arpita economics

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Economics has never been a science - and it is even less now than a few yearsago.Paul Samuelson

INTRODUCTION

Economics is the social science that analyzes the production, distribution,and consumption ofgoods and services. A focus of the subject is how economicagents behave or interact and how economies work. A given economy is the result ofa process that involves its technological evolution, history and social organization, aswell as its geography, natural resource endowment, and ecology, as main factors.These factors give context, content, and set the conditions and parameters in whichan economy functions.The world economic events and how they affect the domestic economy.The economic activity, and of the interactions of consumers and businesses.

Government policy and its effects.

SCARCITY AND EFFICIENCY: THE TWIN THEMES OF ECONOMICS:

Robbinss definition of economics (economics is the science of scarcity)

Scarcity of an economic goods or services (means not that it is rare but only that itis not freely available) occurs where it's impossible to meet all unlimited desires andneeds of the peoples with limited resources. Society must find a balance betweensacrificing one resource and that will result in getting other.Efficiency denotes the most effective use of a society's resources in satisfyingpeoples wants and needs. It means that the economy's resources are being used aseffectively as possible to satisfy people's needs and desires. Thus, the essence ofeconomics is to acknowledge the reality of scarcity and then figure out how to usethese resources to produce the maximum level of satisfaction possible with the giveninputs & technology.

Any problem marked by scarcity of means and multiplicity of ends, becomes ipsofacto an economic problem, and as such, a legitimate part of the science ofeconomics.

MICROECONOMICS AND MACROECONOMICS

1. Microeconomics: This is considered to be the basic economics.Microeconomics may be defined as that branch of economic analysis whichstudies the economic behaviour of the individual unit, may be a person, aparticular household, or a particular firm. It is a study of one particular unitrather than all the units combined together. The microeconomics is alsodescribed as price and value theory, the theory of the household, the firm andthe industry. Most production and welfare theories are of the microeconomicsvariety.
http://en.wikipedia.org/wiki/Social_scienceshttp://en.wikipedia.org/wiki/Production_theory_basicshttp://en.wikipedia.org/wiki/Distribution_(economics)http://en.wikipedia.org/wiki/Consumption_(economics)http://en.wikipedia.org/wiki/Good_(economics_and_accounting)http://en.wikipedia.org/wiki/Service_(economics)http://en.wikipedia.org/wiki/Agent_(economics)http://en.wikipedia.org/wiki/Agent_(economics)http://en.wikipedia.org/wiki/Economyhttp://en.wikipedia.org/wiki/Technological_evolutionhttp://en.wikipedia.org/wiki/Historyhttp://en.wikipedia.org/wiki/Social_organizationhttp://en.wikipedia.org/wiki/Geographyhttp://en.wikipedia.org/wiki/Natural_resourcehttp://en.wikipedia.org/wiki/Ecologyhttp://en.wikipedia.org/wiki/Ecologyhttp://en.wikipedia.org/wiki/Natural_resourcehttp://en.wikipedia.org/wiki/Geographyhttp://en.wikipedia.org/wiki/Social_organizationhttp://en.wikipedia.org/wiki/Historyhttp://en.wikipedia.org/wiki/Technological_evolutionhttp://en.wikipedia.org/wiki/Economyhttp://en.wikipedia.org/wiki/Agent_(economics)http://en.wikipedia.org/wiki/Agent_(economics)http://en.wikipedia.org/wiki/Service_(economics)http://en.wikipedia.org/wiki/Good_(economics_and_accounting)http://en.wikipedia.org/wiki/Consumption_(economics)http://en.wikipedia.org/wiki/Distribution_(economics)http://en.wikipedia.org/wiki/Production_theory_basicshttp://en.wikipedia.org/wiki/Social_sciences


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2. Macroeconomics: Macroeconomics may be defined as that branch ofeconomic analysis which studies behaviour of not one particular unit, but of allthe units combined together. Macroeconomics is a study in aggregates.Hence it is often called Aggregative Economics. It is, indeed, a realisticmethod of economic analysis, though it is complicated and involves the use of

higher mathematics. In this method, we study how the equilibrium in theeconomy is reached consequent upon changes in the macro-variables andaggregates. The publication of Keynes General Theory, in 1936, gave astrong impetus to the growth and development of modern macroeconomics.

Eg: One of the mo st notable macroecon omic d evelopments in recent years has

been the sharp drop in Chinas current-accou nt s urplu s. The Internat ional MonetaryFund is n ow fo recast ing a 2012 surplu s of just 2.3% of GDP, dow n from a pre-cris is

peak of 10.1% of GDP in 2007, owing largely to a decline in Chinas trade surplus that is, the excess of the value of Chinese exports over that of i ts imp orts.

3. International economics: International economics is concerned with theeffects upon economic activity of international differences in productiveresources and consumer preferences and the institutions that affect them. Itseeks to explain the patterns and consequences of transactions andinteractions between the inhabitants of different countries, including trade,investment and migration.

THE LOGIC OF ECONOMICS

Whenever the decisions are made, say by an individual or by a business or by agovernment there are certain considerations being taken into account which arebacked by logics of economic analysis. These need not to be always correct. Alsoknown by FALLACIES OF ECONOMICS, are mainly as follows:

The post hoc fallacy: This is explained as X event follows Y event and hence is theresult of Y which might not be true.

Failure to hold other things constant: When we study any economic relationbetween two factors, we keep other factors constant to come to any conclusion. Butin reality other factors are also dynamic so relation observed is not accurate.

Eg: Kennedy-Joh nson tax cuts of 1964 in US, whic h low ered tax rates sharply and

were fol low ed by an inc rease in government revenues in 1965. The fal lacy is th at i t

overlook s the fact that the econom y grew from 1964-1965, because peoples income

increased and hence the revenues.

The fallacy of composition: This occurs when there is a result true for a smallsample space and we integrate the same result for population under consideration.

Eg: Increasing saving is obviously good for an individual, since it provides forretirement but if everyone saves more, it may cause a recession by

reducing consumerdemand
http://en.wikipedia.org/wiki/Saving_(economics)http://en.wikipedia.org/wiki/Recessionhttp://en.wikipedia.org/wiki/Consumption_(economics)http://en.wikipedia.org/wiki/Consumption_(economics)http://en.wikipedia.org/wiki/Recessionhttp://en.wikipedia.org/wiki/Saving_(economics)


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ECONOMIC SYSTEMS

1. Centrally Planned Economy

A centrally planned economy is the contrast of the market economy. All decisionsare made by the public sector (government). There is very little insight into what theindividual wants. Centrally planned governments would allocate resources as theysee fit. This economic system is designed to promote equality but rarely achieves it.

Nat ions that h ave, in the p ast , only u sed this sys tem are Russia (i .e. United

Soviet Social is ts Republ ic) and China. This system could be known as

soc ia l is t or communis t .

2. Market EconomyA market economy involves all major business decisions being made by only

individuals and private firms. This system is designed so that the consumer demandscertain products, therefore attempting to solve the economic problem. The majorfactor in a market economy is supply and demand.

3. Mixed EconomyA mixed economy is a mixture of both market economies and centrally plannedeconomies. There are two extremes within this system; they are the Americansystem and the communist system. In the American system the economy is stilldominated by supply and demand. Whereas in the communist system, such asChina, private firms have enter the economy but the government still controls muchof trade and have control of answering the economic problem.

MANAGERIAL ECONOMICS

Managerial economics is concerned with application of economic concepts andeconomic analysis to the problems of formulating rational managerial decision. -Edwin Mansfield

Managerial economics refers to the use of economic theory (microeconomics andmacroeconomics) and the tools of analysis of decision science (mathematicaleconomics and econometrics) to examine how an organization can achieve its aims

and objectives most efficiently..
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The most frequent applications of managerial economics techniques are as follows:

Risk analysis: Various models are used to quantify risk and asymmetricinformation and to employ them in decision rules to manage risk.

Production analysis: Microeconomic techniques are used to analyse productionefficiency, optimum factor allocation, costs and economies of scale. They are alsoutilised to estimate the firm's cost function.

Pricing analysis: Microeconomic techniques are employed to examine variouspricing decisions. This involves transfer pricing, joint product pricing, pricediscrimination, price elasticity estimations and choice of the optimal pricing method.Capital budgeting: Investment theory is used to scrutinise a firm's capital purchasingdecisions.

POSITIVE AND NORMATIVE ECONOMICS

Whenever we are to make a decision or are looking to answer the economic questwe need to be rational and consider every aspect of the probable response. The twoways of taking decision are:

Positive Economics: This is a part of Economics that concerns the description andexplanation of economic phenomena. It focuses on facts and cause-and-effectbehavioural relationships and includes the development and testing of economictheories. This is believed to describe the facts of the economy.

Eg: The United States spends $10 bi l l ion more on n at ional defense than o n

higher educat ion.

Normative Economics: This is a part of Economics that expresses value judgmentsabout economic fairness or what the economy ought to be like or what goals ofpublic policy ought to be. It is based on ones opinion and hence cannot beempirically tested. There is no right or wrong associated with the judgments. Theseare the judgments as how the world should be.

Eg: Should the Government of India enact f lexible labour laws for comp anies

to create mo re jobs in the long term

THE THREE PROBLEMS OF AN ECONOMIC ORGANISATION

Organisations have to take a decision on following: What to produce? When to produce? For whom to produce?


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PRODUCTION POSSIBILITY FRONTIER (PPF)

It is a graph showing the various combinations of output that can be produced whenall resources are being utilised in the most efficient manner possible, given thecurrent level of technology. As we know the sources are scarce and have to be

exhausted most efficiently so as to meet out the demands most wisely.The PPF shows the maximum amounts of production that can be obtained in aneconomy, taking into the consideration that maximum resources are utilized.

The graph shows the PP curve between the production of cars and computers inan economy

Illustrating concepts using PPF:

SCARCITY


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EFFICIENCY, INEFFICIENCY AND UNEMPLOYMENT

OPPORTUNITY COST


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ECONOMIC GROWTH IN THE LONG RUN

ECONOMIC GROWTH IN THE SHORT RUN


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THE FIRM

The FIRM or a BUSNIESS is an organisation that brings together the resources,utilises them for the creation of goods and services in order to earn the maximumprofits.

THE GOALS OF THE FIRM

Primary objective of the firm (to economists) is to maximize profits.

Other goals include:Economic Objectives:

Market share Profit Margin Return on Investment Technological Advancement Customer satisfaction Shareholder value

Non-economic Objectives:

Workplace Environment

Product Quality Service to Community

The value of firm can be defined as the present value of sum of all the future profitsincurred for the life of the firm.Value of firm=) )) )TR----total revenueTC----total costr-------discount ratet--------lifetime of organisation

THEORY OF THE FIRM

The theory of the firm consists of a number ofeconomic theories that describe,explain, and predict the nature of the firm, company, orcorporation, including itsexistence, behaviour, structure, and relationship to the market
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WHY DOES FIRM EXISTS:

Firms exist in order to minimize transactions costs Adam Smith

If maximizing production is the foremost objective, team production would befavoured over individual production. In this scenario, a group of individuals workingtogether would provide a greater economic benefit, therefore validating the need fora firm.

The Nature of Economic Costs:

Explicit Costs: Out-of-pocket money costsImplicit Costs: Opportunity costs which are imputed and do not involve a directmoney paymentOpportunity Costs: The costs of the best alternative foregoneTotal Economic Cost:= Explicit + Implicit CostAccounting Cost: Explicit Costs only

PROFIT MAXIMISATION: (Profit = Total Revenue Total cost)

Profit maximization is the main aim of any business and therefore it is also anobjective of financial management. Profit maximization, in financial management,

represents the process or the approach by which profits (EPS) of the business areincreased. In simple words, all the decisions whether investment, financing, ordividend etc are focused to maximize the profits to optimum levels.

WEALTH MAXIMISATION

Wealth maximization is a modern approach to financial management. Maximizationof profit used to be the main aim of a business and financial management till theconcept of wealth maximization came into being. It is a superior goal compared toprofit maximization as it takes broader arena into consideration. Wealth or Value of abusiness is defined as the market price of the capital invested by shareholders.

Wealth maximization simply means maximization of shareholders wealth. Wealth ofa shareholder maximize when the net worth of a company maximizes. This is whywealth maximization is also known as net worth maximization.


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TIME VALUE OF MONEY

This concept states that when the money is kept idle it loses its value. As instead ofkeeping the money idle it should be invested. On investing it might get the returns asprofit moreover it might also create new resources for further utilisation.

Hence a dollar today is worth more than a dollar tomorrow.

FUTURE VALUE

Suppose certain amount of money is invested at a particular rate of interest. Theamount to which an investment will grow after earning interest is known as the futurevalue of current investment.Rate of return is the award the investors get for risking their money in the market.

PRESENT VALUE

Suppose a sum of money in the future as expected payoff to the investment madepresently. The current value of a future cash flow is known as the present value.The present value is obtained by discounting the future value by the discount rate.

NET PRESENT VALUE

This is defined as the difference of the initial cash outflow from the expected presentvalue.Net Present Value = Present value initial cash out flow

N

j

t

t I

k

SNPV

1

0

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St = the cash flow in time period tI0 = the initial investment outlay in time zerok = the required rate of return on the projectN = the projects economic life in periods

Consid er an investmen t today o f $100, that brings net gains o f $100 each year

for 6 years. The future values and pr esent values of these cash f low events

migh t look l ike th is :

All 3 sets of bars represent the same investment cash flow stream. The black barsstand for cash flow figures in the currency units when they actually appear in thefuture (Future values). The lighter bars are values of those cash flows now,in present value terms. The net values in the legend show that after five years, thenet cash flow expected is $500, but the Net Present Value today is discounted tosomething less.

arpita economics

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