3Key Concepts Growth Development GDP GNP Inflation and deflation Import and exportExchange value and PPPCapitalism and communismPlanning vs. executionPolitical economyEconomics for managersChanging Global Economic scenario
4Economics definitions Adam SmithEconomics enquires into the factors that determine wealth of the countryMarshallEconomics is the study of mankind in the ordinary business of lifeRobbinsEconomics is the science of scarcityEconomics is the science which studies human behavior as a relationship between ends and scarce means which have alternate usesUnlimited wants, scarce means, Alternative use of means
5Economics……..is the study of how scarce resources of a society are used to produce important commodities and distribute them among different people.
6Economics studies the management of society’s scarce resources. Subject matterEconomics 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.
7Why 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.
8Scarcity 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.
10Micro 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.
11It is a study of various economic variables in general. Macro Economics………….studies economy as a wholeIt 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.
12Statements in Economics……. We get to see two types of statements in economic theory.They are:Positive statements andNormative statements
13Positive 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…’
14Normative Economics…….. Normative economics explains how economic variables should be.Normative economics explains ‘what should be…..’
15Subject 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.
16Micro economic efficiency Efficiency in productionEfficiency of distributionAllocative efficiency
17Subject 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.
18Microeconomics Product pricing Factor pricing Economic welfare Theory of DemandTheory of production costFactor pricingWagesRentsInterestProfitEconomic welfare
19Macroeconomics Income and employment General price level and inflation Consumption functionInvestmentGeneral price level and inflationEconomic GrowthDistribution( relative shares of wages and profits)
20Central Problems of an Economy What to ProduceHow to produceFor Whom to produceWhat provision be made for economic growth
21Central problems are solved: Market/price MechanismEconomic Planning
22Production Possibility Curve Represents alternate production possibities facing an economyProduction PossibilityCloth (000 m)Wheat (000 Qt)A15B114C212D39E45F
37Capitalism Right to private property Freedom of entreprise Freedom of choice by customersProfit MotiveCompetitionPrice systemInequalities of income
38Critical evaluation of capitalism Free market doesn’t ensure maximum social satisfaction at minimum social costConsumer sovereignty may not be validEconomic instability and unemploymentDoesn’t ensure rapid growth in developing countriesConcentration of wealth and income
40Microeconomics Product pricing Factor pricing Economic welfare Theory of DemandTheory of production costFactor pricingWagesRentsInterestProfitEconomic welfare
41Theory of DemandLaw of Demand: states the functional relationship between price and quantity demandedWhy does the curve slope downward?Income effectSubstitution effectExceptionsVeblin EffectGiffin goods
42Determinants of Demand Taste and preference of consumersIncome of peopleChanges in prices of the related GoodsComplementary goodsSubstitutesThe number of consumers in the marketChanges in propensity to consumeConsumption led growthSavings led growthConsumer expectation with regard to future priceIncome distributionMarginal propensity to consume for the rich is much lesser than the poor
43Contraction and extraction in demand Increase and decrease in demand
45Demand function Qd= f ( P, I, p, T, A) Considering price as the only independent variableQd= f ( P )Detremine Market demand functionQa= 40- 2PQb= pQc= PDemand function and supply function
46A market consists of three consumers whose individual demand functions are as follows. P= QaP= QbP= QcFind out the market demand function. If the supply function is given by Qs= P, determine the equilibrium quantity and price
47So what should managers do? Market share to wallet share
48Demand : Marshall’s cardinal utility Utilities are measurable and quantifiableLaw of DMUThe 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
49Draw the graphs for Total utility and Marginal Utility Cups of coffee consumed/dayTotal utilityMarginal utility112222103308436654041739-234-5
50Principles 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 equalMarginal utility of money expenditure= marginal utility of the product/price
51Marginal utility of product X and Y UnitsMux (marginal utility of product X)Muy (marginal utility of product Y)1202421821316414155129610Price of Good X2Price of Good Y3
52Marginal utility of money expenditure UnitsMUx/PxMUy/Py11082973645Consumer equilibrium is established when the consumer buys 6 units of Ggod X and 4 units of Good Y.
53Find out the optimal combination of goods for a customer: Price of X= 5Price of Y=2Total income= 22Units consumedMUxMUy13020225183164151451012678
54Indifference curve analysis of demand Utility cant be measured, but can be comparedOrdinal analysis of demand is the indifference curve which represents all those combinations of goods which give the same satisfaction to the consumer
55Indifference curve Income-1 Income-2 Good X Good Y 1 12 2 14 8 3 10 5 76
56Budget lineShows all those combinations of two goods which the consumer can buy by spending his money income on the two goods at their given pricesChange in budget line vs. shift in budget lineConsumer’s equilibriumIncome consumption curveICC is the locus of equilibrium points at various levels of consumer’s incomeICC for luxury goods and inferior goods
57Elasticity of Demande=(%change in quantity demanded)/ (% change in price )Elastic demandInelastic demandUnitary elastic demandDifference in elasticity may be because of possibility of substitution
58ProblemsIf 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 demandA 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)
59Total expenditure method Total revenue method/total outlay methodElasticity 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 unitQuantity demandedTotal expenditurePrice elasticity530150>14.75401904.5502254.25602554753003.7580=13.584294<13.2587282.75
60Determinants of elasticity Availability of substitutesProportion of consumer’s income spent on the commodityNumber of uses of the commodityComplementarity between goodsTime of elasticity
61Importance of price elasticity of demand Pricing decisions by business FirmsUses in economic policies regarding price regulationExplanation of paradox of plentyUse in international tradeImportance in fiscal policy
62Cross 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 goodsNegative for complementary goods
63ProblemIf 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.
64Income elasticity of demand Percentage change in purchases of a good/ percentage change in incomea 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 XIncome elasticity for inferior goods and luxury goods
65Consumer surplusDifference between the price that a consumer is willing to pay and the price one actually pays for a productExcess 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.
66Marginal utility and consumer surplus No of unitsMU ($)Price($)Marginal benefit1201282186316414510-2Consumer surplusMarshall’s measure of consumer surplus-graphical representationDiamond and water paradox
68Factors of production: Land, Labour, capital, entrepreneur Production functionLaw of variable functionLaw of return to scaleIsoquantIsocostLCCTheory of costBEP analysisTheory of firmsConcept of revenue
69Production FunctionThe relationship between input and output of a firm is called as production functionThe law of variable proportionLaws of return to scaleTheory of firm: what level of output to be produced to maximize the profitTheory of production supports the theory of firm
70Production FunctionProduction function states the maximum quantity of output that can be produced with any given quantities of various inputsQ= f(L, K, M)L, K, M stand for labour, capital and raw materialShort run production function : Law of variable proportionLong run production Function: forms laws of return to scale
71Short run Production Function Law of variable proportionLaw of diminishing returnVarying one input while we keep all other variables fixed
72Concepts of product Input (units( Total product (quintals) Marginal productAverage product180602170908532701004368989254306286648050750424728639495-95510-1548
73Average product: total product/ no. of units of factors employed Total product: total amount of output produced by a given amount of factorAverage product: total product/ no. of units of factors employedAP= Q/LMarginal Product: output at the marginAddition to the total output by the employment of an extra unit of a factorMP = Change in Q/ Change in L
74Law of variable proportion Stage-1: Increasing returnsTP increasesAP increases, and maximum where stage 1 endsMP increases and then declinesMP is the highest at the point of inflectionStage-2: diminishing returnsAP and MP declineTP is the highest when it endsMP is zero when stage 2 endsStage 3: negative returnsTP and AP declineMP is negative
75Problem Number of variable input Total output (TP) Marginal product of the variable input (MP)Average product of the variable input (AP)3-183042051306719.58136
76Isoquant also called as equal product curve Two factors are considered asvariables in the production processIsoquant represents all those factor combinations capable of producing same amount of outputFactor combinationsFDactor-1Factor -2A112B28C35D4E
77Isocost lineRepresents 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
78Return to scaleAll factors or inputs in a production process are variableConstant returns to scaleIncreasing returns to scaleDecreasing returns to scale
81Total cost (TC)= TFC + TVC Average Total cost= TC/Q AFC= TFC/Q Short run and long runShort run costsFixed and variableTotal cost (TC)= TFC + TVCAverage Total cost= TC/QAFC= TFC/QAVC= TVC/QMarginal cost= change in TC/ Change in QExercise
82Units of outputT6otal fixed costTotal variable costTotal costAverage fixed costAverage variable costAverage total cost50120702358536011041001505145195619024072372878284334Graphical representation