noc21-bt21-lec02

Summary

In this informative lecture by IIT Kanpur-NPTEL, the fascinating world of economics is explored through the lens of decision-making and societal interactions. The session delves into how individuals and societies navigate trade-offs due to limited resources, emphasizing the concept of opportunity cost. Furthermore, the lecture highlights the role of incentives in guiding economic choices and the impact of price fluctuations on consumer and producer behavior. In conclusion, the discussion broadens to encompass the benefits of trade and market dynamics in improving societal well-being and economic efficiency.

Highlights

• Trade-offs are unavoidable in decision-making, both at personal and societal levels. ⚖️
• Opportunity costs represent the next best alternative foregone in a decision. 🛍️
• Rational thinking at the margin – people evaluate additional benefits vs. costs. 📈
• Incentives, like subsidies and taxes, strongly influence economic behaviors. 🤑
• Price is a key incentive in markets, altering consumption and production patterns. 🍏📊
• Trade enhances overall societal welfare by allowing specialization and efficiency. ➗
• Market economies smoothly allocate resources through decentralized decisions. 🌐

Key Takeaways

• Economics is all about understanding trade-offs due to limited resources. 🤔
• Opportunity cost is what you give up to make a decision. It’s crucial in economics! 💡
• Incentives matter! They motivate people to act and can be positive or negative. 🎯
• Price changes are powerful incentives affecting both consumers and producers. 💸
• Interactive markets lead to efficient economic activities by guiding decisions based on self-interest. 🔄

Overview

Economics is where the science of choice meets the art of the possible. With resources being finite, both individuals and societies constantly face trade-offs. This lecture dives deep into the intricacies of decision-making, portraying trade-offs as an essential part of life, from choosing between ice creams and chocolates to societal allocation of funds towards education or defense.

The role of incentives in economics is like a magic wand that can elevate or deter actions. Taxes, subsidies, and prices serve as motivating forces that drive consumer and producer behaviors, often leading to staggering shifts in market dynamics. For instance, a rise in fuel prices doesn't just boost the sales of electric vehicles but can also increase public transit adoption.

A robust discussion on trade unfolds, where it's emphasized how exchanges between individuals amplify overall welfare. In a market economy, trade and specialization enable optimal resource use, contributing to the efficiency and prosperity of society. This lecture intriguingly ties together the concepts of marginal thinking, opportunity cost, and price mechanisms, painting a complete picture of economic interactions.

Chapters

• 00:00 - 10:00: Introduction to Economics and Decision Making The chapter introduces the basic concepts of economics and decision-making. It begins with a continuation of the discussion from module one on what economics entails. The lecture aims to deepen understanding of how decisions are made, considering various economic factors, and examines the nature of interactions in economic environments.
• 10:00 - 30:00: Understanding Trade-offs and Costs In this chapter, the discussion begins with a recap of the previous lecture's topic on decision-making, both at the individual and societal levels. The key point highlighted is that people and societies encounter trade-offs. This forms the foundation for understanding how decisions are constructed and executed, either personally or collectively in a society.
• 30:00 - 60:00: Role of Incentives in Economics The chapter explores the concept of trade-offs in economics, highlighting that due to limited resources, individuals or societies must make decisions about how to allocate their resources efficiently. It uses the example of choosing between ice creams and chocolates with a limited budget to illustrate the idea that acquiring more of one item means having to settle for less of another. This chapter serves to explain the fundamental economic principle of trade-offs, where resource allocation involves opportunity costs and prioritization.
• 60:00 - 90:00: Concept of Trading and Market Economies The chapter explores the concept of trade-offs in the context of trading and market economies. It uses a simple example of a person deciding how to spend 100 rupees to illustrate the fundamental economic principle that choosing one option usually means forgoing another. When a person spends all of their money on one good, such as ice cream, they cannot afford another, such as chocolates. Alternatively, they can allocate funds between ice cream and chocolates, representing the idea that resources are limited and choices must be made regarding their allocation. This scenario introduces the basic notion of opportunity cost and the importance of decision-making in economics.
• 90:00 - 102:30: Summary and Conclusion This chapter discusses the trade-offs faced by society in terms of production decisions. It highlights key questions such as what to produce, how to produce, how much to produce, and whom to produce for. The text provides examples, such as the decision between producing capital goods versus consumer goods, illustrating the choices society must make in allocating resources.

noc21-bt21-lec02 Transcription

• 00:00 - 00:30 [Music] namaste we move forward with our discussion on module one what is economics and in this lecture we will carry forward our discussion on making decisions and we'll also have a look at interactions
• 00:30 - 01:00 so let us begin with a summing up of what we saw in the previous lecture in the last lecture we discussed about how we make decisions how does a person make decisions and how does a society make decisions and we surmise certain points about it the first one being that people and society face trade-offs so whether it is at the level of an individual or it is at the level of the society
• 01:00 - 01:30 there are always certain trade-offs now what is the trade-off trade-off is something that because your resources are limited you can use your resources to get say object one and if you use your resources to get more and more of object one you will get less and less of object two so a simple example is that suppose we have two objects we have ice creams and we have chocolates and we have a limited amount of money with us
• 01:30 - 02:00 suppose we have 100 rupees now those 100 rupees can be used to get ice cream or they can be used to get chocolates now if you spend your 100 rupees only on ice cream you will get zero amount of chocolates if you spend your 100 rupees on getting chocolates you will get zero amount of ice cream or you can use your 100 rupees to get some chocolates and some ice creams so this is a trade-off that we are
• 02:00 - 02:30 facing at the level of an individual now similarly society also faces certain trade-offs primarily in the form of what to produce how to produce how much to produce whom to produce and so on so for instance the society it can utilize its resources to produce capital goods or it can use it to produce consumer goods the society can decide that we should
• 02:30 - 03:00 put more and more amount of money into defense or it can decide that we should put more and more amount of money into health care or education now because the resources are limited if we put more amount of money into say health care we will have less amount of money that is left for education sector and so there is always a trade-off so people and society face trade-offs primarily because the resources are limited now because of these trade-offs we have costs and costs are defined as
• 03:00 - 03:30 what you give up to get something so what is the cost of say ice cream if you are getting a big tub of ice cream for 100 rupees you can see that we have a cost of icm to be hundred rupees but this cost can also be in terms of say time it can be in terms of effort it can be in terms of money it can be in terms of certain other goods so for instance in
• 03:30 - 04:00 place of having say 100 grams of ice cream you could have had 200 chocolates so you can also say that the cost of 100 grams of ice cream is 200 chocolates so in economics we are always concerned about costs what you give up to get something and a very major cost that we need to consider is the opportunity cost which is the cost of the next best thing that you could have had
• 04:00 - 04:30 the third point that we considered was that rational people think at the margin now economics thinks or economics considers that people are rational now who is additional person a rational person is one who does all sorts of computations keeps all sorts of information that he can have access to in his mind before taking a decision to optimize the decision for his or her
• 04:30 - 05:00 own benefit so that is a rational person now economics considers that people are rational so economics considers that people are not taking a decision just out of nothing whenever people make any decision they think about it rationally and such rational people are always thinking at the margin so when we say thinking at the margin we are saying that we are not thinking about
• 05:00 - 05:30 whether i should use my 100 rupees to get only ice cream or whether i should use my 100 rupees to get only chocolate but what we are thinking at all points of time is that suppose i have had 50 grams of ice cream should i spend my remaining 50 rupees on getting more ice cream or should i spend it on getting one amount of chocolates because there is a certain amount of satisfaction that i have already had by having 50
• 05:30 - 06:00 grams of ice cream so for the next 50 rupees will 50 more grams of ice cream give me more amount of satisfaction or when getting certain chocolates will give me one amount of satisfaction is something that i am always considering so this is what we mean by saying that rational people think at the margin so these are three things that we saw in the last lecture and in this lecture we will continue with this discussion on how people and
• 06:00 - 06:30 society make decisions now an important point in making decisions is incentives people respond to incentives incentive is something that induces a person to act now this inducement can be to act more or it can be to act less so for instance if you get
• 06:30 - 07:00 say a subsidy to start an industry you will be more inclined to start an indus in the industry as compared to a situation where you were facing a large amount of taxation if you started in industry so this taxation or subsidy is an incentive that is being used by the government to induce people to do something another example is that in the case of cigarettes
• 07:00 - 07:30 the government taxes cigarettes heavily now this tax puts up more amount of uh or requires more amount of resources to be put in for a single pack of cigarette and this is done so that it acts as a negative inducement so the government does it so so that people spend less amount of of money or resources on getting cigarettes because cigarettes are bad for help so the government can use a reward
• 07:30 - 08:00 such as a subsidy or a punishment such as an excessive taxation to induce people to do something or to refrain from doing something so incentive is something that induces people to act in certain ways and other examples are practicing hard so that you may win the olympic gold medal so the incentive here is the olympic gold medal and to get to that incentive or to get
• 08:00 - 08:30 to that reward you are trying to practice more and more so that is an incentive wearing a helmet for the fear of fine so here the fine is an incentive to induce people to act in terms of wearing the helmet so incentive is something that induces a person to act and when we talk about incentives prices
• 08:30 - 09:00 are a very major incentive in the economic system so prices act as incentives and how do prices act as incentives so suppose the price of apples increases so you are using different fruits you are using different food items and out of those food items the cost of apples has gone up how will you respond there will be a certain amount of response probably because the apples have gone up in price
• 09:00 - 09:30 you will start to consume less index amount of apples or probably you will if you are say a shopkeeper you will think that okay the price of apples is going up so let me buy more and more apples and i should store them so that after some time when the price goes up even further i'll send them off at a profit so the price of apples is acting as an incentive for a consumer to have less index to consume less and less and for the seller
• 09:30 - 10:00 to hold more and more so suppose the price of apples increases the consumers may try to reduce their apple consumption by say shifting to other fruits so you might say okay the price of apples is more i'll consume less amount of apples i'll have more amount of oranges producers may try to increase their apple production by say increasing the number of workers that are employed because apples are fitting a larger amount of price in the market
• 10:00 - 10:30 it is going to lead to larger amounts of profits so the producers may try to increase their apple production and how do they increase their apple production to by increasing the number of workers employed or say by getting newer machinery or say by putting more and more amount of their land into apple production so these are the kinds of responses that we are seeing just because the price of apples has gone up so the price in this case has induced
• 10:30 - 11:00 persons both the consumers and the product and the producers to act and so price is an incentive in this example so what we are saying here is that incentive is something that induces people to act and prices in the economic system are very good incentives now let us look at another example there is a rise in the price of crude oil so here again we are looking at the
• 11:00 - 11:30 price of crude oil as an incentive so what sorts of behaviors will we see if the price of crude oil goes up so here are some news articles relating to the price of crude oil and how people shift their actions so the first one is fuel price impact daily use items like soap shampoo biscuits to become five to eight percent more expensive so what is happening here is that because the price of crude oil has gone
• 11:30 - 12:00 up so a number of articles that require crude oil or its products for their manufacturing say plastics or for say energy use which includes a number of other consumer goods so the price of plastics is will go up the price of energy will go up the price of transporting things will go up and when all these prices go up ultimately the price of the final produce will also go up
• 12:00 - 12:30 so this news article is saying that the fuel price impact is likely to make soap shampoo biscuits and other consumer goods more expensive so how do people act this at this news article says big rise in south africans turning to credit as high fuel prices and cost of living fights so one response is that i have less
• 12:30 - 13:00 amount of money but i want to maintain the same amount of consumption so i'll have to borrow this money from somewhere so more and more people start moving towards credit and so there is a big rise in people that are turning to credit as a source of funds thing is that the rising fuel prices could increase the mobile phone bills because here again the mobile phones uh towers they are fueled by
• 13:00 - 13:30 say a diesel generator or by electricity and the price of diesel will go up the price of electricity will also go up now this article says rising diesel prices may hurt the telecom sector why because they the cost of providing this service of telecommunications is going up because of the increase in the price of crude oil so if there is an increase in your cost and
• 13:30 - 14:00 there is not a corresponding increase in your selling price so your profits will take a hit so this says that rising diesel prices may hurt the telecon sector so how will this telecom sector respond probably if it was having certain plans of expanding it will put the expansion plans on hold or probably it will even try to curtail its operations in certain
• 14:00 - 14:30 areas where it is not getting sufficient amount of profits so here again the price of crude oil is acting as an incentive rising fuel prices are affecting swiggies zomatos delivery fleet ola and uber drivers because here again the cost of providing the service is going up this next article says uber and ola drivers go on a strike demand higher fares for rising fuel cost so the increase in the price of crude oil
• 14:30 - 15:00 is now incentivizing ola and uber drivers to go on strike because they are seeing that their profits are going down and in these situations they would demand higher fares for the rising fuel costs another thing that will come up is that people will start giving you a number of suggestions on how to manage your household budget in the times of rising prices because we saw here that because of
• 15:00 - 15:30 increase in the price of the crude oil the cost of shampoo biscuits and soaps and other things is also going up so another action that has been incentivized is that people who are experts or who are who are ready to give you suggestions on how to maintain your household budget they will come forward and what sorts of suggestions will they
• 15:30 - 16:00 say they are asking to track every expense lower the unnecessary expenses so when the price is going up the amount of consumption will go down try to raise income so people will start to look for other sources of income go for lifestyle changes because the price is going up and your lifestyle cannot be supported by the same amount of income that you
• 16:00 - 16:30 had so you should try to change your lifestyle so that you can so that you are able to accommodate with lesser amounts of stocks lower the debt outflow because nobody knows how long this fuel rise will go up another thing that we will see is rising petrol and diesel prices to give states windfall gain of rupees 227 billion now what what this is saying is that because the price of petrol and diesel have gone up
• 16:30 - 17:00 so the amount of money that the government will get in the form of taxes will also go up now so far we have seen that when the prices of crude oil are going up it is acting as a disincentive for a number of people because their cost of living is going down but in the case of certain governments this might even lead to more and more amount of money that is coming up in the form of taxes
• 17:00 - 17:30 so what will government do in certain in these situations the government will use this money for say certain activities so the government may come up with a new program of infrastructure expansion or the government will come up with a new program of providing money to people or of providing food grades to people so that people are also better off so rising petrol and diesel prices to give states windfall gain of rupees 227 billion
• 17:30 - 18:00 other kinds of impacts are furious french drivers to block roads in fuel price protest so similar to what we saw in the indian context that the ola and uber drivers are coming up in protest so we also see that the french drivers have also come up in protest what happens then this is another news paris police use tear gas water cannons as protests against rising fuel taxes
• 18:00 - 18:30 turn violent so a rise in the cost of living is now leading to violence then rising gasoline prices push macron popularity down now this news article is saying that the popularity of the president is going down because he is not able to uh control the prices so this is another impact
• 18:30 - 19:00 of the rise in the price of crude oil then it says transport is pm phillip suspends the fuel tax rises so the government has now been induced to act the government has been induced to lower the taxes so that the price of fuel comes down so the increase in price of crude oil has not just acted as an incentive for normal people it has also acted as
• 19:00 - 19:30 an incentive for the government to reduce the taxes so this is what we are seeing here the prime minister is suspending the fuel tax rises another impact is french fuel price revolt boosted ethanol use say industry officials now what we are seeing here is that when the price of crude oil is going up
• 19:30 - 20:00 the price of petrol and diesel are going up so now people are shifting towards alternatives now one such good alternative is blended petrol so in the case of blended petrol the petrol is mixed with certain amounts of ethanol which is ethylene now because the price of petrol has gone up so now people are shifting to add more and more amount of ethanol and to shift towards a blended petrol
• 20:00 - 20:30 so this is another act that has been induced because the rise because of the price rise the ethanol is going up next news article says suvs have become classier but here is the big bump on the road a rising fuel prices now what this news article is saying is that people normally go for large sized vehicles such as the suvs or
• 20:30 - 21:00 the sport utility vehicles so they have become classier but then because they are of a large size they have a large amount of weight so they are not that fuel efficient and when the cost of fuel goes up when the cost of petroleum diesel goes up then there is an incentive for people to shift away from these petrol or diesel busting vehicles so here it says that
• 21:00 - 21:30 there is a big bump on the road which is the rising fuel prices so now people will shift away from uh these suvs which are not that fuel efficient so this is another activity that has been induced by rise in the crude oil prices so what will be the impact so people are now shifting away from the suvs people do not want to have a vehicle that is
• 21:30 - 22:00 putting a big strain on their budget so what happens the sale of automobiles goes down so this news article is saying price hikes and rising fuel rates slow september auto sales so because of the the rising fuel rate the uh people are now less incentivized to buy newer vehicles and so the auto industry is going towards the slump now when such a
• 22:00 - 22:30 thing happens the auto industry might respond by say shifting to different category of vehicles or probably by laying off people so then so the auto industry might say okay people are not buying our cars we are not uh having a profitable year so we we cannot afford to have so many employees or the auto industry can say that okay people are not buying these sorts of vehicles why do not we give them an alternative why don't we give them certain vehicles
• 22:30 - 23:00 that are more fuel efficient that people might be more ready to buy so this is another impact that we are seeing because of increase in the price of the crude oil so this news article says weak consumer sentiment no festival cheer for car makers on rising fuel cost and interest rates so this is from november 2018 so november is typically the time when we have festivals like diwali and
• 23:00 - 23:30 people generally go for a large amount of buying in those seasons but this news article is saying that because of the increase in the fuel cost and because of increase in the interest rates people are not buying the vehicles as was projected earlier so next what happens gas prices send surge of riders to mass transit now this news article is saying that because people are coming to this conclusion that that because of these
• 23:30 - 24:00 uh large amount of fuel prices we will not be able to afford our vehicle we will not be able to afford the use of our vehicle to go to our uh our offices or other places every day so people are now shifting to mass transit now mass transit includes things like railways roadways or public buses now this news article is saying that because of increase in gas prices people
• 24:00 - 24:30 are shifting towards mass transit so the gas prices are acting as an incentive for people to act in a certain manner and in this case the action is to ditch their personal vehicles and to shift to public values another article says as gas costs store buyers flock to small cars so because the larger sized vehicles are less fuel efficient so people are have now been induced to
• 24:30 - 25:00 act in a manner that they shift from larger cars to smaller cars or even to scooters and two wheelers because scooters and two wheelers are more fuel efficient as compared to the four way uh the four wheelers so if the uh the the crude oil price rises then people will shift from cars towards scooters and the industry may also respond
• 25:00 - 25:30 by saying that okay the gas and the crude oil prices are high so let us give people things such as electric vehicles so this is another inducement that has been brought up by the increase in the price of crude oil so soaring petrol prices spark interest in electric vehicles camel demand up as oil price sold now this is a different kind of a news but here also it says the the same thing as
• 25:30 - 26:00 the cost of running gas guzzling tractors source even toward angulates are making a comeback raising hopes that a fall in the population of the desert state signature animal can be reversed so what is the same says that because uh the use of vehicles has become more and more unaffordable so now people are shifting back towards the use of camels so this is another act that has been induced by
• 26:00 - 26:30 the rise in the prices so we saw earlier that prices act as incentives and all these different examples are showing the same thing another one says that indigo faces rough flight as the rising fuel cost and price mod workflow so here again in the case of airlines the the fuel prices when they increase they increase the cost of operations
• 26:30 - 27:00 and this news article is saying that the airlines indigo is now facing a rough time because of the increase in the fuel cost now how will the airlines respond rising fuel prices indigo height spheres and other private airlines may follow suit so indigo in this case is saying that okay our cost of operation has gone up and we need to remain profitable so this cost will have to be given to someone
• 27:00 - 27:30 else and in this case this someone else is the consumer so because the the price of uh of fuel has gone up so the ticket prices also go up so in this case the increase in the price of the ticket for the airline will now act as an incentive for other people as well delta airlines to increase fares trim flights as fuel prices rise now here is another act that has been induced
• 27:30 - 28:00 not only do airlines increase their fares but they also reduce operations on those sectors that are not that profitable so because your cost of operation has gone up so to maintain your profitability you will either increase the fare or you will reduce your operations in certain areas you will try to reduce your operations you will abandon plans of expanding this news article says emirates working
• 28:00 - 28:30 to stabilize cost after 42 percent increase in fuel prices now here again the emirates airlines is now trying to stabilize its cost it is trying to gain money from some other sources so that it can remain a flow easyjet investors worry about rising fuel costs when the price of fuel has gone up so now the airlines are not that profitable and if the airlines are not that profitable the investors who have
• 28:30 - 29:00 invested their money in the airlines will also be induced to act in certain ways so they will start thinking okay now the airline sector is not doing that good because their cost of operations has gone up so my money is not safe so let me take my money and put it into some other sector so the investors might try to reduce the amount of investment that they have made in the airline sector and shifted to some other sector so easy
• 29:00 - 29:30 jet investors worry about rising fuel costs and probably they will take their money out of the airmen sector now this article from the economist says crisis what crisis the airlines are suffering but the order books of boeing and airbus are bulging so even though the airlines are suffering because their cost of operations have gone up the order books of the airplane manufacturers such as boeing and airbus are bulging now
• 29:30 - 30:00 why is that so this is again a very similar thing that we saw in the case of vehicles so if suvs have become less incentivizing the companies will give up will uh give you certain alternatives so they will give you electric vehicles or they will give you small sized vehicles now similarly when the price of fuel goes up the airline indus the the industries that are making the aeroplanes they will give the airline certain alternatives
• 30:00 - 30:30 these would be certain aircrafts that are more fuel efficient and so when these companies give you an alternative which is more fuel efficient more and more airline companies will flock towards these newer models and so the order books of boeing and airbus are bulging because everybody now wants to have these aeroplanes that are more fuel efficient so this is another act that has been induced by the
• 30:30 - 31:00 increase in the price of the crude oil that it is now inducing the industries that make the aircraft which is boeing and bus to come up with newer alternatives of of aeroplanes or aircrafts that are more fuel efficient now this article says how rising crude prices will impact indian oil industry upstream oil firms could face a higher subsidy burden while any government move to capped prices
• 31:00 - 31:30 will hurt the margins of downstream companies now this article says that in the case of the petroleum industry you have certain upstream oil firms and certain downstream point companies now the upstream oil companies are those that are either extracting this crude oil from the earth or they are those industries that are buying these this crude oil from other nations
• 31:30 - 32:00 and the downstream companies are those that are using this crude oil processing it and selling off things like petrol diesel kerosene lpg and so on now this article is saying that the upstream oil firms could face a higher subsidy burden because the uh the price of crude oil is now going up which means that the product that
• 32:00 - 32:30 they are selling has increased in its price so their profits might go up whereas the downstream companies because crude oil is a raw material or a resource for these companies and they are selling of other things such as petroleum and diesel so if the price of petrol and diesel also increases commensurate with the increase in the price of the crude oil then these downstream companies will remain afloat but if the government tries to reduce
• 32:30 - 33:00 the prices of petrol and diesel then these companies might take a hit so different players in the oil market will respond in a different manner the upstream companies will respond differently and the downstream companies will respond differently so what will be these sorts of responses refiners look at cutting inventory as oil prices rise now refiners are the downstream players so what they are doing is they are
• 33:00 - 33:30 trying to cut the inventory so they want they uh they are trying to reduce the amount of crude oil that they are purchasing and they are using more and more of their inventory the stocks that they already have because they do not want to put more money into crude oil at a time when the price of crude oil is already high so the refiners must pay for their crude oils in dollars and the soaring import costs
• 33:30 - 34:00 are becoming ahead so in this case this news article says that the refiners are trying to cut in the inventory whereas the upstream players will try to increase the fuel storage why because this is a time when the crude oil prices are going up so the uh the upstream company will think that okay why don't i take more and more of this crude oil from the earth because the prices are going up so it is
• 34:00 - 34:30 incentivizing the upstream companies to extract more and more of the crude oil or to procure more and more of this crude oil in the hopes that in the because of these rising prices they will sell them sell this crude oil off at a larger price and at a larger profit so the upstream companies are trying to increase the fuel storage another incentive or another act that has been induced is that solar beats oil and gas price in eu
• 34:30 - 35:00 so because the oil and gas prices are going up because the crude oil prices are going up so now the industry is looking at alternatives and one such alternative is solar plumb or solar energy with the carbon price set by the blocks emission trading scheme on the rise along with fuel for fuel cost there has never been a stronger economic case for renewables so the act that has been induced in this
• 35:00 - 35:30 case by the increase in the price of crude oil is that it is incentivizing the industry to shift towards the renewable sources of energy so the the energy industry will shift from oil based or gas based power stations to more and more of say solar energy based stations or wind energy based in stations or geothermal energy based stations or even say nuclear power stations
• 35:30 - 36:00 because the price of crude oil is going up and every industry is trying to reduce its cost so as to maximize its profit so this is another act that has been induced by the increasing price of crude oil which is more and more incentivizing towards shift to a renewable source of energy rotten potatoes that's the government's
• 36:00 - 36:30 answer to your rising fuel bill now here again what it says is that while the government is hoping the rally in global rates declines soon it is also looking at alternatives and in this case the alternative is ethanol so what we have seen so far is that people and society respond to incentives incentives are those factors that induce people of society to act in certain manners and in the case of economics price is
• 36:30 - 37:00 a very good incentive so if the price of something goes up we will see a large number of actions by different players now let us now look at interactions in the society now the first thing that we can discern from interactions is that trade can make everyone better off now what this says is that consider a society in which people do not trade so everybody is trying to produce
• 37:00 - 37:30 everything that he or she needs so in this primitive society suppose there is a person so she would have to grow her own food crops she would have to raise her own cattle to get meat and milk she would have to raise her own fiber crops she would have to harvest all of these she would have to make her own cloth she would have to say make her own
• 37:30 - 38:00 implements and so on because this society is not a trading society so everybody has to do everything now in such a society suppose we bring in trade so when we say that we are bringing in trade what we are saying is that suppose there are two people you and me and i am good at cultivating crops and you are good at say raising cattle so i might say that okay i am good at
• 38:00 - 38:30 cultivating crops which means that my cost of cultivation is less than what it would have been if you were cultivating so suppose in one hour i can grow one kg of wheat whereas in one hour you can only grow 100 grams of wheat whereas your specialization is in raising cattle
• 38:30 - 39:00 so in one hour you can say produce 1 kg of milk whereas i can only produce 200 grams of filament now in such a situation if i were to spend say eight hours of my day into four hours of making the wheat and four hours of making milk how much amount of wheat and milk would i have in four hours i will have four kgs of wheat and in four hours i will only have 800 grams of
• 39:00 - 39:30 milk on the other hand in your case you are also doing the same thing so what we are saying here is that for me my rate of production is 1 kg of wheat per hour and 200 grams of milk per hour for you the the productivity is 1 kg
• 39:30 - 40:00 of milk per hour and 100 grams of wheat per hour now suppose in the first case case one both of us are devoting four hours for wheat and four hours forming so how much amount of wheat do i have in 4 hours
• 40:00 - 40:30 it is 4 times 1 kg is 4 kg of weight and 4 times 200 grams which is 800 grams of milk whereas you in four hours you have made four into one pb which is 4 kg of
• 40:30 - 41:00 milk but only 4 into 100 grams which is 400 grams of wheat so this is the first case in which we are not trading you are producing both wheat and milk for your use and i am also producing wheat and mint for my own use and both of us are devoting eight hours into these activities now let us look at the
• 41:00 - 41:30 second case so case two is with trading so in this case what i do is i because i can make more amount of beat per hour as compared to you so let me may let me use all eight hours eight hours to make weed only so i have eight hours into one kg is
• 41:30 - 42:00 eight kg feet and i spend zero hours for milk which gives me zero gram of milk in your case you are using eight hours to make milk so you get one kg of milk per hour so you have eight kg of milk and you spend zero hours
• 42:00 - 42:30 to make wheat and in this case you have 0 grams of wheat now in the first case the total production in the society was 4 kg of wheat and 4 400 grams of wheat which is 4.4 kg of wheat and 4 kg and 800 grams which is 4.8 kg of milk
• 42:30 - 43:00 so this was the total production in the society in case one whereas in case two we will have total production in society is 8 kg of wheat and 8 kg of milk so what we are seeing here is that if both of us were to do
• 43:00 - 43:30 only those things that we had a certain amount of specialization in then we would be able to produce more amount of resources with the same amount of input so in the first case you were working eight hours i was working eight hours in the second case also you are working eight hours i am working eight hours but in the first case the total production is less than five kg of weight and less than 5 pg of milk in for both of us combined
• 43:30 - 44:00 whereas in the second case it is 8 kg of wheat and 8 kg of well out of this 8 kg i keep 5 kg with me and i give you 3 kg to you what do you do out of 8 kg of milk you keep 5 kg with you and you give 3 kg to me
• 44:00 - 44:30 now at the end of the day i have 5 kg of weight and 3 kg of milk this 5 kg of wheat is what i produced and i care and i kept with myself in this 3 kg of milk is what you had given to me and you have 5 kg of
• 44:30 - 45:00 milk and 3 kg of wheat now let us compare this situation five and three with the earlier situation in case one so in case one you you are only having four kg of milk now you have 5 kg of milk so your the so the total amount of milk that you have is more earlier you had 400 grams of
• 45:00 - 45:30 wheat but now you have 3 kg of wheat so the amount of milk that you have is more than what you had earlier the amount of wheat that you have is more than what you had earlier in my case i have now 5 kg of wheat whereas earlier i only had 4 kg of wheat so the amount of wheat that i have now with trading is more and similarly earlier i had only 800 grams of milk
• 45:30 - 46:00 whereas now i have 3 kg of meat so the amount of weed and the amount of milk that i have now is more than what i had if we had not traded so what we are trying to emphasize here is that because of trading your amount of meat of milk and wheat has gone up and my consumption of milk and wheat has also gone up so you are in a more beneficial position and i am also in a more beneficial
• 46:00 - 46:30 position so trade is something that can make everyone better off and why does that happen this happens because competition permits everyone to specialize in what they have the highest comparative advantage in so in the case of trading because none of us is constrained to make everything so we can focus all our time energy and resources into making those things for which we have the highest
• 46:30 - 47:00 comparative advantage what is the comparative advantage it is the ability to produce a good at a lower opportunity cost than another producer so in this case i was able to make 1 kg of wheat per hour and you were able to make only 500 grams of wheat per hour so in this case i have a comparative advantage in the case of weight
• 47:00 - 47:30 whereas in the case of milk i was only able to produce 200 grams per hour but you were able to produce 1 kg per hour so you have a comparative advantage in the case of milk so comparative advantage is the ability to produce a good at a lower opportunity cost than another producer now let us look at the opportunity cost opportunity cost for wheat for me the opportunity cost of
• 47:30 - 48:00 wheat is 200 grams of milk per kg of wheat so if i spend one hour to produce wheat i will there will be 200 grams of milk that is less available for me for you the opportunity cost of wheat is 1 kg divided by 100 grams
• 48:00 - 48:30 which is 10 kg of milk per kg of wheat if you look at this portion to make 1 kg of wheat you had to give up 10 kg of milk and so for so my opportunity cost is less my opportunity cost is only 200 grams of milk your opportunity cost is 10 kg of milk
• 48:30 - 49:00 so because my opportunity cost is less so for the case of wheat it makes much more sense that i should be making that now let us look at opportunity cost of milk now for me the opportunity cost of milk is 1 kg of wheat divided by 200 grams of milk
• 49:00 - 49:30 which is 5 kg of wheat so to produce 1 kg of 1 pg so to make 1 kg of milk i would i will have to forgo 5 kg of wheat whereas in your case to make 1 kg of milk you only have to forgo 100 grams of weight per kg of milk so in the case of milk your opportunity cost is only 100
• 49:30 - 50:00 grams whereas my opportunity cost is 5 kg of wheat so you have a comparative advantage when it comes to milk and trading would say that you should concentrate more and more of your time and resources in producing milk because you have a comparative advantage in producing milk whereas i should spend more and more amount of time money and resources into production of weight because i have
• 50:00 - 50:30 a competitive advantage now if both of us focused on what we had a comparative advantage in the society would benefit because all the the things will be made at the least possible cost so competition permits everyone to specialize in what they have the highest competitive advantage in now when you are only producing wealth and i am only producing weight
• 50:30 - 51:00 it also leads to an increase in efficiency now efficiency is the property of society getting the most it can from its scarce resources now in this case the resource is time so the the society which only comprises of you and me in this example has only eight hours for you and eight hours for me and earlier the society was able to produce 4.4 kg of wheat
• 51:00 - 51:30 and 4.8 kg of milk whereas now the society is able to get 8 kg of wheat and 8 kg of milk so what is happening is that the efficiency of the society has gone up for one day or in one day earlier it was only getting 4.4 kg of wheat and 4.8 kg of milk whereas now it gets 8 kg of wheat and 8 kg of milk so the efficiency has gone up
• 51:30 - 52:00 for the society as a whole at the same time specialization and efficiency reduce prices benefiting the consumers so because there is a specialization you are only focusing on one thing i am only focusing on one thing the efficiencies has gone up so this ultimately benefits the consumers as well because they will be able to get all the resources at the lowest prices in this example both of us are both the producers as well as the consumers but
• 52:00 - 52:30 we can extend this example to the actual society as well and people can get different items at reduced prices through trade as against different items at high opportunity cost when not trading thus trade increases so when we talk about interactions in a society economic interactions in a society we need to remember that if there is trading in the society then everybody is much more well off as
• 52:30 - 53:00 compared to a situation when there was no training so trade makes everyone better off but how do we trade in this example because there are only two people and there are only two things so it is easy for both of us to sit down and negotiate that okay i will give you three kg of wheat and you will give me three kg of milk but then in the case of a larger society all the different producers and all the different consumers cannot sit together
• 53:00 - 53:30 and so we come up with the concept of market markets are usually a good way of organizing economic efficiency market economy is an economy that allocates the resources through decentralized decisions of many firms and households as they interact in the market for goods and services what is the market economy it is an economy that allocates resources in this example the resource
• 53:30 - 54:00 the resource that was available is time or the number of hours that are written now in the market economy both of us are taking this decision based on the most efficient way of producing the goods
• 54:00 - 54:30 an economy that allocates resources in this case the time through decentralized decisions now why are these decentralized decisions because there is nobody who is telling us that we should be doing this it is just you and me who are sitting together and deciding that i should make more and more of wheat you should make more and more of milk the government is not telling us that or there is no person outside of you and me outside of
• 54:30 - 55:00 the producers and the consumers that is deciding on how much amount of resources should be allocated so this is a decentralized decision so the market economy allocates resources through decentralized decisions of many firms and households in this case there were two producers you and me and there were two consumers you and me in the case of a larger society a larger market there will be a number of firms and households and they will all interact
• 55:00 - 55:30 together in the market and there are two kinds of markets markets for goods and markets for services and when all these decisions are happening in a decentralized manner through interactions then we say that this is a market economy now markets are a good way of organizing economic activity efficiently because in the case of markets prices and self-interest guide decisions
• 55:30 - 56:00 which leads to a large autonomy now in this case when we were talking about wheat and milk we were not taking this decision based on say a benevolence so i was not thinking that okay you should benefit and so you should be doing such and such things you were not thinking about me both of us were thinking about ourselves only so i was thinking that in that without the trading i was getting 4 kg of wheat
• 56:00 - 56:30 and 4 and 800 grams of milk with trading i will get more amount of wheat and more amount of milk so this interaction or this specialization is beneficial to me and this is why i am ready to get into this arrangement so this is for my own benefit for my own good similarly in your case also earlier
• 56:30 - 57:00 you are only getting four point you are only getting 4 kg of milk and 400 grams of wheat whereas now you get 5 kg of milk and 3 kg of wheat so it is good for you and because of this reason you are getting into this arrangement so in the case of market the prices and the self-interest is guiding the decision so a market ensures that because both of us are benefiting so we will wholeheartedly participate in this
• 57:00 - 57:30 decision this is there is a large amount of autonomy that we have because nobody is forcing us to take this decision we are taking these this decision out of our own suitable market prices reflect the value of good to the society and also the cost to the society in making that good the value of the good and the cost of the good is reflected by the market prices
• 57:30 - 58:00 what we saw here was that this is the market price and this is reflecting both the value of the product because in the case of wheat i will think that okay for making wheat i need to give up 200 grams of milk and this is also the cost that i am putting in similarly you can also have a
• 58:00 - 58:30 an indication of the value and the cost to you so for you the cost of milk is 100 grams of wheat whereas in my case the cost of milk is 5 kg of beet so in this case what will happen is that my value for milk is much greater my value of milk is 5 kg of wheat your well your value of
• 58:30 - 59:00 milk is 100 grams of wheat so because i value milk much more than you do so if you give milk to me uh it will uh it will benefit me much more then it will harm you and this is also giving me an indication of the cost so looking at the value and the cost through prices both of us can make a rational decision
• 59:00 - 59:30 there is an automatic transfer of information regarding demand and supply why is it automatic because if the price of something is going up it means that the demand is going up or the supply is going down as you saw in the case of the market for crude oil so if the price of crude oil is going up it is also telling us that the supply is less because of which the information gets passed on to both the producers as well
• 59:30 - 60:00 as the consumers so the consumers will use this information to reduce the demand by using less and less amount of the products of crude oil such as petrol by shifting to say more fuel efficient vehicles are shifting to say renewable energy whereas to the producers it will give the information that the supply needs to be increased and markets invisible hand leads firms and consumers to desirable
• 60:00 - 60:30 outcomes as against a certain central planner making the decisions so here it is important to note that if we think about a central planner the central planner will also have a dirt of information and it will also have a death of the resources to process the information in the case of a market because the decisions are happening automatically the information is getting processed automatically so it is much more efficient
• 60:30 - 61:00 so to sum up we saw that in making decisions people in society face tradeoffs which lead to cost cost is what you give up to get something we also saw that rational people think at the margin people respond to incentives and we also looked at interactions that trade can make everyone better off and markets are a good way to organize economic activity so this is a summing up of what we have
• 61:00 - 61:30 seen so far and that's all for today thank you for your attention [Music] [Music]
• 61:30 - 62:00 [Music] you