Economics

• Economics is the social science that studies the production, distribution, and consumption of goods and services.
• It studies how individuals, businesses, governments, and nations make choices on allocating resources to satisfy their wants and needs.
• Tries to determine how these groups should organize and coordinate efforts to achieve maximum output.

Types :-
Microeconomics

• Focuses on the behavior of the individual character actors on the economic stage. i.e. firms and individuals and their interaction in markets.

Macroeconomics

• Study of the economic system as a whole.
• Deals with aggregate economic variables such as level of growth, rate of national output, interest rates, unemployment and inflation

The circular flow of economic activity

The circular flow of economic activity with Government

1.2Technological Change in Global Economy

• Technological change may involve new products, improvements or cost reductions for existing products, or better ways of managing the operations of a business.
• Technological change is the process of invention, innovation and diffusion in technologies and processes
• May be simple or brilliant.
• Technological change can be thought of as altering the firm’s production function.
• Alvin Toffler, 1970s, “Future Shock” :- The average person is emotionally and intellectually left behind by the rapid pace of technical and cultural change.
• Many firms have found it difficult to keep pace.Complicating the situation is the need for firms to stay close of new developments within their own industry.

For instance….

• Electronics companies :-–use the new digital technologies for their audio and video equipment
• Automobile manufacturers :-–Using advanced robotics for assembly
• Computer suppliers :-Include state-of-the-art chips, display terminals, and storage devices.

The Impact of Technological Change

• Technological change may involve new products, improvements or cost reductions for existing products, or better ways of managing the operations of a business.
• May be simple or brilliant.
• Technological change can be thought of as altering the firm’s production function.

Neutral Technological Change

• Can cause a shift in the production isoquants.
• Equal reduction in both inputs.

Non-neutral Technological Change

• increases the marginal product of capital relative to the marginal product of labor.
• Unequal reduction in one of input.

Technological Change and the market Structure

What type of market structure best facilitates the generation of new knowledge?
Does the market structure determine the rate of technological change or does the nature of technology dictate which market structure will prevail?

• Effect of market Structure on Technological Change
• Effect of Technological Change on Market Structure

1)Effect of market Structure on Technological Change

• Market power is a necessary condition for rapid technological change.
• Large firms have been responsible for many important developments.E.g. AT&T’s Bell labs invent the transistor and DuPont introduced Nylon.
• Small firms also have impact . (competitive)
• In evaluating the effect of market structure on technological change, the key is to consider both the ability and the incentives to be progressive.
• Ability involves being able to fund expensive R & D projects, withstand failures, and wait for results.
• Incentives include the need to remain competitive and being able to capture the rewards of technological advance.
• Market structure can affect the rate of technological change
• Technology can also significantly affect the structure of market.e.g. Telecommunication. 
• Changes in technology, by reducing or increasing economies of scale, can alter market structures. 

2) Effect of Technological Change on Market Structure

• Market structure can affect the rate of technological change
• Technology can also significantly affect the structure of market.
• e.g. Telecommunication.
• Changes in technology, by reducing or increasing economies of scale, can alter market structures.

Industrial Innovation

• Invention, Innovation and diffusion.
• Invention can be thought of as a creation of new ideas.
• Innovation represents taking those ideas and transforming them into something that is useful for society.
• Diffusion is the process whereby the new product or process becomes available throughout the society.

1.3Market Failure

Market failure does not mean that the given market has ceased functioning. Instead it is a situation in which given market does not efficiently organize production or allocate goods and services to the consumers
Market failure occurs due to inefficiency in the allocation of goods and services.

• Either overproduction or underproduction
• The production is not socially optimal
• Demand and supply mismatch

Despite having sufficient supply , the demand doesn’t exist for a particular product or an industry

Some major Reasons for market failure

i)Monopoly

• Destroys Competition, Business can charge high prices, supply less intentionally

ii)Information asymmetry / misbalance

• Among buyers and sellers
• Charging higher prices than normal so that a party can make profit
• E.g. electrician charging higher price while repairing devices.

iii)Public Goods

• Public goods are the goods which are produced and  are made available to the member of the society.
• They are the goods , which are non-rival and non-exclusive in nature and provide benefit to the people at 0 marginal cost (MC).

Characteristics of Public Goods
Non-rival
Goods that are non rival can be made available to  everyone without affecting any individual’s  opportunity for consuming  them.Eg: Highway, parks.
Non-exclusive
People  cannot be excluded from consuming it.It is difficult or impossible to charge people for using  nonexclusive good; the goods can be enjoyed without  direct payment. E.g. national defense.
iv)Externalities
An externality is an effect on a third party that is caused by the consumption or production of a good or service.It is the situation in which a person’s activities goods  and  services  effect  the  well-being  uninvolved people.
Types of Externalities
Positive Externalities:A positive externality is a positive spillover that  results from the consumption or production of a  good or service. For example, although public education may only  directly affect students and schools, an educated  population may provide positive effects on society  as a whole. ,Repaint and construction of garden
Negative Externalities: A negative externality is a negative spillover effect  on third parties. For example, secondhand smoke may negatively  impact the health of people, even if they do not  directly engage in smoking.
E.g. Pollution done by steel plant causing damage to aquatic life.
Controlling Externalities

• An Emission Standard
• An Emission fee
• Transferable emission permits
• Recycling
• Refundable deposits
• Property Rights
• Common property Resources