Introduction to Economics: Basic Concepts & Principles for Beginners

Understand basic economic concepts such as scarcity, supply and demand, costs and benefits, etc.

What is Economics

Economic agents / society have some economic problems because of the scarcity of resources. They need to choose scarce resources among alternatives (scarce resources) based on choice and valuation of alternatives.

Thus economics is the study of how economic agents or societies choose to use scarce productive resources that have alternative uses to satisfy wants (needs) which are unlimited and of varying degree of importance.

Review of Economic Terms

• Resources – are factors of production or inputs. – Examples: Land Labour • Capital • Entrepreneurship
• Scarcity – is the condition in which resources are not available to satisfy all the needs and wants of a specified group of people. Example: Most underdeveloped nations have natural resources, but do not have capital or skilled labour to develop them.

Because of scarcity, an allocation decision must be made. The allocation decision is comprised of three separate choices:

• What and how many goods and services should be produced?
• How should these goods and services be produced?
• For whom should these goods and services be produced?

Core Principles of Economics

How people make decisions

• People face trade-off
• The cost of something is what you give up to get it
• Rational people think at the margins
• People respond to incentives

How people interact

• Trade can make everyone better-off
• Markets are usually a good way to organize economic activity
• Governments can sometimes improve market outcomes

How the economy as a whole works

• A country’s standard of living depends on its ability to produce goods and services
• Prices rise when the government prints too much money
• Society faces a short–run trade off between inflation and unemployment

Value

Value refers to the power that goods and services hold so that they can be exchanged for other goods and services (value-in-exchange). For example, if one cycle can be exchanged for two cycles, then the value of one cycle is equal to two cycles.

A commodity can possess value only if it has the following characteristics.

1. Utility: It needs to have utility. A rotten or broken egg has no utility because no one would want it and it cannot be exchanged for anything (possesses no value-in-exchange).
2. Scarcity: Free things like air does not have value. So besides utility, a product /service has to be scarce.
3. Transferability: It should be transferable from one place to another or from one person to another.

Supply and Demand

Most markets are driven by supply and demand. The concept of supply and demand also helps us understand why popular products become cheaper over time.to explain why last year’s popular product is half the price the following year.

For example, taking the example of breakfast cereals, if a lot of people want to buy breakfast-cereals, you can assume that the demand for breakfast cereals is high. As a result, companies can charge more for their cereals and they can divert some of the raw materials (such as dry fruits) to make cereals instead of something else (say sweets).

On the other hand, the increased demand could also attract more manufacturers in the market, which could eventually lead to an oversupply of cereals in the market, because of which the prices of cereals will start falling.

Although this is a simplified example, it gives you a basic idea of the concept of supply and demand.

Costs and Benefits

The concept of costs and benefits is applicable to most decisions that we all make, and it applies to non-financial transactions as well.

Here are a couple of examples:

If demand bottled water is high, bottling companies will hire more people and make more bottled water, but only if the price and quantity they are selling justify the additional costs they need to incur to make more bottles of water.

Similarly, the consumer will buy the best bottled-water can afford to purchase, and not necessarily the cheapest or the most expensive.

We apply this concept in our daily lives as well, which making decisions.

While economics assumes that people are rational most of the time, humans actually make emotional decisions most of the time that do not maximize their own benefit. Advertising tries to capitalize on this tendency of humans to act non-rationally. Most commercials (ads) that we see try to activate us emotionally and we end up overestimating the benefits of the product that is being promoted.

More Useful Concepts in Economics

• Microeconomics
• Macroeconomics
• Managerial Economics

Academic Question on Economics

Q. Explain the concept of opportunity cost arising from the central economic problem of Scare resources and unlimited wants.

a) What is the opportunity cost of seeing a movie?
b) Who will incur a higher opportunity cost if they were to cut their own lawn, you or the billionaire Bill gates? Explain?

Q. Use the graph to answer the following questions:

a) What are production possibilities for the recording studio if it chooses to operate at T?
b) In moving from R to T, what is the opportunity cost to the studio in terms of albums forgone? Explain what is happening.
c) If the studio starts at point N and moves to R, what is the opportunity cost in terms of albums forgone? Explain what is happening.
d) Suppose the studio starts at point M, what possibilities are available to expand production?

Q. Coca Cola and Pepsi are the world’s two largest producer of soft drinks. Profitability of both companies depends on sales volumes, cost of sweeteners and other inputs. Coca Cola decides to increase its retail price by 7%. Price increases were welcomed by the owners with the justification of improving overall profitability and margin.

a) Should Pepsi follow the 7% price rise by Coca Cola?
b) How would the price increase affect level of sales for Coca Cola?
c) How advertising expenditure should be related to pricing?
d) How are Coca Cola and Pepsi affected by changes in the price of their inputs?

Q. What are the three basic economic problems? How are these problems related to allocation decision and types of economies?

Q. Describe the difference between the accounting and the economic concept of profit. How are they useful for managerial decision making?

Q. Explain the differences between profit maximization and shareholder wealth maximization. Which assumption provides a better model of a firm’s behaviour?

Q. Explain the implications of the agency problem for the theory of the firm.

Q. Task One – Questions on Economics – Important Concepts

TASK Two – Write an ESSAY

Task 2a

The management of Ace Body Gyms has asked you to evaluate the effects of the predicted changes in the UK economy outlined above on the performance of the company. Specifically, you should write an essay to address the effects of the independent report on the performance of Ace Body gyms. Performance should include, but is not limited to, the effects on price, cost, demand, investment opportunities, profits etc.

Task 2b

Your report should also include recommendations as to how Ace Body Gyms could maintain a solid performance despite the predicted economic downturn.

Harvard referencing
Marks are also awarded for the structure and presentation of material, including the use of the Harvard Citation and Referencing system.
NOTE: your essay must include at least 5 academic (e.g. referred journal articles or text books) references.

For Part A

• Look at the predicted changes in the UK economy in the paragraph above.
• What effect will each of them individually have on the performance of Ace Body gyms? Think about what we mean by “performance”.
• What effect will they have overall?

Then work out the effect of each on:

Price, Cost, Demand, Investment opportunities, Profits, Other measures of performance?

(You may wish to cover them in a different order.)

You will need to consult your notes for each relevant week, to work out what could happen.

For instance, economic growth…will slow and… result in high unemployment. Which factor of performance will this affect first? What will happen? Will it then affect other factors? How? In what way?

You may cover the effects of each predicted change individually for each part of the performance, as above, or in an overall context.

For instance, economic growth will slow, resulting in high unemployment and lower investment, whilst higher oil prices will lead to inflation. This will affect Ace Body gyms by… affecting price by…affecting cost by…etc.

For Part b

The last sentence of the paragraph gives additional information about how the company may tackle some of the issues.

“The report has urged the UK government to engage more with non-European markets which it says will result in more trade, more foreign investment and more knowledge transfer and sustained economic growth.”

Look through your notes for each relevant topic in the paragraph and each performance factor. For each performance factor, find out how it could be improved, minimised or maximised as appropriate. For instance, what would the business want to do with its costs? Which theory or concept can you link to? Can you link it to the information in the last sentence in the paragraph?

For higher marks, make sure you link what you are saying to an appropriate theory or concept. For instance, with pricing, which pricing strategy would you use to maximise the performance of the business?

And finally…

Finish with a conclusion, summarising your response in parts a and b. Remember to include at least five academic references.

Question. The government of India has asked all the manufactures and importers of pulse oximeters and oxygen concentrators to provide price-related data. The idea being to check the price movements of this equipment and ensure that their existing price are not increased more than 10% in a year. These efforts have been taken to check the timely availability of critical medical equipment at an affordable price to consumers. National Pharmaceutical Pricing Authority (NPPA) is the authority that regulates prices of critical drugs and medical equipment as per the provisions of Drug Price Control Order (DPCO) and puts a cap on their prices, if necessary. In the prevailing situation, for the larger interest of the public, NPPA has imposed on the medical devices industry associations to bring down the retail price of these critical medical equipment.

With a similar objective to serve public interest best, the Government of India (GOI), from time to time, amongst other policy measures, has also undertaken initiatives to increase minimum wage rate to support unskilled and unorganized workers to facilitate their standard of living. In the light of above background, analyse a few of the price control initiatives undertaken by the government; linking it to the concepts/topics discussed under the Introduction to Economics course. lease follow APA guidelines.

Question: Margo spends $10,000 on one year’s college tuition. What is the opportunity cost of spending one year in college for Margo? Thus, what is the cost of going to college?

Question: Marla will make $10 by tutoring for an additional hour but she will lose an hour of studying for her own economics test. Marla decides to study rather than tutor. What does Marla’s choice indicate about the value of an additional hour of studying?

Question: Which of the following are macroeconomic issues, which are microeconomic issues, and which could be either depending on the context?

• a. Inflation.
• b. Low wages in certain service industries.
• c. The rate of exchange between the AUD and USD.
• d. Why the price of cabbages fluctuates more than that of cars.
• e. The rate of economic growth this year compared with last year.
• f. The decline of traditional manufacturing industries.

Question: Consider the issue of Nike setting up factories in Bangladesh, a result of globalisation. Who are the winners and who are the losers? Is wellbeing for the people in Bangladesh improved?

Question: Questions 6 and 7 from Frank and Benanke, p. 437.

Question: Questions 6 and 7 from Goodwin et al., p. 147.

Question: Consider the attached extract of an article. What is likely to happen to the GPI due to this event?