Lecture 2 Oasrientation (2)

7/21/2019 Lecture 2 Oasrientation (2)

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Economics : An Orientation

Dr.Sunitha. S Assistant Professor

School of Management Studies,National Institute of Technology (NIT)

Calicut



Buzz words

• Opportunity Principle• Discounting• Time perspective• Marginalism• Incrementalism



Opportunity Principle

• ost o! ne"t #est alternative !oregone• De$nition % t&e cost e"pressed in terms o!

t&e ne"t #est alternative sacri$ced• 'elps us view t&e true cost o! decision

ma(ing• Implies valuing di)erent c&oices• 'ig&est valued #ene$t t&at must #e

sacri$ced as a result o! c&oosing analternative



Opportunity cost

• *uppose a mac&ine can produceeit&er + or , -T&e opportunity cost!or producing a given .uantity o! +is t&e .uantity o! ,/w&ic& t&eresource would &ave produced-

• I! t&e mac&ine can produce 01units

o! + and or 21 units o! ,/ t&e t&eopportunity cost o! 0" is 2,-



Production Possi#ility 3rontiers• *&ow t&e di)erent com#inations o! goods and services

t&at can #e produced wit& a given amount o! resources

• 4o 5ideal6 point on t&e curve

• Any point inside t&e curve % suggests resources are not#eing utilised e7ciently

• Any point outside t&e curve % not attaina#le wit& t&ecurrent level o! resources

• 8se!ul to demonstrate economic growt& andopportunity cost



Production Possi#ility

3rontiersCapital Goods

Consumer Goods

Yo

Xo

A

B Y1

X1

Assume acountry canproduce two

types of goodswith itsresources –

capital goodsand consumer

goods

If it devotes allresources to capital

goods it could producea maximum of Ym.

If it devotes all itsresources to consumergoods it could produce

a maximum of Xm

Ym

Xm

If the country is atpoint A on the PPF It

can produce thecom ination of Yocapital goods and

Xo consumer goods

If it reallocates its resources!moving round the PPF from A

to B" it can produce moreconsumer goods ut only at

the expense of fewer capitalgoods. #he opportunity cost ofproducing an extra Xo – X$consumer goods is Yo – Y$

capital goods.



Production Possibility

FrontiersCapital Goods

Consumer Goods

Yo

Xo

A

.B

% Y1

X1

Productioninside thePPF – e.g.

point Bmeans thecountry is

not using allits resources

It can only produce atpoints outside the PPF if itfinds a way of expandingits resources or improvesthe productivity of those

resources it already has.#his will push the PPF

further outwards.



Discounting

• T&e concept o! discounting is #asedon t&e !act t&at a rupee now iswort& more t&an a rupee earned a

year a!ter-

• Even i! one is sure a#out !utureincome/ yet it &as to #e discounted#ecause to wait !or !uture implies asacri$ce !or t&e present



• *uppose a sum o! 9s 011 is duea!ter one year- et t&e rate o!interest #e 01 percent - T&en we candetermine t&e sum to #e investednow so as to produce t&e return ;9<o! 9s 011 at t&e end o! t&e year- T&e

present value or t&e discountedvalues o! 9s011 will t&en #e

=0> 9!$&i"



Discounted value o! money = 0

> 011

> 9s-?1-?1

A present value o! 9s011 due two years later would #e

= 2 > 9s011

!$&.$'"

!$&.$'" (

)*(.+,

!$&i"



Time perspective

• *&ort run =ersus long run%=ery s&ort run%*&ort run

% ong run

• 3i"ed versus varia#le costs o!

production



Main Economic Activities

• Production• onsumption• apital !ormation



3actors o! Production

• and• a#our• apital• Entrepreneurs&ip



ircular 3low @ *imple- Assumptions

– /nly two sectors 0 Consumers and Producers – All production is sold to the consumers – Producers provide all the 1oods and 2ervices

– Consumers spend all their Income on goods an services – No government and no overseas sectors – Consumers are the owners of productive resource - land3 la our3

capital and enterprise



ircular 3low @ *imple

Consumers Producers

4esources

1oods and 2ervices

%onsumption 5xpenditure

Income4esources

1oods and 2ervices



ircular 3low @ *avings andInvestment

Income

Consumption Exp

Capital MarketSavings nvestment

Consumers Producers



ircular 3low @ overnment *ector

ncome

G!"E#NMEN$$AXA$ !N

CAP $A% MA#&E$Savings nvestment

Consumption

SPEN' NGS()S ' ES

$AXA$ !NConsumers Producers



ircular 3low @ 3our *ectors

Income

CAP $A% MA#&E$Savings nvestment

!"E#SEAS SEC$!#

G!"E#NMEN$$axes

mports

Govtsu*sidies

Exports

C a p i t a

l O u

t f l o w s

C a p i t a

l n + l o ,

Consumption exp

Consumers Producers



entral pro#lems o! aneconomy

&at to produceCs&ould t&e emp&asis #e on agriculture/manu!acturing or services/ s&ould it #e

on &ealt&/ manu!acturing or &ousingC'ow to produceC

la#our intensive/ land intensive/ capitalintensiveC E7ciencyC

&om to produceC*&ould income distri#ution #e :evenlydistri#utedC or more !or t&e ric&C Or !ort&ose w&o wor( &ardC

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Lecture 2 Oasrientation (2)