Introduction to Economics

WHAT IS ECONOMICS???

• Economics – the study of how individuals and

societies make decisions about ways to use
scarce resources to fulfill wants and needs.
 • It is the study of how society Economics is the
study of how individuals, businesses, and
Economics governments allocate their scarce resources.
• In most societies, resources are allocated through
the combined choices of millions of households
and businesses.
• Economists examine how people make these
choices: how much they work, what they buy, how
much they save, how they invest their savings, and
so on.
• how people, businesses, and societies make
decisions seeking to get the most out of their
limited resources.
• They study the production, distribution and
consumption of goods and service.
Types Of Economics
 Types of Branchers
➢ Microeconomics related to supply and demand decision of individuals and firms, such as how
profits can be maximized and how much of a good or service consumers will demand at a certain
price.
➢ Macroeconomics related to study historical trends in the whole economy and forecast future
trends in areas such as unemployment, inflation, economic growth, productivity, and investment.
➢ Financial Economics to study the money and banking system and the effects of rising interest
rates.
➢ Industrial/Organizational Economics to study the market structure of particular industries in
terms of the number of competitors, and the market decisions of competitive firms and
monopolies.
➢ Public Finance Economists primarily are involved in studying the role of the government in the
economy and the effects of tax cuts, budget deficits, and welfare policies.
• International Economics to study international financial markets,
exchange rates, and the effects of various trade policies such as tariffs.
• Labor Economics to study the supply and demand for labor and the
determination of wages. These economists also try to explain the reasons
for unemployment, and the effects on labor markets of changing
demographic trends such as an aging population and increasing
immigration.
• Econometrics to study all areas of economics and use mathematical
techniques such as calculus, game theory, and regression analysis to
formulate economic models.
• These models help to explain economic relationships and are used to
develop forecasts related to the nature and length of business cycles, the
effects of a specific rate of inflation on the economy, the effects of tax
legislation on unemployment levels, and other economic phenomena.
Few economics concepts
Supply and Demand

Demand refers to how much of a product

The laws of supply and demand are consumers are willing to purchase, while
fundamental principles that explain how
prices are determined in a market. supply indicates how much producers are
willing to sell at various prices.
Market Equilibrium

Market equilibrium occurs when the quantity

supplied equals the quantity demanded,
resulting in a stable market price. It reflects a
balance between buyers and sellers.
Market Structures
• Market structures dictate how firms compete and set prices. The
main types include
➢ perfect competition,
➢ monopolistic competition,
➢ oligopoly, and
➢ monopoly.
• Each structure has unique characteristics that impact consumer
choice and market efficiency.
 Consumer behavior examines how
individuals make decisions to spend
their available resources.
Consumer
Behavior It encompasses the psychology
behind purchasing choices,
preferences, and influences
affecting buying decisions.
Economic Systems

• Economic systems determine how resources are

allocated and include capitalism, socialism, and
mixed economies.
• Each system has its own methods for managing
economic activities and addressing issues like equity
and efficiency.
What is Capitalism?

• Capitalism is an economic system characterized by

• private ownership of production and
• the free market.
• It promotes competition, allowing individuals to pursue their own
economic interests.
• This system often leads to innovation and wealth creation,
• but can also result in inequality and market failures.
• Profit is the primary motive, leading to competitive markets that drive
innovation and economic growth.
Socialism

• Socialism advocates for

• collective ownership of the means of production,
• aiming to achieve economic equality.
• It emphasizes the importance of social welfare and government
intervention in the economy.
• While it seeks to reduce income disparities,
• critics argue it may limit individual freedoms and economic incentives.
• means of production (like factories and land) are owned and
controlled by the community or the government,
Mixed economies

• Mixed economies combine elements of both capitalism and socialism.

• This system allows for private enterprise while also providing a role for government regulation and social welfare programs.
• It aims to balance the benefits of free markets with the need for social equity and public services.
• Most current economies follow a mixed economic system. This means they combine elements of both capitalism and
socialism.
• While there are variations in the degree of government involvement and the specific policies implemented, the general
framework of mixed economies is characterized by:
• Private property: Individuals and businesses can own and control assets.
• Market competition: Businesses compete with each other to attract customers and earn profits.
• Limited government intervention: The government plays a role in regulating the economy, but it does not have complete
control over economic activity.
• Social safety nets: Governments often provide social programs like unemployment benefits, healthcare, and education to
support citizens.
• Examples of mixed economies include the United States, the United Kingdom, Canada, and many other developed countries.
• Pakistan also example of mixed economy.
Role of Government

• Governments play an important role in economics by regulating

markets, providing public goods, and addressing market failures.
• Their policies can significantly influence economic performance and
the overall welfare of society.
Inflation and Deflation

• Inflation refers to the rise in prices over time, while deflation is

the decrease in prices.
• Understanding these concepts is vital as they affect purchasing
power, savings, and overall economic stability.
Unemployment Types

• Unemployment can be categorized into different types:

➢frictional,
➢structural,
➢cyclical, and
➢seasonal.
• Each type has its own causes and implications for the economy,
highlighting the complexities of the labor market.
International Trade

• International trade involves the exchange of goods

and services between countries.
• It allows nations to specialize in what they
produce best, leading to increased efficiency and
economic growth through comparative advantage.
 Economic Indicators

• Economic indicators, such as

➢ GDP, NDP.. etc
➢ unemployment rate, and
➢ inflation rate,
• provide insight into the health of an economy.
• These metrics help policymakers and businesses
make informed decisions regarding economic
strategies.
Exchange Rates

• Exchange rates determine the value of one currency

in relation to another, affecting international trade
and investment.
• Fluctuations in exchange rates can impact inflation,
economic growth, and trade balances, making it a
critical component of global economics.
 Economics and Computer Science

• Data analysis is essential for both

economists and computer scientists
• By leveraging (gain insights) data, we can
uncover
• patterns,
• forecast trends, and
• make informed decisions that drive
economic growth and technological
advancements.
 Algorithmic Trading

• Algorithmic trading is a prime example of how

computer science enhances economic
activities.
• It uses complex algorithms to make
• rapid trading decisions,
• maximizing profits and
• minimizing risks in financial markets,
showcasing the interaction between technology
and economics.
Impact on Policy Making

• The intersection of computer science and economics

significantly impacts policy-making.
• By utilizing computational models and simulations,
policymakers can predict economic outcomes, analyze the
effects of regulations, and design better interventions to
improve societal welfare.
Emerging Technologies in Economics

• Emerging technologies such as blockchain and

artificial intelligence are transforming economic
landscapes.
• These innovations create new business models,
enhance transparency, and improve efficiency,
demonstrating the vital role of computer science in
modern economics.
• Economic concepts such as supply and
demand, market equilibrium, and elasticity are
able to be applied to programming projects.
• Increased Efficiency: By delivering ads that
are highly relevant to users, Facebook and
Instagram can improve advertising
efficiency.
• This means that advertisers can reach their
target audience more effectively, reducing
wasted ad spend.
 Economic problem
• the study of how individuals and societies make decisions
about ways to use scarce resources to fulfill wants and
needs.
Making suitable choices

Limited recourses

Choice between Best allocation of recourses

 Going on a holiday or buying a phone?
 Paying fee or going for shopping?
 Watching movie or study to get good grades?
Unlimited wants For govt
 Investing on hospitals / education institutions
or military supplies limited resources
what does scarcity mean?

• The entire field of economics based on the idea of scarcity.

• what does it mean in everyday life? ?
• It means that there's not enough of something to go around.
• People working in a factory, resource(labor.) you consider that a scarce
resource or a free resource?
• beautiful view from this house or hotel.. is a scarce resource.???
• Water is a scarce resource?
 Opportunity Cost
Opportunity cost is defined as the cost of forgoing the
next best alternative when making a decision.
Opportunity cost
• Opportunity cost represents the value of the next best alternative that is
foregone.
• Understanding this concept is important for making informed choices, as it
helps to evaluate the trade-offs involved in every decision. By recognizing
what we give up, we can better assess our options.
• Opportunity cost is the benefit that is missed
when choosing one option over another.
• It is not just about money; it includes time, resources, and satisfaction.
Understanding this concept allows individuals to make more strategic
decisions in both personal and professional contexts.
 Opportunity Cost
Trade-off: Any alternative that could be chosen

Opportunity Cost: The best alternative sacrificed for

a chosen alternative
Trade-offs and opportunity cost
• Things you forgo or give up to get other thing is trade off.
• Trade-offs in economics refer to exchanging one thing for another
• Opportunity cost: the next best alternative given up by choosing another
item.
• The value of the good, service, or time forgone to obtain something else
• For example, you spend time and money going to a movie, you cannot spend
that time at home for study.
• You would have a burger (rs 100/-) if you didn't buy the chips. (80/-)
The opportunity cost of an item is what you give up to get it.
Thing you leave is trade off
❑Above example : you trade off time to study for watching movie its opportunity
cost is good grades.
❑Trade off chips and opportunity cost is 80/-
• When making decisions, it's smart to take opportunity costs into
account, and people often do.
• College athletes who can earn millions dropping out of school and
playing professional sports understand that their opportunity cost of
attending college is high.
• Not surprisingly, they sometimes decide that the benefit of a college
education is not worth the cost.

• Buying a new phone: The opportunity cost could be the other things
you could have purchased with that money, like a vacation or new
clothes.
• Consider a student deciding between studying for an exam or going
out with friends. The opportunity cost of going out is the potential
academic success they might sacrifice. Such scenarios illustrate how
opportunity cost plays a vital role in our everyday choices and
priorities.
Making Informed Decisions
• In business, opportunity cost can affect investment decisions.
Companies must evaluate the potential returns of different projects,
ensuring that resources are allocated to the most profitable ventures.
Understanding these trade-offs can lead to better financial outcomes
and strategic growth.
• To navigate trade-offs effectively, one must analyze the benefits and
costs associated with each option. By considering opportunity costs,
individuals can prioritize their choices and align them with their long-
term goals, leading to more satisfying outcomes in life and work.
Opportunity Cost

• Opportunity Cost=FO−CO
• FO=Return on best forgone option
• CO=Return on chosen option
• Let's say you have $100 to spend. You can either:
1.Buy a new book (FO) for $20.
2.Buy a new video game (CO) for $30.
• If you choose to buy the video game, the opportunity cost is the value of the
book you could have bought. Using the formula:
• Opportunity Cost = $20 (FO) - $30 (CO) = -$10
• This negative result indicates that you lost $10 worth of potential satisfaction by
choosing the video game.
example
• Job A: Offers a salary of $60,000 per year, a 40-hour workweek, and
generous benefits.
• Job B: Offers a salary of $70,000 per year, a 50-hour workweek, and
limited benefits.

• If you choose Job B, the opportunity cost is the value of the additional
leisure time and benefits you could have enjoyed in Job A.
• Opportunity Cost = $60,000 (FO) - $70,000 (CO) = -$10,000
• This negative result indicates that you lost $10,000 worth of potential
benefits and leisure time by choosing Job B. However, you gained $10,000 in
salary.
• In this case, the trade-off is between higher salary and more favorable
working conditions. The decision of which job to accept depends on
your personal preferences and priorities.
Think…
• You have $100. You have a choice between spending the money now or putting it in investment for a year in a bank
account that pays 5 percent interest. What is the opportunity cost of spending the $100 now?
• You have $800 and are deciding between buying a new phone or using the
money towards a vacation later in the year? Your estimated vacation cost is
$1000. what will you choose ?
• Watching movie at home vs. theater: Choosing to watch a movie at home
instead of going to the theater comes with a cost. The opportunity cost is
the cost of tickets at the theater.
• Buying coffee every day@ $5/day or buying a subscription of Netflix @
$100/m
• Opportunity cost: option 1? opportunity cost of buying coffee every day is
the value of the Netflix subscription, which is $100/month
• opportunity cost option 2 = $150/month (cost of coffee) - $100/month (cost
of Netflix) = $50/month
budget line
• A budget line represents the trade-offs between two goods
or services that can be purchased with a limited budget.
• It illustrates the maximum combination of items one can
afford, emphasizing the concept of opportunity cost.
• Understanding this helps in making better financial choices
and prioritizing needs over wants.
Budget line
• A line that shows the different combinations of two products a consumer
can purchase with a specific money income, given the products’ prices.
• Total expenditure = (price1 x quantity1)+(price2xquitatity2)
 Attainable and Unattainable Combinations
• All the combinations of movies and books on or inside the budget line are
attainable from the $120 of money income. You can afford to buy, for example, 3
movies at $20 each and 6 books at $10 each.
• You also can obviously afford to buy 2 movies and 5 books, thereby using up
only $90 of the $120 available on your gift card. But to achieve maximum
utility, you will want to spend the full $120. The budget line shows all
combinations that cost exactly the full $120.
• In contrast, all combinations beyond the budget line are unattainable. The $120
limit simply does not allow you to purchase, for example, 5 movies at $20 each
and 5 books at $10 each. That $150 expenditure would clearly exceed the $120
limit.
4 - Factors Of Production
4 factors of production

• Although we have unlimited wants, there are not enough resources for everyone.
Resources can be split into 4 factors of production, which are:
1. Land: All natural resources used to make a product or service.
2. Labor: The effort of workers required to make a product or service.
3. Capital: Finance, machinery and equipment required to make a product or
service.
4. Entrepreneurship: is the secret sauce that combines all the other factors of
production into a product or service for the consumer market.
circular flow diagram 2 factor model

• The circular flow model demonstrates how money moves through society. Money flows
from producers to workers as wages and flows back to producers as payment for
products.
• In short, an economy is an endless circular flow of money.
• A good model to start with in economics is the circular flow diagram. It pictures
the economy as consisting of two groups—households and firms—that interact
in two markets: the goods and services market in which firms sell and
households buy and the labor market in which households sell labor to
business firms or other employees.
• In this model, the economy is simplified to include only two types
of decision makers—firms and households.
• Firms produce goods and services using inputs, such as labor,
land, and capital (buildings and machines). These inputs are called
the factors of production.
• Households own the factors of production and consume all the
goods and services that the firms produce
Conti…
• Households Provide Factors of Production: Households supply factors of
production, such as labor, land, and capital, to firms.
• Receive Income: In exchange for providing these factors of production,
households receive income, such as wages, rent, interest, and profits.
• Firms Produce Goods and Services: Firms use the factors of production
to produce goods and services.
• Pay for Factors of Production: Firms pay households for the factors of
production they use.
• Sell Goods and Services: Firms sell their goods and services to
households and other firms.
➢ if you want to buy a cup of coffee. There you spend it on your favorite drink.
When the dollar moves into the Starbucks cash register, it becomes revenue
for the firm.

➢ The dollar doesn’t stay at Starbucks for long, however, because the firm uses it
to buy inputs in the markets for the factors of production.

➢ For instance, Starbucks might use the dollar to pay rent to its landlord for the
space it occupies or to pay the wages of its workers. In either case, the dollar
enters the income of some household and, once again, is back in someone’s
wallet.
• The circular-flow diagram is a very simple model of the economy.
• A more complex and realistic circular-flow model would include, for
instance, the roles of government and international trade. (A portion of
that dollar you gave to Starbucks might be used to pay taxes or to buy
coffee beans from a farmer in Brazil.)
• Yet these details are not crucial for a basic understanding of how the
economy is organized. Because of its simplicity, this circular-flow
diagram is useful to keep in mind when thinking about how the pieces
of the economy fit together.
 Production Possibilities model or
production possibility frontier (PPF)
• A production possibilities table lists the different combinations of two products
that can be produced with a specific set of resources, assuming full
employment.
• Full employment The economy is employing all of its available resources.
• Fixed resources The quantity and quality of the factors of production are fixed.
• Fixed technology The state of technology (the methods used to produce output)
is constant.
• Two goods The economy is producing only two goods:
In simple terms ceteris paribus.
• Means all other things keep equal
constant opportunity cost

• Shape: A straight-line PPF indicates constant opportunity cost.

• The opportunity cost of producing one good remains constant
regardless of how much of it you produce.
• This occurs when resources are perfectly adaptable to producing both
goods, and there are no trade-offs involved.
• This is a simplified model and rarely occurs in the real world.
 y1(constant )
90

80
y1(con
70
x stant )
60
8 0 10
7 10 10 50

6 20 10 40

5 30 10 30

4 40 10 20

3 50 10 10
2 60 10 0
1 70 10 0 1 2 3 4 5 6 7 8 9

0 80 10 y1(constant )
Increasing Opportunity Cost

• Shape : A bowed-outward (concave) PPF indicates increasing opportunity

cost.
• As you produce more of one good, you must sacrifice increasing amounts
of the other good.
• This is because resources are not perfectly adaptable to producing both
goods.
• For example, as you produce more cars, you may need to use resources that
are more suited for producing computers, leading to a higher opportunity
cost of producing cars.
• As we increase the production of a
particular good, the opportunity cost
of producing an additional unit rises.
• Concave shaped graph show
increasing opportunity cost.
 y3(increasing delta
y3(increasing)
x ) y3 350
8 0
300
7 100 100
6 180 80 250
5 240 60
4 280 40 200
3 300 20
2 310 10 150
1 315 5
100
0 320 0
50

0
0 2 4 6 8 10
 Decreasing opportunity cost.

• Shape : A bowed-inward (convex) PPF indicates decreasing opportunity cost.

• As you produce more of one good, the opportunity cost of producing that good
decreases.
• This can happen when there are economies of scale, meaning that as you
produce more of a good, you become more efficient and can produce additional
units at a lower cost.
• The law of decreasing
opportunity cost states that a
firm’s opportunity cost
reduces when production
declines.
• When the cost of producing
one product reduces, making
the next unit also reduces.
• Convex shaped graph show
decreasing opportunity cost.
 y2(decre y2(decreasing)
x asing) delta y2 500
8 0
7 5 5 400
6 15 10
5 35 20 300
4 75 40
200
3 135 60
2 215 80
100
1 315 100
0 435 120 0
0 2 4 6 8 10
 Increases in Resource Supplies/economy
grow.
• Increases in Resource Supplies Although resource supplies are fixed at any
specific moment, they change over time.
• For example, a nation’s growing population brings about increases in the
supplies of labor and entrepreneurial ability. Also, labor quality usually
improves over time.
• The economy’s stock of capital generally increases at a significant, though
unsteady, rate. And although some of our energy and mineral resources are
being depleted, new sources are also being discovered.
• The development of irrigation systems, for example, adds to the supply of
arable land.
• An outward shift in the production possibilities curve that results
• (1) from an increase in resource supplies or quality or an improvement in technology;
• (2) an increase of real output (gross domestic product) or real output per capita
direct relationship:

• The relationship between two variables that change in the

same direction, for example, product price and quantity
supplied. Or income and consumption.
inverse relationship:
• The relationship between two variables that change in
opposite directions, for example, product price and
quantity demanded.
 Dependent and Independent Variables
• independent variable : The variable which is not affected by any other variable. And it
causing a change in some other (dependent) variable.
• dependent variable : A variable that changes as a consequence of a change in some other
(independent) variable; the “effect” or outcome.
• In our income-consumption example, income is the independent variable and consumption the
dependent variable. Income causes consumption effected.
• Ticket prices (set in advance of the season and printed on the ticket) determine presence
basketball games; presence at games does not determine the printed ticket prices for those games.
• Ticket price is the independent variable, and the quantity of tickets purchased is the dependent
variable.
 x y
0 50

Slope of a Line
100 100 0.500
200 150 0.500
300 200 0.500
• The ratio of the vertical change (the rise or fall) to the horizontal
400 250 0.500

change (the run) between any two points on a line.

• Positive Slope Between point b and point c in the graph the rise or
vertical change (the change in consumption) is +$50 and the run or
horizontal change (the change in income) is +$100.

𝑦1 −𝑦2
Slope = y2
𝑥1 −𝑥2
y1

x2
x1
 x y
50 0

Negative Slope
40 4 -2.5
30 8 -2.5
20 12 -2.5
10 16 -2.5
0 20 -2.5

• Negative Slope Between any two of the identified points in the

graph, point c and point d, the vertical change is −10 (the drop)
and the horizontal change is +4 (the run). Therefore

y2
y1
𝑦1 −𝑦2
Slope =
𝑥1 −𝑥2

x x
 x y

Infinite Slopes
500 50
500 100 #DIV/0!
500 150 #DIV/0!
500 200 #DIV/0!
500 250 #DIV/0!
𝑦1 −𝑦2
Slope = • Many variables are unrelated or
𝑥1 −𝑥2 independent of one another. For example,
the quantity of wrist watches purchased is
not related to the price of bananas.
• The price of bananas and the quantity of
watches demanded. There will no
relationship between them so graph of
these is the line parallel to the vertical
axis, purchases of watches remain the
same no matter what happens to the price
of bananas.
• When the factor on (y-axis variable ) keeps
on changing and x axis variable remain
same we have infinite slope.
• The slope of such a line is infinite
 x y

Zero slope
0 180
100 180 0.000
200 180 0.000
300 180 0.000
400 180 0.000

• aggregate consumption is completely

unrelated to the nation’s divorce rate.
places consumption on the vertical axis
and the divorce rate on the horizontal
axis.
• The line parallel to the horizontal axis
represents this lack of relatedness.
• When the factor on (x-axis variable )
keeps on changing and y axis variable
remain same we have zero slope.
• The slope of horizontal lines is zero.
𝑦1 −𝑦2
Slope =
𝑥1 −𝑥2
Slope of a Nonlinear Curve

• The slope of a nonlinear curve changes

from point to point on the curve. The
slope at any point (say, B) can be
determined by drawing a straight line
that is tangent to that point (line bb) and
calculating the slope of that line.
• Consider the downward sloping curve.
Its slope is negative throughout, but the
curve flattens as we move down along
it. Thus, its slope constantly changes
the curve has a different slope at each
point.
Normative statement
• Normative statement which describes how the world should be.
• deals with prospective or theoretical situations.
• subjective and rely heavily on values originating from an individual
opinion.
• what the economy should be like or what policy actions should be recommended

❖The unemployment rate should not exceed 5%.

❖The government should increase spending on education to
improve the quality of life of the population.”
Positive statement

• positive statement which describes the world as it is (what is )

• Positive economics focuses on facts and cause-and-effect
relationships.
• It avoids value judgments and tries to establish scientific statements
about economic behavior.
• Such scientific-based analysis is critical to good policy analysis.
• The current unemployment rate is 20%.
• Health expenditure accounts for 25% of the budget.
• Inflation this year was 3%.