Introducti

on to
Economics
 LEARNING OBJECTIVE

To understand the concept of

economy
To know the 3 vital processes
of an economy
Economy ???
 Economy ???

• Why do people
work ??
 Economy ???

• Why do people
work ??
• Where do people
work??
 Economy

 A.G. Brown defined

economy as a
" system by
which people get
a living."
 Economy
 An economy is a system which
provides people with the means
to work and earn a living in the
process of production.
 All the institutions and
organizations that enable
people to earn a living and at
the same time produce goods
and services to satisfy people’s
wants are collectively called an
Economy.
3 Vital processes
of an Economy ??
3 Vital processes
of an Economy
• Production
• Consumption
• Investment or
Capital formation
 LEARNING OBJECTIVE

• To understand
the need for
studying
economics.
Why study Economics??
Scarcity
Scarcity refers to the
limitation of supply in
relation to demand for a
resources.
It is universal and
everyone faces scarcity of
resources.
What does Scarcity give
rise to ??
What does Scarcity
give rise to ??

Scarcity gives
rise to the
problem of
choice.
What does Scarcity
give rise to ??

Scarcity gives rise

to the problem of
choice.
As scarcity and
choice go together.
What is Economics all
about ???
What is Economics
all about ???

Making choices
in the presence
of scarcity.
 EVALUATION

•‘Scarcity and choice go

together’. Discuss
 EVALUATION

•Why does problem of

choice arises for
producers and for
consumers?
 HOTS

• Only scarce goods command price’. Comment

• Although water is useful, it is cheap. On the
contrary diamond is not much of a use, yet it is
very expensive. Give an economic reason for this
paradox
 LEARNING OBJECTIVE

• To be aware of different
definitions of
economics
• To examine the
distinction between 2
branches of economics.
 ECONOMICS

 Economics comes from the

ancient Greek word
“oikonomikos” or “oikonomia.”
 Oikonomikos literally translates
to “the task of managing a
household.”
 ADAM SMITH
He is regarded as the Father of
Economics

Famous book
An Inquiry into the Nature and Causes of Wealth
of Nations (1776)
 ECONOMICS

Micro Economics
Macro Economics
 Micro Economics
 The term ‘micro’ has been derived from
Greek words ‘mikros’ which means
‘small’.
 Micro economics is that part of economic
theory , which studies the behaviour of
individual units of economy.
 Macro Economics
 The term ‘macro’ has been derived from
the Greek word ‘makros’ which means
large.
 Macro economics is that part of economic
theory which studies the behaviour of
aggregates of the economy as a whole.
Vs
 Difference between
Microeconomics and
Macroeconomics
• Meaning
• Basic Objective
• Other name
• Degree of Aggregation
• Tools
• Basic Assumption
• Example
Difference between Microeconomics
and Macroeconomics
EVALUATION
EVALUATION
 EVALUATION

• ‘Both micro economics and macro economics

have same degree of aggregation’.
Defend or Refute.
DEFINITION OF
GROWTH
DEFINITION
SCARCITY DEFINITION
 LEARNING OBJECTIVE

• To examine the
difference
between positive
and normative
economics
 Economics as a Science
Positive Science ?? Normative Science ??

• Ex-GDP is • Ex-Steps should

increasing at be taken to
the rate of 8% achieve 9%
growth rate in
per annum.
GDP.
 Economics as a Science
Positive Science Normative Science

• What is? • What ought to be?

• What should
• What was? happen?
• What will be ? • What should have
happened ?
BASIS POSITIVE NORMATIVE
ECONOMICS ECONOMICS

1. Meaning

2. Value
Judgments
3. Based on
4. Suggestive
5. Verification
6. Example
Basis POSITIVE NORMATIVE
ECONOMICS ECONOMICS
1. Meaning It deals with It deals with how
economic economic
problems and how problems should
they are actually be solved.
solved.
2. It does not It involves value
Value Judgments involve value judgements
judgements.
3. Based on It is based on real It is based on
facts individual
opinions and ideal
things.
4. Verification It can be verified It cannot be
verified
EVALUATION
 TEST
Q1. Define Economics. (1)
Q2. Define Economy. (1)
Q3. Who is regarded as the father of Economics? (1)
Q4. Distinguish between Microeconomics and Macroeconomics. (4)
Q5. Distinguish between Positive and Normative Economics. Use
examples. (4)
Q6. Although water is useful, it is cheap. On the contrary diamond
is not much of a use, yet it is very expensive. Give an economic
reason for this paradox. (4)
 LEARNING OBJECTIVE

• To analyse the
meaning and
the causes of
economic
problem.
Economic problem ??
Suppose you get an allowance
from parents.
What will be the problem of
choice for you ?
 Economic
problem
Economic Problem is a problem of
resource allocation or making
choices in the use of scarce
resources having alternative uses
for the satisfaction of unlimited
human wants.
Reasons for Economic problem ??
 Economic
problem
Economic Problem is a problem of
resource allocation or making
choices in the use of scarce
resources having alternative uses
for the satisfaction of unlimited
human wants.
Reasons for Economic problem ??
 Economic problem
Reasons For Economic problem
• Scarcity of resources
• Unlimited Human wants
• Alternate uses
 LEARNING OBJECTIVE

• To examine the
3 central
problems of an
economy.
Central Problems Of an Economy

Central problems that are faced by every

economy :
1.What to produce?
2.How to produce?
3.For whom to produce?
 1. What to produce ?
• This problem involves selection of goods and
services to be produced and the quantity to
be produced of each selected commodity.
• Choice among different types of good –
 Consumer &Capital goods
 Civil & War goods
 Public & Private goods
 Necessity & Luxury goods
• Guiding Principle – To allocate resources in
such a way that aggregate satisfaction is
maximized.
 2. How to produce ?

• This problem refers to selection of

technique to be used for production of
goods and services.
• Broadly, 2 techniques of production –
Labour intensive (more labor, less capital)
& Capital intensive (more capital, less
labor) Eg. Handloom and Powerloom to
produce cloth.
• Selection of technique depends on -
Availability of factors & their relative prices
• Guiding Principle - To use the most
efficient technique i.e produced max output
at min cost, with min possible resources.
3. For whom to produce
• This problem relates to the distribution
of produced goods and services among
individuals within the economy.
• It is about deciding who should consume
how much. It relates to who earns how
much as our earnings decide our
consumption
• Output is distributed among FOP in the
form of their money income
• Guiding Principle – To fulfill most urgent
wants of each FOP to maximum possible
extent
 EVALUATION
• Why do problems related to
allocation of resources in an
economy arise??
 HOTS
• Why does the problem of
‘what to produce’ arise?
• Why does problem of ‘how to
produce’ arise?
 Different
Different
possible Production
ways of
combination Possibilities
resource
s of goods &
allocation
services
 PRODUCTION POSSIBILITY CURVE
(PPC) OR
PRODUCTION POSSIBILITY
FRONTIER (PPF)
Different
Different
possible Production
ways of
combination Possibilities
resource
s of goods &
allocation
services
 LEARNING OBJECTIVES

•To examine the concept

of PPC and
Opportunity Cost
 PPC Schedule
PRODUCTION BREAD GUNS
POSSIBILITIE
S
A 0 15

B 1 14
C 2 12
D 3 9
E 4 5
F 5 0
PRODUCTION POSSIBILITY CURVE (PRODUCTION
POSSIBILITY FRONTIER)
 PRODUCTION POSSIBILITY
CURVE
(PRODUCTION POSSIBILITY
FRONTIER)
DEFINITION ????
 PRODUCTION POSSIBILITY CURVE
(PRODUCTION POSSIBILITY
FRONTIER)

It is a graphical representation of different

combinations of two goods that an economy
can produce with full & efficient utilization
of its given resources and the given
technology
 Assumptions of PPC

• The economy produces only two goods.

• There is no change in technology.
• Resources available are given and
constant.

• Resources are fully & efficiently used.

• Resources are not equally efficient in the
production of two goods that is a
What do these points
indicate?
Opportunity Cost
 Opportunity Cost
Opportunity cost of an activity –
It is the value of next best alternative forgone.
Opportunity cost of a good -
The amount of the other goods and services ,
that must be sacrificed to obtain more of any
one good , is called opportunity cost of that
good.
MARGINAL RATE OF TRANSFORMATION
(MARGINAL OPPORTUNITY COST)
MARGINAL RATE OF TRANSFORMATION
(MARGINAL OPPORTUNITY COST)
• It is the rate at which one good has to be
sacrificed in order to produce an extra/
additional unit of the other good.
• MRT =

MRT =
𝛥Y – Fall in the output of a Good
𝛥X – Increase in the output of the other Good.
 MARGINAL RATE OF
TRANSFORMATION
PRODUCTIO BREAD GUN MRT
N S
POSSIBILITI
ES
A 0 15 --

B 1 14 -1/1 =(-) 1
C 2 12 -2/1 =(-) 2
D 3 9 -3/1 = (-)3
E 4 5 -4/1 = (-)4
F 5 0 -5/1 =(-) 5
Features of MRT ???
Features of MRT
• MRT is the slope of PPC.
• Normally, MRT is rising
• It is also called MOC
 Different Shapes of a Curve

• Upward Sloping Straight line Curve

• Upward Sloping Concave Curve
• Upward Sloping Convex Curve
• Downward Sloping Straight Line Curve
• Downward Sloping Concave Curve
• Downward Sloping Convex Curve
Upward Sloping Straight line Curve
Upward Sloping Concave Curve
Upward Sloping Convex Curve
Downward Sloping
Straight line Curve
Downward
Sloping
Concave Curve
Downward Sloping Convex Curve
 LEARNING OBJECTIVES

•To examine the shape

of PPC
Shape of PPC ???
 Shape of PPC

Downward Sloping
Concave Curve
Properties( Characteristics of PPC)
• PPC slopes downward from left to
right.

• PPC is concave to origin.

• It is also called Transformation
Curve.
Why PPC slopes
downward from left to
right ??
Why PPC slopes downward from left to right ??

 'coz its slope which is given by MRT is negative

• Economy can increase production of one good
only by sacrificing production of the other good.

• With full & efficient utilization of given resources,

economy can increase production of one good only by
withdrawing resources from the other good.

• This is because Resources are limited/ scarce.

Why is PPC concave to origin
??
Why is PPC concave to origin??
• It is due to the increasing Marginal Rate of
Transformation (MRT).

• When production of 1 good (say Good Y) is sacrificed to

increase production of the other good (say Good X), more
& more resources have to be withdrawn from Good Y.

• This happens because resources are not equally efficient

in the production of both the goods
EVALUATION
Giving reason comment on the shape of
Production Possibility Curve based on the
following schedule.
GOOD X GOOD Y MRT
0 4
1 3
2 2
3 1
4 0
• Giving reason comment on the shape of
Production Possibility Curve based on the
following
GOOD X schedule.
GOOD Y MRT
0 4 -----
1 3 1/1 = 1
2 2 1/1 = 1
3 1 1/1 = 1
4 0 1/1 = 1
PPC WILL BE A DOWNWARD SLOPING
STRAIGHT LINE.
AS MRT IS CONSTANT
STRAIGHT LINE PPC
Giving reason comment on the shape of
Production Possibility Curve based on the
following schedule.
GOOD X GOOD Y MRT
0 20
1 15
2 11
3 8
4 6
5 5
• Giving reason comment on the shape of Production
Possibility Curve based on the following schedule.
GOOD X GOOD Y MRT
0 20 -----
1 15 5/1 = 5
2 11 4/1 = 4
3 8 3/1 = 3
4 6 2/1 = 2
5 5 1/1 = 1
PPC WILL BE A DOWNWARD SLOPING
Facts about MRT
• MRT is the slope of PPC.
• Normally, MRT is rising
• If MRT is constant, PPC will be a straight line.
• If MRT is increasing, PPC will be concave to
origin.

• IF MRT is falling, PPC will be convex to origin.

 Shift in PPC

• What does PPC indicate ??

 Shift in PPC

• What does productive capacity

depend upon ??
 Shift in PPC

• What will happen to PPC if

there is change in resources/
technology ??
 Change in PPC
Change in
Resources/ • ___
Change in
Technology

Change in
Productive • ___
Capacity

Change in
PPC
• __
2 Types of Change in PPC

• SHIFT IN PPC
• ROTATION OF PPC
 LEARNING OBJECTIVES

•To understand the shift

in PPC
 Shift in PPC
Change in
Resources/
Change in • ___
Technology wrt
both the goods

Change in
Productive
Capacity wrt • ___
both the
goods

Shift in PPC • __
 2 Types of Shift

RIGHTWARD SHIFT IN PPC

LEFTWARD SHIFT IN PPC
 CHANGE IN PPC
CHANGE IN
PPC

SHIFT IN ROTATION OF PPC

PPC
OUTWA OUTWA INWA INWAR
RD RD RD D
ROTATI ROTATI ROTAT ROTATI
RIGH LEF
ON ON ION ON
TWAR TWA
ALONG ALONG ALON ALONG
D RD
THE X- THE Y- G THE THE Y-
SHIF SHI
AXIS AXIS X-AXIS AXIS
T FT
Increase
in Rightward Shift in PPC
Resource • Ex of Increase in resources –
s/ Population growth, discovery
Improve
ment in of new natural resource
Technolo Increase
gy in
Producti • …
ve
Capacity
Rightwar •
d Shift in
Diag
PPC ?
 Leftward Shift in PPC
Decrease in • Ex of Decrease in
Resources/
Deteriorati resources – Destruction of
on of resources, Saturation of
Technology Decreas
natural resource
e in
Product •…
ive
Capacit Leftw
y ard
Shift
• Diagram
in ??
PPC
HOTS
IMPACT OF SARVA SHIKSHA ABHYAN (OPERATION
BLACK BOARD) ON PPC
• Sarva Shiksha Abhiyan or Education for
All campaign aims at giving free and
compulsory education for all children
bellow the age of 14.

• Education improves efficiency,

productivity and skill of people. It leads to
increase in quality of resources.

• This will raise productive capacity of the

economy
IMPACT OF INFLOW OF
FOREIGN CAPITAL/
FOREIGN INVESTMENT
ON PPC
 IMPACT OF INFLOW OF FOREIGN CAPITAL
ON PPC
• Inflow of foreign capital increases the
capital stock of the Economy. This
increases the quantity of resources in the
economy.
• The economy’s capacity to produce goods
and services will increase.
• The PPC will shift to the
right.
IMPACT OF THE LOCK
DOWN CAUSED BY
CORONA ON THE PPC
 IMPACT OF THE LOCK DOWN CAUSED BY
CORONA ON THE PPC
• The Lock Down prevents the proper
utilisation of resources.
• The PPC will not shift as lockdown does
not affect the productive capacity of the
economy.
• The economy will
drift away from the PPC
IMPACT OF FLOODS IN
CHENNAI ON PPC
IMPACT OF FLOODS IN CHENNAI
ON PPC

• Natural calamities like floods and

earthquakes cause large scale
destruction of resources.

• This will reduce economy’s capacity

to produce goods and services.

• The PPC will shift leftward.

 IMPACT OF MAKE IN
INDIA POLICY ON THE
PPC
 IMPACT OF MAKE IN INDIA POLICY ON
THE PPC
• Make in India appeal will lead to increase
in foreign investment. This will increase
capital stock in the economy.
• This will increase India’s production
capacity.
• PPC will shift to right.
 IMPACT OF EMPLOYMENT
GENERATION PROGRAMMES
ON PPC
 IMPACT OF EMPLOYMENT GENERATION
PROGRAMMES ON PPC
• Unemployment in the economy shows that
the resources are not fully utilised. The
economy operates inside PPC.
• Efforts to reduce unemployment leads to
better utilisation of resources. There will
be no change in production capacity and
therefore, no change in PPC
• The economy will move towards PPC.
IMPACT OF OUT FLOW OF
CAPITAL
 IMPACT OF OUT FLOW OF
CAPITAL
• Outflow of capital will reduce the
resources of the economy.
• Production capacity will reduce.
• PPC will shift to left.
IMPACT OF THE
ESTABLISHMENT OF TECHNICAL
TRAINING INSTITUTES AND
INSTITUTES OF SCIENCE AND
TECHNOLOGY ON THE PPC OF
THE ECONOMY
 IMPACT OF THE ESTABLISHMENT
OF TECHNICAL TRAINING
INSTITUTES AND INSTITUTES OF
SCIENCE AND TECHNOLOGY ON
THE PPC OF THE ECONOMY

• Technical Training will lead to skill

development which will lead to
increase in quality of resources.
• This will increase production
capacity of the economy
• There will be rightward shift in PPC.
 ROTATION OF PRODUCTION

POSSIBILITY CURVE

• Rotation of PPC takes place when

there is change in production

capacity (resources/technology) of

the economy with respect to only 1

 CHANGE IN PPC
CHANGE IN PPC

SHIFT IN ROTATION OF PPC

PPC
OUTWA OUTWA INWA INWAR
RD RD RD D
ROTATI ROTATI ROTAT ROTATI
RIGH LEF
ON ON ION ON
TWAR TWA
ALONG ALONG ALON ALONG
D RD
THE X- THE Y- G THE THE Y-
SHIF SHI
AXIS AXIS X-AXIS AXIS
T FT
• A) Development of technology for
good X only/ Increase in resources
with respect to good X only

PPC rotates rightward along the X

axis.
B) Development of technology for
good Y only/ Increase in resources
with respect to good Y only
•

PPC rotates rightward along the Y

axis.
• C) Deterioration of technology
for good X only/ Decrease in
resources with respect to good
X
only

PPC rotates leftward along the X axis.

D) Deterioration of technology for good Y
only/ Decrease in resources with respect to
good Y only