Ch 1

Ten Principles of
Economics
In this chapter, look for the answers to
these questions:
 What kinds of questions does economics
address?
 What are the principles of how people make
decisions?
 What are the principles of how people interact?
 What are the principles of how the economy as a
whole works?

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 2

 Ten Principles of Economics

• Economy, “oikonomos” (Greek)

– “One who manages a household”
– Households and economies have much in
common
• Households face many decisions
– Allocate scarce resources
• Ability, effort, and desire

• Society faces many decisions

– Allocate resources and output

3
 Ten Principles of Economics
• Resources are scarce
• Scarcity
– The limited nature of society’s resources
– Society has limited resources and therefore cannot
produce all the goods and services people wish to
have
• Economics
– How society manages its scarce resources
– How people make decisions

4
 Ten Principles of Economics
• Economists study:
– How people make decisions
• Work, buy, save, invest
– How people interact with one another
– Analyze forces and trends that affect the
economy as a whole
• Growth in average income
• Fraction of the population that cannot find work
• Rate at which prices are rising

5
 Ten Principles of Economics
• How people make decisions
1. People face trade-offs
2. The cost of something is what you give up to
get it
3. Rational people think at the margin
4. People respond to incentives

6
 Ten Principles of Economics
• How people interact
5. Trade can make everyone better off
6. Markets are usually a good way to organize
economic activity
7. Governments can sometimes improve market
outcomes

7
 Ten Principles of Economics
• How the economy as a whole works
8. A country’s standard of living depends on its
ability to produce goods and services
9. Prices rise when the government prints too
much money
10. Society faces a short-run trade-off between
inflation and unemployment

8
 HOW PEOPLE MAKE DECISIONS

 Decision making is
at the heart of
economics.
 The first four
principles deal with
how people make
decisions.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 9

 HOW PEOPLE MAKE DECISIONS

Principle
Principle #1:
#1: People
People Face
Face Tradeoffs
Tradeoffs

All decisions involve tradeoffs. Examples:

 Going to a party the night before your midterm
leaves less time for studying.
 Having more money to buy stuff requires working
longer hours, which leaves less time for leisure.
 Protecting the environment requires resources
that might otherwise be used to produce
consumer goods.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 10

 How People Make Decisions

Principle 1: People face trade-offs

• “There ain’t no such thing as a free lunch”
– To get something that we like, we usually have
to give up something else that we also like
• Making decisions
– Trade off one goal against another

11
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 12
 How People Make Decisions

• Trade offs
– Students: time
– Parents: income
– Society
• National defense vs. consumer goods (guns vs.
butter)
• Clean environment vs. high level of income
• Efficiency vs. equality

13
 How People Make Decisions
• Efficiency
– Society getting the maximum benefits from its
scarce resources
– Size of the economic pie
• Equality
– Distributing economic prosperity uniformly
among the members of society
– How the pie is divided into individual slices

14
 HOW PEOPLE MAKE DECISIONS

Principle
Principle #1:
#1: People
People Face
Face Tradeoffs
Tradeoffs
 Society faces an important tradeoff:
efficiency vs. equity
 efficiency: getting the most out of scarce
resources
 equity: distributing prosperity fairly among
society’s members
 Tradeoff: To increase equity, can redistribute
income from the well-off to the poor.
But this reduces the incentive to work and produce,
and shrinks the size of the economic “pie.”
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 15
AGRICULTURE
•Unveiling the third tranche of the Rs 20-lakh crore
Covid economic package as part of the
‘Atmanirbhar Bharat Abhiyan (self-reliant
campaign)’, the Finance Minister announced a set
of measures for agriculture and allied activities,
including fisheries. The major announcements
included setting up of a Rs 1 lakh crore
agriculture infrastructure fund for farm-gate
infrastructure, and a Rs 10,000 crore scheme
for the formalization of micro food
enterprises.
MSME
•Emergency Credit Line Guarantee scheme,
3,00,000 crore
STARTUP
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS
•RBI 16
revised priority sector lending target
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 17
 The world’s top 10 richest persons
(August 30, 2022):
Bloomberg Billionaires Index.

Elon Musk: $251B

Jeff Bezos: $153B
Gautam Adani: $137B
Bernard Arnault: $136B
Bill Gates: $117B
Warren Buffett: $100B
Larry Page: $100B
Sergey Brin: $95.8B
Steve Ballmer: $93.7B
Larry Ellison: $93.3B:
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 18
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 19
Question. Describe some of the trade offs:

• A family deciding to buy new car

• Decide whether to take vacation
• Government deciding how much to spend on
national parks
• A company president deciding whether to open
a new factory

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 20

 HOW PEOPLE MAKE DECISIONS

Principle
Principle #2: #2: TheThe Cost
Cost ofof Something
Something Is
Is What
What
You
You Give
Give Up
Up to
to Get
Get ItIt
People face trade-offs
People face trade-offs
 Making decisions
 Requires comparing the costs and benefits of
alternative choices.
The opportunity cost of any item is
 whatever must be given up to obtain it.
It is the relevant cost for decision making.
“The cost involved in any decision consists of the
sacrifices of alternatives required by that decision. If
there are no sacrifices, there is no cost.”
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 21
 HOW PEOPLE MAKE DECISIONS

Principle
Principle #2:
#2: The
The Cost
Cost ofof Something
Something Is
Is What
What
You
You Give
Give Up
Up to
to Get
Get ItIt
Examples:
The opportunity cost of…
…going to college for a year is not just the tuition,
books, and fees, but also the foregone wages.
…seeing a movie is not just the price of the
ticket, but the value of the time you spend in
the theater.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 22

 Questions
Q1. You were planning to spend Saturday working at your part
time job, but a friend ask you to go for party. What is the
true cost of going party?
Q2. You have choice between spending the Rs. 1,00,000 now
or putting it for a year in bank/stock market/mutual fund/
lottery. What is the opportunity cost of spending rupees?
Q4 You are trying to decide whether to take a vacation. Most
of the costs of vacation are measured in rupees, but the
benefits of the vacation are psychological. How can you
compare benefits to cost?

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 23

 HOW PEOPLE MAKE DECISIONS

Principle
Principle #3:
#3: Rational
Rational People
People Think
Think at
at the
the Margin
Margin
 A method for systematically selecting among
possible choices that is based on reason and facts.
 A person is rational if she systematically and
purposefully does the best she can to achieve her
objectives.
 Many decisions are not “all or nothing,”
but involve marginal changes – incremental
adjustments to an existing plan.
 Evaluating the costs and benefits of marginal
changesTEN
CHAPTER 1
is an important part of decision making.
PRINCIPLES OF ECONOMICS 24
 How People Make Decisions, #3

• Rational decision maker

– Make decisions by comparing
marginal benefits and marginal
costs
– Take action only if:
• Marginal benefits > Marginal
costs

25 25
 HOW PEOPLE MAKE DECISIONS

Principle
Principle #3:
#3: Rational
Rational People
People Think
Think at
at the
the
Margin
Margin
Examples:
 A student considers whether to go to college
for an additional year, comparing the fees &
foregone wages to the extra income he could earn
with an extra year of education.
 Cost of Flight or train
 A firm considers whether to increase output,
comparing the cost of the needed labor and
materials to the extra revenue.
 Sunk cost
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 26
Question on Sunk Cost
You are selling your 1996 Mercedes. You have
already spent $1000 on repairs.
At the last minute, the transmission dies. You can
pay $600 to have it repaired, or sell the car “as is.”
In each of the following scenarios, should you have
the transmission repaired?
A. Book value is $6500 if transmission works,
$5700 if it doesn’t
B. book value is $6000 if transmission works,
$5500 if it doesn’t

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 27

ANSWER
Cost of fixing transmission = $600
A. Book value is $6500 if transmission works,
$5700 if it doesn’t
Benefit of fixing the transmission = $800
($6500 – 5700).
It’s worthwhile to have the transmission fixed.
B. Book value is $6000 if transmission works,
$5500 if it doesn’t
Benefit of fixing the transmission is only $500.
Paying $600 to fix transmission is not
worthwhile.
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 28
Observations:
 The $1000 you previously spent on repairs is
irrelevant. What matters is the cost and benefit
of the marginal repair (the transmission).
 The change in incentives from scenario A
to scenario B caused your decision to change.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 29

Questions
1. Company that you manage has invested $5 million in
developing a new product, but the development is not
quite finished. At a recent meeting, your sales people
report that the introduction of competing products has
reduced the expected sales of your new product to $3mi.
If it would cost $1mi. to finish development & make the
product, should you go ahead & do so? What is the most
you should pay to complete development?
2. You win Rs. 1000 in a basketball pool. You have a
choice between spending the money now or putting it
away for a year in a bank account that pays 5% interest.
What is the OC of spending Rs. 1000 now?
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 30
 HOW PEOPLE MAKE DECISIONS

Principle
Principle #4:
#4: People
People Respond
Respond to
to Incentives
Incentives
 Incentive: something that induces a person to
act, i.e. the prospect of a reward or punishment.
 Rational people respond to incentives because
they make decisions by comparing costs and
benefits. Examples:
• In response to higher petrol prices, sales of CNG
kits rise.
• Students’ specialization respond to availability of
jobs

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 31

 How People Make Decisions,
#4
Principle 4: People respond to incentives
• Incentive
– Something that induces a person to act
– Higher price
• Buyers - consume less
• Sellers - produce more
– Public policy
• Change costs or benefits
• Change people’s behavior

• High prices of crude oil - its impact

32
32
 COVID 19 IMPACT
• Social change
• Behavioural change
• Organizational change
• Cultural change
• Change in lifestyle
• ‘Janata Curfew’ , Do Gaj ki Doori Hai Bahoot
Zaroori, Do Gaj ki Doori Mask hai Zaroori, Pahle
Davaai, Phir Dhilaai…

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 33

• Cyclone Asna to form in Arabian Sea (30th Aug ‘24)
• A deep depression over the Saurashtra and Kutch
areas of Gujarat is expected to heighten into
Cyclone Asna on Friday, marking a rare prevalence
for August.
• Last year, Cyclone 'Biparjoy' has affected 1.33 lakh
hectare area and projected a total economic loss of
₹ 1212.50 crore in agriculture and horticulture crops
in Gujarat.
• Expected loss would be around $7.82 billion
(2024 USD)
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 34
 Many public policies change the costs and
benefits that people face. Sometimes
policymakers fail to understand how policies alter
incentives and behavior.
 Example: Seat belt laws increase the use of seat
belts and lower the incentives of individuals to
drive safely. This leads to an increase in the
number of car accidents.
 Example: Helmet cases
 Example: Sun Film in Vehicles
 Negative impact of “Janata Cerfew”, MANREGA
project TEN
CHAPTER 1 ?? PRINCIPLES OF ECONOMICS 35
 HOW PEOPLE INTERACT

 An “economy” is just
a group of people
interacting with
each other.
 The next
three principles
deal with how people
interact.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 36

 HOW PEOPLE INTERACT

Principle
Principle #5:
#5: Trade
Trade Can
Can Make
Make Everyone
Everyone Better
Better
Off
Off
 Rather than being self-sufficient, people can
specialize in producing one good or service
and exchange it for other goods.
 Countries also benefit from trade & specialization:
• get a better price abroad for goods they
produce
• buy other goods more cheaply from abroad
than could be produced at home

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 37

 How People Interact, #5

Principle 5: Trade can make everyone

better off
•Trade
– Allows each person to specialize in
the activities he or she does best
– Enjoy a greater variety of goods
and services at lower cost

38 38
• Acc. to the Commerce Ministry data, China was India's top
trading partner from 2013-14 till 2017-18 and also in 2020-
21.
• Before China, the UAE was the country's largest trading
partner. The US was the largest partner in 2021-22 and
2022-23.
• Exports (merchandise):The top exports of India
are Refined Petroleum ($86.2B), Diamonds ($25.9B),
Packaged Medicaments ($19.5B), Jewellery ($12.6B), and
Rice ($11.1B).
• Imports (merchandise):The top imports of India are
Crude Petroleum ($170B), Coal Briquettes ($58.7B), Gold
($35.8B), Petroleum Gas ($32B), and Diamonds ($26.1B).

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 39

Latest Trends of India’s Foreign Trade(2024)
• China has overtaken the US as India's largest
trading partner, with a total two-way commerce
of $118.4 billion, in the FY 2023-24.
– India's exports to China rose by 8.7% to $16.67
billion, while imports increased by 3.24% to $101.7
billion.
– India’s exports to the US dipped slightly to $77.5
billion, and imports decreased by about 20% to $40.8
billion (the two-way commerce stood at $118.3
billion).
• The UAE with USD 83.6 billion, was the third largest
trading partner of India. It was followed
by Russia
CHAPTER ($65.7
1 TEN billion),
PRINCIPLES Saudi Arabia ($43.4 billion),
OF ECONOMICS 40
Israeli technology to transform Indian agriculture
• Agriculture, the backbone of Indian economy,
has been facing various challenges in recent years-
Lower productivity, resource crunch and erratic
weather, all of these translating into lower returns.
• Israel is the example for the world in optimizing the use of water
in general and agriculture in particular. India has openly embraced
Israel for this. Micro Irrigation Incubated in Israel and gradually
spread worldwide, micro irrigation has proven to be a technology
which has the potential to change the face of Indian agriculture.
•Israeli water management technology to help Indian farmers
•A well established leader in water management, desalination and
recycling techniques, Israel has set a template for reusing
wastewater for irrigation. It treats 80 per cent of its domestic
wastewater, which is recycled for agricultural use and constitutes
nearly 50 per cent of the total water used for agriculture.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 41

 Questions
 Q1. Your roommate is better cook than you are, but you can
clean more quickly than your roommate can. If your roommate
did all the cooking & you did all the cleaning, would it take less
or more time if you divide each task evenly? Give similar
example of how specialization and trade can make two
countries better off.
 Q2. Nation with corrupt police and court system typically have
lower standards of living than nation with less corruption. Why
might that be the case? (India 76 least out of 175 countries)
 Q3. You are planning to spend Saturday working at your part
time job, but a friend asks you to go for picnic. What is the true
cost of going for picnic? Now suppose that you are planning to
spend the day studying at the library. What is the cost of going
to picnic in this case? Explain.
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 42
 Least Corrupt Countries (Corruptions Perception Index 2021)
Corruption
Country Corruption Score Population 2021
Rank
Denmark 1 88 5813.298
New Zealand 2 87 4860.643
Sweden 3 85 10160.169
Singapore 3 85 5896.686
Finland 3 85 5548.36
Gabon 4 31 2278.825
Norway 7 84 5465.63
Netherlands 8 82 17173.099
Canada 9 81 38067.903
Luxembourg 9 81 634.814
Germany 11 80 83900.473
United Kingdom 11 80 68207.116
Australia 13 77 25788.215
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 43
 Most Corrupt Countries (Corruptions Perceptions Index 2021)
Corruption
Country Corruption Rank Population 2021
Score
Iraq 168 18 41179.35
Venezuela 168 18 28704.954
Burundi 170 17 12255.433
Libya 170 17 6958.532
Sudan 172 16 44909.353
Afghanistan 172 16 39835.428
Yemen 176 14 30490.64
North Korea 176 14 25887.041
Syria 178 13 18275.702
South Sudan 178 13 11381.378
Somalia
CHAPTER 1 180
TEN PRINCIPLES OF ECONOMICS 10 16359.50444
 What makes these countries
the best countries to live in
the world in 2024?
.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 45

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 46
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 47
 HOW PEOPLE INTERACT

Principle
Principle #6:
#6: Markets
Markets Are
Are Usually
Usually A
A Good
Good
Way
Way to
to Organize
Organize Economic
Economic Activity
Activity
 A market is a group of buyers and sellers.
(They need not be in a single location.)
 “Organize economic activity” means determining
• what goods to produce
• how to produce them
• how much of each to produce
• who gets them

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 48

 HOW PEOPLE INTERACT

Principle
Principle #6:
#6: Markets
Markets Are
Are Usually
Usually A
A Good
Good
Way
Way to
to Organize
Organize Economic
Economic Activity
Activity
 In a market economy, these decisions result from
the interactions of many households and firms.
 Famous insight by Adam Smith in
The Wealth of Nations (1776):
Each of these households and firms
acts as if “led by an invisible hand”
to promote general economic well-being.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 49

 HOW PEOPLE INTERACT

Principle
Principle #6:
#6: Markets
Markets Are
Are Usually
Usually A
A Good
Good
Way
Way to
to Organize
Organize Economic
Economic Activity
Activity
 The invisible hand works through the price system:
• The interaction of buyers and sellers
determine prices of goods and services.
• Each price reflects the good’s value to buyers
and the cost of producing the good.
• Prices guide self-interested households and
firms to make decisions that, in many cases,
maximize society’s economic well-being.
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 50
 Walmart now owns an 82.3% stake in Flipkart,
with US-based hedge fund Tiger Management,
China's Tencent, Accel Partners and Microsoft
Corp., among the other key investors. The IPO
will offer an opportunity to minority investors to
sell or pare their holdings.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 51

 Rank Industry In rupees

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 52

Post-merger, public sector banks (PSBs) have seen an
improvement in profitability in the year ended March 2021 despite
the coronavirus pandemic induced disruptions.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 53

 HOW PEOPLE INTERACT

Principle
Principle #7:
#7: Governments
Governments Can
Can Sometimes
Sometimes
Improve
Improve Market
Market Outcomes
Outcomes
 Important role for govt: enforce property rights
(with police, courts)
 People are less inclined to work, produce, invest, or
purchase if large risk of their property being stolen.
• A restaurant won’t serve meals if customers
do not pay before they leave.
• A music company won’t produce CDs if too many
people avoid paying by making illegal copies.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 54

 India's Rs 20 lakh crore Covid relief
package one among the largest in the
world

Provision of ₹11,11,111 crore for

infrastructure (3.4% of GDP) (Budget
‘24-’25)

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 55

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 56
List of Important schemes launched by Modi
Government:

1.Atmanirbhar Bharat Abhiyan

2.PM-KISAN (Pradhan Mantri Kisan Samman Nidhi)
Scheme
3.PM Garib Kalyan Yojana (PMGKY)
4.Jan Dhan Yojana
5.Skill India Mission
6.Make in India
7.Swachh Bharat Mission
8.Sukanya Samriddhi Scheme – Beti Bachao Beti
Padhao
9.Ujala Yojna
10.Atal Pension Yojana
11.Prime Minister Jeevan Jyoti Bima Yojana
12.Digital India Mission
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 57
13.Start-up India
 HOW PEOPLE INTERACT

Principle
Principle #7:
#7: Governments
Governments Can
Can Sometimes
Sometimes
Improve
Improve Market
Market Outcomes
Outcomes
 Govt may alter market outcome to promote efficiency
 Market failure, when the market fails to allocate
society’s resources efficiently. Causes:
• Externalities, when the production or consumption
of a good affects bystanders (e.g. pollution)
• Market power, a single buyer or seller has
substantial influence on market price (e.g. monopoly)
 In such cases, public policy may increase efficiency.
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 58
 HOW PEOPLE INTERACT

Principle
Principle #7:
#7: Governments
Governments Can
Can Sometimes
Sometimes
Improve
Improve Market
Market Outcomes
Outcomes
 Govt. may alter market outcome to promote equity
 If the market’s distribution of economic well-being
is not desirable, tax or welfare policies can change
how the economic “pie” is divided.

 Ques.: Update regarding different schemes of

present central government.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 59

Questions
I State & explain whether the activities motivated by
equity or efficiency. Also discuss type of market failure
in case of efficiency.
1. Regulating Electrical Utilities
2. Providing some poor people with voucher that can
be used to buy food
3. Prohibiting smoking in Public places
4. Evaluating mergers of Indian companies
5. Providing unemployment insurance
6. Imposing higher personal income tax rates on
people with higher incomes
7. Instituting laws against driving while intoxicated
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 60
Questions & Answers
I State & explain whether the activities motivated by equity or
efficiency. Also discuss type of market failure in case of efficiency :
1. Regulating Electrical Utilities - Efficiency: The market failure
comes from the market power of the Electrical Utilities firm.
2. Providing some poor people with voucher that can be used to buy
food – Equity
3. Prohibiting smoking in Public places – Efficiency, Externality
arises because secondhand smoke harms nonsmokers.
4. Evaluating mergers of Indian companies - Efficiency: The market
failure comes from the market power of the Electrical Utilities firm.
5. Providing unemployment insurance - Equity
6. Imposing higher personal income tax rates on people with higher
incomes – Equity
7. Instituting laws against driving while intoxicated – Efficiency,:
There is an externality because of accidents caused by drunk
drivers.
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 61
HOW THE ECONOMY AS A WHOLE WORKS

 The last three

principles deal with
the economy as a
whole.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 62

 HOW THE ECONOMY AS A WHOLE WORKS

Principle
Principle #8:
#8: A A country’s
country’s standard
standard of
of living
living
depends
depends onon its
its ability
ability to
to produce
produce goods
goods & &
services.
services.
 Huge variation in living standards across
countries and over time:
• Average income in rich countries is more than
ten times average income in poor countries.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 63

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 64
 HOW THE ECONOMY AS A WHOLE WORKS

Principle
Principle #8:
#8: A A country’s
country’s standard
standard of
of living
living
depends
depends onon its
its ability
ability to
to produce
produce goods
goods & &
services.
services.
 The most important determinant of living standards:
productivity, the amount of goods and services
produced per unit of labor.
 Productivity depends on the equipment, skills, and
technology available to workers.
 Other factors (e.g., labor unions, competition from
abroad) have far less impact on living standards.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 65

India is widely considered to be an emerging global power due to its
growing economy, large population, and increasing role in
international affairs. Some reasons for India's emergence as a
global power include:

• Large and growing market: India's population and rising middle

class provide a large domestic market with high consumer demand.

• Skilled workforce: India has a large and skilled technical workforce

with expertise in science, technology, and engineering.

• Fastest growing economy: India is the fastest growing emerging

economy.

• G20 presidency: India assumed the presidency of the G20 in

2023, which was a landmark year for the country.

• Advanced
CHAPTER 1energy solutions:
TEN PRINCIPLES India is emerging as a global
OF ECONOMICS 66
The Economic Diplomacy of India
• These efforts are aimed at boosting economic growth, increasing trade
opportunities, and enhancing diplomatic ties.
• India has been actively involved in regional trade agreements,
including the South Asian Free Trade Agreement (SAFTA) within
the South Asian Association for Regional Cooperation (SAARC) and the
Bay of Bengal Initiative for Multi-Sectoral Technical and Economic
Cooperation (BIMSTEC).

•Result: Trade and investment prospects have grown significantly over

the past ten years as a result of the India Act policy. The value of goods
exchanged between India and ASEAN nations increased.

• India adopted the initiative to cooperate with other countries to improve

trade relations and has signed 13 free trade agreements (FTAs) with
countries like Japan, South Korea, United Arab Emirates and Australia.
Free Trade Agreements (FTAs) are agreements that two or more
countries freely sign to remove trade and investment barriers including
tariffs, import quotas, and export restrictions.
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 67
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 68
 HOW THE ECONOMY AS A WHOLE WORKS

Principle
Principle #9:
#9: Prices
Prices rise
rise when
when the
the government
government
prints
prints too
too much
much money.
money.
 Inflation: Increases in the general level of prices.

 In the long run, inflation is almost always caused

by excessive growth in the quantity of money,
which causes the value of money to fall.
 The faster the govt. creates money,
the greater the inflation rate.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 69

• Retail price inflation in India jumped to 7.44% in July 2023,
the highest since April 2022, compared to an upwardly
revised 4.87% in June and market forecasts of 6.4%.

• India's retail inflation eased to 3.54% in July, from

5.08% in June and 4.75% in May 2024, according to the
latest Ministry of Statistics and Programme
Implementation data. It is the first time in nearly five
years that India's CPI inflation fell below RBI's target of
4%. (Aug ‘24)
source: Ministry of Statistics and Programme Implementation
(MOSPI)

• This is based on the All India Consumer Price Index

(CPI). The inflation rate for rural India was 4.10%, while
theCHAPTER
rate for1 urban India OF
TEN PRINCIPLES was 2.98%.
ECONOMICS 70
 ZIMBABWE INFLATION
 Inflation spiraled to 500 billion percent. (2016)
 December, 2007, a new note of 500,000
dollars introduced to the market
 Next - 750,000 dollars.
 January 2008 – a new note of 10 million dollars.
 This US $10 dollar note is 10 times worth more
than the 10 million dollars Zimbabwe note.
 This guy is going to a supermarket. The
exchange rate is 25 million Zimbabwe dollars for 1 US dollar.
 This mountain of cash is worth 100 US Dollars.
 Once considered the "breadbasket of Africa," Zimbabwe is
now struggling to feed its population.
 Zimbabweans To Pay 35 Quadrillion Local
Dollars For $1 As Currency Dies (1015).

Annual inflation rate up 352 percent 71

(https://www.youtube.com/watch?v=78-BlZXm7wA)
Türkiye (63.9%), Iran (32.8%), and Nigeria (16.9%). 72
 HOW THE ECONOMY AS A WHOLE WORKS

Principle
Principle #10:
#10: Society
Society faces
faces aa short-run
short-run
tradeoff
tradeoff between
between inflation
inflation and
and unemployment
unemployment
 In the short-run (1 – 2 years),
many economic policies push inflation and
unemployment in opposite directions.
 Other factors can make this tradeoff more or less
favorable, but the tradeoff is always present.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 73

The Centre for Monitoring Indian Economy, a private
organization (CMIE), estimates India's unemployment rate in
India is around 7.95% at present. It is 7.93% in urban India
whereas only 7.44% in rural India. India's daily and monthly
unemployment rates are made public by CMIE on 1st March
2023.

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 74

 Ten Principles of Economics
1. People face trade offs
2. The cost of something is what you give up to get it
3. Rational people think at margin
4. People respond to incentives
5. Trade can make everyone better off
6. Markets are good way to organize economic activity
7. Governments can sometimes improve market outcomes
8. A countries ability depends on its ability to produce goods &
services
9. Price rises when government prints too much money
10.Society faces a short run trade off between inflation &
unemployment

75
 (Live Mint , Jul 2018)
• SpiceJet has come up with “Mega Monsoon Sale”, offering flight tickets from an all-inclusive Rs 999. It is
applicable on travel till 8 October, 2018.
• SpiceJet launched its first daily direct flight between Kanpur and Delhi under the air regional
connectivity UDAN scheme. With the addition of the Delhi-Kanpur-Delhi flight, SpiceJet now operates 15
flights under the UDAN scheme.
• Indigo is offering all inclusive air fares starting at Rs 789 for the travel period of July 1 to September 30
this year.
• GoAir has also come up with a monsoon sale, offering flight tickets starting Rs 999. The booking
period for GoAir offer closes on 6 July and is applicable on travel between 10 July and 30 September,
2018.
• Jet Airways, on the other hand, has a 20% discount on the domestic fares of its domestic flight tickets for
travel period from July 8 to September 30. While the discount on Spice Jet is applicable for both, direct
and layover flights, the Jet Airways offer is only valid on direct flights, Cleartrip said on its website, while
listing offers by all the three airlines.
1. Principle #1 : People face trade offs

2. Principle #3 : Rational people think at margin

3. Principle #4 : People respond to incentives

4. Principle #6 : Markets are good way to organize eco. activity

5. Principle #8 : A countries ability depends on its ability to produce goods & services

76
 New electric vehicle
(EV) subsidy scheme
• The new electric vehicle (EV) subsidy scheme, PM E-Drive offer a
Rs 10,000 subsidy on every electric 2-wheeler sold up to March
2025, with the support being halved in the next financial year.
There will be a subsidy of Rs 50,000 for every electric 3-wheelar
as the govt seeks to promote green public transport, which will be
reduced to 25,000 from April ‘25.
1. Principle #1 : People face trade offs
2. Principle #3 : Rational people think at margin
3. Principle #4 : People respond to incentives
4. Principle #6 : Markets are good way to organize eco. activity
5. Principle #8 : A countries ability depends on its ability to produce goods &
services
6. 7# Governments can sometimes improve market outcomes

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 77

 Adani Group denies ’baseless’ claims of
‘involvement’ in Swiss Bank accounts,
refutes Hindenburg’s allegations (13th Sep
‘24)
• The Adani Group, an Indian business conglomerate, strongly
refuted claims regarding the freezing of funds in Swiss bank
accounts in a media statement on September 12.
• US-based short seller Hindenburg Research on social media
platform X claimed that Swiss authorities had frozen over $310
million across multiple Swiss bank accounts as part of an
investigation into the Adani Group.
• The Adani Group concluded by reaffirming its commitment to
transparency and compliance with all legal and regulatory
requirements, while condemning what it views as baseless
allegations against the company.
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 78
 After Reliance, Tata Group & Adani, set to
announce AI partnership with NVIDIA (Sep ‘24)
• The partnership done to boost India's artificial intelligence and
semiconductor chip ambitions.
• The partnership will help develop an indigenous foundation large language
model trained on the nation's diverse languages and tailored for generative
Al applications.
• NVIDIA will provide Jio with end-to-end AI supercomputer technologies
including CPU, GPU, networking, and AI operating systems and frameworks
for building the most advanced AI models. Jio will manage and maintain the
AI cloud infrastructure and oversee customer engagement and access.
• As per details, the AI infra will be hosted by data centers that will expand to
2,000 MW.
Principle #1 , #3, #4, #6, #7 & #8

79
Maruti Suzuki posted its highest market share in more
than a decade in July (TOI, 12th Aug 17)
* Almost one in every two passenger vehicles rolled
out of the country's manufacturing plants had a
Maruti badge on it.
* The maker of the Alto and Wagon
R are in high demand
* Maruti manufactured 1,10,405 of
the 2,22,368 units dispatched by passenger
vehicle makers in July, when its local sales
rose 22%. It maintained a sales mark of over 1 lakh
since the beginning of the fiscal year.

Principle #1 : People face trade offs

Principle #3 : Rational people think at margin
Principle #4 : People respond to incentives
Principle #6 : Markets are good way to organize eco.
activity
Principle # 8:A countries ability depends on its ability
80
India to overtake US
Smartphone market by
2017
• The market is expected to continue to grow in double-digits over the next
few years as people switch to smartphones and gradually upgrade to 4G-
enabled phones. (TOI, 11th Aug 15)
• By 2017, we expect India to overtake USA to be the second largest
smartphone market globally
• Samsung maintained its leadership in the Indian smartphone market with
23% share, followed by Micromax (17%), Intex (11%), Lava (7%) and
Lenovo (6%).
• As China started to slow down, most vendors from the country have
targeted India as the next big growth market for smartphones
• Principles
# 1 People face trade offs
#3 Rational people think at margin
#4 People respond to incentives
#5 Trade can make everyone better off
#6 Markets are good way to organize economic activity
#8 A countries ability depends on its ability to produce goods & services
81
India's GDP growth is likely
to revive to 7.9% in the
current financial year, driven
by structural reforms and
cyclical easing of the
monetary policy.
• As China's Growth Loses Speed, All Eyes On Upcoming India Budget
• China’s GDP growth rate was 7.4% in 2014 and India’s GDP growth rate
around 5%. But the world’s second most-populous country with 1.2 billion
people has much going for growth & stabilisation.
• It further will increase up to 8.1 per cent in 2016-17
• Principles
#7 Governments can sometimes improve market outcomes
#8 A countries ability depends on its ability to produce goods &
services

82
The
The Flipkart-Walmart
Flipkart-Walmart deal
deal is
is aa
game
game changer
changer (May
(May 2018)
2018)
 The Flipkart-Walmart deal is expected to create jobs & efficient
agriculture supply chains, and increase the flow of FDI through
a cascading effect on other industries
 Marriage between the iconic American brick-and-mortar
company and an Indian e-commerce start-up that has shaken
up the retail and e-commerce scene in India.
 Beyond the sheer size of the investment—a whopping $17
billion for a 77% stake—the deal is a game changer for US-India
commercial ties.
 Walmart’s inv. demonstrates India’s growth as a formidable
marketplace, one with the potential to transform the entire retail
and e-commerce sector, connect with consumers efficiently
through robust e-commerce platform & create jobs for the rural
economy
CHAPTER 1through Walmart’s
TEN PRINCIPLES immense supply chains mngt. 83
OF ECONOMICS
RBI using forex reserves 'sensibly' to defend rupee,
lower outflow in festive season (TOI, 10/09/2022)

•The Indian rupee, which was falling since the start of

calendar year 2022 and touched lifetime lows multiple
times, was defended by the Reserve Bank of India (RBI)
multiple times in a prudent manner by spending the
country's forex reserves.

•RBI's website, the central bank, since the start of this

calendar year, has spent $94.752 billion till date to defend
rupee from a free fall.

•As on August 26, the forex reserve of the country was

$561.046 billion, sharply lower from $633.614 billion as on
December 31, 2021.
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 84