Transcript Lecutre 1

Nature and Scope of Economics
Definition of Economics
1. Definition of the Classical School of Thought led by Adam Smith
2. Definition of the NEO Classical School of Thought led by Alfard Marshall
3. Definition of Economics given by Loinel Robbin
Adam Smith’s Definition of Economics
“Economics is a science of wealth”
1.
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Production of wealth
Land
Labor
Capital
Organization
2. Exchange of wealth
3. Distribution of wealth
4. Consumption of wealth
Alfard Marshall’s definition of Economics
“Economics is a science which studies human behavior in the ordinary
business of life, it examine that part of individual and social action which is
most closely connected with the attainment and the use of material
requisites of well being”
Main Points of the definition
1. Ordinary business of life
2. Analysis of economic activities
3. Attainment and use of material requisites
4. Well being or welfare of the society
Criticism on Marshall’s definition
1. It limits the scope of Economics
2. Material requisites which don’t promote welfare are excluded
3. Welfare is not measurable concept
4. Problems in policy making
Robbins Definition of Economics
“Economics is a science which studies human behavior as a
relationship between multiple ends and scare means which have
alternative uses”
Main points of the definition
1. Multiple ends
2. All wants are not equally important
3. Scarce Resources
4. Alternative use of resources
Modern Definition of Economics
Economics is the social science that studies the choices that
individuals, businesses, governments, and entire societies make as
they cope with scarcity and the incentives that influence and
reconcile those choices.
Merits of Robbin’s definition of Economics
1. Comprehensiveness
2. Extension of the scope of Economics
3. Analytical in Nature
Micro economics vs Macro economics
Micro -- study of how individuals make decisions and interact with
others in society
Macro -- study of aggregate behavior of the economy (inflation,
unemployment, growth)
Basic Terms and Concepts in Economics
Human Wants:
1.Non-economic wants
2.Economic wants
•Necessities
•Comforts
•Luxuries
Characteristics of Economic Wants
Economic wants are:
1. Unlimited
2. Not equally important
3. Rise again and again
4. Can be satisfied by different means
5. Satisfiable
Goods and Services
Economic goods can be divided into two categories
1. Consumer Goods
2. Capital Goods
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Raw material
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Semi-manufactured goods
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Fully manufactured goods
Utility
“utility is the power of a good or service by which it can satisfy a
human want”
Characteristics of Utility
1. Utility depends or Human wants
2. It depends on use
3. It depends on knowledge
4. It depends on ownership
5. It depends on number
6. It depends on form
7. It depends on place
8. It depend on time and seasons
Demand
Quantity Demanded refers to the amount (quantity) of a good that buyers are
willing to purchase at alternative prices for a given period.
or
Demand = Power to purchase + will to purchase
Requisites:
•Desire for specific commodity.
•Sufficient resources to purchase the desired commodity.
•Willingness to spend the resources.
•Availability of the commodity at
(i) Certain price (ii) Certain place (iii) Certain time.
Determinants of Demand
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What factors determine how much ice cream you will buy?
1. Product’s Own Price
2. Consumer Income
3. Prices of Related Goods
4. Tastes
5. Expectations
6. Number of Consumers
etc
Kinds of Demand
1. Individual demand
2. Market demand
3. Income demand
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Demand for normal goods (price –ve, income +ve)
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Demand for inferior goods (eg., coarse grain)
4. Cross demand
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Demand for substitutes or competitive goods (eg.,tea & coffee, bread and
rice)
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Demand for complementary goods (eg., pen & ink)
5. Direct demand (eg., ice-creams)
6. Derived demand (eg., TV & TV mechanics)
Factors Affecting Demand
1. Prices of Goods
2. Income of Consumer
3. Prices of Related Goods
4. Population
5. Tastes, Habit
6. Expectation about future prices
7. Climatic Factors
8. Demonstration Effect
9. Distribution of national income
Demand Schedule
Demand Schedule: a tabular presentation showing different quantities of a
commodity that would be demanded at different prices.
Types of Demand Schedules
Individual Demand schedule
Market Demand Schedule
Price
A
Price
A
B
C
M.S
1
50
1
50
45
40
135
2
40
2
40
30
38
108
3
30
3
35
20
30
85
4
20
4
20
15
25
60
The Law of Demand
Prof. Samuelson: “Law of demand states that people will buy more at lower price
and buy less at higher prices, others thing remaining the same.”
Ferguson: “According to the law of demand, the quantity demanded varies
inversely with price”.
Chief Characteristics:
Inverse relationship.
Price independent and demand dependent variable.
Assumptions:
No change in tastes and preference of the consumers.
Consumer’s income must remain the same.
The price of the related commodities should not change.
The commodity should be a normal commodity
John's Demand Schedule
Price of Ice-cream Cone ($)
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Quantity of cones
Demanded
12
10
8
6
4
2
0
John’s Demand Curve
Price of IceCream
Cone
$3.00
2.50
2.00
1.50
1.00
0.50
0
2
4
6
8
10
12
Quantity of
Ice-Cream
Cones
Exceptions and Importance of Law of Demand
Exceptions:
Inferior goods
Articles of snob appeal. (exception: Veblen goods, eg., diamonds)
Expectation regarding future prices (shares, industrial materials)
Emergencies
Quality-price relationship
Ignorance
Change in fashion, habits, attitudes, etc..
Importance:
Price determination.
To Finance Minister
To farmers
In the field of Planning.
Shift of Demand Vs Movement Along a Demand Curve
• A change in demand is not the
same as a change in quantity
demanded.
• In this example, a higher price
causes lower quantity demanded.
• Changes in determinants of
demand, other than price, cause a
change in demand, or a shift of the
entire demand curve, from DA to DB.
A Change in Demand Versus a Change in Quantity
Demanded
• When demand shifts to the right,
demand increases. This causes
quantity demanded to be greater
than it was prior to the shift, for
each and every price level.
A Change in Demand Versus a Change in Quantity
Demanded
To summarize:
Change in price of a good or service
leads to
Change in quantity demanded
(Movement along the curve).
Change in income, preferences, or
prices of other goods or services
leads to
Change in demand
(Shift of curve).
The Impact of a Change in Income
• Higher income decreases the
demand for an inferior good
• Higher income increases the
demand for a normal good
The Impact of a Change in the Price of Related Goods
• Demand for complement good (ketchup) shifts
left
• Demand for substitute good (chicken) shifts
right
• Price of hamburger rises
• Quantity of hamburger
demanded falls
From Household to Market Demand
Demand for a good or service can be defined for an individual household, or for a
group of households that make up a market.
Market demand is the sum of all the quantities of a good or service demanded per
period by all the households buying in the market for that good or service.
From Household Demand to Market Demand
Assuming there are only two households in the market, market demand is
derived as follows: