Pace2race Institute (www.pace2race.

com) Economics- Introduction

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of how men and society
Study of studies human behavior
An inquiry into the choose, with or without the
mankind in as a relationship
nature and causes use of money, to employ
the ordinary between ends and
of the wealth of the scarce productive resources
business of scarce means which
nations which could have alternative
life have alternative uses

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uses

Methods of Study Why to Study?

DEDUCTIVE
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particular
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Economic Systems
INDUCTIVE

particular to the general

QUESTIONS
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Production Possibility Shift in PPC

Curve
 Pace2race Institute (www.pace2race.com) Demand

Price elasticity of demand expresses the response of quantity demanded of a

What is Demand? Law of Demand good to a change in its price

demand refers to the quantity of a good or an inverse relationship between price and
service that consumers are willing and able
quantity demanded
to purchase at various prices during a
period of time

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Rationale of Demand

Diminishing Marginal utility

Substitution effect

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Determinants of Demand Income effect
Different uses Determinants

Availability of substitutes
Exceptions
Price of the commodity Position of a commodity in consumers budget
Level of income of the household Conspicuous Goods Nature of need that commodity satisfies
Tastes and preferences of consumers Giffen goods Number of uses to which a commodity can be put
Future expectations Period

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Price of related commodities Speculative goods Consumer Habits
(i) Complementary
(ii) Competing

In point elasticity, we measure In arc elasticity, we measure elasticity

ce elasticity at a given point on a
demand curve.
between 2 points on a demand curve.

Demand Schedule is a series of quantities which

consumer would like to buy at different prices at a
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given point of time
When we plot the prices and quantities
demand on a graph it is termed as a
demand curve
Income elasticity of demand is the degree of responsiveness of quantity
demanded of goods to a small change in the income of consumers.

Cross demand refers to the quantities of a commodity or service which will be

When we add up the various quantities demanded purchased with reference to changes, not of that particular commodity, but of
by the number of consumers in the market we can other inter-related commodities, other things remaining the same.
obtain the market demand schedule If we plot market demand schedule on a
graph we get market demand curve
 Pace2race Institute (www.pace2race.com)
Marginal Utility
It is the additional utility
derived from additional unit
of a commodity
Diminishing Marginal Utility
The additional benefit which a
person derives from a given
increase in stock of a thing
diminishes with every increase
in the stock that he already has
Consumer Surplus - Marshall
consumers surplus = What a
consumer is ready to pay - What
he actually pays.
Indifference Curve Analysis
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Indifference curve gives same
satisfaction to the consumer at
every point. It is a ordinal concept
Indifference Shedule
Consumer Behavior
Assumptions of Marginal Utility Indifference Map Properties of Indifference curves
Cardinal measurability of utility
Slope downward to right
Constancy of marginal utility of money
Always convex to origin
Hypothesis of independent utility
Can never intersect each other
Higher indifference curve
Limitation of Dim. Marg. Utility represent higher satisfaction
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Homogeneous units Indifference curve will never
Standard units of consumption touch the axis
Element Concept
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Law fails for prestigious goods
Case of related goods
Limitations of Consumer Surplus
Set of Indifference Curves
Can not be measured precisely
Affected by availability of substitutes Budget Line
Can not be measured in terms of
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money as marginal utility of money a budget line shows all those
changes combinations of two goods which the
In case of necessaries, marginal consumer can buy spending his given
utilities of earlier units are infinitely money income on the two goods at
large their given prices. All those
combinations which are within
Assumptions of Indiff. Curve Analysis
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Consumer is rational
the reach of the consumer (assuming
that he spends all his money income)
Capable of ranking all combinations will lie on the
of goods budget line.
If combination A has more
commodities then B, then A should
be preferred Consumer Equilibrium
If consumer prefers combination A
to B, B to C then he must prefer
combination A to C
 Pace2race Institute (www.pace2race.com) Production

Production Law of Variable Proportions Stages

Production is the organized activity of transforming resources into finished

products in the form of goods and services; and the objective of production is to Law of increasing returns
satisfy the demand of such transformed resources Law of diminishing returns
James Bates and J.R. Parkinson Law of negative returns
A rational producer will always produce

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Factors of Production in stage 2 where both the marginal
product and average product of the
variable factors are diminishing.
Land Labour Capital Enterprenuer

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The law of diminishing return is the
Nature Gift Human Effort Stages of formation Functions marginal product of each unit of input
Fixed Supply Perishable Savings Initiating a will decline as the amount of that output
Indestructible Mobile Mobilization business increases, holding all other inputs
Passive Inseparable from Investments Risk bearing constant
Different uses laborer Innovations Samuelson
All laborer not
productive Returns to Scale

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Production Function Constant Increasing Decreasing
The term production function is applied to the physical relationship between a with the increase in the increasing returns to scale When output increases in
firms input of resources and its output of goods or services per unit of time scale in some proportion, means that output a smaller proportion with
leaving prices aside output increases in the increases in a greater an increase in all inputs,
Richard H. Leftwich proportion than the decreasing returns to
Equation
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same proportion
increase in inputs. scale are said to prevail.

q = f (a, b, c, d .n) Related to particular unit of time

where q stands for the rate Technical knowledge is constant
of output of given Factors of production are
commodity a,b,c,d.n, divisible
are different factors Best available technique is used
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(inputs) and services used
per unit of time. Economies & Diseconomies

Cobb-Douglas Production Function Internal External

Technical Cheaper raw material

Managerial Technological
where Q is output, L the quantity Commercial Development of skilled labour
of labour and C the quantity of Financial Growth of ancillary industries
capital. K and a are positive Risk Bearing Better transportation and
constants marketing

Economic Costs
economic costs include :
(1) the normal return on money
capital invested by the
entrepreneur himself in his own
business;
(2) the wages or salary not
paid to the entrepreneur but could
have been earned
Direct or Traceable Costs
Direct costs are costs that are
readily identified and are traceable
to a particular product, operation or
plant.
Cost Function
The cost function refers to the
mathematical relation between
cost of a product and the various
determinants of costs.
Completely Fixed Cost
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Outlay & Opp. Costs
Outlay costs involve actual
expenditure of funds on, say,
wages, material, rent, interest, etc.
Opportunity cost, on the other
hand, is concerned with the cost of
foregone opportunity
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Indirect or non-traceable costs
Indirect costs are not readily
identified nor visibly traceable to
specific goods, services, operations,
etc.
Completely Variable Cost
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Semi Variable Cost
Cost
Short Run Total Cost Curves Total cost of a business is the sum
of total variable cost and total fixed
cost or symbolically
TC = TFC + TVC
Average Fixed Cost
AFC is the total fixed cost divided
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by the number of units of output
produced.
Average Variable Cost
Average variable cost is the total
variable cost divided by the number
of units of output produced
Short Run Marginal and Average Cost Curves
Average Total Cost
Average total cost is a sum of
average variable cost and average
fixed cost. i.e.,
ATC = AFC + AVC.
Relationship bet. AC & MC
MC < AC ---- Average Cost Falls
MC > AC ---- Average Cost Rises
MC = AC ---- Average Cost is Min.
Long Run Average cost Curve
Constant Technology Changing Technology
 Pace2race Institute (www.pace2race.com) Price Determination

Demand Curve under Perfect Compt. Equilibrium

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Equilibrium Price MC Curve = Supply Curve

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Monopoly

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Where demand meets supply
Shifts in Demand & Supply
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Demand curve Long run equilibrium

Monopolistic Oligopoly
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Long Run Equilibrium

Kinked Demand Curve