1. BGE 221-3 Economics and Project Management
. Course Content:
Introduction, demand and supply, equilibrium,
elasticity and efficiency, production and
cost of production, profit maximization, market
structures, national output measurements
aggregate demand and supply, budget deficits and
fiscal policy, external trade, money and banking,
employment and unemployment,
introduction to Sri Lankan economy

2. • The word ‘Economics’ originates from the Greek
work ‘Oikonomikos’
(a) ‘Oikos’, which means ‘Home’, and
(b) ‘Nomos’, which means ‘Management’.
• Economics means ‘Home Management’.
• The head of a family faces the problem of managing
the unlimited wants of the family members within
the limited income of the family.
• The same is true for a society.

3. • If we consider the whole society as a ‘family’,
then the society also faces the problem of
tackling unlimited wants of the members of the
society with the limited resources available in
that society.
• Thus, Economics means the study of the way in
which mankind organizes itself to tackle the basic
problems of scarcity.

4. • All societies have more wants than resources.
• Hence, a system must be devised to allocate these
resources between competing ends.
“Economics is a social science that studies
how society chooses to allocate its scarce resources,
which have alternative uses, to provide goods and services
for present and future consumption”

5. Scarcity
•Human wants are unlimited
• Limited means to satisfy human want
• Alternative uses of scarce resources
• Efficient use of scarce resources
• Need for choice and optimization
Economics is about choice

6.  Free goods and Economic goods
 Scarce resources:
- land
- labor
- capital
- entrepreneurship
 We use these to produce
economic goods

7. Approaches to Economics
 We study Opportunity cost of any activity
- The value of the best or the highest
opportunity that has to forego or
sacrifice to acquire the commodity
concern
1. Microeconomics focuses on the actions of
individuals and industries
2. Macroeconomics takes a broader view by
analyzing the economic activity of an entire
country or the international marketplace.

8. 3. Partial equilibrium analysis
Assuming other things are held constant but
only one variable can vary
4. General equilibrium analysis
Allow all the variables to vary

9.  Adam Smith -the Father of Economics,
established the first modern economic
theory, in the Wealth of Nations, in 1776.
 Smith believed that people who acted in
their own self-interest produced goods and
wealth that benefited all of society
 governments should not restrict or interfere in
markets
 Karl Marx, in Das Capital, theorized, laborers
should own and control the means of production
to ensure social and economic stability
 Emphasizes Socialist economic system with
central planning

10. What is a market? & How it works?
Vegetable Market in Badulla
Central market
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... ..
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. .
.. .. .
..
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...
..
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.. .. .
..
Many Buyers
Many Sellers
Modeling a competitive market

11. Each buyer faces with a demand function:
Qd
i = f(PX, PY, I, T)
Each supplier faces with a supply function:
QS
i = g(PX, PY, F, T)
 Let us use partial equilibrium analysis
Qd
i = f(PX, PY, I, T)
Constant and coefficients
Each supplier faces with a supply function:
QS
i = g(PX, PY, F, T)
Constant and coefficients

12. Now with this demand Qd
i = f(PX ) and with the
supply functions
we can go to the market and observe consumers’
and suppliers’ behavior:
QS
i = g(PX )
Mr. A Mr. B Mr. C TOTAL
DEMANDPrice grams
10 500 1100 1000 2600
20 400 900 950 2250
30 300 700 900 1900
40 200 500 850 1550
50 100 300 800 1200
60 0 100 750 850
Mr.X Mr. Y Mr. Z TOTAL
SUPPLYPrice grams
10 100 50 200 350
20 200 60 400 660
30 300 70 600 970
40 400 80 800 1280
50 500 90 1000 1590
60 600 100 1200 1900
Beans Market

13. 0
100
200
300
400
500
600
1 2 3 4 5 6
0
200
400
600
800
1000
1200
1 2 3 4 5 6
0
200
400
600
800
1000
1200
1 2 3 4 5 6
0
500
1000
1500
2000
2500
3000
1 2 3 4 5 6
Mr. A’s
Demand
curve
Mr. B’s
Demand
curve
Mr. C’s
Demand
curve
Market
Demand
curve
0
100
200
300
400
500
600
700
1 2 3 4 5 6
0
20
40
60
80
100
120
1 2 3 4 5 6 0
200
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800
1000
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1400
1 2 3 4 5 6
0
500
1000
1500
2000
1 2 3 4 5 6
Mr. X’s
Supply
curve
Mr. Y’s
Supply
curve
Mr. Z’s
Supply
curve
Market
Supply
curve

14. . . .... ..
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.. .. .
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0
500
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1 2 3 4 5 6
Market
Demand
curve
0
500
1000
1500
2000
1 2 3 4 5 6
Market
Supply
curve
Theory of Demand
Theory of Supply

15. 0
500
1000
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1 2 3 4 5 6
0
500
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1 2 3 4 5 6
0
500
1000
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1 2 3 4 5 6
0
500
1000
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1 2 3 4 5 6
Market equilibrium

16. Excess Supply
Excess Demand
Market forces corrects disequilibrium and
bring towards an equilibrium
0
500
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1 2 3 4 5 6 7 8 9 10
MARKET MECHANISM