ECONOMICS

Meaning of Economy 3/2019

Central problem of Economy 3/2022; 3/2019
Briefly Discuss the basic problem of Scarcity and Choice 5/2016

Economy-
 The Sum of total economic activities of the society
 Every activity, which has economic motive, constitutes part of economy.
 According to Brown, ‘‘Economy is the system of earning livelihood’’
 Economy consists of all agricultural, industrial, manufacturing, construction, mining, business and
other productive activities.
 It also includes services in private institutions and government departments.
 Professionals like doctors, lawyers, singers, nurses and managers, etc. are also the members of
economy.
BASIC OR CENTRAL PROBLEMS OF ECONOMY
In every economy, economic resources are limited, whereas demands are unlimited. This is why, every
economy has to face and solve the following basic problems:
A. Allocation of Resources
1. What to produce? (Types/Amount)
2. How to produce? (Labour/Machine)
3. For whom to produce? (Distribution of Income)
B. Fuller Utilization/Employment of Resources (Efficient use)
C. Growth of Resources (Economic development)
Economic problems arise (WHY?) due to following facts of economic life:
1. Unlimited wants (Choice)
 Human wants are unlimited. As we satisfy one want, many more new wants come up.
 Besides this, one cannot satisfy even one particular want for all times to come.
 As we fulfill a particular want at a particular time, after a certain time it crops up again.
 This is why, it is said that wants are not only unlimited but they are recurring in nature
also.
 Similarly, with the development of education, knowledge, scientific advancement and
economic growth wants go on increasing.
2. Different priorities
3. Limited means (Scarcity)
 If means had been unlimited to satisfy unlimited wants, there would have been no
economic problem.
 The reality of the life is different i.e., the existing supply of resources is inadequate in
relation to the known desires of individuals.
 This gives rise to the problem of scarcity which is the basis of all economic problems.
4. Means having alternative uses

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Meaning of Economics 2/2018

Characteristics of Law of Economics 3/2019

Economics
 "Economics is the study of people in the ordinary business of life." (Marshal, 1890)
 "Economics is the science which studies human behavior as a relationship between given ends
and scarce means which have alternative uses." (Robbins, 1932)
 Economics is the "study of how societies use scarce resources to produce valuable commodities
and distribute them among different people." (Paul A. Samuelson 1948)
ECONOMIC LAWS or PRINCIPLES
In economics, the term ‘law’ means statements of general tendencies. Economic laws generalize the
human behavior regarding economic activities.
Characteristics:
1. Economic laws are statements of economic tendency
2. Economic laws are hypothetical
3. Economic laws are relative
4. Economic laws are human laws
5. Certain universal laws
Assumption of Economic Laws:
1. Other Things Remaining the Same
2. Rationality of Human Conduct

Define and explain the OPPORTUNITY COST with an example from your work place 7/2020-
2018/2016
Describe any of the economic concept (Opportunity Cost) in this course 5/2022

Opportunity Cost ("eternal truths of economics")

 Opportunity cost is a term used in economics, to mean the cost of something in terms of an
opportunity forgone (and the benefits that could be received from that opportunity), or the
most valuable forgone alternative.
 For example, if a city authority decides to build a hospital on a vacant land that it owns, the
opportunity cost is some other thing that might have been done with the land and construction
funds instead.
 In building the hospital, the city has foregone the opportunity to build a training center on that
land, or a parking lot, or the ability to sell the land to reduce the city's debt, and so on.
 Opportunity cost need not be assessed in monetary terms, but rather, is assessed in terms of
anything that is of value to the person or persons doing the assessment.
 The consideration of opportunity costs is one of the key differences between the concepts of
economic cost and accounting cost.
Example: Self-Explaining on Doing Courses in PGD HRM with self-finance and Losing the opportunity
cost of Workload pressure, family-friends time and managing other life event

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Define Productive Capacity 2/2016

Discuss either the concept of Production Possibility Curve 10/2023

Product Capacity- The maximum possible output of an economy

Production Possibility Curve/ Frontier )PPC/PPF)

 PPC/PPF The Production Possibility Frontier (PPF) or Production Possibility Curve (PPC) is the
graphical expression of both the concepts of limitation of resource and opportunity cost.
 It shows the maximum amounts of production that can be obtained by an economy, assuming
that the technological knowledge and quantity of input is fixed and the economy operates at its’
level of productive efficiency
 In a very simple sense, the graph that depicts opportunity cost between any two given items (gun
and butter)produced by an imaginary economy is known in economics as the ‘PPC’ or ‘PPF’

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The economy will be operating on the PPF

 (at point A,B,C,D,E)
o If all resources (inputs) are fully utilized and used most appropriately (efficiently).
 (at point like G) or Shift Inwards
o If all the resources are not utilized appropriately, then the economy will be operating
somewhere inside the PPF.
o Such cases of operating inside the PPF affirms economic inefficiency in using resource(s) for
that certain period of time and production of an item can be increase without making trade-
off against other item.
o The PPF shifts inward when an economy’s ability to produce decreases, (reflecting a decrease
in the aggregate number of military and civilian goods that can be produced).
o This is possible due to some major disaster, such as hurricanes or military invasion. The PPF
of the Iraq probably shifted inward due to the US invasions.
 (at point like H) or Shift Outwards
o In any economy, operation outside the PPF is not possible because of resource constrain that
is known as scarcity (So, scarcity means that an economy cannot go above or the right of the
PPF).
o Over time, the position of the PPF is not static. It shifts outward (upward and/or to the right,
when an economy’s ability to produce increases (, i.e., an increase in the aggregate number
of guns and butter that can be produced). This can happen if the availability of resources
(factors of production) increases, or if technology or management skills are improved.

Define Microeconomics and Macroeconomics 3/2019

State the micro/macroeconomics outcomes of the Labour Market 5/2022

Microeconomics

The part of economics concerned with single The branch of economics concerned with large-
factors and the effects of individual decisions. scale or general economic factors, such as
interest rates and national productivity
Study of economics at an individual or group or Study of economics at an national company level
company level
Analyze demand and supply of labour / goods Analyze employment/unemployment
rate/Aggregate demand/supply of good
Effect on wages of Labor General livelihood rate
Effect on Supply of Labour It also determines remuneration of various skill
Deals with the problems of allocation of Deals with the fuller utilization of resources and
resources in the market economy other general problems of inflation, savings,
investment, unemployment etc.
In a market economy goods and services are Forces of demand and supply guide which goods
freely bought and sold and how much is to be produced and consumed.
It decides which goods and how much should be
consumed and produced in the economy within a
given span of time, say within a given period

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What are the major features of Labour Economics? 10/2023;

What are the distinctive features of “Labour” as economic elements? 5/2022 ; 7/2019; 7/2018
What do you understand by organization functioning and outcomes of Labour market? Illustrate
with examples 8/2019; 8/2016
Labor economics
The field of economics, which examines the organization, functioning, and outcomes of labor markets;
the decisions of prospective and present labor market participants; and the public policies, which relate
to the employment and payment of labor resources.

Distinctive Feature of Labour as economic elements

1. Labor is a factor of production, not a final product

2. Like capital, labor is a flow of services attached to a stock of “equipment”
3. Unlike capital, the “stock” cannot be bought and sold
4. Labor is a very heterogeneous commodity
5. The quality of labor services being supplied is often hard to measure
6. Sometimes the demanders and/or suppliers of labor have considerable monopoly power
7. Labor markets are highly regulated; the exchange of labor is both highly taxed and subsidized
8. Labour Services are rented, not for sold
9. Labour Suppliers care about the way in which the labour is used
10. Labour supply is affected by non-monetary aspects (Leisure, Misconduct)
11. Labour productivity is affected by pay and working conditions
12. Labour is perishable
13. As compared to goods and services, labour is less mobile
14. Labour is human being not a machine
15. Labour demand is indirect
16. Labour creates capital
17. Measuring cost of Labour Production is impossible

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Which sub branch of economics can provide useful knowledge to HRM? and How? 7/2018
Importance of labor economics (HOW)

Labour Economics

 A field of study that focuses on studying the labour market and the behaviour of employees and
employers.
 The subject analyses factors affecting employees before, during, and post-working periods.
 It examines the allocation of labour resources and seeks to understand the factors influencing
wages, employment levels, and working conditions.
 Within human resource management, labour economics provides insights into the dynamics of
the labour market and helps organization’s make informed decisions related to workforce
planning, recruitment, compensation, and employee relations.
Some key areas within labour economics that are relevant to human resource management:
1. Determining Compensation and Benefits
2. Understanding Labor Market Dynamics (Discrimination/ Regulations Compliance)
3. Labor Supply and Demand Planning
4. Optimizing Workforce Efficiency (Employee Motivation and Incentives)
5. Human Capital Development (Training and Development)
6. Workforce Planning (Recruitment and Selection /Employee Retention and Engagement)
7. Labour Relations and Collective Bargaining

What are the major features of Personnel Economics? 3/2022

Brief on development of Personnel Economics 8/2017

Personnel Economics
The subfield of labor economics that analyzes the design and effects of personnel policies. A broader
definition would recognize the strong complementation of PE with the economics of organizations. The
economics of organizations emphasizes the boundaries of the firm, organizational structure, and
decision-making. These are closely related to personnel policies and involve similar economic trade-offs.
Moreover, they are all of relevance to an executive responsible for setting or overseeing organizational
policies.

Development of PE
PE became a strong subfield in its own right, somewhat separate from labor economics, with two
developments.
1. The first was the adaptation of the economics of information and other ideas from economic theory to
applications inside organizations
a. As the theoretical ideas advanced, economists (especially those employed in business schools) began
applying the ideas to understand the policies that a firm uses for its internal design and
management of personnel
b. The focus gradually evolved to a more practical focus. A leader in this development was Edward
Lazear, who is generally credited as the primary founder of the field of PE
c. Two excellent examples of his applied theoretical approach are his articles on salaries versus piece
rate compensation plans and tournaments
d. Both provided empirically testable predictions and practically implementable prescriptions

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2. Personnel economists explore how the tools of sorting, signaling, and investments in human
capital might be used by a firm to improve the quality of its workforce.
a. They have used the idea of signaling to analyze how a firm can improve recruiting quality by
structuring the job offer so that workers who believe themselves to be a good fit are more
likely to accept the offer, while those who do not are more likely to reject the offer
b. Application of economic ideas of sorting can be used to model how to structure a firm's
promotion system.
c. Economists have studied the effects of various kinds of promotion systems on the
incentives

Draw / Describe / Explain Circular flow of economic activities with its real-life applications. 10/2023;
5/2022; 8/2018; 5/2016 (Courtesy: Copy from other’s notes )
The circular flow of economic activities is a simplified representation of the flow of goods, services, and money
within an economy between households, firms, and the government. It illustrates how various economic agents
interact in markets for goods, services (product markets), and markets for factors of production (factor markets).
Here is a description of the circular flow along with an appropriate diagram:

1. Households: Households are the primary consumers of goods and services in the economy. They provide
factors of production such as labor, land, and capital to firms in exchange for wages, rent, interest, and profits.
Households use their income to purchase goods and services from firms.
2. Firms: Firms produce goods and services using inputs from households and other factors of production. They
sell these goods and services to households in exchange for revenue. Firms also pay wages, rent, interest, and
profits to households as payments for the factors of production.
3. Product Market: This is where goods and services are bought and sold between firms and households. Firms
supply goods and services, while households demand them. Firms earn revenue from the sale of goods and
services, which they use to pay for factors of production and other expenses.

4. Factor Market: This is where factors of production are bought and sold between households and firms.
Households supply factors of production (such as labor) to firms in exchange for payments (wages, rent,
interest, profits). Firms demand factors of production to produce goods and services.
5. Government: The government plays a role in the circular flow by collecting taxes from households, firms,
providing goods, and services (such as public infrastructure, education, and healthcare) in return. Government
spending injects money into the economy, influencing the flow of economic activities.
6. Financial Markets: Although not explicitly shown in the basic circular flow model, financial markets facilitate
the flow of funds between savers (households and firms) and borrowers (firms and government) through
mechanisms such as loans, bonds, and stocks.

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Describe the law of demand with some of its exceptions 8/2022; 7/2019-2018; 5/2016

Law of Demand
The law of demand states the inverse relationship between price (of Goods) and quantity (of Goods)
demanded.

EXCEPTIONS TO THE LAW OF DEMAND

 Serious shortage of Giffen Goods  Price of necessity of life goes up
 luxury item / Veblen Goods  Out of fashion
 Sheer ignorance  Speculative Goods
(Extra)
Demand for a good or service is defined to be the relationship that exists between the price of the good
and the quantity demanded in a given time period, ceteris paribus.
The demand function is algebraic expression of the relationship between price of a product and the
quantity demanded for, in relation to the specific period of time. The simplest form of the demand
function is as Qd = f(p) , here. ‘Qd’ stands for quantity demanded and ‘p’ stands for price.

Determinants of Demands 3/2022

A Consumers’ demand for a commodity or service depends on several factors, the most important of
which are the following:
1. Price of the commodity or service, 5. Population and its distribution.
2. Consumers’ income, 6. Consumers’ expectations (in case of durable
3. Prices of related goods or services, goods).
4. Consumer tastes and preferences, 7. Weathe

What are the substitution effect for Labour demand 3/2022

The Demand curve usually slopes downwards; this is in accordance with the law of diminishing marginal
utility. More precisely, we can consider the following reasons to explain the downward slope of the
demand curve:
 If price falls, a consumer can afford to buy more. He is able and willing to buy more because the
thing being cheaper, his real income increases. It is called income effect.
 When the commodity become cheaper, it tends to be substituted wholly or partly for other
commodity. It is called substitution effect. The income and substitution effect combine to
increase the ability and willingness of the consumers to buy more of the commodity whose price
fallen.

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Determinants of Supply 4/2019

The supply of a commodity or service depends on several factors, the most important of which are the
following:
1. Price of the commodity or service 5. Number of Sellers
2. Costs of the various factors of production 6. Goals set by the producing firms
3. Improved techniques of production 7. Weather.
4. Improvement in the means of transport and
communication

EXTRA
LAW OF SUPPLY
The law of supply states the positive relationship between price (of Goods) and quantity (of Goods)
Supply
EXCEPTIONS TO THE LAW OF SUPPLY
1. rare contribution or unique items
2. The supply of labour up to a certain level
3. The price of agricultural products does not always follow
4. leaded by sellers’ expectation

What is a market equilibrium? Explain equilibrium price, market price and regulatory price. 10/2023;
5/2022; 2/2019; 2017; 2016
MARKET EQUILIBRIUM
To find the price, we have to look though the interaction of demand and supply curves and find out the
market equilibrium point, where supply meets demand. Let us combine the market demand and supply
curves on one diagram:

It can be seen that the market demand and supply curves intersect at a price of tk.3 and a quantity of 60
units. This combination of price and quantity represents an equilibrium since the quantity demanded
equals the quantity supplied. Once this price is achieved, there is no reason for the price to either rise or
fall (as long as neither the demand nor the supply curve shifts).
EXTRA
If the price is above the equilibrium, a surplus occurs. This situation is illustrated in this diagram. The
presence of a surplus would be expected to cause firms to lower prices until the surplus disappears (this
occurs at the equilibrium price of tk.3).
If the price is below the equilibrium, a shortage occurs. This possibility is illustrated in this diagram.
When a shortage occurs, producers will be expected to increase the price. The price will continue to rise
until the shortage is eliminated when the price reaches the equilibrium price of tk. 3.

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Discuss the changes in equilibrium of a normal good with specific reference to increase in the
consumer income and increase input price 7/2019
Draw an initial equilibrium of a normal good (Mobile/Biscuits) market and show the primary effect
of (technological changes / increased consumers income) in the market 4/2016
Increased Demand
An increase in demand results in an increase in the equilibrium levels of both price and quantity. An
increase in income level, increase in the price of the substitute product, favorable seasonal effect,
change of consumes’ taste in favor of the commodity etc. may cause such shift in demand and
readjustment of the market equilibrium.
Decreased Demand
A decrease in demand results in a decrease in the equilibrium levels of price and quantity. A decrease in
income level, price reduction of the substitute product, unfavorable seasonal effect, change of
consumes’ taste against of the commodity etc. may cause such shift in demand and readjustment the
market equilibrium.

Increased Supply
An increase in supply may make such rightward shift of supply curve that is realized by a higher
equilibrium quantity and a lower equilibrium price. It can be propelled by technological advancement,
reduction in cost of factor of production, decrease of fuel price, improvement of transportation and
communication facilities, etc.

Decreased Supply
If supply falls, equilibrium quantity will fall and equilibrium price will rise by a leftward shift of supply
curve. Such shift may be occurred by Increase in input price, natural calamities, distortion of
transportation and communication network, and decline in production capacity due to war or political
unrest, exhaustion of natural resources, etc.

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What do you understand by the concept of “Income Effect” for individual labour supply? Why the
individual Labour supply is represented by `backward bending curve”? Explain in relation to
substitution effect and income effect. 10/2023; 8/2018; 7/2016
Describe the relation between wage and quantity demand for labour in light of Substitution effect
and scale effect 8/2016

Substitution and income effects of a wage change

A change in the wage results in two effects on an individual's labor supply:

A substitution effect, and An income effect.
As the wage rate rises, the opportunity cost of leisure time rises. In response to this higher wage, individuals
consume less leisure time and spend more time at work. This is the substitution effect resulting from a higher
wage.
An increase in the wage, however, also raises an individual's real income. This leads to an increase in the
consumption of all normal goods. Since leisure is expected to be a normal good for most individuals, a higher
wage will generally induce individuals to consume more leisure time. Individuals who receive a higher wage can
afford to take more time off from work. This is the income effect resulting from a wage increase.

If we assume that leisure is a normal good, an increase in the wage will cause the quantity of labor supplied to:
Increase if the substitution effect > the income effect, and Decrease if the income effect > the substitution
effect. This may result in a backward-bending labor supply curve.

PRICE CEILINGS
A price ceiling is a legally mandated maximum price. The purpose of a price ceiling is to keep the price of a good
below the market equilibrium price. Rent controls and regulated gasoline prices are examples of price ceilings.
This explains why rent controls and regulated gasoline prices have resulted in shortages.

PRICE FLOOR
A price floor is a legally mandated minimum price. The purpose of a price floor is to keep the price of a good
above the market equilibrium price. Agricultural price supports and minimum wage laws are example of price
ceilings. An effective price floor results in a surplus of a commodity since quantity supplied exceeds quantity
demanded when the price of a good is kept above the equilibrium price

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