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economics ppt
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Economics : An Orientation
Dr.Sunitha. SAssistant Professor
School of Management Studies,National Institute of Technology (NIT)
Calicut
Economic System
• Capitalism• Socialism• Mixed economy
Types of Industrial organisations /firms
• Private sector• Public sector• Corporations• Non-profit organisations
Forms of ownership
• Private sector (Wholly owned by people,individually or as a group)
• Public sector (owned,managed and controlled by government),and
• Joint stock company (owned and managed jointly by individuals and government)
• Cooperative is a non profit,non political,non religious,voluntary organisation formed with an economic objective
Buzz words
• Opportunity Principle• Discounting• Time perspective• Marginalism• Incrementalism
Opportunity Principle
• Cost of next best alternative foregone• Definition – the cost expressed in terms of
the next best alternative sacrificed• Helps us view the true cost of decision
making• Implies valuing different choices• Highest valued benefit that must be
sacrificed as a result of choosing an alternative
Opportunity cost
• Suppose a machine can produce either X or Y .The opportunity cost for producing a given quantity of X is the quantity of Y,which the resource would have produced.
• If the machine can produce 10units of X and or 20 units of Y, the the opportunity cost of 1x is 2Y.
Production Possibility Frontiers
• Show 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
Production Possibility Frontiers
Capital Goods
Consumer Goods
Yo
Xo
A
BY1
X1
Assume a country can produce two
types of goods with its
resources – capital goods and consumer
goods
If it devotes all resources to capital
goods it could produce a maximum of Ym.
If it devotes all its resources to consumer goods it could produce
a maximum of Xm
Ym
Xm
If the country is at point A on the PPF It can produce the combination of Yo capital goods and
Xo consumer goods
If it reallocates its resources (moving round the PPF from A
to B) it can produce more consumer goods but only at the expense of fewer capital
goods. The opportunity cost of producing an extra Xo – X1 consumer goods is Yo – Y1
capital goods.
Production Possibility Frontiers
Capital Goods
Consumer Goods
Yo
Xo
A
.B
CY1
X1
Production inside the PPF – e.g.
point B means the country is
not using all its resources
It can only produce at points outside the PPF if it finds a way of expanding its resources or improves the productivity of those resources it already has. This will push the PPF
further outwards.
Discounting
• The concept of discounting is based on the fact that a rupee now is worth more than a rupee earned a year after.
• Even if one is sure about future income, yet it has to be discounted because to wait for future implies a sacrifice for the present
• Suppose a sum of Rs 100 is due after one year. Let the rate of interest be 10 percent. Then we can determine the sum to be invested now so as to produce the return (R) of Rs 100 at the end of the year. The present value or the discounted values of Rs100 will then be
V1= R(1+i)
Discounted value of money
V1
= 100
= Rs.90.90
A present value of Rs100 due two years later would be
V2 = Rs100
(1+.10)
(1+.10)2=82.64
(1+i)
Marginalism
• Marginal analysis is related to a unit change in independent variable, say increase in costs as a result of a unit change in output.– Marginal output of labour: output
produced by the last unit of labour– Marginal cost of production: cost
incurred for producing the additional unit of output
Profit of a firm using principle of marginalism
Units of output(1)
Total Revenue(Rs) (2)
Marginal revenue (Rs)(3)
Total costs (Rs)
(4)
Marginal cost (Rs)(5)
Total profits(Rs) (6)=(2)-(4)
Average profit (Rs) (7)=(6) / (1)
Marginal profits(Rs) (8)
1 20 - 15 5 5.0 -
2 40 20 29 14 11 5.5 6
3 60 20 42 13 18 6.0 7
4 80 20 52 10 28 7.0 10
5 100 20 65 13 35 7.0 7
6 120 20 81 16 39 6.5 4
7 140 20 101 20 39 5.6 0
8 160 20 125 24 35 4.4 -4
Incrementalism
• Incremental reasoning involves estimating the impact of decision alternatives.
• Usually, changes occur in “chunk” rather than unit changes.
• Incrementalism is more general whereas marginalism is more specific.
Incrementalism..
• Incremental costs :change in total costs as a result of change in the level of output, investment etc.
• Incremental revenue is a change in total revenue resulting from a change in the level of output, price etc.
While taking a decision, always incremental revenue should always be greater than incremental costs
Time perspective
• Short run Versus long run– Very short run– Short run– Long run
• Fixed versus variable costs of production
Main Economic Activities
• Production• Consumption• Capital formation
Factors of Production
• Land • Labour• Capital• Entrepreneurship
Circular Flow - Simple• Assumptions:
– Only two sectors - Consumers and Producers– All production is sold to the consumers– Producers provide all the Goods and Services– Consumers spend all their Income on goods an services– No government and no overseas sectors– Consumers are the owners of productive resource - land, labour,
capital and enterprise
Circular Flow - Simple
Consumers Producers
Resources
Goods and Services
Consumption Expenditure
Income
Resources
Goods and Services
Circular Flow - Savings and Investment
Income
Consumption Exp
Capital MarketSavings Investment
Consumers Producers
Circular Flow - Government Sector
Income
GOVERNMENTTAXATION
CAPITAL MARKETSavings Investment
Consumption
SPENDINGSUBSIDIES
TAXATIONConsumers Producers
Circular Flow - Four Sectors
Income
CAPITAL MARKETSavings Investment
OVERSEAS SECTOR
GOVERNMENTTaxes
Imports
Govt subsidies
Exports
Cap
ital
Out
flow
s
Cap
ital
In
flo
w
Consumption exp
Consumers Producers
Central problems of an economy
What to produce? should the emphasis be on agriculture,
manufacturing or services, should it be on health, manufacturing or housing?
How to produce? labour intensive, land intensive, capital
intensive? Efficiency?
Whom to produce? Should income distribution be :evenly
distributed? or more for the rich? Or for those who work hard?