Fundamental Concepts

Scarcity & Choice

Macro and Micro economics
Economic Agents
Fundamental problems
Market

SCARCITY AND CHOICE

Scarcity is a situation when demand exceeds supply.
A commodity is scarce if somebody has to sacrifice

something (pay money, time, etc) to obtain it.

Not necessary that sacrifice have to be made by person
who obtained it or used it.
Almost everything is scarce except sunlight, air etc.
The more you have to sacrifice more scarcer it is.
Wherever there is scarcity there is choice.
Most of our activities are nothing but manifestation of
some choice decisions the decisions that have their
roots in the conflict between our unmet need and
scarcity of resources

The resource base of society:

Natural Resources: land, water, air,

minerals, forest etc

Human Resources: skilled and unskilled
labour
Capital Resources: machines, buildings,
equipment, etc
Entrepreneurial Resources: the organisers
who combine the above resources make
production decisions, and take risks.

 Economics: studies the production, consumption and

distribution of goods and services, with an aim to

explain, how economic agents interact, how consumers
and producers react to changing conditions. Economics
provide powerful guidance and influence to policymaking at the national level. Economics analysis and
provides decisions to how a nation approaches taxation,
regulation, and government spending.
Finance: Study of prices, interest rates, money flows

and thefinancial markets. It is concerned with value

of money, rates of return, cost of capital, optimal
financial structures and the quantification of risk. It is
the science of managing funds keeping in mind the
time, cash at hand and the risk involved i.e. efficient
and productive management of assets and liabilities
based on existing information.

Economics
Economics is the study of the use of limited

resources
for
the
achievement
of
alternative ends.
A social science that covers the behaviours
and actions of individuals in the process of
producing, exchanging and consuming
goods and services.
It analysis how choice decisions are made
by an individual unit (consumer/ producer)
and society as a whole.
The ultimate goal of analysis is to help
resolve the conflict between scarcity and

Microeconomics and
Macroeconomics
Microeconomics tools: like demand, cost and market analysis.
It focuses on choices and decision making process of an
individual unit.
It concentrates on the analysis of individual prices and
markets and allocation of specific resources to particular
uses.
Macroeconomics:
Study of broad aggregates such as total employment,
national income and inflation.
Example: study of hospital cost is a microeconomic analysis
but the analysis of state expenditure on healthcare requires
aggregation over individual choices without much attention
how these choices are made.

Economic Agents
Economic Agents are decision making units divided

as Consumers, Producers and Government.

Economic agent is one who can take economic
decisions independently.
Example: A consumer can independently decide
whether he would seek medical care to cure a
disease, it is responsibility of provider to decide on
how they would provide it, and the government
may decide to intervene by imposing price control
on the provider
or by establishing a parallel
system of healthcare provision.

Interaction between these economic agents forms the

basis of an economic system.

The consumers and producers interact to each other in
a set-up called Market.
Market has 2 forces: Demand & Supply; operating
against each other.
The consumers demand goods and services in the
output market.
Producers supply them, but need resources to produce
goods. So they place their demand for resources like
land, labour, capital, raw material etc in this market.
Consumers supply input to demand output, while
producers demand input to supply output.

Fundamental problems

What is to be produced?
How is to be produced?
For whom is to be produced?

What is to be produced ?
Consumers decide, through their preference.
If all of us wish to wear jeans, why the producer will

continue producing kurta?

Economics tries to analyse and predict the consumers
decision making process in an objective way through
its Theory of Consumer Behaviour and Demand.
It attempts to answer why in a particular situation
consumers decides to buy X, not Y ?
Why and when they will decide for more mango and
less banana ?
Why they would buy a quacks service when a qualified
doctor is readily available ?

How is to be produced?
Producers have to find out the cheapest

way to produce the good or to sell it in the

market with highest level of profit.
How will they do that ?
If cheeseburger is decided, should they use
less labour and more machines to produce
it ?
When they will produce more and when
less ?
Who will produce, who will not ?
Economics
answer it by Theory of

For whom to be produced ?

Who will get how much share of these goods ?
Eg. If producers come up with 2 types of vehicle, cars

and bicycle.
Who will drive cars
Who will ride bicycles ?
Who will have none ?
What determines this distribution ?
Why rich are rich and poor are poor ?
The government distributes health in egalitarian way.
You get what others get irrespective of whether you
deserve more or not ?

Market
The usual outcome of an uncontrolled interaction

between interests is chaos.

Every day millions of people are interacting with
each other to fulfil their needs for consumption /
production of goods / services. These needs cross
each other and people end up meeting their needs
according to their capacity or resources.
The invisible hand which makes it possible is called
Free Market mechanism.
Primary condition for establishing a market is a
contractual relationship (explicit / implicit)between
buyers and sellers.

Explicit Contracts: are made when a buyer and a

seller operate on the basis of a written agreement.
Here, Both accept a mutually agreed price, quantity,
terms & conditions.
Implicit Contract: No written agreement is necessary.
Buyers know how much they have to pay for a certain
good.
Market allows 2 opposite forces play freely against
each other to determine a price of good at which both
buyer and seller reach a mutually satisfactory situation
: Demand & supply.

Following

conditions

required

for

this

automatic

situation:

The good is scarce (buyers can have it only by sacrificing

other scarce thing)
Government does not intervene in the process
Buyers as well as sellers are fully informed about the good
and its exchange value.

Solution reaches where price acts like signal / indicator

of the degree of scarcity of good. Higher the price

scarcer it is.
At certain price buyers want to buy becomes exactly
equal to the amount the sellers want to sell : Market
Equilibrium.

In case of market imbalance, price starts moving, agent

change their decision until balance is restored.

Example:

At a Rs 4 buyers are willing to buy 200 units of electricity.

Suppliers find it too low to cover their production costs
and are willing to sell only 100 units.

Hence, only 50% of quantity demanded is met, creating

market imbalance and an upward pressure on price.

Price will increase to Rs 5 when few buyers will opt out of

market or will reduce their demand, leading to reduction
in total demand, say 150 units.

While at Rs 5 supplied amount is likely to increase, since

suppliers would be willing to supply.

Hence equilibrium would reach at Rs 5.