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Economics has never been a science - and it is even less now than a few years ago.

Paul Samuelson

INTRODUCTION Economics is the social science that analyzes the production, distribution, and consumption of goods and services. A focus of the subject is how economic agents behave or interact and how economies work. A given economy is the result of a process that involves its technological evolution, history and social organization, as well as its geography, natural resource endowment, and ecology, as main factors. These factors give context, content, and set the conditions and parameters in which an 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 it is not freely available) occurs where it's impossible to meet all unlimited desires and needs of the peoples with limited resources. Society must find a balance between sacrificing one resource and that will result in getting other. Efficiency denotes the most effective use of a society's resources in satisfying peoples wants and needs. It means that the economy's resources are being used as effectively as possible to satisfy people's needs and desires. Thus, the essence of economics is to acknowledge the reality of scarcity and then figure out how to use these resources to produce the maximum level of satisfaction possible with the given inputs & technology. Any problem marked by scarcity of means and multiplicity of ends, becomes ipso facto an economic problem, and as such, a legitimate part of the science of economics.

MICROECONOMICS AND MACROECONOMICS 1. Microeconomics: This is considered to be the basic economics. Microeconomics may be defined as that branch of economic analysis which studies the economic behaviour of the individual unit, may be a person, a particular household, or a particular firm. It is a study of one particular unit rather than all the units combined together. The microeconomics is also described as price and value theory, the theory of the household, the firm and the industry. Most production and welfare theories are of the microeconomics variety.

2. Macroeconomics: Macroeconomics may be defined as that branch of economic analysis which studies behaviour of not one particular unit, but of all the units combined together. Macroeconomics is a study in aggregates. Hence it is often called Aggregative Economics. It is, indeed, a realistic method of economic analysis, though it is complicated and involves the use of higher mathematics. In this method, we study how the equilibrium in the economy is reached consequent upon changes in the macro-variables and aggregates. The publication of Keynes General Theory, in 1936, gave a strong impetus to the growth and development of modern macroeconomics.
Eg: One of the most notable macroeconomic developments in recent years has been the sharp drop in Chinas current-account surplus. The International Monetary Fund is now forecasting a 2012 surplus of just 2.3% of GDP, down from a pre-crisis 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 its imports.

3. International economics: International economics is concerned with the effects upon economic activity of international differences in productive resources and consumer preferences and the institutions that affect them. It seeks to explain the patterns and consequences of transactions and interactions between the inhabitants of different countries, including trade, investment and migration.


Whenever the decisions are made, say by an individual or by a business or by a government there are certain considerations being taken into account which are backed by logics of economic analysis. These need not to be always correct. Also known by FALLACIES OF ECONOMICS, are mainly as follows: The post hoc fallacy: This is explained as X event follows Y event and hence is the result of Y which might not be true. Failure to hold other things constant: When we study any economic relation between two factors, we keep other factors constant to come to any conclusion. But in reality other factors are also dynamic so relation observed is not accurate.
Eg: Kennedy-Johnson tax cuts of 1964 in US, which lowered tax rates sharply and were followed by an increase in government revenues in 1965. The fallacy is that it overlooks the fact that the economy 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 small sample space and we integrate the same result for population under consideration.
Eg: Increasing saving is obviously good for an individual, since it provides for retirement but if everyone saves more, it may cause a recession by reducing consumer demand


1. Centrally Planned Economy A centrally planned economy is the contrast of the market economy. All decisions are made by the public sector (government). There is very little insight into what the individual wants. Centrally planned governments would allocate resources as they see fit. This economic system is designed to promote equality but rarely achieves it. Nations that have, in the past, only used this system are Russia (i.e. United Soviet Socialists Republic) and China. This system could be known as socialist or communist. 2. Market Economy A market economy involves all major business decisions being made by only individuals and private firms. This system is designed so that the consumer demands certain products, therefore attempting to solve the economic problem. The major factor in a market economy is supply and demand. 3. Mixed Economy A mixed economy is a mixture of both market economies and centrally planned economies. There are two extremes within this system; they are the American system and the communist system. In the American system the economy is still dominated by supply and demand. Whereas in the communist system, such as China, private firms have enter the economy but the government still controls much of trade and have control of answering the economic problem. MANAGERIAL ECONOMICS Managerial economics is concerned with application of economic concepts and economic analysis to the problems of formulating rational managerial decision. Edwin Mansfield Managerial economics refers to the use of economic theory (microeconomics and macroeconomics) and the tools of analysis of decision science (mathematical economics and econometrics) to examine how an organization can achieve its aims and objectives most efficiently. .

The most frequent applications of managerial economics techniques are as follows: Risk analysis: Various models are used to quantify risk and asymmetric information and to employ them in decision rules to manage risk. Production analysis: Microeconomic techniques are used to analyse production efficiency, optimum factor allocation, costs and economies of scale. They are also utilised to estimate the firm's cost function. Pricing analysis: Microeconomic techniques are employed to examine various pricing decisions. This involves transfer pricing, joint product pricing, price discrimination, price elasticity estimations and choice of the optimal pricing method. Capital budgeting: Investment theory is used to scrutinise a firm's capital purchasing decisions. POSITIVE AND NORMATIVE ECONOMICS Whenever we are to make a decision or are looking to answer the economic quest we need to be rational and consider every aspect of the probable response. The two ways of taking decision are: Positive Economics: This is a part of Economics that concerns the description and explanation of economic phenomena. It focuses on facts and cause-and-effect behavioural relationships and includes the development and testing of economic theories. This is believed to describe the facts of the economy. Eg: The United States spends $10 billion more on national defense than on higher education. Normative Economics: This is a part of Economics that expresses value judgments about economic fairness or what the economy ought to be like or what goals of public policy ought to be. It is based on ones opinion and hence cannot be empirically tested. There is no right or wrong associated with the judgments. These are the judgments as how the world should be. Eg: Should the Government of India enact flexible labour laws for companies to create more 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?

PRODUCTION POSSIBILITY FRONTIER (PPF) It is a graph showing the various combinations of output that can be produced when all resources are being utilised in the most efficient manner possible, given the current 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 an economy, taking into the consideration that maximum resources are utilized.

The graph shows the PP curve an economy Illustrating concepts using PPF: SCARCITY

between the production of cars and computers in





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 maximum profits. 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 profits incurred for the life of the firm. ) )) Value of firm= ) TR----total revenue TC----total cost r-------discount rate t--------lifetime of organisation

THEORY OF THE FIRM The theory of the firm consists of a number of economic theories that describe, explain, and predict the nature of the firm, company, or corporation, including its existence, behaviour, structure, and relationship to the market

WHY DOES FIRM EXISTS: Firms exist in order to minimize transactions costs Adam Smith

If maximizing production is the foremost objective, team production would be favoured over individual production. In this scenario, a group of individuals working together would provide a greater economic benefit, therefore validating the need for a firm.

The Nature of Economic Costs: Explicit Costs: Out-of-pocket money costs Implicit Costs: Opportunity costs which are imputed and do not involve a direct money payment Opportunity Costs: The costs of the best alternative foregone Total Economic Cost:= Explicit + Implicit Cost Accounting 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 an objective of financial management. Profit maximization, in financial management, represents the process or the approach by which profits (EPS) of the business are increased. In simple words, all the decisions whether investment, financing, or dividend etc are focused to maximize the profits to optimum levels.

WEALTH MAXIMISATION Wealth maximization is a modern approach to financial management. Maximization of profit used to be the main aim of a business and financial management till the concept of wealth maximization came into being. It is a superior goal compared to profit maximization as it takes broader arena into consideration. Wealth or Value of a business is defined as the market price of the capital invested by shareholders. Wealth maximization simply means maximization of shareholders wealth. Wealth of a shareholder maximize when the net worth of a company maximizes. This is why wealth maximization is also known as net worth maximization.

TIME VALUE OF MONEY This concept states that when the money is kept idle it loses its value. As instead of keeping the money idle it should be invested. On investing it might get the returns as profit 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. The amount to which an investment will grow after earning interest is known as the future value 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 made presently. 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 present value. Net Present Value = Present value initial cash out flow

1 k
j 1



St = the cash flow in time period t I0 = the initial investment outlay in time zero k = the required rate of return on the project N = the projects economic life in periods

Consider an investment today of $100, that brings net gains of $100 each year for 6 years. The future values and present values of these cash flow events might look like this:

All 3 sets of bars represent the same investment cash flow stream. The black bars stand for cash flow figures in the currency units when they actually appear in the future (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, the net cash flow expected is $500, but the Net Present Value today is discounted to something less.