Introduction to Economics

The Science of Economics is made for the benefit and development of the world.  - Kautilya Chanakya

P.Naresh Kumar MSc(Quan.Econ);MSc(Stat);Faculty In Economics,

SIBER,Kolhapur

What is Economics?

• Economics covers all kinds of topics.

• At the core it is devoted to understanding how society allocates its scarce resources.

• Along the way to studying the implicationof scarcity, economics tries to figure out the 1001 puzzles of everyday life.

Definitions of Economics

1.Economics asks what goods are produced, how these goods are produced, and whom they are produced.

2) Economics analyzes movements in the overall economy --- trends in prices, output, unemployment and foreign trade.

Once such trends are understood, economics helps to develop the policies by which Governments can improve the performance of the economy3) Economics is the study of commerce among nations. It helps explain why nations export some goods and import others, and analyses the effects of putting economic barriers at national frontiers.

4) Economics is the science of choice. It studies how people choose to use scarceor limited productive resources ( labour, equipment, technical knowledge) to producevarious commodities and to distribute thesegoods for consumption5) Economics is the study of money, banking,capital and wealth.

In a common theme

Economics is the study of how societiesuse scarce resource to produce valuable commodities and distribute them among different people.

We distinguish two types of Economics

Micro Economics

• It analyses the behaviour of individual components like industries, firms and households.• Micro Economics means economics

through microscope.• ---How individual prices are set, consider what

determines price of land, labour and capital, andinquire in to the strengths and weaknesses of the market mechanism.

Macro Economics

• It studies the functioning of the economy as a whole.• we examine the economy through wide-lens.• It examines how the level and growth of output

are determined, analyzes inflation and unemployment, asks about the total money supplyand investigates why some nations thrive while others stagnate.

The scientific Approach

• Economists have no monopoly on the truth aboutthe important issues of the day. Indeed, many phenomena are poorly understood and highlycontroversial. But economists and otherscientists have developed techniques- called thescientific approach- that give a head start inunderstanding the complex forces that affecteconomic growth, prices and wages, incomedistribution and foreign trade.

Observation

• One of the major sources of economic knowledge is observation of economicaffairs, especially drawing upon thehistorical record.E.g.: consider inflation- meaning a rise in the general level of prices.citizens, bankers and political leaders often worry about inflation and take painful steps,contradicting output and increasing unemployment, to prevent or slow a threatening inflation.

Economic Analysis

• This is an approach that starts with a set of assumptions and then deduces logically certain predictions about the economic behavior of people,firms or the overall economy.E.g.: Attempts to restrict the import of foreign goods in order to ‘protect’ domestic workers and firms from foreign competition.

Statistical Analysis

• A complete understanding of economic activity relies upon the use of economic data and statistical analysis.• Governments and businesses issue volumes of

data that can help us to analyze economic behaviourquantitatively.• While the actual application of such information

requires advanced tools in probability and econometrics, understanding the results requires only careful reading and common sense.

Experiments

• The economic world is enormously complicated with millions people and billionsof prices. In an exciting new development, economists are turning to laboratory and other controlled experiments.• It is more difficult to perform experiments in

economies than in the laboratory sciences. To beginwith, economists cannot measure economic

Variables with precision that physical scientists can apply in measuring mass, velocity, or distance• Moreover it is very difficult to replicate

the economy in a laboratory.

Pitfalls in Economic Reasoning

• In all areas of economics, old and new, certain pitfalls lie in the path of the serious economist.

• Falling to keep “others Things Equal”• The Post Hoc Fallacy• Fallacy of Composition

others Things Equal

• Most of economic problems involve several forces interacting at the same.E.g.: the number of cars bought in a given year is determined by the price of cars, consumer incomes, gasoline prices etc.How can we isolate the impact on car sales of a single variable such as the price of gasoline.

The Post Hoc Fallacy

• A common mistake in studies of cause-and-effectrelationships is the Post Hoc Fallacy.E.g.: Dr.Optimist’s observation is that after the Govt. has cut tax rates, the Govt.s total tax revenuesbegan to rise. Dr.Optimist then claims “Aha, if we lower the tax rates, we will rise revenues and reducethe budget deficit.”

Dr.Optimist fallacy was to assume that the tax cut was responsible for the increase in Govt.s revenues; overlooked was the fact thatthe growing economy was raising people’s income and might have increased tax revenues even more had taxes not been cut.

Fallacy of Composition

• It is the misconception that what is true for a part is therefore true for the whole.• One thing that is true for an individual is

not necessarily true for everyone.E.g: If all farmers produce a bog crop, total farm income will probably fall.

The Law of Scarcity

• Economics study the way goods are produced and consumed because people wantto consume far more than an economy canproduce.• The law of scarcity states that goods are scarce

because there are not enough resources to produceall the goods that people want to consume. All of economics flows from this central fact.

• No country has reaches utopia of limitless possibilities. Goods are limited while wants seem infinite. Even in U.S., the most productive economy ever known, productionis not high enough to meet everyone’sdesires.

The uses of Economics

• Economic knowledge serves us in managing our personal lives, in understanding society and in improving the world around us.• The ways that economics can help us

individually will be as different as are ourpersonal lives.

• Learning about stock market may help people manage their own finances.• Better awareness of the determinants of

cost and revenue will produce better businessdecisions.• The doctor, the investor and the farmer all

need to know about profit from their businesses.