economics: an orientation sunitha.s assistant professor school of management studies, national...
Post on 24-Dec-2015
217 Views
Preview:
TRANSCRIPT
Economics: An Orientation
Sunitha.SAssistant Professor
School of Management Studies,National Institute of Technology (NIT) Calicut
Industrial EconomicsLecture 01.01.2010
A quick glance about EcoMicro Economics
Individual units: how a consumer gets satisfaction ? how a single producer maximizes profit? etc
Macro EconomicsAggregate units: national income, inflation, employment
Monetary EconomicsHow money, credit ,banks, stock markets function?
Public FinanceGovt expenditure, budget, taxation, public debt
International EconomicsExchange rate, foreign trade, IMF, World Bank, WTO,GATT
2
Books for Reference
• Principles of Micro Economics, (Gregory. N. Mankiw)
• Principles of Macro Economics , (Gregory. N.Mankiw)
• Economics, Samuelson, P.A. and W.D. Nordhaus
• Books on Financial Management/Managerial Economics
Additional books for reference would be informed later
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?
4
Buzz words• Marginalism• Incrementalism• Opportunity Principle• Discounting• Time perspective
5
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
6
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 12 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 -47
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.
8
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
9
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
10
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 10 units of X and or 20 units of Y, the the opportunity cost of 1x is 2Y.
11
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 cost12
Production Possibility Frontiers
13
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.
14
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
15
• 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
16
(1+i)
V1 = R
V1= 100
= Rs.90.90
A present value of Rs100 due two years later would be
V2 = Rs100
17
(1+.10)
(1+.10)2
=82.64
(1+i)
Time perspective• Short run Versus long run
• Very short run• Short run• Long run
• Fixed versus variable costs of production
18
Circular Flow of Income• Y = Income
• C = Consumption Expenditure
• S = Savings
• I = Investment
• T = Taxation
• G = Government Expenditure
• M = Imports
• X = Exports
19
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
20
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 SectorsIncome
CAPITAL MARKETSavings Investment
OVERSEAS SECTOR
GOVERNMENTTaxes
Imports
Govt subsidies
Exports
LE
AK
AG
ES
INJE
CT
ION
S
Consumption exp
Consumers Producers
Thank You
top related