Principles of Economics and Management

(PEM)
GTU # 3140709

Unit-1
Introduction to
Economics

Prof. Vijay M. Shekhat

Computer Engineering Department
Darshan Institute of Engineering & Technology, Rajkot
Vijay.shekhat@Darshan.ac.in
9558045778
 Looping
Outline
• Introduction to Economics
• Definitions, Scope and Nature
• Difference between Microeconomics and Macroeconomics
• Theory of Demand & Supply
• Meaning and Determinants
• Law of Demand and Supply
• An equilibrium between Demand & Supply
• Elasticity
• Elasticity of Demand
• Price Elasticity
• Income Elasticity
• Cross Elasticity
• Promotional Elasticity
What is Economy? and What is Economics?
Economy
 The state of a country or region in terms of
 Production and Consumption of Goods and Services
 Supply (flow) of Money
Economics
 Economics is the science that studies economic activities.
 It is understanding of economic activities that govern the production,
distribution, and consumption of goods and services in an economy.
 The term Economics has been derived from the Greek words
 “Oikoon” means House and “nomos” means Management.
 Which imply that economics is concerned with the management of Household Goods.

Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 3

Definition of Economics
 It is hard to precisely define Economics because.
 It is a continuously evolving science.
 It is concerned with human behaviour in a dynamic and fast-changing society.
 It has to face new problems and new phenomena that cope up over time.
Adam Smith (1723-1790) defined
“Economics is a study of Wealth (Assets)”
• A subject dealing with producing wealth and using it.
Alfred Marshall (1723-1790) defined
“Economics as a study of Mankind (Humanity) in the ordinary business of life”
• It inquires how he gets his income and how he use it.
Lionel Robbins (1898-1984) defined
“Economics as a science which studies human behavior as a relationship
between ends (Unlimited Wants) and scarce means (Limited Resources) which
have alternative uses”
Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 4
Emergence of Economic Problems
 Responsible factors for the emergence of economic problems are:
1. The existence of 2. The scarcity of
unlimited human wants. available resources. Unlimite
d Want

Satisfactio
Effort
n

Source: swaraj-karun.blogspot.com

 Economics deals with how the numerous (many) human wants are to be satisfied with limited
resources.
 Thus, the science of economics centers on Unlimited Want - Effort - Satisfaction.

Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 5

Scope of Economics
Scope of Economics

Traditional Approach Modern Approach

1. Consumption 1. Microeconomics

2. Production 2. Macroeconomics

3. Exchange

4. Distribution

5. Public Finance

Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 6

Traditional Approach
1. Consumption
 The satisfaction of human wants through the use of goods and services is called
consumption.

2. Production
 Production would mean the creation of utility or producing things for satisfying
human wants.

3. Exchange
 Goods are produced not only for self-consumption but also for sales.
 The process of buying and selling is called exchange.

Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 7

Traditional Approach (Cont.)
4. Distribution
 The process of determining rewards between production factors is called distribution.
 The production of any commodity requires four factors.
 Land, Labor, Capital, and Entrepreneur.
 These factors are to be rewarded for their services.
 The landowner gets rent.
 The labor earns the salary.
 The capitalist is given with interest.
 The entrepreneur is rewarded with profit.

5. Public Finance
 It studies how the organization gets money and how it spends it.
 Thus, in public finance, we study about public revenue and public expenditure.
 E.g share Market, Income Taxes, etc…
Source: indianfolk.com
Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 8
Scope of Economics
Scope of Economics

Traditional Approach Modern Approach

1. Consumption 1. Microeconomics

2. Production 2. Macroeconomics

3. Exchange

4. Distribution

5. Public Finance

Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 9

Modern Approach
 Microeconomics give an idea of the  Macroeconomics give an idea of the
individual’s preference and welfare. Ex- functioning of the economy as a whole. E.g.-
Study of price-level of one firm. Study of national price-level.

Source: cosmolearning.org

Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 10

Modern Approach (Cont.)
1. Microeconomics
 Microeconomics analyses the economic behaviour of any particular decision-making unit such as a
Household or a Firm.
 Microeconomics studies,
 The flow of economic resources from households to business firms.
 The flow of goods and services from business firms to households.
 It studies the behaviour of individual decision-making unit with regard to fixation of price and output.
 Hence, Microeconomics is also called Price Theory.
2. Macroeconomics
 Macroeconomics studies the behaviour of the economic system as a whole or all the decision-making units
put together.
 Macroeconomics deals with the behaviour of aggregates.
 For Example, Total Employment, Gross National Product (GNP), National Income, National Price Level,
etc.
 Hence, Macroeconomics is also known as Income Theory.

Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 11

Microeconomics vs. Macroeconomics
Microeconomics Macroeconomics
Micro means small. Macro means large.
Study of the individual behavior of mankind like Study of the nation as a large entity like national
individual incomes, consumptions, savings, and income, distribution, consumption, savings, and
investment. investments.
The objective of microeconomics is the The objective of macroeconomics is to govern the
maximization of individual satisfaction and economic parameters of a nation like, growth in
minimization of costs. national income, distribution, employment, etc.
Judgments are based on demand and supply of Judgments are based on aggregate demand and
individuals and business firms. aggregate supply.

Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 12

Cont…
Microeconomics Macroeconomics
An analysis is based on following assumptions: An analysis is based on following assumptions:
1. A rational judgment of the individuals. 1. Aggregate demand of the nation.
2. Keeping all variables except one under the analysis 2. Aggregate supply of resources and its allocation to
as static. meet the aggregate demand.

Dealing with the partial equilibrium confined to Dealing with the equilibrium establishment for a nation,
industry categories and percolated to individual firms. and also global equilibrium through global economic
co-operation.
Attainment of equilibrium under the shorter time span Attainment of equilibrium under the long time span, the
with the periodic adjustments for correcting the decision of today will produce the results after a long
disequilibrium. span of time.

Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 13

Nature of Economics
 Economics - A Science and An Art
1. Economics is a science
2. Economics is an art
3. Economics is a social science
4. Positive science
5. Normative science

Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 14

1. Economics is a science
 Science is a structured body of knowledge That traces the relationship between cause
(reason) and effect.
 Applying these characteristics, we find that economics is a branch of knowledge where the
various facts relevant to it can be systematically collected, classified and analyse.
 The motives of individuals and business firms can be very easily measured in terms of
money.
 Thus, economics is a science.

Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 15

2. Economics is an art
 An art is a system of rules for the accomplishment of a given task.
 A science teaches us to know.
 An art teaches us to do.
 Applying this definition, we find that economics offers us a practical solution to problems.
 Science and Art are complementary to each other and economics is both a science and an art.

Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 16

3. Economics is a social science
 For production, we are working on materials that are drawn from all over the world and
Produced goods to be sold all over the world.
 Which satisfies wants of the society.
 In this way, the process of satisfying wants of society is not only an individual process but
also a social process.
 There for in economics, one has to study social behaviour.

Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 17

4. Positive science
 Positive Science only describes what it is.
 It does not indicate what is good or what is bad for the society.
 It will simply provide the results of an economic analysis of a problem.
 E.g. 12% labor force in India was unemployed last year is a positive statement which could
be verified by scientific measurement.

12%

88%

Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 18

5. Normative science
 Normative Science makes the distinction between good and bad.
 A positive statement is based on facts.
 A normative statement involves ethical (moral) values.
 E.g. 12% unemployment is too high.
 It also suggests how it can be rectified.
 It prescribes what should be done to promote human welfare.

Source: www.mortylefkoe.com
Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 19
Theory of Demand and Supply

Demand
Quantity of a product people are willing to buy at a certain price.

Demand
Relationship
The relationship between price and quantity demanded.

Supply Quantity of a certain goods producers are willing to supply when

receiving a certain price.

Supply
Correlation between price and how much goods or service is supplied
Relationship
to the market.
Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 20
Determinants of Demand
Price • Price decreases demand will increase and if price increases then demand will decrease.

Income • It is obvious that when incomes of a person will increase then demand will also increase.

Demography • As population increases, demand will also increase.

(Population)

Test and • If a person like something, then he will demand more.

Preference of
Consumers
• If he doesn’t like it, then he will refuse to buy.

Expectations of • If the consumer expects the rise in price, then he will demand more at this time and vice
Future Price versa.

Prices of Related • The demand is also affected by the prices of the substitute and complementary products.
Commodities

Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 21

Determinants of Supply
• If the price will increase, then the supplier will willing to supply more as profit increases and vice
Price
versa.

Strategy of the • The strategies followed by the suppliers determine the quantity released at different prices.
Supplier

• The number of suppliers represents the market structure.

Number of Supplier
• Monopoly or Competition becomes the basis for supply.

• The government policy of taxation, price controls, incentives to buy consumer and industrial products
Government Policies
affects the supply of commodities.

Technology • The technological improvement helps large production at low cost. This factor affects both the
Development and
Adoption consumers and the suppliers.

• The future expectations about price rise or price fall prompt the suppliers to restrict or to release the
Future Expectations
supply respectively.

Natural Calamities • The natural calamity like flood, earthquake, etc. destroys the supply.

Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 22

The Law of Demand
 The law of demand states that,
“If all other factors remain equal, the higher the price of a good, the fewer people will demand that good”

Price

P1 Demand Relation

P2

P3
Demand

Q1 Q2 Q3 Quantity

Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 23

The Law of Supply
 The law of supply demonstrates the quantities that will be sold at a certain price.
 Producers supply more at a higher price because selling more quantity at higher price increases revenue.

Price Supply
Supply Relation
P3

P2

P1

Quantity
Q1 Q2 Q3
Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 24
Supply and Demand Relationship
 According to the demand relationship, as demand increases, so does the price.
 Consequently, the rise in price should prompt more supply and increased supply will meet
customer demand.
 Again price will fall as demand is decreasing.

Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 25

Equilibrium
 A point where the quantity of goods being supplied is exactly the same as the quantity of
goods being demanded.
 i.e. Demand Quantity = Supply Quantity

Price Equilibrium Supply

P*

Demand
Quantity
Q*
 Equilibrium is practically not achievable as demand and supply quantities are continuously
changing based on market needs.

Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 26

Elasticity of Demand
 Demand elasticity is a measure of, how much the quantity demanded will change if another
factor changes
 Elasticity greater than one is called elastic.
 Elasticity less than one is called inelastic.
 Elasticity equal to one is unit elastic.
 This is important for setting prices so as to maximize profit.

Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 27

Types of “Elasticity of Demand”

1 2
Price Elasticity Income Elasticity

Types of
“Elasticity of Demand”

4 3
Promotional Elasticity Cross Elasticity /
of Demand Cross-Price Elasticity

Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 28

1. Price Elasticity

 Factors affect price elasticity:

 The number of close substitutes.
 Type of goods whether it is a necessity or luxury.
 Necessities tend to have inelastic demand
 While luxuries are more elastic
 For Example:

Food is necessity Air Conditioner is luxury

Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 29

2. Income Elasticity

 The demand will increase with an increase in income at a slower rate for normal necessities
than luxury goods.
 Low-grade goods have a negative income elasticity of demand.
 For Example:
 If the quantity demanded of a goods increases by 15% in response to a 10% increase in income, then,
income elasticity of demand would be 15% / 10% = 1.5

Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 30

3. Cross Elasticity / Cross-Price Elasticity

 The cross-price elasticity may be a positive or negative value, depending on whether the
goods are substitutes or complements.
 For Example:
 Bournvita and Horlicks are Substitute Products

 Car and Petrol are Complementary Products

Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 31

4. Promotional Elasticity of Demand

 Promotion by means of media or by giving some gifts, consumers will attract towards that
product.
 For Example:
 Promotion by gifts like Free Products, Gift Coupons, etc.
 Promotion by media like Advertisements
Source: www.shutterstock.com
 It is more affected when a market is of competition.
 Promotional Elasticity of Demand is:
 Higher when a product is a luxury. - air condition
 Medium when a product is of comfort. - air cooler
 Lower when a product is of necessity. - fen

Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 32

GTU Questions
1. Define Economics? Why is the study of Economics useful for engineers?
2. Differentiate between Microeconomics and Macroeconomics.
3. What do you mean by elasticity? Explain the types of elasticity with examples.
4. Explain: Law of Demand and supply.
5. Write a detailed note on ‘Demand and supply Equilibrium’ with diagram.
6. Briefly discuss the determinants of supply for any commodity.

Prof. Vijay M Shekhat #3140709 (PEM)  Unit 1 – Introduction to Economics 33

 Principles of Economics and Management
(PEM)
GTU # 3140709

Thank
You

Prof. Vijay M. Shekhat

Computer Engineering Department
Darshan Institute of Engineering & Technology, Rajkot
Vijay.shekhat@Darshan.ac.in
9558045778