Download - WSC Lecture - Basics of Economics
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LECTURE – 2
BASICS OF ECONOMICS
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• This lecture will essentially introduce you to a few basic economic concepts to give you a taste of the subject – which may also be handy while getting into finance.
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What is economics?Essentially a subject which deals with production, consumption and management of wealth and resources.One of its basic principles is that someone’s gain is someone else’s loss.
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Some economic terminologies
Demand• Demand – The willingness and ability to buy something at a particular price and time.
• Law of Demand – Keeping everything else constant, price and demand share an inverse relationship.
However, sometimes it gets violated – like in the case of Gold – you’d have observed that as gold prices rise people buy more and more of it because they expect the rise of price even further.
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A demand curve
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Supply The willingness and ability to sell something at a particular price and time.• Law of Supply - Keeping everything else constant, price and supply share a direct relationship.
This too, sometimes gets violated – like in the case of agricultural goods, where without proper storage facility, the goods will go stale so they’ll have to be sold before they go stale.
A supply curve.
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Other terms• Scarcity – A condition when demand exceeds supply. Scarcity is the whole reason behind trade. A product or a share in the stock market has a price because there is only limited quantity of it.
• Opportunity cost – The cost of the next best alternative that is forgone to buy a product. Example – The opportunity cost of buying shares worth X is probably Government bonds worth X.
• Equilibrium – A condition in which trade/business is feasible. Here, the producer and consumer agree to a price and desired quantity to be bought/sold. When this happens, the producer gets the money and the consumer gets the good. This is termed as a business transaction.
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Equilibrium – When demand meets supply
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But how does producer guess the price at which he/she should sell the good?• Here , a concept called price elasticity of demand is used. • Basically, it shows how consumer demand responds to changes in price.
-> If demand does not change much with change in price, it is inelastic-> If demand changes to a decent extent with change in price, it is elastic . Thus the producer varies the price accordingly.
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Income and Revenue• Income – What is earned as a result of labour/efforts.• Disposable Income – Income which you are free to spend after deducting tax and other liabilities like EMI.
• Another source of income is dividends – which is a return earned when money is invested in stocks. Companies as per their choice can declare dividend when it earns profit
• Revenue – Money earned from sales of a product. When cesses like corporate tax, property tax etc is removed then it is called income of a firm
In foreign countries, revenue is also called turnover. Profit – the excess of revenue over costs incurred.
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So…what’s really happening out there?
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Controllers of money flow in an economy• The Central Bank(RBI in India)• The Government (Through finance ministry)
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Role of RBI-> The major role of RBI is to mint currency notes and coins as per its wish.-> Other than that its role is to control inflation rates. Inflation is defined as a state of steady rise in prices. – one of its causes being rise in disposable income. A mild inflation, however, is necessary for growth.-> To curb this, it instructs banks to increase interest rates so that people borrow less – hence disposable income falls and inflation starts getting under control. RBI adjusts interest rates in terms of basis points – 1/100 of a percent.-> RBI also helps banks save themselves during financial turmoil so that the banking system does not crash.
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Basic types of market structures• Perfect competition – One in which there are large number of buyers and sellers, uniform price and no advertising costs. Firm is price taker.
• Monopoly – Single seller , who is the price maker. Can be regulated by Govt.
Indian Railways is one example of a Govt. monopoly Monopolistic competition – Large number of buyers and sellers, product differentiation and huge advertising cost. This type of market is what is realistically seen.