.

• In the circular flow model, the inter-dependent entities of producer and

consumer are referred to as "firms" and "households" respectively and
provide each other with factors in order to facilitate the flow of income.

• Real Flow and Money Flow. Real Flow- In a simple economy, the flow of
factor services from households to firms and corresponding flow of goods
and services from firms to households s known to be as real flow.

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We are all Interdependent
• A market economy works through a process of voluntary Interdependent-
exchange or interaction between willing parties in the we are mutually
system. This circular flow of goods and services is what dependent in a
market economy.
creates a country’s wealth. A decision made
• The key factor in this circular flow is the market. The by one individual
affects other
market is the place where buyers and sellers meet to participants in
exchange goods and services for money. intended and
unintended ways.

Interact- to act in
a way that affects
another

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Lets identify each participant in the market
• Individuals/Households- This is your role in the circular flow.
You provide a service, labor to the factor market in exchange
for wages. You also purchase goods and services from the
product market using your income.
• Factor or Resource Market- This is where factors of
production are bought and sold. The Factor Market gives
productive resources (goods used to produce other goods;
like capitol goods) to Businesses in exchange for payment.

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Lets identify each participant in the market cont..
• Businesses- Businesses buy productive
resources from factor markets to create a
product that they sell to the Product Market.

• Product Market- the Product Market receives

products from businesses and provides goods
and services directly to the individual
consumer in exchange for payment.

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 Circular Flow Chart Participants

The Circular Flow Chart is a diagram that illustrates the

circular flow of goods and services and money in a market. Participants
• Individual
Product
Market • Factor/Resource Market
• Business
• Product Market
Business Government Individual • Government
• in a market economy, the
government plays an indirect role
by regulating for fairness and
Factor
/Resource equality
Market

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 Our First Model
• The Circular-Flow Diagram: Model that traces the flow of resources, products and
income and revenue among economic decision makers.
• Refers to a simple economic model which describes the reciprocal circulation of
income between producers and consumers.
• Two types of “actors”:
• households
• firms
• Two markets:
• the market for goods and services
• the market for “factors of production”
The Circular-Flow Diagram
Revenue Spending
Market for
Goods
Goods & and Services Goods &
Services sold Services
bought

Firms
Households

Inputs for Labor, land,

production Market for and capital
Factors
of Production
Wages, rent, Income
and profit 26
Two Sector Model
• In the simple two sector circular flow of income model the state of equilibrium is
defined as a situation in which there is no tendency for the levels of income (Y),
expenditure (E) and output (O) to change,
Y=E=O

• This means that the expenditure of buyers (households) becomes income for
sellers (firms). The firms then spend this income on factors of production such as
labour, capital and raw materials, "transferring" their income to the factor
owners. The factor owners spend this income on goods which leads to a circular
flow of income.

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Production Possibilities Frontier (PPF)
• The Production Possibilities Frontier (PPF):
a graph that shows the combinations of
two goods the economy can possibly produce given the available resources and
the available technology
• Example:
• Two goods: computers and wheat
• One resource: labor (measured in hours)
• Economy has 5000 labor hours per month available for production.
PPF Example
Wheat
Production
Point (tons)
on Com- 6,000
graph puters Wheat E
5,000
A 5000 0 4,000 D
B 400 1,000 3,000 C
C 250 2,500 2,000
D 100 4,000 1,000
B
E 0 5,000 A
0
0 100 200 300 400 500 600
Computers
29
Opportunity cost principle
• Related to alternative uses of scarce resources
• Opportunity cost of availing an opportunity is the expected income
foregone from second best alternative
• Opportunity cost is the next best alternative foregone
• Difference between actual earning and its opportunity cost is called
economic gain.
Marginal Principle
• Refers to change (increase or decrease) in total of any quantity due to
a unit change in its determinant.
• MC= TCn - TCn-1
• MR = TRn-TRn-1
• Decision Rule FOR Profit Maximization: MR=MC
Marginal value
• The marginal value of a dependent variable is the change in
this dependent variable associated with a one unit change in
a particular independent variable.
Time Perspective Principle
• Short run & Long run time periods play an important role in Business decisions
• Short run mean that period within which some of inputs cannot be altered (fixed
inputs).
• However in long run all inputs can be altered so they are variable in long run
• Determination of time perspective is of great significance where projections are
involved
Variables and Functions
Variable
• By definition, any economic quantity , value or rate that
varies on its own or due to a change in its determinant(s) is
an economic variable.
Functions
• A function is a mathematical technique of stating the relationship between any
two variables having cause and effect relationship
• When a relation is established between two or more variables, it is said that they
are functionally related
• When two variables are involved it is bi-variate and more than two it is Multi-
variate
Functions
• Of the two one is independent variable which may change on its own
independently and other is dependent which changes in relation to
changes in the assigned independent variable in a given function
• In mathematical terms, Y= f (X)