Class Exercise: As per your own understanding, write down what you understand by economics. What is Economics?

The term economics is derived from the Greek word oeconomicus by Xenophon in 431 B.C. It is derived from two words economy and science. Economy means proper utilization of resources. It means economics is the science of economy or science of proper utilization of resources. It is comprised of theories, laws, principle related to utilization of resources so as to solve the economic problems, satisfy the human wants or need and so on. It analyses the production, distribution, and consumption of goods and services. It is not FINANCE. However, the economics is defined in different ways by different economists.

Some Basic Definitions of Economics 1. Economics is the study of how people choose to allocate scarce goods and resources to achieve their unlimited desires. Goods: Things that people like to consume (car, house, and mobile phone) Bads: Things that people dont like to consume. (eg: garbage, pollution etc) Resources: Things we use to produce goods. (eg: labour, tools and equipment, oil etc) 2. Other definitions: Economics is the study of how individuals (and hence the society) manages its scarce resources. Economics is a study of human behaviour, with an emphasis on human decision making. Economics is one of several sciences that tries to explain human behaviour, but differs in that it emphasizes rational decision making. So, it is hard to define economics. Let us discuss certain key economic concepts, which will stay with us as long as we study economics. Class Exercise: You have 15000 rupees. You want to buy a Nokia Lumia 520 (whose price is Rs 12999). You also wish to buy a Samsung Galaxy S (whose price is Rs. 13880). Which model or models would you purchase and why? #Key Economics Concept 1: Scarcity Scarcity exists and it implies trade-offs. We cant have all or everything as much as we like. We all want multi-storied buildings, Mercedes or the fastest cars etc; even if

we have large and fancy houses, not all will have the fastest cars or robots that clean those houses. So, we have to give up something because resources are scarce. Every time, the resources are used to make 1 thing, we have to forego something else. This TRADE-OFF is the giving up of one thing to get another. This means we make a CHOICE: If I have 10 rupees and I spend it on apples, it means I cannot purchase oranges. This in economics terms is called OPPORTUNITY COST: The value of the best thing we give up to get something. This is used to tackle scarcity. For example, if I choose to spend 10 rupees on 2 apples (rupees 5 each) and the next best thing was an orange for 8 rupees, then the orange was the OC of the apple. This is not necessarily the same as the monetary cost. This proves something very crucial: NOTHING IS FREE IN THIS WORLD. Class Exercise: You are sitting with your friend and chatting at South City Mall. You choose not to do your economics homework, which is due the next day. Express this statement as an opportunity cost. [The economics homework is the opportunity cost of the time spent with the friend]. Homework: The total school fees of X are given below:
Tuition Books Living Expenses Transportation 56,00 0 4,000 14,00 0 2,400

Xs uncle offers him a job worth Rs. 1, 00,000. X decides not to attend school and do the job. Express this as an Opportunity Cost in terms of one another. #Key Economics Concept 2: Rationality People tend to choose rationally to achieve their goals, which implies that they respond to incentives and make decisions at the margin. While doing economics, we assume that people behave rationally. Rational: By RATIONAL we mean, people tend to choose the correct means to achieve their goals. These assumptions are used to build models, which are simple frameworks, for understanding economic phenomenon with unnecessary complications assumed away. An assumption is an useful lie, as it often predicts economic decisions accurately or sometimes incorrectly. Incentive: A reason for doing something. If the cost of something goes up, people do less of it, but if the benefit of something goes up, people do more of it. For example, (ask students about favourite food), becomes cheap, they would eat more of it. But, if they knew that the hamburgers would ultimately damage their health, they would eat less of it.
At the margin: People decide whether to do a little bit more of something or a little bit less of

something. For example, a farmer growing potatoes, will naturally want to produce a little more. To know if it is the right decision, he will compare its MARGINAL BENEFITS with its MARGINAL

COST. The cost of obtaining one additional unit of a good or service is called the marginal cost. The benefits obtained from consuming one additional unit of a good or service are called the marginal benefits. If the marginal benefits > marginal costs, it makes sense to purchase another unit of the good; when the marginal benefits are less than the marginal costs, then you do not purchase another unit of the good.

Class Exercise: Should you have come to class today? Let us compare the marginal costs and benefits.
MARGINAL COSTS Gas and other expenses Paper and Ink Used Opp. Cost (Watching a Movie) TOTAL MARGINAL COSTS

70 20 20 0 29 0 30 20 250 300

MARGINAL BENEFITS Knowledge Higher income in future due to better economics grade earned because you learned about opportunity costs in class today Were able to socialize with other students TOTAL MARGINAL BENEFITS

So, properly measured since the marginal benefits of attending class today are greater than the marginal costs, rational behaviour dictates that you should have come to class today. #Key Economics Concept 3: Markets and Trade tend to work well and make people better off. People in different countries become better off when they trade with one another. Trade: The exchange of goods and resources between people or different geographic regions. If Japan exchanges automobiles (cars) for milk from India, trade happens. Markets: The set of buyers and sellers and their interactions with each other. If an economist says Market for apples, he refers to all the buyers of apples and sellers of apples who trade money for apples between each other. Three important facts of our economic life (use of wealth, income and commodities in our everyday life): 1. Unlimited Wants Human wants are unlimited. As soon as one particular want is satisfied, another need crops up. Is it possible to satisfy all our needs and desires? 2. Limited Resources

Resources at our disposal are limited. We have {limited supply of land, limited skilled labour, limited money and business talent=Factors of Production.} So it is not possible to satisfy all our wants at a time. Hence an individual has to decide which want (need) is MORE URGENT and important and thus has to be satisfied first and the less urgent can be satisfied later. 3. Alternative Uses Although resources are scarce, they have alternate uses. If some wants are satisfied, others will remain unsatisfied. For example, the land at Singur, could have been used to produce 3 types of crops or the Nano Plant. Land is fixed. So, if more land is used to produce crops, less land will be available for the Nano project. [Draw rough diagram and explain another example: If your mother has cooked chicken curry in the morning, and you eat more of it during lunch, less will be available during dinner.] These 3 facets explain that ECONOMICS IS A SCIENCE OF CHOICE. It starts with a particular countrys constant struggle with the problem of SCARCITY. The problem of scarcity arises when RESOURCES ARE SCARCE. The Factors of Production 1. What is Production? Classical View: A social activity whose purpose is to change one state of matter into another. For example, in the industrial sector, raw materials and inputs like glass, steel etc are used in the production process and final products such as motor cars are obtained. This is an example of production, since, in this case, the raw materials and inputs are transformed into outputs or final goods. The change is of 3 types: a. Quantitative: Growing crops from seeds b. Qualitative: Cars manufactured from glass, steel and other inputs c. Spatial: Extraction of iron ore from mines Neo-classical View: According to Neo-classical economists like Alfred Marshall, Leon Walras and W.S. Jevons, production is the creation of utility through exchange. Utility refers to the capacity of a commodity to satisfy a human need or human desire.

Homework: Based on the above definitions and diagrams, which do you feel is a better definition of production? Why? Answer: Of the 2 definitions, the classical one is more acceptable because it has wider application. The neoclassical definition has a much restricted application because marketability of a product is more important than changing one form of matter into another. On the other hand, the classical definition is much wider in scope in the sense that production may take place within the market system or even outside the market system. In other words, it is not dependant on the existence of market. Components of Production: [Draw Q=f(L, K) and ask if they understand anything] Production of commodities requires the use of certain factors of production or inputs. These factor inputs or economic resources are also known as COMPONENTS of PRODUCTION. They are divided into 4 broad categories: 1. Land [Fixed SupplyGift of Nature (not created through human effort and has no COP) Geographical Immobility] 2. Labour [Unlike land, labour is reproducibleit is perishablecannot be stored for future usecan be bought and sold in the market for a price, which is the wage, i.e the price of labour] 3. Capital [Karl Marx, said that capital is the result of past labour of stored-up labourMan-made resourceCirculating Capital (eg: Corn produced by a farmer; and from the current o/p a certain amount is set aside for next agricultural season] 4. Entrepreneurship/ Organization/ Business Ability [Task of entrepreneur is twofold: organizing the production process, i.e hiring and combining the other 3 FOPsRisk-Taking and Uncertainty bearing (production is anticipation of demandeg: no of chairs in the room kept by shah Nawaz sir will depend of no of students entering the room). The organization= Sole Propreitorship, Partnership or Joint Stock Company or Corporate firms.