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Economics, my dear friends, is a social science and many do not even hesitate to call it the 'Queen' of social sciences.

Obviously as the queen at matter deals with many other social sciences such as sociology, psychology, political science etc. The ensuing discussion would take you through some of the most important concepts in economics that can prove useful from the view point of our discussion to follow in the formal classroom. This discussion is equally important from the point of view of those students who have not had an opportunity of learning this subject. It would aim at bringing them at par with those who have already learnt the subject. Economics, my dear friends, is a subject that deals with human behaviour. This human behaviour is constantly trying to reconcile between unlimited wants and limited resources. These limited resources have alternative uses. Hence resources can be put to use alternatively after the (unlimited) wants are ranked according to choices and preferences. This is called preparation of scale of preference. This is how economics becomes a subject of choice because you need to choose between many. At the same time economics is also a science of scarcity as there are limited resources. When resources become ample or for that matter when wants are confined (controlled by people to the extent of their needs and not greed) the need to teach economics would be revisited. From the fact that the wants are unlimited and resources limited arise the concept of reconciliation or compromise between wants and resources. In the process of meeting some wants some are sacrificed. The most important want is satisfied and the less sacrificed. This process of sacrifice of the next best alternative is known as the opportunity lost and the same when expressed in value terms is known as the opportunity cost. The concept of opportunity cost plays a vital role in determining economists' concept of profit. The profit arrived at by the economist is always less than that of an accountant as the accountants do not take into consideration the cost of sacrifice made in taking a decision. They rather consider only the explicit and not the imputed (implicit) costs. Economists consider both and hence their share of profit falls short of that of the accountant. times it becomes very difficult to understand it also. Economics in its subject

Economics For Managers

Economics: Micro and Macro Economics branches out into micro and macro economics. They are the two pillars of economics. All other branches in economics stem out of these two basic branches.

Economics For Managers

Economics

Macro Economics

Micro Economics

Micro economics deals with minute aspects of the economy. It deals with each economic unit on individual level. It deals with how individuals and firms make decisions under different situations and how do they interact. Macro economics on the other hand studies economy as a whole and in that sense it is a study of various economic variables in general. It studies economy wide phenomena such as recession, economic growth, inflation, output etc. All the other major branches in economics originate out of either micro or macro economics. Micro and macro are in this sense the two pillars of economics. Those branches of economics that deal with economic issues at large are the off shoots of macro economic theory while the rest that of micro economics. Micro economics becomes a prerequisite for subjects such as labour, industrial and agricultural economics. Micro economics also becomes of great importance while taking managerial decisions. One of the closest branches of microeconomics is managerial economics. Macro economics on the other hand deals with larger issues at the national and the international level. The disciplines that have a links with macro economics include public economics, international trade, monetary economics and development economics. There are some other braches of economics that emerged out of sheer need of time. Such branches of economics include economics of information, transport economics, urban economics etc.

Positive and Normative statements in economics:

Reasons behind studying economics: The main objective behind study of economics is improving ones ability to understand business fluctuations and transactions with clarity. It helps us to give a broader point of view than what a typical commerce graduate would offer. It would enable the learner to have a more comprehensive view of the economy as a whole. One of the core branches of micro economics is Managerial economics. This is what a management student is expected to learn to begin with. It would give the students an insight on issues such as demand, supply, elasticity, production, costs and markets. Before a firm sells products in the market, it should ideally know what class of buyers it is catering to, what is the elasticity of demand for the product the firm is planning to sale, what are its competitors, what type of a market it is in, what would be its explicit and implicit costs of production etc. Managerial economics would hence provide a learner with an ability to deal with the basic problems of a decision making unit of an economy called the 'firm'. Tools like elasticity are not only used at an individual level but also at the national level while determining the subsidy and taxation policy of the government. A firm decides to set up its plants depending upon the subsidy or tax schemes of the government. In case of indirect taxes the shift of the indirect tax from the manufacturer to the wholesaler, from the wholesaler to the retailer and from the retailer to the ultimate buyer depends on the elasticity of demand for that product. Hence, study of elasticity as a tool of managerial decision making becomes of crucial importance. The concept of elasticity is not only used in taking individual or national level decisions but it is essential in taking the international decisions also. For example, whether devaluation of Indian rupee be successful or not depends on the elasticity of demand for our exports. If the said devaluation is going to generate more revenue then it becomes imperative to devalue the currency otherwise not. Many other important issues are discussed in managerial economics that concern decision making. It may be for individual households, firms or even government.

Economics For Managers

We also come across two types of statements in economics. They are positive statements and normative statements. We also refer to as positive economics and normative economics on the basis of such statements. Positive economics explains things, economic problems and variables as they are. Positive economics in this sense explains, 'what is' Normative economics on the other hand explains how economic variables should be. So normative economics explains 'what should be..

Alongside becomes important the study of macroeconomic issues also. Macroeconomics mainly deals with the aggregates. It does not study economic activity from minute perspective. It talks of economy in general unlike micro economics. Issues of national importance, relating to national economy are discussed under macroeconomics. Macroeconomics discusses public revenue, public expenditure (here by public we mean government), policies of national importance such the monetary and the fiscal policy. It also deals with international trade and other important issues relating to development and growth. Looking at all that has been discussed above an impression that study of economics is indispensable is created. Let us carefully look at some of those terms in economics that are used often and must be known to all. Basic terms in micro economics: Economy: This word is derived from a Greek word. It means one who manages a household. Economics: Science of human behaviour that tries to reconcile between unlimited wants and limited resources that have alternative uses. (Definition given by Lionel Robbins) Economics is the study of how society manages its scarce resources. Scarcity: Scarcity is shortage. This arises out of the imbalance between unlimited wants and limited resources available in the economy. Availability of limited resources also impinges the productive capacity of an economy.

Economics For Managers

Opportunity cost: It is the next best alternative sacrificed by the decision maker in the process of decision making. Since the resources are limited all wants can not be satisfied at a time and hence some wants are sacrificed. The best alternative cost involved in the same is the opportunity cost. It is what one gives up to obtain any good. Factors of production: These are the inputs used in the process of production. There are four main factors of production. They are: Land, Labour, Capital and Entrepreneur. Factor payments: The factors of production mentioned above are paid remuneration for the work they render. This is called factor payment. The factor payments include: Rent paid to land, Wages paid to labourers, interest paid on capital borrowed and profit earnt by entrepreneur. So the four factor payments include rent, wages, interest and profit. Market: It is place where buyers and sellers involve in exchange. It may have a particular location or may not. It forms a group of buyers and sellers for exchange of various or particular goods and services. Markets could be perfect or imperfect depending upon the availability of number of buyers, sellers and the variety of products. Market economy: An economy that is decentralized and is without any government regulation is called a market economy. It is also known as the situation of laissez faire. By laissez faire we mean no government intervention. The resources in a market economy are allocated through a decentralized process of many firms and households when they interact for goods and services in the market. sacrificed in the process of decision making is the opportunity lost and the

Economics For Managers

Economics For Managers

Externality: The impact of one person's actions on the well-being of another. Externalities could be positive or negative. For example, a non smoker standing, in a public place, next to a smoker faces a negative externality. Now think of an example of positive externality. Demand: Demand is desire backed by the ability and willingness to pay for that commodity per unit of time. Supply: It is the amount of goods a seller is willing to and is able to sell in the market per unit of time. Equilibrium: It is a point of rest. It may be stable equilibrium or a dynamic equilibrium. Equilibrium price means the price where demand and supply balance. Equilibrium quantity would mean the quantity where demand and supply balance. Surplus and shortage: Surplus is where quantity demanded is less compared to quantity supplied. Shortage on the other hand means the excess quantity demanded over the quantity supplied. Price ceiling and price floors: When the government feels that the market prices are excessively high then the government may intervene in the market by regulating the prices. These are called the price controls. These controls are seen either in the form of ceilings or in the form of floors. This is depending on what the policy makers feel about the existing prices. If they feel prices are high in the economy they may introduce a price lower than the equilibrium market price called the price ceiling. So it is the maximum price that can be charged in the market. The floor price is the minimum that has to be paid. The policymakers when feel that the equilibrium market price is less than should be paid in that case the government may introduce a price floor. It is the price higher than the market equilibrium price. Rent controls are a good example of price ceilings while minimum wages are a good example of price floors.

Some important issues in macro economics: Gross Dometic Product (GDP); often used as a proxy measure for National Income Definition: A measure of economic activity within the country. Gross value of all goods and services produced over a given time period (usually a year) excluding net property income from abroad. It can be measured either as the total of income, expenditure or output. Gross National Product (GNP) Definition: A measure of Indian citizens activities all over the world. The difference between GNP and GDP is the value of any net property income from abroad. Human Development Index (HDI) Definition: Introduced by the UN in 1990, the index takes into account not only the goods and services produced but also the ability of a population to use these and the time they have to enjoy them. It is a composite index based on real GDP per capita (PPP), life expectancy at birth and educational achievement that measures socio-economic development. Inflation Definition: The rise in general prices and the reduction in value of money. Inflation is a sustained increase in the general price level. In other words it is the rate at which prices are increasing. It can be measured either monthly, quarterly or annually. It is usually measured by the Wholesale Price Index (WPI) or the Consumer Price Index (CPI). Laissez Faire Definition: The term "laissez-faire" is used to describe an economic system where the government intervenes as little as possible and leaves the private sector to organize most economic activity through markets. Classical economists were great advocates of a laissez-faire system with minimal government intervention. They believed free markets were the best organizers of economic activity. This would also mean that Government policy or fiscal policy initiatives were not required for the stabilization of the economy. Domestic Product (GDP) is a measure of National Income. It is the total

Economics For Managers

Free market economy Definition: A system where resources are owned by households: markets allocate resources through the price mechanism; and income depends upon

Economics For Managers

the value of resources owned by an individual. Trickle-down theory Definition: The process whereby the economic gains from economic growth pass down throughout the entire society eventually giving rise to development. Keynes Definition: John Maynard Keynes is probably the best-known UK economist. He was born in 1883 and is attributed with having changed the methodology behind economic policy making. He proposed a much more interventionist approach by the government and argued that they should aim to actively manage the level of aggregate demand to achieve full employment. His best-known work was the General Theory of Employment, Interest and Money (1936). For many decades after the Second World War, governments used essentially Keynesian techniques to manage the economy. It was Keynes who for the first time stated the importance of a stabilization policy to steer the economy out of a recession. His attack on the laissez-faire principle is what lends credibility to the role of fiscal policy today. In fact, even President George W. Bush has used a confirmed Keynesian approach to drive the US economy out of the recession after the WTC attacks. Planned Economies Definition: Economies in which the state decides what goods are produced, the methods of production, and who gets the goods.

Command Economy Definition: The state allocates resources, and sets production targets and growth rates according to its own view of people's wants. The state allocates

view of people's wants. Parallel Economy Definition: The production that takes place outside of the declared and formal circular flow of income. Black Economy Definition: Unrecorded production. The Black economy results from activity that has not been recorded through the tax system or other conventional means of recording. What the Finance Minister has tried to do through the Cash Transaction Tax in the Union Budget 2005-06 is to tap these markets. Laffer Curve Definition: The Laffer curve is named after Professor Art Laffer who suggested that as taxes increased from fairly low levels, tax revenue received by the government would also increase. However, there would come a point as tax rates would be so high that people would not regard it as worth working so hard. This lack of incentives would lead to a fall in income and therefore a fall in tax revenue. Thus, the Laffer curve has an inverted-U shape. As the tax rates keep on rising, the tax collections rise initially. After the peak though, an increase in tax rates is associated with a reduction in tax receipts. This is another concept that has been used in Indian budget making. The rationale behind slashing tax rates as a part of reforms was derived from the Laffer ideology. Speaking of the budget, kindly remember to carry a copy of the budget as well as the Economic Survey of India when you get to SIBM. We are developing some interesting modules to follow up the action of the Finance Ministry on the budget.

Economics For Managers

resources, and sets production targets and growth rates according to its own

Balance of Payments (BOP) Definition: A record of the income and expenditure transactions between UK residents and persons abroad. The balance of payments accounts record all flows of money in and out of the UK. These flows might result from the sale of exports (an inflow or credit) or from the UK purchasing imports from overseas (an outflow or debit). They might also arise from other countries investing in the UK (inward investment - a credit), or from UK companies investing abroad (a debit). All flows of money are added together and grouped according to their type. The overall account is then called the balance of payments - principally because the total of outflows must be equivalent to the total of inflows. The balance of payments therefore balances!! J-curve Effect Definition: The tendency for a fall in the value of the currency to worsen the balance of trade before it improves the position. Exchange rate Definition: The price of one currency in terms of another currency. For example, the exchange rate between the Indian Rupee INR and the $ may be Rs. 45 =$1. This means that you need to pay a price of Rs. 45 to get every $1. Exchange rates can be fixed or floating. Fixed means that they stay at the same value as set by the Central Banks. Floating means that they fluctuate day to day according to the market. More generally the term can also refer to the price at which any good is being traded for another good. Floating exchange rate Definition: A currency exchange rate that is determined by buyers and sellers without government intervention. A floating exchange rate system is where the external value of the currency is allowed to find its own value against other currencies. The value will be determined by supply and demand in the foreign exchange market. The value will then rise or fall according to changes in supply and demand.

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Fixed Exchange rates Definition: A fixed exchange rate system is one where the value of the currency against other currencies remains exactly the same. A fixed exchange rate doesn't stay fixed on its own. Central banks have to hold large stocks of foreign exchange, so that they can actively intervene to hold the value of the currency stable. Monetary and fiscal policies will also have to be directed to keeping the rate constant. Dirty float Definition: The Central Bank attempts to influence the value of a floating exchange rate in order to gain a competitive advantage. India has a dirty float regime after 1994. The RBI lets the exchange rate float between certain limits; if the rate overshoots these limits, it then intervenes in the market by either buying or selling dollars and thus stabilizes the exchange rate at a desired level. PPP theory Definition: Suggests that the prices of goods in countries will tend to equate under floating exchange rates so that people would be able to purchase the same quantity of goods in any country for a given sum of money. PPP exchange rate Definition: The PPP rate is the exchange rate at which the money you exchange would buy exactly the same basket of goods in both countries. For example, say a certain basket of goods costs Rs.200 in India, and the same basket costs $10 in the US. The PPP rate would be Rs.20 = $1. The PPP rate will often differ from the actual rate. General Agreement on Trade and Tariff (GATT) Definition: GATT was an international organization established in 1947, which aimed to reduce, by agreement, the levels of tariffs and other protectionist tools and thereby ensure free trade in the world. India was one of the founder members of GATT. There were 11 major rounds of negotiations and the last one was the "Uruguay Round". As more and more trade related issues came cropping up, it was felt that a trade organization with legislative powers was needed and that is how the WTO was born out of the GATT in 1995.

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World Trade Organization (WTO) Definition: The World Trade organisation replaced GATT in 1995. The World Trade Organization (WTO) is the only international organization dealing with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible. Protectionism Definition: The practice of taking steps to protect what one sees as one's own interests. Most commonly used to describe steps taken by countries to protect their domestic industries from foreign competition. This can be done by raising the customs duties or the tariff barriers or through Non-Tariff Barriers (NTBs) Non-Tariff Barriers (NTBs) Definition: Measures other than tariffs that impede international trade and restrict the import and export of goods. Such measures include customs delays and boycotts.

Economics For Managers

International Monetary Fund (IMF) An organization established to encourage international co-operation in the monetary field, the stabilization of exchange rates and the removal of foreign exchange restrictions. IMF offers advice to the nations suffering on account of BOP problems. It offers financial assistance to those suffering from BOP problems but this help is extended by the IMF only to solve the current account deficits of the BOP and not the capital account.

International Bank for Reconstruction and Development (IBRD) IBRD is commonly known as the World Bank. It gives long term loans to member countries for high priority infrastructure, agricultural, industrial and educational projects. The World Bank is a group of institutions and they include the 1) IFC (International Finance Corporation) 2) IDA (International Development Agency) 3) IBRD (International Bank for Reconstruction and Development) 4) MIGA (Multilateral Investment Guarantee Agency) 5) ICSID (International Conference for Settlement of Investment Disputes)

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