First and Second session: Perhaps we couldnt have studied economics if there was no shortage or scarcity prevailing in the

world Thus the very concept of economics starts with scarcity and its solution Definition of economics- science of making choice that satisfies the need in best possible way in layman term - inputs (land, labour, capital, raw material, technology) converted to outputs (final goods, fridge, refrigerator, car, foods, and clothes) In every stage of our life we go through the brutal truth of economics When we were child 50- 100 rupees everyday we had to make choice out of biscuits/chocolate/sweets When we are youngwe go for the education which guarantees a job How inflation will affect our occupation? Why do we always worry about inflation? What is fiscal policywhy branded attas have failed to market in India What will be the impact if America stops importing big cars from Japan Why Japan, Korea are able to produce cheaper cars than countries like US Why draught in Brazil increases the food and coffee prizes in NY Whom should we vote congress or BJP because do we know how their economic policies are going to affect our life Why Beijing was so interested to sponsor the 2008 Olympics? Economics solve three vital questions: What to produce and what quantity How to produce And for whom to produce Lets get familiar with few important phrase or terms which are very relevant. RationalityOpportunity cost--the forgone benefit due to you choose another option not the former Marginalism-- how much to have General and partial equilibrium when we analyse the equilibrium of the whole economy vs equilibrium of an individual market or economic unit Economic cost include all the hidden costs like environmental cost with the accounting cost Fallacies---false idea and belief Fallacies of assumption- every analyze that we do is based assumption in fact the very base of economics and science is based on assumption but some time assuming too much lead something to be far from reality For example- john Keynes, the noted economist came out with a theory called the general theory of unemployment, interest and money where he stressed that

Branded atta failed to position in India Fallacies of composition- the whole is not the sum of parts Tourism in America America is loosing power Sixth Pay Commission salary hike of central government employees Rs 30, 621 crore If industries are showing positive growth that doesnt mean every organisation in the industry is positive growth. There are many companies who are in loss Fallacy of subjectivity- making decision out of past experience, gut feelings or knowledge Economic liberalization and privatization in China, USSR Dot.com burst--Fallacy of post hoc Procter hoc- after that, therefore, because of that 9/11 attack and recession in Zimbabwe The nuclear liability bill deal Fallacy of syllogism- if x=y and y=z, then x=z Deficit financing Fallacy of black, white and grey- the opposite might not be true If Africa is the worlds poorest continent, it might not be true that African countries are not growing Fallacy of broken window- precious, beyond pricing Cost of clean air, sea side view, an untouched virgin forest 3rd session: Micro vs macro economics study of the behavior and impact of an individual economic unit/ when we study the economy as a whole aggregate demand/ aggregate supply, unemployment, impact is price fluctuation/ policies Market is the domain where buyers and sellers meet for bargaining, price is determined and transaction take place. Competitive vs non-competitive market N-numbers of players (buyers and sellers) participate in the market Positive vs normative economics To understand relevance of economics, demand and supply is importantit helps to -how changing world economic conditions affect market price and production -what is the impact of government intervention, price control, minimum wage rate, price supports, production incentives etc

-and how tax, tariffs, subsidies and import quotas affect consumers and producers Law of demand- holding other things constant, price and quantity demanded are inversely related P=proportionate to 1/q Example- the explosive growth of personal computerIn 1963 Prize$100,000 Quantity demanded- 1 million After due to competition, automation, prices fell down In 2003 Price-$100 Demand-100 billion Example-2:Demand of cars --- due to average income rise, population increase, prices of complementary goods like gasoline, taste, status symbol, specific influence, alternative forms of transport Why demand curve is downward sloping- substitution effect and income effect However, the quantity of goods that a consumer is willing to buy depends on many other factors - Income of the consumers - Complementary (copper and aliminum, beef and chicken, bricks made of mud and cement) and substitute goods - Taste and preference of consumers - Weather change etc - Future price expectations Law of Supply - keeping other things constant, the quantity of supply increases with the increase in price P is directly proportionate to supply Other variables-Production cost -price of other raw materials -labor wage -interest charges -technological advances -organisational change Market equilibrium where demand and supply curve meet When to use market equilibrium? In perfectly competitive market condition

Changes in market equilibrium Examples1. Price of Eggs and college education in US Relative price of egg fell by 74%... It was 0.61 cents per dozen in 1970 which became .22 cents in 2002 due to mechanization of poultry farms increased productivity and efficiency on the other hand demand has also come down significantly on the health conscious ground both shifted demand and supply curve downward On the other hand relative education price increased due to salary increase of faculties, infrastructural cost increase and demand has also increased because more students wanted to pursue college education in 2002 than in 1970thus it increased from mere 72 lakh to 132 lakh Example-2, Immigration and growing cities Immigration aloneImmigration along with growth of cities 2. The long run behavior of natural resource prices Demand and supply in short run as well as long run oil price rise and automobile industry The weather in Brazil and the price of coffee in New York

Application of demand and supply theoryElasticity price sensitivity Definition --- change in one factor due to 1% change in the other factor Calculating elasticity Complete price elastic E>1 Price inelastic --- E<1 Unit inelastic --- E=1 Revenue and demand elasticity --Price elasticity of demand what is the change in quantity demanded due to change in the price of the product. % change in Q Ep -----------------------------% change in P

Income Elasticity of demand change in quantity demanded due to change in the income of the consumer % change in Q Ei - -----------------------% change in income Cross price elasticity what is change in quantity demanded of one product due to % change in price of the other product % change in Q of Product1 Ec - -----------------------% change in P of Product2 Airline example Imposing tax on Cigarette smoking Elasticity of supply what is the change in quantity supplied due to 1% change in price of the product % change in Q supplied Calculating elasticity of supply -----------------------------------% change in P of the product Few macroeconomic case studies The economics of agriculture Long term relative decline of agriculture Crop restrictions Impact of tax on price and quantity--Tax on gasoline and to reduce consumption for pollution and environmental hazards

Minimum wage controversy In 1938- wage25 cents per hour In 1947- wage65 cents for manufacturing workersand in 2003-- $5.35

Session 4th Consumer behavior- how consumers allocate its limited incomes and determine demand How income and price affect consumer demand and why demand for some products is more sensitive than that of others

Assumptionconsumers have complete knowledge about market and products Consumer behavior can be best understood by three different and distinct steps -Market basket list of specific quantities of one or more goods Consumer preference Describe logical reason why people prefer one good over the other Assumptions=) completeness three possibilities A is preferred over B or B is preferred to A or A and B are indifferent or gives same level of satisfaction =) transitivity - Honda city is preferred to Wagon R and Maruti esteem =) more is better than less There are two way of explaining it Indifference curve set of combinations of different market baskets that give the same level of satisfaction to the consumer Indifference map - a set of indifference curve Can In. Curves overlap each other?? Why the shape of indifference curve is downward sloping? Marginal rate of substitution- maximum unit of one good that a consumer is willing to give up in order to obtain an additional unit of another good Why the indifference curve is convex?? Or another assumptiondiminishing MRS

Example - designing a new automobile or carinterior space and horse power/power

steering

Utility theoryUtility-satisfaction/ benefit/ wellbeing the numerical score representing the satisfaction that a consumer gets from a market basket. Market basket- FC A 20 30 B 10 50 C 40 20 D 30 40 E 10 20 F 10 40 Utility

Marginal Utility - additional satisfaction due to an additional unit of consumptions The law of diminishing marginal utility the more one consumes the less one would want to consume more of it. Consumer behavior --- through marginal utility Example - can money buy happiness???

Budget constraint 2nd step consumers face budget constraint due to the limited resources Total amount spend is equal to the income Pf.F + Pc.C= I 1 Total income rs 8000 1 unit of F is rs. 100 and 1 unit of C is rs. 200 Makes the budget line What happens when =) Income changes =) price changes 3rd is consumer choice When we plot indifference curve and budget line together Marginal utility and happiness-MU additional satisfaction out of consumption of one additional unit of food Petrol rationing--Restricting quantity of consumptions--Price consumption curve -Income-consumption curve And angel curve The market demand and supply---

5th session Introduction to production analysis There is a relation between the outputs and inputs - production function Factors of production Raw materials Machinery Labour services Capital goods Land Entrepreneur 011 24633005 X= f (L, L, K, E) Concept of TP= total product= total amount of output produced by total inputs put together. AP= Average product = output per unit - total output divided by total inputs And MP= marginal product= extra or additional output obtained by an extra or additional inputs Graphs TP, MP, AP Law of variable proportions in short run, as we increase the variable factors of production, out initially increases at an increasing rate, as we deploy more variable factors, output increases at a decreasing rate and when we add more variable inputs, outputs starts diminishing Graph Law of diminishing returns We will obtain less and less output when we add more extra units of inputs Example - agriculturephosphorus 100 pounds in one acre maximum, after 300 pounds, output starts declining ISOQUANTS or Equal Product Curves Are locus of all those combination of substitutable inputs resulting equal level of outputs Graph Properties IQ map Properties of IQ:

Downward sloping Convex to the origin- becoz Marginal rate of technical substitution goes on diminishing Can never intersect Cant be straight line unless factors of production are completely substitute MRTS Rate at which one factor of production is substituted by another for the same level of outputs TIME IN PRODUCTION Short run & long run Pipeline, large power plant takes time NIPPON steel, Arcelor-Mittal steel to meet short term steel demand BIRLA Copper to meet copper demand in India and neighbor countries RETURN TO SCALE (RTS) Change in output due to change in all inputs in the same proportion (keeping the factor proportions unaltered)

Variants of RTS
Constant return to scale When a proportion increase in all the inputs generates a same proportionate increase in outputs Graph Diminishing return to scale Proportion increase in all inputs gives less level of outputs Graph Increasing return to scale More Graph

ECONOMIES AND DISECONOMIES OF SCALE

Economies= cost advantages EoS can be external as well as Internal Economies of scale in electronics industries Calculator, refrigerators, LCD screens, PC keyboard etc Economies of scale in commodity marketssteel producers Hindalco, Nalco, Serlite aluminum productions Internal economies = real economies and pecuniary economies REAL ECONOMIES Reduction in the physical quantity of inputs which leads to reduction in cost Like Labour economies Examplethe trade of pin-maker Technical economies Example--Producing coca cola/ double dekar bus/ Selling or marketing economies ExampleHLL, Managerial economies Specialization of management function Mechanization of management function Risk and survival economies Pecuniary economies Paying low for inputs for bulk purchasing ExampleReliance in polyester business, 1966, Wal-Mart example INTERNAL DISECONOMIES GM example in 1930s

External economies

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LG selected MIDC industrial estate complex for its rs.500 crore project why? External diseconomies environmental pollution ISO-COST Budget of the producer is called the ISO-Cost line Graph Change in the price of factors of production Least cost combination With the help of iso-cost curve and isoquant curve, one gets the least cost combination graph expansion path Cost analysis

For every factor employed in the production, there is a cost attached to it. Cost has many connotations. Generally the money cost is considered. Total money invested in the production process in order to get a certain level of output in the forms of salary, buying raw materials and many. Two categories of cost Fixed cost- indirect cost which an entrepreneur has to bear even at the zero level of output Variable cost- which vary with the variations of output level. At zero level production, variable cost is zero. Concepts of Total cost - cost incurred for all factors of production employed for a given level of output TC=FC+VC Average Cost - cost producing per unit of outputs AC= TC/q Marginal cost- cost of producing one additional unit of output Average fixed cost- fixed cost per unit of output produced AFC= FC/q

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Average variable cost - it is the variable cost per unit of output produced AVC=VC/q Example- producing cricket matches Economic relevance of distinction between fixed cost and variable cost If a firm continuously making losses, it may continue its business. But how long can it run his business, is a tough question before the producer. The firm can only decide this with the help of fixed cost and variable cost. If return= variable cost Return=) variable cost AR=AVC which is ====shut down point If AR= AC--- break-even point Separate explanation of Short run average cost curve Initially downward sloping then upward sloping Relation between average cost and marginal cost When AC falls, MC lies below the AC and when it goes up, it is above the AC Long run costs Long run average cost- since all factors of production is variable in the long run, LACC is a function of variable costit is the culmination of various short run cost curve showing the average cost of production at different level of output at different plant size/ equipments

Opportunity cost- forgone benefits- building a gymnasium is the office space instead of cafeteria, sporting center, lease the place too. Modern theory of costmany modern economists argue about the shape of the short run average variable cost curve is more of like saucer (plate) shape rather than U-shaped. Because firms build plants with substantial reserve capacity

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9th classObjectives of firms Getting the economic rent for the benefits or service the firm provides to the society A firm exists till it provides more benefits, when its harm supersedes the benefits, it is bound to shut down. Example is of Bhopal tragedy where union carbide gas leak accident killed over 20,000 people and other few millions still suffer from the cause Objectives--1. profit maximization in the world of capitalism, businesses are initiated by entrepreneurs and they seek profit in return for the benefits or service they provide to the society exampleElectrolux Kelvinator India (number one company for home appliances) case in 2003 former CEO Ramsundar had a vision to continue the record while the new CEO was more focused about profit. Thus the old push strategy was replaced by the pull strategy. 2. Sales maximizationfirms are not run by owners but managers and professionals thus higher sales lead to higher incentivesexample of Sunil Bharti Mittal, TCS 12.6 billion rupees (US$256 million), Wipro- US$177 million where InfosysRs.46.8 billion ($1.16 billion) in IT industry 3. Welfare maximizationfor a cause, education- RamKrishna Mission, Al-Ameen Mission, health- Disha, Dristi and many others, sanitation etc, DMRC generated a revenue of 4.27 crore where expenditure was 4.53 so incurred 26 lakh net loss still didnt increase the fair because the sole purpose is not to earn money but to provide transport services.

Point of equilibrium for various firms Equilibrium means reaching a point where it gives stability to the firm or where te profitability is at the highestwill have to take decisions in respect to the level of output to produce and the price to charge 1. For profit maximizing firms-

The entire concept is guided by three primary assumptions1. entrepreneur is rational and aims to earn the highest profit 2. For simplicity, the firm produces one product 3. He is aware at where the profit is maximized.

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There are two approaches to determine the dynamics of profit maximization one is TR/TC approach and the other one is MR/MC approach TR/TCwhere the gap between TR and TC is highest MR/MCwhere both meets together

2. For sales maximizing firms TR/TCwhere TR is at the highest MR/MCMR is zero

Market analysis--Definition- is a domain where buyers and sellers participate for bargaining, transactions and negations Market structure Is determined by two factorsnumber of firms engaged and kind of products they produce (homogeneity or differentiation of products) Market structure number of players Sellers buyers type of products

Perfect competition

Imperfect competition 1. Monopoly one 2. Pure Oligopoly few 3. Impure oligopoly few 4. Duopoly two 5. Monopolistic Competition many 6. Monopsony many 7. Bilateral monopoly one

many many many many many one one

unique homogeneous homogeneous differentiated differentiated homogeneous tailor made

Market structures and their characteristics Perfect competition

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Ideal form of market, its buyers paradise,

Characteristics 1. large number, small in size producing homogeneous products 2. since small, capacity to produce is less thus influence is less compare to the market demand 3. less ability to influence the price so price taker, Elasticity is infinite 4. knowledge is perfect so zero information cost 5. free entry and exit 6. factors of production is mobile 7. no transport cost

Examples --- markets of stocks and shares as securities can be transported, a price change information is easily circulated, buyers can get the information easily by phone organized commodity markets in raw materials and foodstuffs as many buyers and sellers, all are small players

Imperfect competition Buyer or seller can influence the price

Examples--- retail market---strength of advertising Labor market is not mobile and local Housing market- houses cant be shifted Monopoly 1. One seller 2. big in size 3. Knowledge imperfect-information cost 4. Price inelastic 5. Price discrimination can be practiced 6. A regulated monopolist provide lower price Examples--- De Beers in diamond industry and LNG pipelines/Indian railway/atomic energy industry Pure Oligopoly 1. few sellers 2. size vary but relatively bigger, 3. information cost

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4. elasticity depend on price Example- oil IOL, ONGC, BP, Reliance, HPC, TATA petrodyne/steel SAIL, TATA steel, POSCO, Jindal/ copper Hindustan/ hindalco

Impure monopoly Same but product differentiated Exampleautomobiles, cameras, pendrive, harddisk etc Duopoly 1. two firms, differentiated 2. knowledge imperfect 3. elasticity depends on product differentiation Examplebeverage industrycoke and Pepsi ruling over the industry Monopolistic competition 1. many but each has monopoly in itself, size is bigger 2. price elastic, Examplerestaurant, beauty shops monopsony 1. many sellers but one buyer 2. since one buyer, they dictate price Example Indian cricketICC rules the term

Bilateral monopoly 1. one buyer and one seller 2. inter-dependent 3. Example--- BPO, KPO

Industry structure changes with time--Like in case of PDA--- Palm computing innovated palm pilot then

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There are three primary economic functions of government 1. Efficiency- Destroy monopoly, stop external disefficiencies, control pollution 2. Equity- stops inequality through taxes and massive public expenditure 3. Stability- less price fluctuation through fiscal and monetary policies

Macroeconomic objectives
Output High output GDP monetary value of goods and services produced within the territory of the economy over a period of time GNP goods and services produced by citizen of the country High growth Unemployment the more is unemployment, loss to the economy Price stability with free market Inflation increase in the general price level of goods and services Consumer Price Index average price of goods at the time of consumption Producers Price Index Wholesale price index the wholesale price Efficient foreign economic policy Net export export - import Stable foreign exchange rate

Instruments
Fiscal policy Revenue generation through taxation/profit from govt run companies/foreign exchange earnings/ Government expenditure in different sectors defence/ education/ healthcare/sanitation/ infrastructure/ transport/communication Monetary policy Control of money supply Higher interest rate 17

Foreign economics Trade policies Exchange rate intervention Income policies From voluntary wage-price guidelines to mandatory controls

Circular flow of income:

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