Subject Code: HSS-01
Course Title: Economics
Why to Study Economics…?
Why to learn economics?
To learn how to avoid being deceived by
economists
Economics as a discipline exists because
resources are limited
How can economics, being a science, be
exciting for me to learn about?
Economics studies the behavior of human beings
within society- and that is what makes economics
fascinating
Why to Study Economics…?
Don’t successful business people operate on
intuition? So is economics really useful for
businesspeople?
Economists just state the obvious
What can learning about economics do for
me?
“Economics may not keep you out of the
unemployment line, but at least you will know
why you are there”
Everyday Economics
Economics is approached as common sense
Economics is everywhere and for everyone.
It is for people like you—educated, intelligent,
and aware—who want to understand the world
better and want to make the best decisions in
their daily lives.
Economics is decision-making that not only
involves allocating scarce resources to
various use or uses but also is “rational.”
Economics and Choice
Economics is the study of how individuals and
society manages its scarce resources.
“Economics is the study of how people and
society choose to employ scarce resources
that could have alternative uses in order to
produce various commodities and to distribute
them for consumption , now and/or in the
future among various persons and groups in
the society” by Samuelson and Nordhaous
How Economists Think
The first step in this process is to identify the
fundamental economic problem: scarcity.
What goods and services will be produced
and in what quantities?
How will they be produced?
Who will consume them?
Decision Makers
Households are groups of people that live
together.
Firms are organizations that use resources
to produce goods and services.
Government is an organization that sets laws
and rules, taxes, spends, and provides public
services.
How Economy Works
The circular flow diagram shows the transactions among
households, firms, governments, and the rest of the world
How Economy Works
These transactions take place in factor markets, goods
markets, and financial markets.
How Economy Works
Firms hire factors of production from households. The blue
flow, Y, shows total income paid by firms to households.
How Economy Works
Households buy consumer goods and services. The red flow,
C, shows consumption expenditures.
How Economy Works
Households save, S, and pay net taxes, NT. Firms borrow
some of what households save to finance their investment.
How Economy Works
Firms buy capital goods from other firms. The red flow I
represents this investment expenditure by firms.
How Economy Works
Governments buy goods and services, G, and borrow or
repay debt if spending exceeds or is less than net taxes.
How Economy Works
The rest of the world buys goods and services from us, X, and
sells us goods and services, M. Net exports are X – M.
How Economy Works
And the rest of the world borrows from us or lends to us
depending on whether net exports are positive or negative.
What Economists Do
“economics is what economist do”
What are the “tools” of economics?
Uses abstract models to help explain how a complex,
real world operates.
Develops theories, collects, and analyzes data to
evaluate the theories.
What are the principal “schools of thought” in
economics?
Economic Science and
Economic Policy
Economic science is the attempt to
understand the economic world.
• Science makes predictions.
Economic policy is the attempt to improve the
economic world.
• Policy makes prescriptions.
Policies made without science usually will not
be very good.
Economic Science is Young
Economics as a science is just over 200 years old.
Adam Smith’s The Wealth of Nations (1776) marks the
beginning of our subject.
It began with Aristotle but got mixed up with ethics in
the Middle Ages. Adam Smith separated it from ethics,
and Walrus mathematized it. Alfred Marshall tried to
narrow it, and Keynes made is fashionable. Robbins
widened it, and Samuelson dynamized it, but modern
science made it statistical and tried to confine it again.
Compared to physics and chemistry, however, we are
newcomers.
Difference between Microeconomics
and Macroeconomics
Economic questions can be divided into two big
groups: microeconomics and macroeconomics.
Microeconomics focuses on the individual parts of the
economy.
How households and firms make decisions and how
they interact in specific markets
Macroeconomics looks at the economy as a whole.
Economy-wide phenomena, including inflation,
unemployment, and economic growth
Suggested Books
Koutsoyiannis, A., “Modern Microeconomics”, Second
Edition, Macmillon
Salvatore, D., “Principles of Microeconomics”, Fifth
Edition, Oxford University Press
Mankiw, N.G., “Principles Of Microeconomics”, Sixth
Edition, Cengage Learning India