HS20201

ECONOMICS
I I T K H A R AG P U R ( AU T U M N ‘ 2 2 )
A N U B H A B PAT TA N AYA K
C A P I TA L I S M : A
HISTORICAL
RECOUNT

• Back in the 14th Century, Divide between

rich and poor was present across the world,
but such divide across countries was more or
less absent – an average person in any
country had similar income.
• “Then—as now—your prospects depended
on where your parents were on the
economic ladder and whether you were male
or female.”
• “back then the part of the world in which
you were born mattered much less.”
• Colonialism grew with capitalism
ECONOMIC SYSTEMS

• Human economic progress has been remarkable since the 1700s

• This was due to a new economic system called ‘capitalism’, which revolutionized the
way we live.
(Note: there are several ways of organizing the economy. Economic organization resting upon
capitalism is one way).
• Total output increased significantly. (Why?)
• Under capitalism the following play major role
o Private property
o Markets
o Firms
• However, the system has its own pitfalls / limitations. (?)
ECONOMICS IS ABOUT…

1. Value of something in Exchange

2. Production and consumption
3. Trade-off
4. Strategy and Competition
5. Scarce resources and its management (production, allocation/distribution and consumption)
6. Distribution and inequality
7. Politics and policy
8. Environment
9. Behaviour
10. Cooperation and network
AN ECONOMIST’S MAIN JOB…

• How can we explain what we see/observe?

However, don’t try to explain everything. Accepting with humility our limited knowledge is not
a sin.
• Start with a question, and look at the evidence.
• Build a model that helps you understand what you see.
• Critically evaluate the model: does it provide the insight into the question, and explain
the evidence?
• Love us or hate us, but you can’t ignore us nor get rid of us.
• An economist is within all of us.
BASIC ECONOMIC CONCEPTS
SCARCITY

• The limited nature of society’s resources

• society has limited resources and therefore cannot produce all the goods and services
people wish to have
• So as a society we have to make decisions – what to produce; how much of it?
• Economics – the study of how society manages its scarce resources.
PEOPLE FACE TRADE-OFFS
• Individual choice – decisions
by individuals about what to
do, which necessarily involve
decisions about what not to do
• “There is no such thing as a
free lunch.”
• There are always tradeoffs – to
get more of something we like,
we have to give up something
else that we like.
PEOPLE FACE TRADE-OFFS

• Another tradeoff society faces is between efficiency and equity.

• Efficiency – means that society is getting the most it can from
its scarce resources
• Equity – means that the benefits of those resources are
distributed fairly among society’s members.
• Policies such as taxes and welfare make incomes more equal but
these policies reduce rewards/returns to hard work, and, thus
the economy doesn’t produce as much.
• As a result, when the government tries to cut the pie into more
equal pieces, the pie gets smaller.
THE COST OF SOMETHING IS
W H AT YO U G I V E U P T O G E T I T
• Opportunity cost – whatever must be given up to obtain some
item
• Weigh the costs vs. benefits
• Example: attending college
Give up money for tuition and books, and also give up time as a wage
earner
Benefit - intellectual enrichment and a lifetime of better job
opportunities.
• Remember that you are always trying to minimize your opportunity cost;
even while you may be increasing your accounting cost
ECONOMY

• Decisions can be made individually as a society

• Economy – system for coordinating a society’s productive and
consumptive activities.
Market economy/capitalism/free enterprise economy – laissez faire
Communism
Socialism
E C O N O M I C P RO B L E M S A S O C I E T Y M U S T
S O LV E
• What should be produced? How much?
• How will society produce it?
• For whom should society produce?
TYPES OF ECONOMIC SYSTEMS

• Capitalism – an economic system based on private property and

market forces in which individuals answer the questions of what,
how, and for whom to produce. Individuals follow their self-
interest, and the market forces of supply and demand coordinate
individual actions; government can play a role in defending
property rights and ensuring a fair playing field among economic
actors.
• Welfare capitalism – the economic system that has evolved in most
developed countries, including the United States. Under welfare
capitalism, the market system still operates, but the government
plays an increasing role in the regulation of markets in order to
better provide for the basic welfare of all its citizens.
TYPES OF ECONOMIC SYSTEMS

• Socialism – an economic system based on government ownership of

property and control of economic decisions. There are different
degrees of socialism
• Communism – an economic system based on individuals’ goodwill
toward one another; property is collectively owned and society
decides what, how, and for whom to produce, with the best interests
of all its members in mind.
• East Germany
• 1991 Communism
• 2003 Capitalism
P R I VAT E P RO P E RT Y

• Private ownership provides a self-interested motive to use resources

wisely.
Resource owner will gain if resources are used well
Weigh costs and benefits – will take action with greatest benefit
• In a command economy people do not have the incentive to use the
property wisely, less efficient
P R I VAT E P RO P E RT Y

• Securing property rights is important in terms of risk-taking

• Benefit - gain wealth, property
• Cost – lose property
• Market economy develops a legal system to protect property rights
Grants patents and copyrights to reward research and creativity.
ECONOMY RESOURCES ARE THE
F A C T O R S O F P RO D U C T I O N
• Land
• Labor
• Capital
• Entrepreneur
E C O N O M I C P RO B L E M

• Resources(Factors of Production) are scarce.

• Resources Incomes
Land(natural)
Labor
Capital
Entrepreneurship

Peoples’ wants and needs for goods and services (outputs) are unlimited.
E C O N O M I C P RO B L E M

• Resources(Factors of Production) are scarce.

• Resources Incomes
Land(natural) rent
Labor wages
Capital Interest
Entrepreneurship profits

Peoples’ wants and needs for goods and services (outputs) are unlimited.
M I C RO E C O N O M I C S A N D
M A C RO E C O N O M I C S
• Microeconomics – the study of how households and firms make decisions
and how they interact in markets
• Macroeconomics – the study of economy-wide phenomena, including
inflation, unemployment, and economic growth
• Microeconomics and macroeconomics are closely intertwined because
changes in the overall economy arise from the decisions of individual
households and firms.
• Because microeconomics and macroeconomics address different questions,
they sometimes take different approaches and are often taught in separate
courses
THE ECONOMIST AS POLICY
A DV I S E R
• Example of a discussion of minimum
wage laws: Polly says, “Minimum-
wage laws cause unemployment.”
Norma says, “the government should
raise the minimum wage.”
• Positive statements – claims that
attempt to describe the world as it is.
• Normative statements – claims that
attempt to prescribe how the world
should be
• Positive statements can be evaluated
using data, while normative
statements involve personal
viewpoints
I D E N T I F Y I N G P O S I T I V E V S.
N O R M AT I V E
Which of these statements are “positive” and which
are “normative”? How can you tell the difference?
a. Prices rise when the government increases the quantity of
money.
b. The government should print less money.
c. A tax cut is needed to stimulate the economy.
d. An increase in the price of gasoline will cause an increase
in consumer demand for video rentals.

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ANSWERS
a. Prices rise when the government increases the quantity of money.
Positive, describes a relationship, could use data to confirm or refute.
b. The government should print less money.
Normative, this is a value judgment, cannot be confirmed or refuted.

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ANSWERS
c. A tax cut is needed to stimulate the economy.
Normative, another value judgment.
d. An increase in the price of gasoline will cause an increase in consumer
demand for video rentals.
Positive, describes a relationship.
Note that a statement need not be true to be positive.

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P O S I T I V E V E R S U S N O R M AT I V E
A N A LY S I S
• Positive or Normative Statements? ?
An increase in the minimum wage will cause a decrease in employment
among the least-skilled.
POSITIVE

Higher federal budget deficits will cause interest rates to increase.

POSITIVE

? ?
P O S I T I V E V E R S U S N O R M AT I V E
A N A LY S I S
• Positive or Normative Statements? ?
The income gains from a higher minimum wage are worth more than
any slight reductions in employment.
NORMATIVE

State governments should be allowed to collect from tobacco companies

the costs of treating smoking-related illnesses among the poor.
NORMATIVE

? ?
W H Y E C O N O M I S T S D I S AG R E E –
SCIENTIFIC JUDGMENTS
• Economists often disagree about the validity of alternative theories or
about the size of the effects of changes in the economy on the behavior of
households and firms
• Ex: Some economists feel that a change in tax code that would eliminate
a tax on income and create a tax on consumption would increase saving
in this country. However, other economists feel that the change in the tax
system would have little effect on saving behavior and therefore do not
support the change.
• Differences in value – national sales tax falls more on the lower income
groups, so if economists believes that a society should support income
equality would be against a national sales tax
• Economics is tied to politics.
A powerful interest group will promote an economist that shares their ideas.
I N T RO D U C T I O N T O
M A C RO E C O N O M I C S
BUSINESS CYCLE –
F L U C T U AT I O N S I N E C O N O M I C
AC T I V I T Y
• Peak – the highest point before a
recession.
• Recession – a decline that lasts at least
6 months (2 quarters)
• Trough – the lowest point at the end
of the recession and before an
expansion
• Expansion – the period between the
end of a recession and the next peak
• Recovery – the very beginning of an
economic expansion
• Boom – an extremely fast increase in
output, usually near the end of an
expansion
• Depression – a very long and low
recession
EM P L OY M ENT

• Employment – the number of people currently employed in the economy

• Unemployment – the number of people who are actively looking for work but aren’t
currently working
• Labor force – the sum of the employed and the unemployed
• Unemployment rate – the percentage of the labor force that is unemployed
AG G R E G AT E O U T P U T

• Output – the quantity of goods and services

• Aggregate output – the economy’s total production of goods and services for a given
period of time.
PRICE

• Inflation – a rise in the overall price level

Too high – really bad
People hold less cash
Caused by the government printing too much money
• Deflation – a fall in the overall price level
Really bad
People hold more cash
• Economists want price stability (goal of the Fed)
Price stability – the overall price level is changing either not at all or only
very slowly.
 ECONOMIC
G ROW T H
• An increase in
the maximum
amount of goods
and services an
economy can
produce
• An increase in
the GDP per
capita
M A C RO E C O N O M I C S

• The Short-run • The Medium-Run • The Long Run

AD & AS Labour Market Savings
Goods Market Phillips Curve Capital Accumulation
Money Market NRU Tehnological Progress
IS-LM IS-LM-PC Model Network
Climate Change