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OBJECTIVES OF STUDYING
ECONOMICS BEFORE A
PROFESSIONAL MANAGER
A SIMPLE DEFINITION
• IT IS A SOCIAL SCIENCE THAT STUDIES
THE APPLICATION OF SCARCE
RESOURCES TOWARDS ALTERNATIVE
MULTIPLE END-USES.
(SCARCITY OF MEANS AND MULTIPLICITY
OF ENDS DEFINITION BY LIONNEL
ROBBINS)
THE DIFFERENT ENDS CAN BE ORDERED
IN TERMS OF PRIORITIES
SCOPE OF THE SUBJECT
• THE SUBJECT STUDIES THE MANNER IN
WHICH HUMAN CIVILIZATION HAS
ANSWERED THREE BROAD QUESTIONS:-
1.WHAT TO PRODUCE(ALLOCATION OF
RESOURCES)
2.HOW TO PRODUCE(CHOICE OF
TECHNOLOGY)
3.FOR WHOM TO PRODUCE(THE
DISTRIBUTION)
THE TWIN OBJECTIVES
BEFORE A PROFESSIONAL
MANAGER
1.UNDERSTANDING THE BUSINESS
ENVIRONMENT-AN APPLICATION OF
MACROECONOMICS.
2.PRUDENT MANAGERIAL DECISION-
MAKING. THIS IS AN APPLICATION OF
MICROECONOMICS
1.UNDERSTANDING THE
BUSINESS ENVIRONMENT
• MACROECONOMICS IS THE ANALYTICAL
STUDY OF ECONOMIC AGGREGATES OF A
NATION LIKE NATIONAL INCOME, GROWTH,
INFLATION, EMPLOYMENT, PER-CAPITA
INCOME
• IT ALSO STUDIES GOVERNMENT POLICIES
IN REGARD TO TAXES, INTEREST RATES
AND EXCHANGE RATES
2.PRUDENT MANAGERIAL
DECISION-MAKING
• APPLICATIONS OF MICROECONOMICS
• MICROECONOMICS IS THE STUDY OF
THE BEHAVIOUR OF THE INDIVIDUAL
ECONOMIC UNIT-NAMELY, THE
INDIVIDUAL HOUSEHOLD/CONSUMER,
AND THE INDIVIDUAL BUSINESS FIRM.
• THIS BRANCH ALSO STUDIES THE
NATURE OF MARKETS AND THEIR
TYPES
ECONOMIC MODELS
• ECONOMISTS USE THESE AS CONCEPTUAL
TOOLS BOTH IN MACROECONOMICS AND IN
MICROECONOMICS
• THE PURPOSE IS TO SIMPLIFY A COMPLEX
REAL SITUATION AND TO BEGIN TO
UNDERSTAND IT.
• EVERY ECONOMIC THEORY IS A MODEL-IT
MAKES GENERAL ASSUMPTIONS AND
DRAWS LOGICAL CONCLUSIONS BASED ON
THEM
• A MODEL IS ALSO EMPIRICALLY TESTED
USING STATISTICAL DATA AND ANALYSIS.
PRODUCTION
POSSIBILITIES FRONTIER
WHAT IS IT?
• AN ELEMENTARY MODEL EXPLAINING THE
SCOPE OF MACROECONOMICS
• HIGHLIGHTS THE TWO BASIC OPTIONS
AVAILABLE TO A SOCIETY
• IT DEALS WITH THE USE OF THE TOTAL
RESOURCES AVAILABLE FOR EITHER
CONSUMPTION OR INVESTMENT
• IT DESCRIBES THE OUTCOME OF EACH
CHOICE
DEFINITION AND EXPLANATION
• P-P CURVE IS THE LOCUS OF ALL THE
COMBINATIONS OF THE TWO GOODS THAT ARE
ASSUMED TO BE POSSIBLE WITH THE EXISTING
RESOURCES AND TECHNOLOGY:-
• GUNS SYMBOLIZING INVESTMENT TOWARDS
GREATER PRODUCTIVITY IN THE
FUTURE(BECAUSE THERE IS GREATER SECURITY
WITH THEM)
• BUTTER SYMBOLIZING CONSUMPTION ACTIVITY IN
THE PRESENT
• IT IS ASSUMED THAT THESE TWO PRODUCTS CAN
BE CONTINUOUSLY SUBSTITUTED FOR EACH
OTHER Contd…
DEFINITION AND EXPLANATION
• THE NATION FACES A TRADE-OFF AS SHOWN BY
THE P-P CURVE: FULL CAPACITY UTILIZATION OF
CONSUMER GOODS MANUFACTURING IN THE
PRESENT VS. ENSURING MORE CAPACITY
CREATION IN THE FUTURE(GROWTH)
• THE CHOICE IS MADE BY PRIVATE INDIVIDUAL
PLAYERS COLLECTIVELY(BEHAVIOUR OF SAVING,
CONSUMPTION, AND INVESTMENT) AS WELL AS
GOVERNMENTS(MONETARY AND FISCAL POLICIES)
• THE QUESTION BEING DISCUSSED IS: WHAT ARE
THE OUTCOMES OF CHOICES EXERCISED BY THE
NATION OF POINTS ON THE P-P CURVE?
DETAILED EXPLANATION OF
SAMUELSON’S MODEL OF THE
P-P FRONTIER
• P-P FRONTIER IS CONCAVE WITH
RESPECT TO THE ORIGIN
• GUNS AND BUTTER ARE THE ONLY
TWO GOODS BEING CONSIDERED
FOR PRODUCTION
• THE SOCIETY OR NATION CAN DIVIDE
ALL THE AVAILABLE FACTORS OF
PRODUCTION BETWEEN THESE TWO
PRODUCTS
WHAT IS THE CONCLUSION?
• MORE CONSUMPTION LEADS TO
CAPACITY UTILIZATION IN CURRENT
PERIOD WHILE MORE INVESTMENT
LEADS TO ENHANCED GROWTH OF
CAPACITY IN THE FUTURE
• GOVERNMENT POLICIES AND SOCIAL
PREFERENCES INFLUENCE THIS
CHOICE
LOGICAL POINTS-REASON FOR
CONCAVITY OF THE P-P CURVE
• INCREMENTAL OPPORTUNITY COST OF
EACH GOOD GOES ON INCREASING
• WE NEED TO GIVE UP MORE AND MORE OF
THE OTHER GOOD AS WE PERSIST WITH
THE SUBSTITUTION
• THE REASON-INITIALLY, THE MOST
SUITABLE OF THE FACTORS FOR THE
GOOD MAY BE UTILIZED( THE EFFICIENCY
IS MORE). THIS DOES NOT AFFECT THE
OUTPUT OF THE OTHER GOOD SO MUCH
AS THE LEAST DESIRABLE FACTORS MAY
BE DIVERTED
NATIONAL INCOME
ACCOUNTING
WHAT IT MEANS
• MEASUREMENT OF THE VALUE OF THE
TOTAL ECONOMIC ACTIVITY OF EVERY
KIND, PERTAINING TO A NATION, IN A
PERIOD OF TIME USUALLY AN YEAR.
• THE UNIT OF MEASUREMENT IS THE
CURRENCY OF THE NATION.
• THERE ARE DIFFERENT MEASURES OF IT
• THERE ARE ALSO DIFFERENT METHODS OF
DETERMINING THEIR VALUE.
THREE METHODS
• EXPENDITURE METHOD
• OUTPUT/ VALUE-ADDED METHOD
• INCOME METHOD
THESE METHODS ARE COMBINED BY
THE AGENCIES LIKE THE CSO TO
ARRIVE AT VARIOUS SECTORAL
TOTALS.
EIGHT DIFFERENT MEASURES
OF NATIONAL INCOME
• GROSS AND NET VALUES:-
Dr. Cr.
Rs. in ‘000 Rs. in ‘000
crores crores