INTRODUCTION TO ECONOMICS

Dr. Yogesh A. Chauhan

GCET
 INTRODUCTION
• Economic activity- price tag, barter system
• Economy: The manner in which the people are
employed and goods are produced in a
country. (set of all the economic activities)
• Capitalistic , Socialistic , Mixed
 Classification of Goods
• Goods: Anything that can satisfy a human want is
called a ‘good’ in economics. Goods and services
are included in ‘goods’.
• Classification of Goods:
1. Free goods and economic goods
2. Consumers’ goods and producers’ goods
3. Substitute goods and complementary goods
4. Durable goods and non durable (perishable)
goods
5. Transferable and non transferable goods
6. Superior(Normal) goods and inferior goods
7. Private goods and public goods
 INTRODUCTION

• ‘OIKON’ & ‘NOMOS’ – Greek words

Laws of Household
Decision making about allocation of limited
resources which demands trade offs.
➢ Definition: Study of how society manages its
scarce resources
How people make decisions, how much they
work, what and from where do they buy at what
prices, how much they earn and how much they
spend, how do they invest their savings etc..
 Foundation stones of Economics
1. Multiplicity of wants
2. Scarcity of means
3. Alternative uses of means
 Definitions
• Economics is a social science concerned with the
proper uses and allocation of resources with a
view to achieve and maintain growth with
stability.
• Economics is a study of how people organize the
use of resources to satisfy their wants.
• Adam Smith: Economics is a science of wealth.
• Marshall: Economics is a study of man’s actions in
the ordinary business of life; it enquires how he
gets his income and how he uses it. (welfare-
human )
• Robbins: A science which studies human
behaviour as a relationship between ends and
scarce means which have alternative uses.
Decision making on:
▪ What commodities to be produced & in what
quantity
▪ How to produce- who will produce & with
what quantity and
▪ For whom to produce.
 MICRO & MACRO ECONOMICS
• Microeconomics: study of how households
and individual firms make decisions and how
they interact in the market
• Macroeconomics: study of economy-wide
phenomena, including national income, GDP,
inflation, unemployment and economic
growth.
 Differences: Micro & Macro Economics
BASIS MICROECONOMICS MACROECONOMICS
DEFINITION Study of individual Study of the nation as an
behaviour of mankind. entity like national income,
( incomes, consumptions, inflation, consumption,
savings, investments) savings etc.
Objective Maximization of individual To govern economic
satisfaction and parameters of a nation like
minimization of costs growth in national income,
equitable distribution, full
employment, price stability
etc
Basis of judgement Based on equality of It considers the aggregate
demand and supply of demand and supply. The
individuals and business adjustments in both is a
firms. (prices – govern by matter of central decision
demand and supply) in the form of price control
or restrictions.
 Differences: Micro & Macro Economics
BASIS MICROECONOMICS MACROECONOMICS
Assumptions Concerned with rational Aggregate demand of the
behaviour of individuals. nation and aggregate
‘Ceteris peribus’ is used to supply of resources and its
explain economic laws allocation to meet the
aggregate demand as per
market demand
Economic equilibrium Partial equilibrium confined General equilibrium for a
to industry categories and nation
individual firms

Time element Shorter time span Longer time span. Current

decision of today will yield
the results after a long
span of time.
 Demand
• Need
• Desire
• Want
• Demand
 Demand
1. Desire
2. Capability to pay
3. Willingness to pay

Combination of the three will constitute

demand of a commodity.
 Demand
Definition
• Various quantities of a commodity, which the
consumers would buy from a market, in a
given period of time at various prices
• or at various incomes
• or at various prices of related goods.
1. Price Demand
2. Income Demand
3. Cross Demand
 Demand determinants
• Price
• Income
• Prices of related goods
• Availability
• Past experience
• Taste & preference
• Season
• Future expectation about change in the price
• Future expectation about change in the income
 Law of Demand
Any rise in the price of the commodity would be
followed by decrease in the demand and any fall
in the price of the commodity would be
followed by increase in the demand of that
commodity. – Ceteris Paribus
Demand Schedule
Price Quantity Demanded
10 500
9 600
8 700
7 800
 Demand Curve

Price Demand Curve

D’

Quantity
 Exception to the law of demand
1. Basic Necessities
2. Life saving drugs
3. Snob value
4. Loyalty
5. No close substitutes
6. Seasonal commodities
7. Obsolete commodities
8. Future expectation about change in the price
 Change in the Demand
Extension, Contraction, Increase and Decrease
• Extension and Contraction of the Demand:
Change in the demand because of the price

• Increase and Decrease in the Demand:

Change in the demand is due to a reason other
than the price of the commodity
 Demand Curve

Contraction
D

Price

Extension
D’

Quantity
 Demand Curve

D1
D
Increase in the demand
Price

D1’
D’

Quantity
 Demand Curve

D
Decrease in the Demand
D2
Price

D’

D2’

Quantity
Law of Diminishing Marginal Utility
• As consumption increases the marginal
utility derived from each additional unit declines.
• Utility is the satisfaction or benefit derived by
consuming a product.
• Marginal Utility: Additional utility derived by the
consumption of the additional unit (the change in
the utility from an increase in the consumption of
that good)
Law of Diminishing Marginal Utility
Why people buy more at less price
1. Income effect
2. Substitution effect
3. Alternative uses
4. Law of diminishing marginal utility
 Elasticity of Demand
• The degree of responsiveness in quantity
demanded to a change in price of a
commodity. (It is a measure of how sensitive
the quantity demanded of a commodity is to
its price)
1. Price Elasticity of Demand
2. Income Elasticity of Demand
3. Cross Elasticity of Demand
 Price Elasticity of Demand

PED = 0
PRICE

PRICE
PED= ∞

QUANTITY QUANTITY
 𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
PED =
𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑝𝑟𝑖𝑐𝑒

𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

IED =
𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝐼𝑛𝑐𝑜𝑚𝑒

𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

CED =
𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑟𝑒𝑙𝑎𝑡𝑒𝑑 𝑔𝑜𝑜𝑑𝑠
 𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
PED =
𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑝𝑟𝑖𝑐𝑒
= ΔQ/Q1 ÷ ΔP/P1= Q2-Q1/Q1 ÷ P2-P1/P1

𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

IED =
𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝐼𝑛𝑐𝑜𝑚𝑒
= ΔQ/Q1 ÷ ΔI/I1 = Q2-Q1/Q1 ÷ I2-I1/I1

𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

CED=
𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑟𝑒𝑙𝑎𝑡𝑒𝑑 𝑔𝑜𝑜𝑑𝑠
= ΔQA/Q1A ÷ ΔPB/P1B = Q2A-Q1A/Q1A ÷ P2B-P1B/P1B
 Measurement of Elasticity
Price Quantity
demanded
10 250
12 100

PED = 100-250/250 ÷ 12-10/10 = -0.6 ÷ 0.2 =3

Price Quantity
Demanded
20 1500
19 1600

PED = 1600-1500/1500 ÷ 19-20/20 =0.067 ÷ -0.05 = 1.34

 Factors affecting Price Elasticity of Demand

• Luxurious v/s Necessities

• Preponement and postponement of
purchasing decision
• Durable v/s perishable commodity
• Single use v/s multiple use commodity
• Availability of substitutes
• Percentage of income spent on the
commodity
 Importance of Elasticity
• Businessmen - For deciding the price
• Finance Minister - For deciding the tax structure
 Supply
• Definition: The quantities of a product which
the producer is able and willing to offer for
sale in the market at various prices.
 Factors affecting Supply
• Price
• Natural factors- rainfall, sunlight (especially for
agricultural products)
• Technology
• Availability of raw materials
• Government policy – tax, subsidy, duties (import
/export policy)
• Cost of production - change in factor prices
• Number of suppliers
• Change in the input prices
 Law of Supply
• Any rise in the price of the commodity would
be followed by ___________of supply and any
fall in the price of the commodity would be
followed by _____________ of supply. (Ceteris
Paribus)
• Keeping other factors constant an increase in
the price of a commodity results in increase in
the quantity supplied and vice versa.
 SUPPLY CURVE

S
PRICE

QUANTITY
• Supply Curve • Reserve Price: The price
below which the
producer is not ready to
offer any unit for sale in
the market.
PRICE

QUANTITY
 Supply v/s Stock
• Stock is the potential supply
• When the time in the market is favourable,
the quantity would be converted from stock to
supply.
Market Price Determination
Shortage v/s Surplus
S
D

S>D
PRICE

P Equilibrium Point

S D>S D

O Q
QUANTITY