Batch 17 -

Introduction to Economics
Ashutosh Y Anoop Menon Arun Nair Prashant Pathak Vinod Nair Rajesh Rajappan Praveen Mishra 08 18 36 24 57 58 62

Contents
Understanding Economics
Micro & Macro Economic Theory

Concept of Equilibrium
Demand Analysis & 1st Law of Demand

Factors affecting Demand Curve Elasticity of Demand

Let Us Understand

Economics
Economics is the Science of solving the problem of Scarcity
Economics is study of human behavior in producing , distributing ,consuming material, goods & services in a world of Scarce Resources . Economics study enables us to take decision in various fields and matters ,it studies activities of individuals, institutions relating to production, consumption and exchange of goods
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Let Us Understand

Economics

Micro Economics

Macro Economics
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Micro Economics
Definition: According to K.E. Boulding: Microeconomics is the study of particular firms, particular households, individual prices, wages, incomes, individual industries, particular commodities

Micro Economics
Product Pricing Theory of Demand Theory of Production

Factor Pricing

Theory of Economic welfare

Wages

Rent

Interest

Profit 5

Micro Economics Analysis

It is concerned with individual unit or specific economic unit like firm, factory, owner, consumer etc
Optimum utilization of attainment of objectives available resources for the

Theory is also known as Price Theory and is mainly concerned with flow of Goods and Services Theory can also be considered as theory of Demand

Macro Economics
Macro approach describes aggregate economics behavior.
Macro It is a general economics and covers the area as Income Economics Output and employment.

Theory of Income & Employment

Theory of General Price Level

Theory of Economic Growth

Theory of Distribution

Close relation of Micro & Macro Economics

Micro & Macro economics are inter dependent Micro theory contributes to Macro economic theory Pricing of commodities Determination of profit Rate of interest Similarly theory of aggregate are derived from theory of individual behavior ie Theory of Investment ,Theory of consumption.

Static Analysis
Nature of Static Static economy is the Growth less economy. Market forces remain in perfect equilibrium. Rate of Demand & Consumption is constant It facilitate the understanding of economic theory Solution for economic problem.

Major Disadvantage of Static Method is that it gives a Steal Picture of the economic
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Dynamic Analysis
Economic Dynamics Is a process of change through time. Is a Realistic Method of economic theory. Is related to developing economics. It facilitates process of development study. Both Static & Dynamic are complementary to each other.

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Concept of Equilibrium
Equilibrium determined by the demand and supply forces. A firm is said to be equilibrium when it has no desire to change its own level of output. That is when it gets maximum profit and produces at lowest cost
S E P D 0 Q

OP= Equilibrium Price OQ = Equilibrium quantity

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Demand Analysis
Demand is a microeconomic concept. Generally demand is simply a desire for commodity .In economic it is affective desire. Demand = Desire + ability to buy + Price + Point of time
Demand analysis is helpful is knowing the relation both the demand for a commodity and the factors influencing demand. It helps the seller to decide the price policy and also in predicting demand.

Demand:
Is a desire to own something and the ability to pay for it Is a desire backed by purchasing power to buy a commodity at a particular price and at a point of time
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1st Law of Demand

The law of demand states When goods price is lower, consumers will buy more of it. When the price is higher, consumers will buy less of it.

P r i c e Demand

Price and demand quantity are inversely related to each other.

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1st Law of Demand Contd

Exceptions.
Sometime price seems to have little or no effect on demand quantity. Eg. Salt is cheap and even if price double , demand will more or less would remain constant. Sometime higher price can increase the demand quantity, as people would anticipate further increase in price and they might buy excess quantity.

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Relationship between Income & Demand

Relationship between demand of the product and consumer purchasing power depends on type of product considered and level of consumer income.

Demand

Normal Goods Inferior Goods

In expensive Goods

Income

If a demand for As Income rises a line of demand for a commodity product goes increase as down. Such income increasesare Product it is Inferior to be said Product Normal Goods
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Factor affecting Demand Curve

Change in Real Income. Population ( Size of the Market) Taste and Fashion Shortage of goods or fear of future Price change. Government Policy

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Shift In Demand

PRICE

D2
P

D1

D1 is the D2 is a situation D is a situation situation when when consumer when consumer consumer tends buys a nominal buys least to buy more quantity at same quantity at same quantity at a market price market price market price

Q2

Q QUANTITY

Q1

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Shift In Supply

PRICE

S1
P

S2

Q1

Q QUANTITY

Q2

S1 is a situation S2 situation is when quantity possible as supplied (Q1)is S is a situation suppliesnominal least asget more when cost of profit margin due quantity supplied resource is high andsame market at less cost of profit margin resource used or of suppliers is less price production cost is at the same less market price

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Elasticity of Demand

The extend to which people wants to buy more or less of a product or services, when its Demand is price changes is called Elasticity of Demand . Demand is Demand is
when % cut in When % cut in of demand for luxurious items when Elasticity Price brings Price brings Price brings about exactly to be % higher than necessity items i.e. a about smaller % about equal expansion price will have affect with variation expansion in in expansion of demand so as demand so as of buyers demand so as to number to leave total decrease in in increase total revenue revenue revenue unchanged

Unit elastic Inelastic Elastic

tends small large

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Types of Demand Elasticity

Demand Elasticity Price Elasticity Income Elasticity Cross Elasticity

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Price elasticity of demand

1. Availability of substitutes Calculatingof expenditure (needles: inelastic; TV: 2. Proportion Price Elasticity elastic) PED = % Change in Qty Demanded 3. Nature of the commodity (necessity vs. luxury) % Change in Price 4. Possibility of new purchase 5. Durability of Goods 6. Distribution of income 7. Price level (very costly & very cheap goods: inelastic)

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Income Elasticity and Cross Elasticity Cross Elasticity Income Elasticity Is the change in Demand for goods causing to change An increase in Income increases the Demand for in Price thus Substitute goods, of its the income Elasticity is the change in High Cross Elasticity means they are substitute and demand with respective income.

price of one can affect the demand for another . Eg Luxury item is Income Elastic and nesesacity like
Low Cross Elasticity - box etc. are income inelastic Soap, needles, match Here the product are not closely related to each other and price change in one product will not affect the price of other product.
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Thanks

Thanks To All

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