Introduction¶

Constrained optimization wrt trade-offs and scarcity to maximize utility with minimal cost

Deals with

1. what to produce
2. how to produce
3. for whom to produce

Aspects¶

• scarcity of resources
• forecasting
• factors of production
• proportion of input and output
• allocation of resources

Assumptions of Classical Economics¶

1. Stable & well-defined Preferences
   1. Completeness: no one feels unsure about preferences
      1. Either \(A > B\) or \(B<A\) or \(A \sim B\)
   2. Transitivity: If you prefer \(A > B\) and \(B > C\), then you must prefer \(A > C\)
   3. Non-satiation: More is better
   4. Can be represented as a utility function
2. Rational behavior
   1. Want to maximize utility
   2. Only have self-interest
   3. People don’t care about others’ interests
   4. No peer-pressure
   5. risk-averse
   6. Perfect Bayesian information processors
   7. process information optimally
   8. pay perfect attention to all details
   9. don’t forget information
   10. No biases
   11. preferences over final outcomes, not changes
   12. no “taste” for beliefs/information; purely objective
3. Budget constraints
   1. Budget = Income; ie no savings/borrowings

These may seem like we are making very incorrect assumptions. But these assumptions are required to understand the main concepts. For more accurate modelling, we use Behavioral Economics

Preferences¶

Elements of Market¶

1. Demand
2. Supply
3. Equilibrium

These are built from the indifference and budget constraints curves of utility maximization

Paradox of Value¶

The paradox of value is the contradiction that, although water is more necessary than diamonds for survival, diamonds are costlier

This can only be explained through the elements of market

Misc¶

Black Money¶

The money isn’t necessarily illegal, the problem is that the transaction is unofficial, to avoid paying taxes for the transaction.

Demonetization¶

They assumed that all black wealth is in the form of cash, but if you look at data - 0.0002% of total wealth is in the form of cash - only ~1% of black wealth is in cash

Demerits were the cost of - Printing the notes - Time of people in queues wasted and hence they did not perform productively - Informal sector shops lost everything, due to the above

It mainly did one thing: introduction of a new commodity: old currency

Fake Currency¶

Fake currency is only an issue if it facilitates illegal activities. However, as long as fake currency is used for legal activities, then there is no problem from the perspective of economics. However, if the proportion of fake money is too large, then there is risk of inflation

Income¶

Circular Flow Model¶

More cycles \(\implies\)higher output

Cashless economy allows to complete more cycles Credit card basically provides preponed salary; instigates flow from consumer sector to production sector

Sectors of Economy¶

1. consumer
2. business/production
3. financial
4. Govt
5. external/foreign/international

All of these sectors are inter-linked and anything that affects one sector affects the others too - Agricultural inflation affects non-agricultural sectors, as agricultural products are used as raw materials - Agricultural sector depends on the manufacturing sector and vice-versa

2 sector¶

Consumer and production

Production sector produces goods and services; consumers buy them

Production sector provides jobs; consumers work

3 sector¶

Financial sector provides investments to the producers

Consumers deposit the savings into the financial sector, and they gain more or assets go through depreciation

4 Sector¶

International sector allows

• imports/exports
• remittance(overseas transfers) - consumer the money sent back to the family in another country
• net lending overseas - financial sector gives out loans to other countries
• overseas income from foreign to all other sectors

5 sector¶

Govt

• consumers
  • collect taxes
  • provide direct income transfers (like pensions)
• business
  • collects taxes
  • govt purchases
  • transfer payments (tax holidays)

• financial sector

  • loans in times of govt deficit
  • liquidity injection Hot money/cash for the banks
  • foreign sector
  • import duties/taxes

Idk¶

There is always a conflict b/w efficiency vs equity.

Commodities¶

Categories¶

Types¶

Money¶

Medium of exchange that does not provide returns

1. Facilitates trade
   1. prevents the need for coincidence of wants; ie money prevents the need for both parties to want to exchange products that they want from the other person
2. Mode of deferred payment
3. Unit of value
4. Store of value

Money could be - cash - digital wallet - checkable deposits

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