introduction to economics concepts in microeconomics · 2021. 1. 6. · 4 factors of production law...
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Economy : Module I (Introduction and Micro-economics)Economy: Module I- (Introduction and Micro-economics)
Introduction to Economics
Concepts in Microeconomics
Economy
Economy : Module I (Introduction and Micro-economics)Economy: Module I- (Introduction and Micro-economics)
Points to be covered
● Definition of economics
● Micro and Macro Economics
● Evolution of Economics - Capitalism, Socialism and Mixed Economy
● 4 factors of Production
● Law of Demand and Supply
● Market Equilibrium
● Types of Goods
● Elasticities
● Savings, Investment and Capital Formation
● Questions
Economy : Module I (Introduction and Micro-economics)Economy: Module I- (Introduction and Micro-economics)
Micro and Macro Economics
Micro Macro
Study if individual units Study of Economy as a whole
Deals with individual income, individual
units, individual outputs, etc.
Deals with aggregates such as National
Income, Employment, etc.
Main tools are demand and supply.Tools are aggregate demand and
supply.
Economy : Module I (Introduction and Micro-economics)Economy: Module I- (Introduction and Micro-economics)
Features Capitalism Socialism Mixed Economy
Factors of production are owned by
Private Enterprises Government By both
Role of the government
Minimal MaximumMore of providing a
conducive environment
Price determinationMarket forces will
decideGovernment to decide
Both (government in some cases and market
in others)
Competition Very high Almost absent high
Motive Profits Social welfare both
Exploitation (of factors of
production)Yes No No
OutcomesSocial strata, increasing
income gap, thriving private sector etc
Wage gaps absent, prominent role of PSEs
Prominence given to both public and private
sector enterprises
Economy : Module I (Introduction and Micro-economics)
We like it more the better we understand it. As long as a lack of economic
understanding prevails among the general public, making good policy choices will take
a lot of political courage.
What Economics is about?
Economy : Module I (Introduction and Micro-economics)
ECONOMISTS
RESEARCH PAPER
STUDENTS TRAINED
PUBLIC
Problem with Economics Writings
COMMENTATORS
The new demands that society makes are legitimate, but they sometimes open a gap between those who create knowledge and those who convey it.
Economy : Module I (Introduction and Micro-economics)
Paul Krugman, a Nobel Laureate says there are three types of Writings in economics:
1. Greek-letter
2. Up-and-down: Share market and TV debates
3. Airport: found at airport book shops. These books are usually fun, rarely well-
informed, and never serious.
Economy : Module I (Introduction and Micro-economics)
Economy Is A System Of Truly Bewildering Size And Complexity. Consider What Is Involved
When:
YOU BUY A CHOCLOLATE
COCOA FROM
GHANA
PROCESSED
IN AACRRA
SUGAR IN
MAURITIUS
MILK IN
HOLLAND
MADE & PACKED IN
BELGIAN FACTORY
SHIPPED ON A
GREEK SHIP
SHIP REGISTERED IN
PANAMA
CREW
INDIAN
IN MUMBAI DOCK
WORKERS ARE MARATHI
TRUCK DRIVER IS
SIKH
WHOLESELLER
MARWARI
SALES PERSON
HARYANAVI
SALES PERSON
HARYANAVI
Economy : Module I (Introduction and Micro-economics)
Despite Having Such A Big Chain Why Isn’t Economy A Chaotic
Mess?
The Fundamental Problem Of Economics Then Is That Of
Coordination.
Economy : Module I (Introduction and Micro-economics)
• Economics consists of 4 human behaviour
1. Production-Economic Growth
2. Exchange and Evaluation-Flow
3. Social Distribution-Economic Development
4. Accumulation-Stock
Economy : Module I (Introduction and Micro-economics)
Here Growth and Development chapter has to be clubbed
• Growth v. Development
• Growth v. Environment
• Inclusive and Exclusive Growth
Economy : Module I (Introduction and Micro-economics)
Economy : Module I (Introduction and Micro-economics)
What
• It is a behavioural science.
• Wealth Theory-Adam Smith. Economics is a science of wealth. Optimisation of resources
and its use. There are 3 most important stakeholders: Households, private sector and the
Government. Maximisation of wealth remains valid though it is narrow.
Economy : Module I (Introduction and Micro-economics)
• Welfare Theory-Alfred Marshall. It is the study of mankind how we acquire material
and non-material prerequisites for improving his welfare. Because wealth is just a
means and cannot be an end.
• Scarcity and unlimited want Theory-Robbins (Scarcity of resources having
alternative use). Scarcity or choice definition. With limited resources, we have to
optimise unlimited wants. Though these limited resources have alternative uses.
Economy : Module I (Introduction and Micro-economics)
Evolution
1. Mercantilism-England (Trade). An economy can grow only through Trade
2. Physiocrates-France (Production). An economy can grow only through production.
Economy : Module I (Introduction and Micro-economics)
3. Classical Theory- Adam Smith (invisible hand theory, market mechanism and price
system, Price mechanism)- Synthesised Mercantilism and Physiocrats. Laissez fair or
free economy. Non-interventionist economy. No intervention by the state. Market
forces are: Demand and Supply.
➢ But they failed on 2 counts :
a) Why diamond is costlier than water.
b) Could not address the causes of great depressions during 1929-33.
Economy : Module I (Introduction and Micro-economics)
4. Keynesian Theory (Pump priming) of Cambridge University. If S>D then do not cut
production. It will not solve the issue.
Economy : Module I (Introduction and Micro-economics)
5. Monetarism (Milton J Friedman) from Chicago school. He said Money matters.
Monetary policy is the product of this school
Economy : Module I (Introduction and Micro-economics)
6. Neo Classical Theory: All pricing theories were given by them. According to them
Prices of factor is determined by Marginal Productivity and Prices of Products are
determined by Marginal Utility
Economy : Module I (Introduction and Micro-economics)
7. Rational Expectation Theory: People make choices based on their rational
outlook, available information and past experiences. The current expectations in the
economy are equivalent to what people think the future state of the economy will
become. This contrasts with the idea that government policy influences people's
decisions.
Economy : Module I (Introduction and Micro-economics)Economy: Module I- (Introduction and Micro-economics)
Four factors of Production
Economy : Module I (Introduction and Micro-economics)Economy: Module I- (Introduction and Micro-economics)
Cost and revenue
Cost on the company
FoP Revenue to the providers
Rent Land Rent
Salary/wage/income Labour Salary/wage/income
Interest Capital Interest
Profit Entrepreneurship Profit
Economy : Module I (Introduction and Micro-economics)
Law of Demand by Leon Walres
• Under normal circumstances, if price is high; quantity demanded would be low and
vice a versa
Economy : Module I (Introduction and Micro-economics)
Determinants of Demand
1. Price of commodity
2. Income of consumers
3. Price of related commodities
4. Taste/preferences
5. Expectation of changes in price
6. Change in weather
Economy : Module I (Introduction and Micro-economics)
Law of Supply by William Stanley Jevons
• Under normal circumstances, higher the prices; the quantity supplied is more as
profit will increase.
Economy : Module I (Introduction and Micro-economics)
Determinants of Supply
1. Prices
2. Cost of production
3. Changes in prices
4. Change in technology
5. Natural factors
Economy : Module I (Introduction and Micro-economics)
Consumer Surplus
• Consumer Surplus is the area under the demand curve that represents the
difference between what a consumer is willing and able to pay for a product and
what the consumer actually ends up paying.
Producer Surplus
• The Producer Surplus is the area under the supply curve that represents the
difference between what a producer is willing and able to accept for selling a
product and what the producer sells it for.
Economy : Module I (Introduction and Micro-economics)
Law of Market by Alfred Marshall
• That price is market price where supplier is willing to supply and buyer is ready to
buy
Economy : Module I (Introduction and Micro-economics)
1. Perfect competition
a) Large no. of firms
b) Homogenous products
c) Firms cannot exploit consumers
d) Free entry and exit
e) No interdependence
f) Prices are determined by the market
g) Firm is price taker and not maker
Economy : Module I (Introduction and Micro-economics)
2. Monopoly
a) Single firm
b) Unique product
c) No close substitute
d) Undesirable
e) Restricted entry
f) Firm is price maker
g) No interdependence as there is only one firm
Economy : Module I (Introduction and Micro-economics)
3. Monopolistic competition
a) Large no. of firms
b) Differentiated products
c) Close substitutes such as soaps, cosmetics etc.
d) Some scope of exploitation
e) Firms have some control over prices
f) Free entry and exit
g) No interdependence
Economy : Module I (Introduction and Micro-economics)
4. Oligopoly
a) Few firms
b) Interdependence among other firms (automobiles, communication etc.)
5. Cartel: It refers to an agreement among firms to jointly determine their output
and prices to collectively maximise their profits but such agreements are illegal.
6. Monopsony: It is a type of market in which there is only one buyer of product
such as defence sector, but if buyer is one and seller is also one then such
situation is called Bilateral Monpsony.
Economy : Module I (Introduction and Micro-economics)Economy: Module I- (Introduction and Micro-economics)
Opportunity cost
● The scarcity of resources will lead to making difficult choices
● How much is forgone of A in order to get some of B
● The allocation will lead to a mix of goods/services
Economy : Module I (Introduction and Micro-economics)
Types of Goods:
1. Giffin Goods: P down—D also down
2. Inferior goods: I increases—D decreases
3. Necessary goods: No impact on demand with the change in price.
4. Normal goods: I increases—D also increases
5. Luxury or white goods: Slight change in P—Bigger change in D
• Elasticity: To what extent demand changes with change in price.
Economy : Module I (Introduction and Micro-economics)
• Law of Consumption by Ernst Engel in 1857. It says:
• If an individual’s income increases by X%, then
1. Consumption of Giffin goods and inferior goods decreases
2. Consumption of necessary goods increases at the rate less than X%.
3. Consumption of normal goods increases at the rate equal to X%.
4. Consumption of white/luxury goods increases at the rate more than X%.
Economy : Module I (Introduction and Micro-economics)Economy: Module I- (Introduction and Micro-economics)
● Elasticity measures the change in the demand with the change in the variables (ex-
price, income etc) or it is a measure of responsiveness of demand with variables
such as price, income etc
○ Price elasticity of demand
○ Income elasticity of demand
○ Cross elasticity of demand
Elasticities
Economy : Module I (Introduction and Micro-economics)Economy: Module I- (Introduction and Micro-economics)
Price elasticity of demand
Elasticity note
PED<1 Inelastic Usually the essentials
PED=1 Unitary elasticA unit change in price leads to unit change in
demand
PED>1 Elastic luxuries
Economy : Module I (Introduction and Micro-economics)Economy: Module I- (Introduction and Micro-economics)
Income Elasticity of demand
Note Type of
good
IED<0 There is fall in the demand with the increase in the
income
Inferior good
IED>0 There is rise in the demand with the increase in the
income
Normal good
Economy : Module I (Introduction and Micro-economics)Economy: Module I- (Introduction and Micro-economics)
Cross elasticity of demand
Note
CED<0 Complementary goods
CED=0 Unrelated goods
CED>0 Substitutes
Economy : Module I (Introduction and Micro-economics)Economy: Module I- (Introduction and Micro-economics)
Determinants
• Availability of substitutes
• Is the good essential or non-essential?
• There may not always be a change in the demand as a reaction
to price take a bit of time (time horizon)
• Effect on the budget/expenditure
Economy : Module I (Introduction and Micro-economics)
Savings, Investment and Capital Formation
Economy : Module I (Introduction and Micro-economics)
Economy : Module I (Introduction and Micro-economics)
Savings, Investment and Capital Formation
Economy : Module I (Introduction and Micro-economics)Economy: Module I- (Introduction and Micro-economics)
Which of the following can add to the aggregate demand
1) Lowering of income tax rates
2) Increase in the cost of raw materials
3) Increase in the VAT
Choose the correct option
(a)Only 1 is correct
(b)1 and 2 are correct
(c)1 and 3 are correct
(d)All are correct
Previous Year Questions
Economy : Module I (Introduction and Micro-economics)Economy: Module I- (Introduction and Micro-economics)
Which of the following can add to the aggregate demand
1) Lowering of income tax rates
2) Increase in the cost of raw materials
3) Increase in the VAT
Choose the correct option
(a)Only 1 is correct
(b)1 and 2 are correct
(c)1 and 3 are correct
(d)All are correct
Previous Year Questions
Economy : Module I (Introduction and Micro-economics)Economy: Module I- (Introduction and Micro-economics)
Expansion / Contraction of demand is because of
1. Change in the price of the good
2. Change in the tastes/preferences of the consumer
3. Change in the income of the consumer
Choose the correct option
a) Only 1 is correct
b) 1 and 2 are correct
c) 1 and 3 are correct
d) All are correct
Previous Year Questions
Economy : Module I (Introduction and Micro-economics)Economy: Module I- (Introduction and Micro-economics)
Expansion / Contraction of demand is because of
1. Change in the price of the good
2. Change in the tastes/preferences of the consumer
3. Change in the income of the consumer
Choose the correct option
a) Only 1 is correct
b) 1 and 2 are correct
c) 1 and 3 are correct
d) All are correct
Previous Year Questions
Economy : Module I (Introduction and Micro-economics)Economy: Module I- (Introduction and Micro-economics)
The income effect on the demand of Inferior goods will be __________
a) Positive
b) Negative
c) Zero
d) No effect as both are independent of each other
Choose the correct option
Previous Year Questions
Economy : Module I (Introduction and Micro-economics)Economy: Module I- (Introduction and Micro-economics)
The income effect on the demand of Inferior goods will be __________
a) Positive
b) Negative
c) Zero
d) No effect as both are independent of each other
Choose the correct option
Previous Year Questions
Economy : Module I (Introduction and Micro-economics)Economy: Module I- (Introduction and Micro-economics)
Giffen goods are the goods where _______________
a) Demand goes up as the prices go up
b) Demand goes down as the prices go down
c) Demand goes up as the income goes up
d) Demand goes up as the income goes down
Choose the correct option
a) 1 and 3 are correct
b) 1 and 2 are correct
c) 1 and 3 are correct
d) All are correct
Previous Year Questions
Economy : Module I (Introduction and Micro-economics)Economy: Module I- (Introduction and Micro-economics)
Giffen goods are the goods where _______________
a) Demand goes up as the prices go up
b) Demand goes down as the prices go down
c) Demand goes up as the income goes up
d) Demand goes up as the income goes down
Choose the correct option
a) 1 and 3 are correct
b) 1 and 2 are correct
c) 1 and 3 are correct
d) All are correct
Previous Year Questions
Economy : Module I (Introduction and Micro-economics)Economy: Module I- (Introduction and Micro-economics)
Engel’s law observes that as the income of a person increases, ___________
1) The absolute expenditure on food increases
2) The absolute expenditure on food decreases
3) The proportionate expenditure on food increases
4) The proportionate expenditure on food decreases
Choose the correct option
a) 1 and 3 are correct
b) 1 and 4 are correct
c) 2 and 3 are correct
d) 2 and 4 are correct
Previous Year Questions
Economy : Module I (Introduction and Micro-economics)Economy: Module I- (Introduction and Micro-economics)
Engel’s law observes that as the income of a person increases, ___________
1) The absolute expenditure on food increases
2) The absolute expenditure on food decreases
3) The proportionate expenditure on food increases
4) The proportionate expenditure on food decreases
Choose the correct option
a) 1 and 3 are correct
b) 1 and 4 are correct
c) 2 and 3 are correct
d) 2 and 4 are correct
Previous Year Questions
Economy : Module I (Introduction and Micro-economics)Economy: Module I- (Introduction and Micro-economics)
Which of the following statement(s) is/are correct regarding public goods?
a. Public goods are excludable but non rivalrous
b. Public goods are non- excludable but rivalrous
c. Public goods are neither excludable nor rivalrous
d. Public goods are both excludable and rivalrous
Previous Year Questions
Economy : Module I (Introduction and Micro-economics)Economy: Module I- (Introduction and Micro-economics)
Which of the following statement(s) is/are correct regarding public goods?
a. Public goods are excludable but non rivalrous
b. Public goods are non- excludable but rivalrous
c. Public goods are neither excludable nor rivalrous
d. Public goods are both excludable and rivalrous
Previous Year Questions
Economy : Module I (Introduction and Micro-economics)
Previous Year Questions
If a commodity is provided free to the public by the Government, then
a. the opportunity cost is zero.
b. the opportunity cost is ignored.
c. the opportunity cost is transferred from the consumers of the product to the tax-paying public.
d. the opportunity cost is transferred from the consumers of the product to the Government.
Economy : Module I (Introduction and Micro-economics)
Previous Year Questions
If a commodity is provided free to the public by the Government, then
a. the opportunity cost is zero.
b. the opportunity cost is ignored.
c. the opportunity cost is transferred from the consumers of the product to the tax-paying public
d. the opportunity cost is transferred from the consumers of the product to the Government.
Economy : Module I (Introduction and Micro-economics)Economy : Module II - (National Income Aggregates)
Economic growth in country X will necessarily have to occur if
(a) there is technical progress in the world economy
(b) there is population growth in X
(c) there is capital formation in X
(d) the volume of trade grows in the world economy
Previous Year Questions
Economy : Module I (Introduction and Micro-economics)Economy : Module II - (National Income Aggregates)
Economic growth in country X will necessarily have to occur if
(a) there is technical progress in the world economy
(b) there is population growth in X
(c) there is capital formation in X
(d) the volume of trade grows in the world economy
Previous Year Questions
Economy : Module I (Introduction and Micro-economics)Economy: Module I- (Introduction and Micro-economics)
Thank You.