Unit I:

Basic Economic Concepts

Dr.Kishore Kumar.Y
Assistant Professor
Symbiosis Law School, Hyderabad
Introduction to Economics
Why Economics?
 What is Economics?
The study of how individuals and societies choose to allocate
and use scarce resources to satisfy unlimited wants.
Embedded in the definition are four key words:
 Choice
 Resource Allocation
 Scarcity
 Unlimited Wants
Economics involves
Examining how individuals, businesses, governments, and
societies choose to use scarce resources to satisfy their
wants.
Organizing, analyzing, and interpreting data about those
economic behaviors.
Developing theories and economic laws that explain how the
economy works and to predict what might happen in the
future.
 How is Economics used?
•Economists use the scientific method to make
generalizations and abstractions to develop theories. This
is called theoretical economics.
•These theories are then applied to fix problems or meet
economic goals. This is called policy economics.
•Economic Theory is a statement of Cause and Effect
relationship between two or more observed facts of real
economic life.
•Reliability:
•Statement of Tendencies (Generalization of C & E Relationship)
•Not as exact and precise as Natural Laws (Human element)
•Hypothetical (under Assumptions)
•Based on unrealistic assumptions (Profit Maximisation)
 5 Key Economic
Assumptions
1. Society’s wants are unlimited, but
resources are limited (scarcity).
ALL

2. Due to scarcity, choices must be made. Every choice

has a cost (a trade-off).
3. Everyone’s goal is to make choices that maximize
their satisfaction. Everyone acts in their own “self-
interest.”
4. Everyone acts rationally by comparing the marginal
costs and marginal benefits of every choice
5. Real-life situations can be explained and analyzed
through simplified models and graphs.
 Trade-offs
ALL decisions involve trade-offs.
Trade-offs are all the alternatives that we give up
whenever we choose one course of action over others.
(Examples: going to the movies)

The most desirable alternative given up as a result of a

decision is known as opportunity cost.

What are trade-offs of deciding to go to college?

What is the opportunity cost of going to
college?
8
 Economic Activities

1.Production. The process of transforming inputs into outputs.

2. Distribution. The way total output, income, or wealth is
distributed among individuals or among the factors of production
3. Exchange. The process of trading goods between buyers and
sellers in a particular market.
4. Consumption. The process of how goods and services are
utilized that give satisfaction to the consumers.
 Economic Goals
1.Economic efficiency
2. Economic growth and economic development
3. Economic freedom
4. Economic security
5. Equitable distribution of income
6. Full employment
7. Price level stability
8. Reasonable balance of trade
Economics is the study of how individuals and societies
choose to use the scarce resources that nature and
previous generations have provided.

It is the study of economic problems. Wants are motive

for economic activity. Wants leads to efforts and which
lead to satisfaction

Three fundamental concepts:

– Opportunity cost
– Marginalism, and
– Efficient markets
 Introduction
Economics is the one of the oldest discipline among
humanities and is categorized as a social science.
An economic activity refers to an activity that helps
the people to achieve economic gains, which is
valued in term of money.
All economic processes of consumption, production,
exchange, savings, investment, and distribution,
work under the price mechanism system, which is
labelled as the “Invisible Hand” by Adam Smith.
Introduction to Economics
Economics is the Social Science that describes the
factors that determine the
Production
Distribution
Consumption of Goods and Services
Origin
The term economics comes from two Greek terms
–
“Oikos” = “house”
“Nomos” = “custom” or “law”

“Rules of the household for good management”

 The word Economics is derived from the Greek word
―OKIOSNEMEIN meaning household management

Economics-Social science concerned with the

efficient use of limited resources to achieve
maximum satisfaction of economic wants.

(Study of how individuals and societies deal with

scarcity )
Economics is “the branch of knowledge concerned with the
production, distribution, consumption, and transfer of
wealth”.

Economics is the study of how people allocate their

limited resources to produce and consumer goods and
services to satisfy their endless wants or to maximize
their gains.

Economics is the study of what constitutes rational

human behavior in the endeavor to fulfill needs and
wants
 Needs and Wants
Needs are things, such as food, clothing, and shelter, that
are necessary for survival.
E.g.:- Food, Clothing and Shelter

Wants are desires that can be satisfied by consuming a good

or service. We would like to have
E.g. :- Fancy Food, big screen TV, jewelry
These are also known as Luxuries.

Necessities are few but our wants are endless.

People try to balance needs and wants.

 What is Economics in General?
• Economics is the science of scarcity.
• Scarcity is the condition in which our wants are
greater than our limited resources.
• Since we are unable to have everything we desire, we
must make choices on how we will use our resources.
• In economics we will study the choices of
individuals, firms, and governments.
• Economics is the study of choices.
Examples:
You must choose between buying jeans or buying shoes.
Businesses must choose how many people to hire
Governments must choose how much to spend on
 Why Study Economics?
A good understanding of this subject will not only help
us learn economics as an academic discipline but
would also help us understand the world and the
reality that we are in. Specifically, a study of this
course will help us:
1. Appreciate events in economic history and
understand how the present-day system of
economics came to be.
2. Learn the ways in which economics explain the
activities of man through its tools, models, principles
and standards.
3. Make use of production and consumption concepts
in business endeavors or simply in understanding
people’s economic behavior.
4. Manage economic and financial affairs; thereby, achieving a
good standard of living for ourselves, our families and our
nation.

5. Understand government’s functions in economics and

choose leaders who are economically sensible.

6. Understand what is happening in the economy of the India

and the world and know how nationwide and worldwide
economic policies and events affect us all.

7. For Law students Economics can be related to Social

Justice, Economic Welfare, Economic Inequalities, Economic
growth, Economic Crimes, Labour Laws, Torts, Contracts,
Property, MRTP/Competition Law etc.
What is Economic Activity & Non Economic
Activity
An economic activity refers to an activity that helps
the people to achieve economic gains, which is
valued in term of money.
Farmer producing for self consumption
 A household having all the vegetables and fruits
required for them produced in the backyard
 Mother preparing food and tutoring her children in
mathematics
 A student distributing news papers, as a part time
job
 Son cleaning his fathers car
A Separate Discipline
Political Economy was the earlier name for the
subject, but economists in the late 19th century
suggested “economics” as a shorter term for
“economic science” to establish itself as a
separate discipline outside of political science
and other social sciences
 Introduction
The word Economics is derived from the Greek word
―OKIOSNEMEIN meaning household management
Man is a bundle of desires. Goods and services satisfy
these wants, but almost all the goods are scares
To produce goods factors of production are needed and
these are all scarce

The term economics comes from two Greek terms

“Oikos” = “house”
“Nomos” = “custom” or “law”
“Rules of the household for good management”
 The Study of Economics
Economics is the study of how individuals and
societies choose to use the scarce resources that
nature and previous generations have provided.

It is the study of economic problems.

Wants are motive for economic activity.
Wants leads to efforts and which lead to satisfaction
What is Economic Activity & Non Economic Activity

An economic activity refers to an activity that helps the

people to achieve economic gains, which is valued in
terms of money.
 Farmer producing for self consumption
 A household having all the vegetables and fruits
required for them produced in the backyard
 Mother preparing food and tutoring her children.
 A student distributing news papers, as a part time job
 Son cleaning his fathers car
 Basic concepts of economics
Goods:
Goods are the articles and services which satisfy a
human want like books, pens, cell phones etc.
Hence, all tangible things that satisfy human
wants are called goods
Good can be divided into two types
Free Goods
Economic Goods
Free Goods
Free goods are Nature’s gift
Their supply is abundant
They do not have price
There is no cost of production
They have value in use and do not have value in
exchange
Their notional values are not included in national
income
Example: Air, Water and Sunshine
Economic goods
Economic goods are man made
Supply is always less than their demand
These goods have prices
These goods have cost of production
These goods have value in use and also value in
exchange
Their values are included in national income
Example: Pens, Books, Laptops etc.
They are further classified into Consumer goods,
Capital goods and Intermediary goods
 Consumer goods
A consumer good is an economic good or
commodity purchased by households for final
consumption (they directly satisfy human
wants)
Consumer goods are divided into two types
Perishable goods
Durable goods are also divided into
Necessary goods
Comfortable goods and
Luxury goods
 Perishable-Durable goods
Perishable Goods:
They lose their value in single use
For example milk, fruits, Vegetables etc

Durable Goods:
They yield service or utility over a time rather
than being completely used up at the moment of
consumption.
For example televisions, computers etc.
 Necessary goods
These are much essential to continue our life and
without using these goods survival is questionable
Generally its utility will be more than its price
Example: Rice, Wheat etc
 Comfortable goods
Comfortable goods are not necessary for our day to
day living
But these goods will enhance our efficiency
For example: Fan, chair and table etc.
 Luxury goods

Luxury goods are neither required as essential goods, nor

useful as comfortable goods.
Generally it utility will be less than its price
For example: BMW car etc.
 Producer / Capital goods
Goods which are used in the production of other
goods are called producer goods
They satisfy human wants indirectly
For example: Machines, buildings etc.

A good can be classified into consumer good or

capital good depending on the nature of its use. For
example, when paddy is used for food it becomes a
consumer good and when used as seed in cultivation,
it become a capital good
 Capital goods
Producer or capital goods are divided into two types
Single use capital goods: Used only once in the
production process. For example raw materials,
coal, electricity etc.
Durable use capital goods: Used for long time in the
process of production. For example Machines ,tools
etc.
 Intermediary goods
Goods which are under the process of production
and semi finished goods are known as
intermediary goods.
For example, bricks and steel used as intermediary
goods in construction work.
 Wealth
Wealth means stock of assets held by an individual or
institution that has the potential for yielding income in
some form. Wealth may be held in various forms. These
include money, shares of companies, land etc.
The important characteristics of wealth are:
(i) Utility
(ii) Scarcity
(iii) Value in exchange and
(iv) Transferability
Wealth in physical for is tangible wealth. Diamonds,
factories and houses are example of physical assets.
Human capital is intangible wealth
Wealth is classified into personal wealth, social wealth,
national wealth and international wealth
 Income
Income is a flow from wealth where as wealth is a
stock. In every economy income flows from
households to firms and vice versa.
Thus the factor market and product market are
closely related to each other
 Utility
The concept of utility has great importance in economics. The
want satisfying capacity of a commodity at a point of time is
known as utility.
It is a subjective concept, only consumer can judge the utility of
a commodity
Types of Utility
1. Form Utility
2. Place Utility
3. Time Utility
4. Service Utility
Utility
1. Form Utility: If a commodity satisfies a consumer by its shape,
colour, size etc. it is known as ‘form utility’. For example
conversion of wooden log into a chair or a table
2. Place Utility: When goods acquire utility with the change of their
place, is known as ‘place utility’. For example vegetables at the
production place have no utility but when they are brought to the
market they gain utility
3. Time Utility: Goods acquire additional utility because of time. For
example ice creams and coolers have more utility in summer
4. Service Utility: Services also have the ability to satisfy human
wants. For example the teaching of a good teacher directly helps
a student to build his career.
 Value
I. Value in Use: it refers to the capacity of the goods to
satisfy human wants. Free goods have value in use and
they don not have any value in exchange. For example
water has greater value in use but no value in exchange

II. Value in Exchange: it refers to the quantity of other

goods (or more usually money) a good can be exchanged
for. All economic goods have value in use and value in
exchange. For example a pen can be exchanged to a book.
Wants
Human wants are the basis for all economic activities. They
depend on economic and social status of individuals. The
nature of human wants can be understood by considering the
following characteristics:
1. Unlimited wants: Human wants are unlimited. If you
satisfy one want, another one crops up
2. A particular want is satiable: As wants are unlimited, a
person can satisfy a particular want at a point of time.
For example if a person is thirsty he can satisfy it by
drinking a glass of water
3. Competition: Wants are unlimited whereas resources to
satisfy them are limited. Therefore, a scale of preference
is essential to satisfy wants
wants
4. Complementary: Satisfaction of a single want requires the
use of more number of commodities. For example writing
need is satisfied only when we have a pen, ink and paper
together
5. Substitution: A person can satisfy his wants with various
commodities. If a person is hungry he can eat rice or fruits
6. Recurring: When you satisfy a particular want at a point of
time it may reappear at another time
7. Habits: Wants change into habits. For example smoking
cigarettes for casual results into a habit if it is not controlled
8. Wants vary with Time, Place and Person: Wants are
dynamic in nature. Hence, they are changing for time to time,
place to place and person to person (Necessities, Comforts
and Luxuries)
Welfare
Welfare is an important concept in economics.
It refers to the satisfaction that an individual or
society derives from wealth and can be attributed to
the standard of living of individuals or societies.
It is a subjective concepts and cannot be measure
obejctively
Welfare depends on the distribution of income among
different sections of people in the society
As economy grows, the living conditions of its people
improve, which can be taken as an indicator of
improvement in welfare
Traditionally classification of Economics
Traditionally, the subject matter of economics has
been divided into five groups i.e.
Consumption
Production
Distribution
Exchange
Public Finance
Modern classification of Economics
Modern economic theory divided economics into
two branches
Micro Economics
Macro Economics
 Micro-economics
Micro economics is the study of individual units of
the economy (household, firms, buyers & sellers)
It is known as “Price theory”
It explains price determination in both commodity
and factor markets
It is based on price mechanism which depends on
demand and supply
Microeconomics is the branch of economics that
examines the functioning of individual industries and
the behavior of individual decision making units—
that is, individuals, households, business firms and
industries
Scope of micro economics
Product Pricing (Theory of Demand and Theory of
Production and Costs)
Factor Pricing (Theory of Distribution) (Rent,
Wage, Interest, Profit)
Macro-economics
Macro economics is the study of economy as a whole
Macroeconomics is the branch of economics that
examines the economic behavior of aggregates—
National Economic Growth,
Government Spending,
Inflation, Unemployment and so on-on a national scale
It is known as “Income and Employment theory”
It deals with national income, total employment,
aggregate savings and investment, general price level
and economic growth based on aggregate demand and
aggregate supply
The Method of Economics

•
Positive Economics: A positive science may be defined as a body of
systematized knowledge concerning ‘what it is’. The classical
school of economists were of the opinion that economics is purely a
positive science which had no right to comment upon the rightness
or wrongness of economic policy. Further economist cannot give
any final judgment on any matter.
Positive Statements- Based on facts. Avoids value judgements (what
is).
Positive economics studies economic behavior without making
judgments. It describes what exists and how it works.
Positive economics includes:
Descriptive economics, which involves the compilation of data that
describe phenomena and facts.
Economic theory, which involves building models of behavior.
An economic theory is a general statement of cause and effect,
action and reaction
Positive & normative economics
Normative Economics:
A normative science may be defined as a body of
systematized knowledge relating to the object of
‘what ought to be’, and concerned with the ideal as
distinguished from the actual.
Normative economics, also called policy economics,
analyzes outcomes of economic behavior, evaluates
them as good or bad, and may prescribe courses of
action.
Normative Statements-Includes value judgements
what ought to be).
Deductive and inductive methods
Mainly two methods are used by economists for conducting
economic investigation.
Deductive Method: This method is also known as ‘a priori’
method because it is based on abstract reasoning and not
on actual facts. General to Particular.
Individuals rank their preferences according to a certain
order of priority.
Law of Diminishing Marginal Utility
(It does not require any evidences to support it.)
Selecting the problem
Formulating assumptions
Formulating the hypothesis and
Verifying the hypothesis
 Advantages and limitations
ADVANTAGES:
It is less expensive and less time consuming
It helps in laying down basic principles of human
behavior and
It analyses complex economic phenomena and brings
exactness to economic generalizations
LIMITATION:
It is based on unrealistic assumptions with little
empirical content
Inductive method
This method is also known as concrete,
historical empirical, realistic and a posteriori
method. This method proceeds from particular
to the general
Selection of the problem
Collection of data
Observations and
Generalization
Advantages and limitations
Advantages:
It is nearer to reality and therefore expected to
depict reality, and
This method involves less chances of mistakes

Limitation:
This method is expensive and time consuming
It can be used who possess skill and competence in
handling complex data
Science or Art
Art:
Practical application of knowledge
Tries to promote the welfare of human beings

Science:
Science is a systemized study of a subject.
Science establishes the relationship between
cause and effect of a fact.
Laws of Science are universal.
 Scope of Economics
• Micro Economics: This is considered to be the basic economics.
Microeconomics may be defined as that branch of economic
analysis which studies the economic behaviour of the individual
unit, may be a person, a particular household, or a particular firm. It
is a study of one particular unit rather than all the units combined
together. The microeconomics is also described as price and value
theory, the theory of the household, the firm and the industry. Most
production and welfare theories are of the microeconomics variety.

• (ii) Macro Economics: Macroeconomics may be defined as that

branch of economic analysis which studies behaviour of not one
particular unit, but of all the units combined together.
Macroeconomics is a study in aggregates. Hence, it is often called
Aggregative Economics. It is, indeed, a realistic method of economic
analysis, though it is complicated and involves the use of higher
mathematics. In this method, we study how the equilibrium in the
economy is reached consequent upon changes in the macro-
variables and aggregates.
• The publication of Keynes’ General Theory, in 1936, gave a strong
impetus to the growth and development of modern
macroeconomics.

• (iii) International Economics: As the countries of the modern world

are realising the significance of trade and commerce with other
countries, the role of international economics is getting more and
more significant nowadays.

• (iv) Public Finance: The great depression of the 1930s led to the
realization of the role of government in stabilising the economic
growth besides other objectives like growth, redistribution of
income, etc. Therefore, a full branch of economics known as Public
Finance or the fiscal economics has emerged to analyse the role of
government in the economy. Earlier the classical economists
believed in the laissez faire economy ruling out role of the
government in economic issues.
• (V)Development Economics: After the Second World War many
countries got freedom from the colonial rule, their economics
required different treatment for growth and development.
This led to emergence of new branch of economics known as
development economics.

• (vi) Health Economics: A new realisation has emerged from

human development for economic growth. Therefore branches
like health economics are gaining momentum.
• (vii) Environmental Economics: Unchecked emphasis on economic
growth without caring for natural resources and ecological balance,
now, economic growth is facing a new challenge from the
environmental side. there fore, Environmental Economics has
emerged as one of the major branches of economics that is
considered significant for sustainable development.

• (viii) Urban and Rural Economics: Role of location is quite important

for economic attainments. There is also much debate on urban-rural
divide. Therefore, economists have realised that there should be
specific focus on urban areas and rural areas. Therefore, there is
expansion of branches like urban economics and rural economics.

• (ix) Similarly, regional economics is also being emphasised to meet

the challenge of geographical inequalities. There are many other
branches of economics that form the scope of economics. There
are welfare economics, monetary economics, energy economics,
transport economics, demography, labour econ
 Salient Functions of an Economic System
1. To produce the goods for consumption of the population
2. To utilize the resources in efficient method of production
3. To employ the labor force in occupations where
productivity is at optimum
4. To apportion the wealth and income available to everyone
in an equitable manner
5. To encourage innovation and technology in order to
maximize efficiency, optimize satisfaction and minimize
waste
 Other Social Sciences related to Economics:
Anthropology: The most comprehensive of the social sciences.
It covers the biological, psychological, social, and cultural
aspects of human life. It studies every aspect of human society,
including social structure, aesthetic expression, language, and
the belief system.

Political Science: Studies the mechanics of the distribution of

power and is concerned with the relationship between authority
and the masses.

Psychology: Studies society from the viewpoint of the

individuals and groups. It finds out how society influences the
individual’s personality and how the individual responds to
social stimuli and pressures
Sociology: Studies society by analyzing human groups,
institutions, and social relationships. It analyzes the
social patterns that result from numerous individual
reactions.

History: Systematic recording of past events and also a

detailed and in-depth interpretation of the causes and
effects of past events on the lives of the members of a
society.
The Factors of Production

Labour Capital

Land Organization

Product

16
65
Factors of Production
CENTRAL PROBLEMS OF AN ECONOMY
OR
BASIC ECONOMIC PROBLEMS
THE ECONOMIC PROBLEM

Unlimited Wants
Scarce Resources – Land, Labour, Capital
Many Uses of Resources
Scarcity Means There Is Not Enough For
Everyone

Government must step in to help allocate

(distribute) resources 50
Every society must answer three questions:

The Three Economic Questions

1. What goods and services should be
produced?
2. How should these goods and services be
produced?
3. Who consumes these goods and
services?
The way these questions are answered
determines the economic system
An economic system is the method used by a
society to produce and distribute goods and 51
 Economic Systems
1. Centrally-Planned (Command) Economy
2. Free Market Economy
3. Mixed Economy

71
 What to Produce?
To answer the first fundamental economic question, a
society must decide the mix of goods and services it
will produce. Will it produce mainly food, or will it also
produce automobiles, televisions, computers, furniture,
and shoes? The goods and services a society chooses
to produce depend, in part, on the natural resources it
possesses.
Because of scarcity, no country can produce every
good it wants in the quantity it would like. More of one
good (say, television sets) leaves fewer resources to
produce other goods (such as cars). No matter what
nation we are talking about—the United States, China,
Japan, India, Russia, Cuba, or Brazil—each must
Pangasinan State University
decide what goods will be produced.
Social Science Department – PSU Lingayen

BACHELOR OF ARTS IN ECONOMICS

 How to Produce?
The next question every society has to answer deals
with the ways in which people produce the goods. Will
farmers using modern tractors produce food, or will
farmers using primitive tools produce it? Will the food
be produced on private farms, where production
decisions are made by individual farmers, or will it be
produced on collective farms, where production
decisions are made by people in the government?

Answering this second question involves using scarce

resources in the most efficient way to satisfy society’s
wants. Again, decisions on methods of production are
influenced,
Pangasinan State University in part, by the natural resources society
possesses.
Social Science Department – PSU Lingayen

BACHELOR OF ARTS IN ECONOMICS

 For Whom to Produce?
This answers how goods and services are distributed
among people in society. This actually involves two
questions. Exactly how much should people get and how
should their share be delivered to them? Should everyone
get an equal share of the goods and services? Or should a
person’s share be determined by how much he or she is
willing to pay? Once the question of how much has been
decided, societies must then decide exactly how they are
going to get these goods to people. To do this, societies
develop distribution systems, which include road and rail
systems, seaports, airports, trains, ships, airplanes,
computer networks—anything that helps move goods and
services from producers to consumers in an efficient
manner.
 THE ECONOMIC PROBLEM

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, capital intensive?
Who should get the goods and services produced?
– Even distribution? More for the rich? For those
who
work hard?
 I. What to produce?
There are two aspects of this central problem—
1. Which Goods Should Be Produced, or what goods
should be produced?
An economy wants many things but all these cannot be
produced with the available resources.
Therefore, an economy has to choose what goods
should be produced and what goods should not be.

General Or Capital Goods; Or Civil Goods Or

Defence Goods.
 Cont...
2.What should be the quantities of the goods that
are to be produced. Production of goods depends
upon the use of resources.
Hence, this problem of allocation of resources. If we
allocate more resources for the production of one
commodity, the resources for the production of other
commodities would be less
 II. How to produce?
• Which technique should be used for the production of
given commodities.
• This problem arises because there are various techniques
available for the production of a commodity
• Example: Electricity
• Such possibilities exist relating to the production of other
commodities also.
 III. For whom to produce?

• The main objective of producing a commodity is its

consumption in the economy.
• An Economy has to decide as to for whom goods
should be produced.
• This is the problem of distribution of produced
goods and services. Therefore, what goods should
be consumed and by whom depends on
distribution of National Product.
 Economic System

The manner or the structure through which the

economy of a country operates is known as
Economic System
Variety of Economic Systems
They differ from each other not only in details
but also in broader outlines
Types of Economic Systems:
– Capitalist
– Socialist and
– Mixed Economy
Types of ECONOMIC SYSTEMS

Economy

Market Command Mixed

18
Classification of Economic System

1. Traditional Economy
2. Market Economy
3. Command Economy
4. Mixed Economy
 Traditional Economy

Traditional economy is an economic system

in which the society produces what best ensures its
survival.
Resources are allocated according to long-lived
practices from the past.
People make economic decisions based on customs
and beliefs that have been handed down from
generation to generation.
Free Market System
(Capitalism)

84
 Characteristics of Free Market
1. Little government involvement in the economy.
(Laissez Faire = Let it be)
2. Individuals OWN resources and answer the three
economic questions.
3. The opportunity to make PROFIT gives people
INCENTIVE to produce quality items efficiently.
4. Wide variety of goods available to consumers.
5. Competition and Self-Interest work together to
regulate the economy (keep prices down and
quality up).
57
If consumers want computers and only one company
is making them…
Other businesses have the INCENTIVE to start
making computers to earn PROFIT.
This leads to more COMPETITION….
Which means lower prices, better quality, and more
product variety.
We produce the goods and services that society
wants because “resources follow profits”.
The End Result: Most efficient production of the
goods that consumers want, produced at the lowest
prices and the highest quality.
 The Invisible Hand
The concept that society’s goals will be met as
individuals seek their own self-interest.
Example: Society wants fuel efficient cars…
•Profit seeking producers will make more.
•Competition between firms results in low prices,
high quality, and greater efficiency.
•The government doesn’t need to get involved since
the needs of society are automatically met.
Competition and self-interest act as an invisible hand
that regulates the free market.

59
 Market Economy
In a pure market economy there is no government
involvement in economic decisions
Market economy is characterized by the private ownership
of resources and the use of a system of markets and prices to
coordinate and direct economic activity.
Private individuals own most, if not all, the resources and
control their use.
The prices of goods and services are determined in a free
price system .
Market economy or capitalism is sometimes called laissez-
faire; translated from the French, this phrase means “to let
do,” or to let people do as they choose without government
intervention.
The Government lets the market
answer the following three basic economic
questions:
1. What ?
Consumers decide what should be produced in
a market economy through the purchases they make.
2. How ?
Production is left entirely up to businesses. Businesses must be
competitive in such an economy and produce quality products at
lower prices than their competitors.
3. For whom ?
In a market economy, the people who have more money are able
to buy more goods and services.
 Capitalism/ Free Enterprise/Laissez-Faire
All economic activities are guided by market forces
Policy of laissez-faire (absence of state intervention).
Privately owned resources
What to Produce, how to produce and for whom to produce power
rests with the producers
Profit maximization is the main aim

Merits and Demerits of Capitalism

Merits
Self regulatory
Fast implementation of efficient decisions
Hides real need of the society

Demerits
High rate of Obsolescence
Inequalities in income and wealth
 Characteristics of a Market Economy

1. Private Property
2. Freedom of Enterprise or Choice
3. Self-interest
4. Competition
5. Markets and Prices
6. Technology and Capital Goods
7. Specialization
8. Use of Money
9. Active, but Limited, Government
 Centrally Planned Economies
In a centrally planned economy (communism)
the government…
1. owns all the resources.
2. decides what to produce, how much to
produce, and who will receive it.
Examples:
– Cuba, China, North Korea, former
Soviet Union

Why do centrally planned economies face

problems of poor-quality goods, shortages,
and unhappy citizens?
NO PROFIT MEANS NO INCENTIVES!! 92
 Advantages and Disadvantages
What is GOOD about What is BAD about
Communism? Communism?
1. Low unemployment- 1. No incentive to
everyone has a job work
2. Great Job Security- harder
the government 2. No incentive to
doesn’t go out of innovate or come up
business with good ideas
3. Equal incomes 3. No Competition,
means keeps quality of
no extremely poor goods poor.
people 4. Corrupt leaders
4. Free Health Care 5. Few individual 93
Socialism/Planned System/ Command Economy

Originated due to drawbacks of capitalism

Just opposite to capitalism
The merits of capitalism become the demerits and
merits thus become the demerits
It aims at removing the inequalities of income and
wealth, inequalities of economic opportunities,
unemployment and waste of productive resources
 Command Economy
In a command economy the Government takes economic
decisions.
An economy characterized by public ownership of
virtually all property resources and the rendering of
economic decisions through central economic planning.
Government owns most of the businesses and makes all
economic decisions.
There is no free competition because the government is the
only seller.
Countries using mainly the command system include North
Korea, Venezula, Cuba, the former Soviet Union etc.
 Command Economy
In a command economy the Government answers the
three basic economic questions.
1. What?
A central planning committee decides what
products are needed.
2. How?
Since the Government owns all means of production in a
command economy, it decides how goods and services will be
produced.
3. For Whom ?
The Government decides who will get what is produced in a
command economy.
 Flaws of Command Economy
1. Running an economy is so complicated that some
resources are used inefficiently.
2. Because nobody in particular owns resources, each
person has less incentive to employ them in their highest
valued use, so some resources are wasted.
3. Central plans may reflect more the preferences of central
planners than those of society.
4. Because government is responsible for all production, the
variety of products tends to be more limited than in a
capitalist economy.
5. Each individual has less personal freedom in making
economic choices.
 Mixed Economy
In the Mixed economies the Government and the Market
work together in decision making

Mixed Economy is a blend of market system and some form

of government regulation and control.
Private ownership of resources exists side by side with
substantial public ownership of resources and government
participation in economic activities.
This involves a degree of private economic freedom mixed
with a degree of government regulation of markets.
The major and strategic industries are owned and managed
by the state while the minor industries belong to the private
sector.
 Mixed Economy
Merits of capitalism and Socialism are taken and a
Mixed economy is formed
Generally adopted by countries with low per capita
income and is underdeveloped or is developing
(India)
Some sectors are kept in Government control
Criteria for judging economic outcomes
Economic growth, or an increase in the total output of
an economy.

Economic stability, or the condition in which output is

steady or growing, with low inflation and full
employment of resources.

Efficiency, or allocative efficiency. An efficient

economy is one that produces what people want at the
least possible cost

Equity, or fairness of economic outcomes

 Relevance of Economics to Law
The major economic problems are the economic
progress, economic stability, human welfare and
economic inequalities.
The state has to enact legal laws to solve these problems.
Thus the economic problem are the basis for law making.
The relevance of economics to the law has to be
evaluated with this background.
 Economic Welfare and Law
To achieve social welfare economic welfare is required.
For the economic welfare of the working class, the acts
such as:
 Factories Act
 The Workmen's Compensation Act
 The Employees State Insurance Act
 Maternity Benefit Act
 The Employees Provident Fund Act
 The Employees Family Pension Scheme
 Payment of Gratuity Act
 Consumer Protection and Law
Consumer welfare depends on their achievement of maximum
satisfaction. To protect the consumer welfare the Acts such as:
 Consumer Protection Act
 The Essential Commodities Act
 The Sale of Goods Act
 The Drugs and Cosmetic Act
 The Drugs and Magic Remedies (Objectionable Advertisements) Act
 The Prevention of Food Adulteration Act
 The Protection of Civil Rights Act
 The Trade and Merchandise Marks Act
 The Water ( prevention and Control of Pollution) Act
 The Standards of Weights and Measures Act
 The Prevention of Black Marketing and Maintenance of supplies of
Essential commodities Act
The Bureau of Indian Standards Act, Environment Protection Act, etc.
 Economics Inequalities and Law
To achieve Justice of Equality and to remove economic
inequalities, the government enacted the progressive tax
laws such as
Income Tax Act,
the Wealth Tax Act,
The Gift Tax Act,
The Estate Duties Act, etc.
Monopolies Restrictive Trade Practices Act (Competition
Act 2002)
Land Reforms Act
The Land Acquisition Act
The Tenancy Act
 Economics Growth and Law
Mostly Economic growth depends on the factors of production,
productivity and trade. To regulate trade, the acts such as:
The Indian Contract Act
The Partnership Act
The Sale of Goods Act
The Hire Purchase Act
The Indian Companies Act
To regulate Foreign Trade:
FERA and FEMA
The Customs Act.
The Arbitration Act
For operation money market:
The Indian Banking Act
The Insolvency Act
Negotiable Instruments Act, etc
 Economics Crimes and Law
Most of the Civil and Criminal cases arise due to disputes
of land and other properties.
The Criminal Procedure Code
The Indian Penal Code
Evidence Act
The Civil Procedure Code
Economics concepts and policies are the basis for many
statutory laws and at the same time the acts are intended
for the economic welfare. Thus economics stands as the
means and end of law. This signifies the relevance of
economics to Law.
Relation of Managerial Economics to Other
Subjects/Disciplines
Economics
Operations-linear programming, game theory, dynamic
programming, input-out analysis, simulation techniques
Statistics-Trend projection, correlation, multiple regression, measures
of central tendency like the mean, median, mode, measures of
dispersion
Accounting
Mathematics-geometry, algebra and calculus, logarithms and
exponential, vectors and determinants, input-out tables
Psychology
Political Science
History
Sociology
Ethics
Law
 Economics and Law
Law is viewed as a social tool that promotes market
conditions, economic efficiency, through legislations and
enforcement
Law is an instrument of social change: whenever the society
and its needs change, the law changes

MRTP to Competition Act

FERA to FEMA
Private Universities legislations
Banking Regulation Act
Insurance Act
Security and Investment Legislations Act
Consumer Protection Act to COPRA-19
In your own words or according to you,
how economics and Business are related
Examples from you-----
Production Possibility Frontier( PPC)
The production-possibility frontier (or PPF ) shows or
measures the maximum quantity of goods that can be
efficiently produced by an economy, given its technological
knowledge and the quantity of available inputs.
 Production Possibility Frontier
Like all other economic models, the PPC is based on
assumptions that simplify the economic interactions. For the
PPC these assumptions are:

1. Resources are fixed. There is no way to increase the

availability of land, labor, capital, and entrepreneurship.
2. All resources are fully employed. There is no waste of
any of the factors of production. In other words, the
economy.
3. Only two things can be produced. This assumption
simplifies the situation and suits the graphic format, with one
variable on each axis.
4. Technology is fixed. There are no technological
breakthroughs to improve methods of production.
 PPF: An Analysis
The PPF model demonstrates the following economic principles:
 The economy is said to be operating efficiently if it is operating
on the production possibilities frontier (e.g. Point A or B)
because it is producing a mix of output that is the maximum
possible from the resources available.
 Points inside the curve (e.g. Point C) are therefore inefficient
while points outside the curve (e.g. Point D) are currently
unattainable.
 If the economy is operating on the production possibilities
frontier, we can see the tradeoffs society faces. To produce
more of one good, it must produce less of the other. The
amount of one good given up when producing more of another
good is the opportunity cost of the additional production.
 PPF: An Analysis
 The production possibilities frontier is bowed outward
because the opportunity cost of producing more of a
good increases as we near maximum production of that
good. This is because we use resources better suited
toward production of the other good in order to continue
to expand production of the first good. A technological
advance in production shifts the production possibilities
frontier outward. This is a demonstration of economic
growth.
Production Possibility Frontier
Capital Consumer
Combination
Goods
Goods
A 160 0
B 140 40
C 80 80
D 0 100
The Production Possibilities Curve (PPC)

Using Economic Models…

Step 1: Explain concept in words
Step 2: Use numbers as examples
Step 3: Generate graphs from numbers
Step 4: Make generalizations using graph

11
5
PRODUCTION POSSIBILITY FRONTIERS

PPF Shows the different 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 efficiently
Any point outside the curve – not attainable with
the current level of resources
Useful to demonstrate economic growth and
opportunity cost
What is the Production Possibilities Curve?
• A production possibilities graph (PPG) is a
model that shows alternative ways that an
economy can use its scarce resources
• This model graphically demonstrates scarcity,
trade-offs, opportunity costs, and efficiency.

4 Key Assumptions
• Only two goods can be produced
• Full employment of resources
• Fixed Resources (Ceteris Paribus)
• Fixed Technology
11
7
 Production “Possibilities” Table
a b c d e f
Bikes 14 12 9 5 0 0
0 2 4 6 8 10
Computers
Each point represents a specific
combination of goods that can be
produced given full employment of
resources.
NOW GRAPH IT: Put bikes on y-axis and
computers on x-axis
11
8
 PRODUCTION POSSIBILITIES
How does the PPG graphically demonstrates scarcity,
trade-offs, opportunity costs, and efficiency?
Impossible/Unattainable
A (given current resources)
14
B
12
G
10 C
Bikes

8
Efficient
6 D

4 Inefficient/
Unemployment
2
E
0
0 2 4 6 8
10
15
 Opportunity Cost
Example:
1.The opportunity cost of moving
from a to b is… 2

Bikes
moving from b to d is… 7 Bikes
2.The opportunity cost of
3. The opportunity cost of
moving from d to b is… 4 Computer

4. The opportunity cost of

moving from f to c is… 0 Computers

5. What can you say about point G?

Unattainable

12
0
The Production Possibilities
Curve (or Frontier)

12
1
 PRODUCTION POSSIBILITIES
A B C D E
CALZONES 4 3 2 1 0
PIZZA 0 1 2 3 4
• List the Opportunity Cost of moving from a-b,
b-c, c-d, and d-e.
• Constant Opportunity Cost- Resources are
easily adaptable for producing either
good.
• Result is a straight line PPC (not common)

12
2
 PRODUCTION POSSIBILITIES
A B C D E
PIZZA 18 17 15 10 0
ROBOTS 0 1 2 3 4
• List the Opportunity Cost of moving from a-b,
b-c, c-d, and d-e.
• Law of Increasing Opportunity Cost-
• As you produce more of any good, the
opportunity cost (forgone production of
another good) will increase.
• Why? Resources are NOT easily
adaptable
to producing both goods.
• Result is a bowed out (Concave) PPC
 PER UNIT Opportunity Cost
How much each marginal = Opportunity
unit costs Cost Units
Gained
Example:
1.The PER UNIT opportunity cost
of moving from a to b is…
1 Bike
2.The PER UNIT opportunity
cost of moving from b to c is…
1.5 (3/2) Bikes
3.The PER UNIT opportunity
cost of
moving from c to d is…
2
Bikes
4.The
PER UNIT opportunity cost of
moving from d to e is…
NOTICE: Increasing Opportunity Costs 20
Shifting the Production
Possibilities Curve

12
5
 PRODUCTION POSSIBILITIES
4 Key Assumptions Revisited
• Only two goods can be produced
• Full employment of resources
• Fixed Resources (4 Factors)
• Fixed Technology
What if there is a change?

3 Shifters of the PPC

1. Change in resource quantity or quality
2. Change in Technology
3. Change in Trade
12
6
PRODUCTION POSSIBILITIES
Q 14 What happens if
13
12 there is an increase
11
10 in population?
9
Robots

8
7
6
5
4
3
2
1

1 2 3 4 5 6 7 Q
8
Pizzas 12
7
PRODUCTION POSSIBILITIES
Q 14 A’ What happens if
13
12
B’
there is an increase
11
10
C’
in population?
9
Robots

8
7
6 D’
5
4
3
2
1 E’
1 2 3 4 5 6 7 Q
8
Pizzas 24
 PRODUCTION POSSIBILITIES
Q 14
13 Technology
12
11 improvements in pizza
10
9 ovens
Robots

8
7
6
5
4
3
2
1

1 2 3 4 5 6 7 Q
8
Pizzas 12
9
 Two Types of Efficiency
Productive Efficiency-
• Products are being produced in the
least costly way.
• This is any point ON the Production
Possibilities Curve
Allocative Efficiency-
• The products being produced are the
ones most desired by society.
• This optimal point on the PPC depends
on the desires of society. 13
0