1. Associate Professor, SIBM, Pune.
Economics
Rajesh Panda
Associate Professor, SIBM, Pune.

2. Various facets
Microeconomics
Macroeconomics
Managerial Economics

3. Key Concepts Growth Development GDP GNP Inflation and deflation
Import and export
Exchange value and PPP
Capitalism and communism
Planning vs. execution
Political economy
Economics for managers
Changing Global Economic scenario

4. Economics definitions
Adam Smith
Economics enquires into the factors that determine wealth of the country
Marshall
Economics is the study of mankind in the ordinary business of life
Robbins
Economics is the science of scarcity
Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternate uses
Unlimited wants, scarce means, Alternative use of means

5. Economics
……..is the study of how scarce resources of a society are used to produce important commodities and distribute them among different people.

6. Economics studies the management of society’s scarce resources.
Subject matter
Economics studies the management of society’s scarce resources.
Management of resources is the central theme of economics because resources are scarce. Hence economics is also called the science of scarcity.

7. Why is Economics important?
To ensure proper allocation of scarce resources.
To ensure cost minimisation.
Improving one’s ability to understand business fluctuations and transactions with clarity.

8. Scarcity is unavailability of a resource or a good in abundance.
On account of limited resources society is unable to produce all the goods and services it wants to.

9. Economic study
Economics
Macro Economics
Micro Economics

10. Micro economics deals with minute aspects of the economy.
It deals with each economic unit on individual level.
It deals with how individuals and firms make decisions under different situations and how do they interact.

11. It is a study of various economic variables in general.
Macro Economics
………….studies economy as a whole
It is a study of various economic variables in general.
It studies economy wide phenomena such as nation’s income, recession, economic growth, inflation, output etc.

12. Statements in Economics…….
We get to see two types of statements in economic theory.
They are:
Positive statements and
Normative statements

13. Positive statements……..
These statements are also referred to as Positive and Normative economics.
Positive economics explains things, economic problems and variables as they are.
Positive economics explains, ‘what is…’

14. Normative Economics……..
Normative economics explains how economic variables should be.
Normative economics explains ‘what should be…..’

15. Subject matter of Micro Economics
Micro economics deals with demand . supply and equilibrium in a market.
The forces of demand and supply are at the centre of micro economic theory.
These forces determine price fluctuations relating to any product.

16. Micro economic efficiency
Efficiency in production
Efficiency of distribution
Allocative efficiency

17. Subject matter of Macro Economics
Macro economics deals with issues that are aggregate in nature.
They include:
National income – Employment- Inflation etc..
It also studies the relationships between different aggregates.

18. Microeconomics Product pricing Factor pricing Economic welfare
Theory of Demand
Theory of production cost
Factor pricing
Wages
Rents
Interest
Profit
Economic welfare

19. Macroeconomics Income and employment General price level and inflation
Consumption function
Investment
General price level and inflation
Economic Growth
Distribution( relative shares of wages and profits)

20. Central Problems of an Economy
What to Produce
How to produce
For Whom to produce
What provision be made for economic growth

21. Central problems are solved:
Market/price Mechanism
Economic Planning

22. Production Possibility Curve
Represents alternate production possibities facing an economy
Production Possibility
Cloth (000 m)
Wheat (000 Qt) A 15 B 1 14 C 2 12 D 3 9 E 4 5 F

23. Production Possibilities Frontier
Cars
Computers 15

24. Production Possibilities Frontier
Cars
Computers 16

25. Production Possibilities Frontier
1000
Cars
Computers
3000 17

26. Production Possibilities Frontier
1000
700
Cars
Computers
3000 18

27. Production Possibilities Frontier
1000
700
Cars
Computers
2000
3000 19

28. Production Possibilities Frontier
1000 A
700
Cars
Efficient
Resource Use
Computers
2000
3000 20

29. Principles of Economics Illustrated by the Production Possibilities Frontier . . .
Efficiency
Tradeoffs
Opportunity Cost
Economic Growth 21

30. Production Possibilities Frontier
1000
700
Cars
Computers
2000
3000 22

31. Production Possibilities Frontier
1000
700
Cars
Computers
2000
3000 23

32. Production Possibilities Frontier
1000
700
Cars
Computers
2000
3000 24

33. Production Possibilities Frontier
1000
Tradeoffs
700
Cars
Computers
2000
3000 25

34. Production Possibilities Frontier
1000
Cars
Computers
3000 26

35. Production Possibilities Frontier
1000
Cars
Computers
3000 27

36. Production Possibilities Frontier
Growth
1000
Cars
Computers
3000 28

37. Capitalism Right to private property Freedom of entreprise
Freedom of choice by customers
Profit Motive
Competition
Price system
Inequalities of income

38. Critical evaluation of capitalism
Free market doesn’t ensure maximum social satisfaction at minimum social cost
Consumer sovereignty may not be valid
Economic instability and unemployment
Doesn’t ensure rapid growth in developing countries
Concentration of wealth and income

39. Capitalism Vs Communism

40. Microeconomics Product pricing Factor pricing Economic welfare
Theory of Demand
Theory of production cost
Factor pricing
Wages
Rents
Interest
Profit
Economic welfare

41. Theory of Demand
Law of Demand: states the functional relationship between price and quantity demanded
Why does the curve slope downward?
Income effect
Substitution effect
Exceptions
Veblin Effect
Giffin goods

42. Determinants of Demand
Taste and preference of consumers
Income of people
Changes in prices of the related Goods
Complementary goods
Substitutes
The number of consumers in the market
Changes in propensity to consume
Consumption led growth
Savings led growth
Consumer expectation with regard to future price
Income distribution
Marginal propensity to consume for the rich is much lesser than the poor

43. Contraction and extraction in demand
Increase and decrease in demand

44. Demand function
Demand function
Supply function
Equilibrium

45. Demand function Qd= f ( P, I, p, T, A)
Considering price as the only independent variable
Qd= f ( P )
Detremine Market demand function
Qa= 40- 2P
Qb= p
Qc= P
Demand function and supply function

46. A market consists of three consumers whose individual demand functions are as follows.
P= Qa
P= Qb
P= Qc
Find out the market demand function. If the supply function is given by Qs= P, determine the equilibrium quantity and price

47. So what should managers do?
Market share to wallet share

48. Demand : Marshall’s cardinal utility
Utilities are measurable and quantifiable
Law of DMU
The additional benefit a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he already has

49. Draw the graphs for Total utility and Marginal Utility
Cups of coffee consumed/day
Total utility
Marginal utility 1 12 2 22 10 3 30 8 4 36 6 5 40 41 7 39 -2 34 -5

50. Principles of equi-marginal utility
Consumer will distribute his money income between the goods in such a way that the utility derived from the last rupee spent on each good is equal
Marginal utility of money expenditure= marginal utility of the product/price

51. Marginal utility of product X and Y
Units
Mux (marginal utility of product X)
Muy (marginal utility of product Y) 1 20 24 2 18 21 3 16 4 14 15 5 12 9 6 10
Price of Good X 2
Price of Good Y 3

52. Marginal utility of money expenditure
Units
MUx/Px
MUy/Py 1 10 8 2 9 7 3 6 4 5
Consumer equilibrium is established when the consumer buys 6 units of Ggod X and 4 units of Good Y.

53. Find out the optimal combination of goods for a customer:
Price of X= 5
Price of Y=2
Total income= 22
Units consumed
MUx
MUy 1 30 20 2 25 18 3 16 4 15 14 5 10 12 6 7 8

54. Indifference curve analysis of demand
Utility cant be measured, but can be compared
Ordinal analysis of demand is the indifference curve which represents all those combinations of goods which give the same satisfaction to the consumer

55. Indifference curve Income-1 Income-2 Good X Good Y 1 12 2 14 8 3 10 57 6

56. Budget line
Shows all those combinations of two goods which the consumer can buy by spending his money income on the two goods at their given prices
Change in budget line vs. shift in budget line
Consumer’s equilibrium
Income consumption curve
ICC is the locus of equilibrium points at various levels of consumer’s income
ICC for luxury goods and inferior goods

57. Elasticity of Demand
e=(%change in quantity demanded)/ (% change in price )
Elastic demand
Inelastic demand
Unitary elastic demand
Difference in elasticity may be because of possibility of substitution

58. Problems
If the price of a commodity falls from $10 to $9 per unit, the quantity demanded increases from100 units to 120 units. Find out the price elasticity of demand
A consumer purchases 80 units of a commodity when its price is $1 and purchases only 48 units when its price is $2. What is the price elasticity of demand for this commodity? (Arc elasticity of demand)

59. Total expenditure method
Total revenue method/total outlay method
Elasticity is computed from the total change in expenditure.
This method can only say whether elasticity is more than one, less than one or equal to one.
Price per unit
Quantity demanded
Total expenditure
Price elasticity 5 30
150
>1
4.75 40
190
4.5 50
225
4.25 60
255 4 75
300
3.75 80 =1
3.5 84
294
<1
3.25 87
282.75

60. Determinants of elasticity
Availability of substitutes
Proportion of consumer’s income spent on the commodity
Number of uses of the commodity
Complementarity between goods
Time of elasticity

61. Importance of price elasticity of demand
Pricing decisions by business Firms
Uses in economic policies regarding price regulation
Explanation of paradox of plenty
Use in international trade
Importance in fiscal policy

62. Cross elasticity of demand
Degree of responsiveness of demand for one good to the change in price of another good
(%change in the quantity demanded of X)/(%change in price of Y)
Positive for substitute goods
Negative for complementary goods

63. Problem
If the price of coffee rises from Rs 45 to Rs. 50 per hundred gram, as a result of this consumer’s demand for tea increases from 60 gram per day to 70 gram per day. Find out the cross elasticity of tea for coffee.

64. Income elasticity of demand
Percentage change in purchases of a good/ percentage change in income
a consumer’s daily income increases from $50 to $ 60, and so his purchase of good X increases from 25 units per month to 30 per month. Calculate the income elasticity of good X
Income elasticity for inferior goods and luxury goods

65. Consumer surplus
Difference between the price that a consumer is willing to pay and the price one actually pays for a product
Excess of price that a customer would be willing to pay rather than go without a thing over that which he actually pays is the economic measure of consumer’s surplus.

66. Marginal utility and consumer surplus
No of units
MU ($)
Price($)
Marginal benefit 1 20 12 8 2 18 6 3 16 4 14 5 10 -2
Consumer surplus
Marshall’s measure of consumer surplus-graphical representation
Diamond and water paradox

67. Theory of production

68. Factors of production: Land, Labour, capital, entrepreneur
Production function
Law of variable function
Law of return to scale
Isoquant
Isocost
LCC
Theory of cost
BEP analysis
Theory of firms
Concept of revenue

69. Production Function
The relationship between input and output of a firm is called as production function
The law of variable proportion
Laws of return to scale
Theory of firm: what level of output to be produced to maximize the profit
Theory of production supports the theory of firm

70. Production Function
Production function states the maximum quantity of output that can be produced with any given quantities of various inputs
Q= f(L, K, M)
L, K, M stand for labour, capital and raw material
Short run production function : Law of variable proportion
Long run production Function: forms laws of return to scale

71. Short run Production Function
Law of variable proportion
Law of diminishing return
Varying one input while we keep all other variables fixed

72. Concepts of product Input (units( Total product (quintals)
Marginal product
Average product 1 80 60 2
170 90 85 3
270
100 4
368 98 92 5
430 62 86 6
480 50 7
504 24 72 8 63 9
495 -9 55 10
-15 48

73. Average product: total product/ no. of units of factors employed
Total product: total amount of output produced by a given amount of factor
Average product: total product/ no. of units of factors employed
AP= Q/L
Marginal Product: output at the margin
Addition to the total output by the employment of an extra unit of a factor
MP = Change in Q/ Change in L

74. Law of variable proportion
Stage-1: Increasing returns
TP increases
AP increases, and maximum where stage 1 ends
MP increases and then declines
MP is the highest at the point of inflection
Stage-2: diminishing returns
AP and MP decline
TP is the highest when it ends
MP is zero when stage 2 ends
Stage 3: negative returns
TP and AP decline
MP is negative

75. Problem Number of variable input Total output (TP)
Marginal product of the variable input (MP)
Average product of the variable input (AP) 3 - 18 30 4 20 5
130 6 7
19.5 8
136

76. Isoquant also called as equal product curve
Two factors are considered asvariables in the production process
Isoquant represents all those factor combinations capable of producing same amount of output
Factor combinations
FDactor-1
Factor -2 A 1 12 B 2 8 C 3 5 D 4 E

77. Isocost line
Represents various combinations of two factors that the farm can buy with a given outlay.
Helps in determining what combinations of factors the firm will choose for production

78. Return to scale
All factors or inputs in a production process are variable
Constant returns to scale
Increasing returns to scale
Decreasing returns to scale

79. Cost of production and cost curves

80. Accounting cost
Economic cost
Economic cost= Accounting costs + implicit cost
Economic profit = total revenue- economic costs

81. Total cost (TC)= TFC + TVC Average Total cost= TC/Q AFC= TFC/Q
Short run and long run
Short run costs
Fixed and variable
Total cost (TC)= TFC + TVC
Average Total cost= TC/Q
AFC= TFC/Q
AVC= TVC/Q
Marginal cost= change in TC/ Change in Q
Exercise

82. Units of output
T6otal fixed cost
Total variable cost
Total cost
Average fixed cost
Average variable cost
Average total cost 50 1 20 70 2 35 85 3 60
110 4
100
150 5
145
195 6
190
240 7
237
287 8
284
334
Graphical representation

83. Problem Output TC TFC TVC AFC AC 50 1 70 2 100 3 120 4 135 5 150 6 16050 1 70 2
100 3
120 4
135 5
150 6
160 7
165

84. Marginal cost Output Total cost Marginal cost 100 - 1 125 25 2 145 20
100 - 1
125 25 2
145 20 3
160 15 4
180 5
206 26 6
136 30 7
273 37

85. Problem Quantity TFC TVC TC AFC AVC AC MC 1 30 10 40 - 2 18 15 24 3 546 4 32
7.5
15.5 5 42 72
14.4

86. Concepts of revenue Total revenue Average revenue Marginal revenue
Production function: decision when MC= MR

87. Summary Micro Vs. Macro Demand and supply Cardinal and ordinal utility
Production function
Cost concepts
Revenue concepts