INTRODUCTION TO

ECONOMICS

WHY STUDY ECONOMICS?

Why should I study economics?

Let us count the way:
Many study economics to help them get a good job
Some study economics to understand the economy
of a nation. Why and how global financial crisis
affect all of us?
Or people want to understand what kind of policies
are good for a nations economic growth
What it means to say when a MacBook is made in
the USA?
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All these reasons, an many more, make good

sense.
Without studying economics, you can't informed
about a countries growth, employment scenario,
market structure, international trade, tax policy,
fiscal and monetary policy or the causes of global
economic crisis, etc.
Choosing your lifes occupation is the most
important economic decision you will make.
Your future depends not only on your own abilities
but also on how a national and regional economic
forces affect your wages.
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WHAT IS ECONOMICS?

Economics is the social science that analyzes the

production, distribution, and consumption of goods
and services.
Economics is the study of how societies use scarce
resources to produce valuable goods and services
and distribute them among different individuals.
Economics the study of how people use their
scarce resources to satisfy their unlimited wants

THE ART AND SCIENCE OF

ECONOMIC ANALYSIS
You have been hearing about economics issues for
years:
Unemployment, Inflation, poverty, fiscal deficits,
stock prices, computer prices, etc.
When explanations of these issues go into any
depth, you may feel confused.
Economics is about making choices
Get part-time job or focus on your study
Live in hostel or rent a room outside campus
Choosing non-CSE streams at IITs vs CSE at NITs

Taking a course on Economics or Psychology or

English or Sociology

THE ECONOMIC PROBLEM

Unlimited
Needs &
Wants

Limited
Resources

Scarcity
Choices

WHAT
to
produc
e

HOW
to
produ
ce

FOR
WHOM
to
produce

THE ECONOMIC PROBLEM

Would you like a nicer home, a new car, better
meals, more free time, more spending money, more
sleep? Who wouldnt?
But even if we satisfy some of these desires, other
keep popping up.
The problem is that, although your wants, or
desires are virtually unlimited, the resources
available to satisfy these wants are scarce.
A resource is scarce when it is not freely available.
When price exceeds zero.
Labour, capital, natural resources, and
entrepreneur

WHY SHOULD AN ENGINEER LEARN

ECONOMICS?
An Engineer innovates new things by knowing the
subject of engineering and sciences.
But
by having knowledge of economics and
management, you can better perform in this
competitive world.
Rational Decision-Making Process

Predicting Future

To understand the large-scale engineering projects

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RATIONAL DECISION-MAKING PROCESS

1.
2.
3.
4.
5.
6.

Identify a problem
Define the goals or
objectives
Collect all the relevant
information
Identify a set of feasible
decision alternatives
Select the decision
criterion to use
Select the best alternative
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ENGINEERING ECONOMIC
DECISIONS
Manufacturing

Planning

Profit

Investment
Marketing
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PREDICTING THE FUTURE OF A

PRODUCT
Estimating

a required

investment
Forecasting a product
demand
Estimating a selling
price
Estimating a
manufacturing cost
Estimating a product
life

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ROLE OF ENGINEERS IN BUSINESS

ENVIRONMENT
Create & Design
Engineering Projects

Analyze

Evaluate

Production Methods
Engineering Safety
Environmental Impacts
Market Assessment

Expected
Profitability
Timing of
Cash Flows
Degree of
Financial Risk

Evaluate
Impact on
Financial
Statements
Firms Market
Value
Stock Price

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TEN PRINCIPLES OF ECONOMICS

Society and Scarce Resources:
The

management of societys resources is important because

resources are scarce.
Scarcity. . . means that society has limited resources and
therefore cannot produce all the goods and services people
wish to have.

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TEN PRINCIPLES OF ECONOMICS

How people make decisions.

People

face tradeoffs.
The cost of something is what you give up to get it.
Rational people think at the margin.
People respond to incentives.

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TEN PRINCIPLES OF ECONOMICS

How people interact with each other.

Trade

can make everyone better off.

Markets are usually a good way to organize economic
activity.
Governments can sometimes improve economic
outcomes.

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TEN PRINCIPLES OF ECONOMICS

The forces and trends that affect how the

economy as a whole works.
The

standard of living depends on a countrys

production.
Prices rise when the government prints too much
money.
Society faces a short-run tradeoff between inflation
and unemployment.

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PRINCIPLE #1: PEOPLE FACE

TRADEOFFS.
There is no such thing as a free lunch! There is no free
lunch because all goods and services involve a cost to
someone.

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PRINCIPLE #1: PEOPLE FACE

TRADEOFFS.
To get one thing, we usually have to give up
another thing.
Guns

v. butter
Food v. clothing
Leisure time v. work
Efficiency v. equity

Making decisions requires trading

off one goal against another.

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#1: PEOPLE FACE TRADEOFFS

Efficiency v. Equity

means society gets the most that it can

from its scarce resources.
Equity means the benefits of those resources are
distributed fairly among the members of society.
Efficiency

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PRINCIPLE #2: THE COST OF SOMETHING

IS WHAT YOU GIVE UP TO GET IT.

Decisions require comparing costs and benefits of

alternatives.
Whether

to go to college or to work?
Whether to study or go for watching movie?
Whether to go to class or sleep in?

The opportunity cost of an item is what you give up to

obtain that item.

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PRINCIPLE #3: RATIONAL PEOPLE

THINK AT THE MARGIN.

Marginal changes are small, incremental adjustments

to an existing plan of action.

People make decisions by comparing

costs and benefits at the margin.
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PRINCIPLE #4: PEOPLE RESPOND

TO INCENTIVES.
Marginal changes in costs or benefits motivate
people to respond.
The decision to choose one alternative over
another occurs when that alternatives marginal
benefits exceed its marginal costs!

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PRINCIPLE #5: TRADE CAN MAKE

EVERYONE BETTER OFF.
People gain from their ability to trade with one
another.
Competition results in gains from trading.
Trade allows people to specialize in what they do
best.

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PRINCIPLE #6: MARKETS ARE

USUALLY A GOOD WAY TO
ORGANIZE ECONOMIC ACTIVITY.

A market economy is an economy that allocates

resources through the decentralized decisions of
many firms and households as they interact in
markets for goods and services.
Households

decide what to buy and who to work for.

Firms decide who to hire and what to produce.

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PRINCIPLE #6: MARKETS ARE

USUALLY A GOOD WAY TO
ORGANIZE ECONOMIC ACTIVITY.

Adam Smith made the observation that households and

firms interacting in markets act as if guided by an
invisible hand.
Because

households and firms look at prices when deciding

what to buy and sell, they unknowingly take into account the
social costs of their actions.
As a result, prices guide decision makers to reach outcomes
that tend to maximize the welfare of society as a whole.

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PRINCIPLE #7: GOVERNMENTS CAN

SOMETIMES IMPROVE MARKET OUTCOMES.
Market failure occurs when the market fails to allocate
resources efficiently.
When the market fails (breaks down) government can
intervene to promote efficiency and equity.

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PRINCIPLE #7: GOVERNMENTS CAN

SOMETIMES IMPROVE MARKET OUTCOMES.

Market failure may be caused by

an

externality, which is the impact of one person or firms

actions on the well-being of a bystander.
market power, which is the ability of a single person or firm
to unduly influence market prices.

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PRINCIPLE #8: THE STANDARD OF LIVING

DEPENDS ON A COUNTRYS PRODUCTION.

Standard of living may be measured in different

ways:
By

comparing personal incomes.

By comparing the total market value of a nations
production.

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PRINCIPLE #8: THE STANDARD OF LIVING

DEPENDS ON A COUNTRYS PRODUCTION.
Almost all variations in living standards are explained
by differences in countries productivities.
Productivity is the amount of goods and services
produced from each hour of a workers time.

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PRINCIPLE #8: THE STANDARD OF LIVING

DEPENDS ON A COUNTRYS PRODUCTION.

Standard of living may be measured in different ways:

By

comparing personal incomes.

By comparing the total market value of a nations production.

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PRINCIPLE #9: PRICES RISE WHEN THE

GOVERNMENT PRINTS TOO MUCH MONEY.
Inflation is an increase in the overall level of
prices in the economy.
One cause of inflation is the growth in the
quantity of money.
When the government creates large quantities of
money, the value of the money falls.

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PRINCIPLE #10: SOCIETY FACES A

SHORT-RUN TRADEOFF BETWEEN
INFLATION AND UNEMPLOYMENT.

The Phillips Curve illustrates the tradeoff between

inflation and unemployment:
Inflation Unemployment

Its a short-run tradeoff!

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WHY STUDY ECONOMICS?

The economics profession thrive because its models
usually do better job of making economic sense out of a
confusing world than do alternative approaches.
Economists have been appointed as policy makers,
planners, advisor, etc.
Better job opportunities with high median earnings.
Economics major earned more than most of the other
professions barring few engineering streams, physics and
pharmacy.
Famous Economists:

Three of the last seven U.S. presidents, Billionaire Donald Trump

Former eBay president Meg Whitman, Fromer Microsoft Chief

Executive Officer Steve Ballmer, CNN founder Ted Turner, Intel
president Paul Otellini, high-tech guru Esther Dyson, etc.

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