Microeconomic_Basic_Concepts_&_Principals[1] - Read-Only

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1. Basic Concepts and Principles

2. Learning Outcomes T o dis c uss t he key e c on o m ic c o nce p ts l i ke scarc i t y , rationality, equilibrium and opportunity cost. T o h e lp t h e s t u d e nts ana l y se ho w de cis i o n s a re m ad e about what, how and for whom to produce.

3. Indians splurge big on festive season sales, buoying economy

4. What is Economics? D i scuss e s ho w a soci e ty tr i es to sol v e t h e h u m a n problems of unlimited wants and scarce resources. Scientific study of the choices made by individuals and societies with regard to the alternative uses of scarce resources employed to satisfy wants.

5. Basic Assumptions Ceteris Paribus Latin phrase “ W i t h o t he r t h in g s r e m a ining t h e s a me ” o r “ a ll ot h er things being equal”. Rationality Consumers maximize utility subject to given money income. Producers maximize profit subject to given resources or minimize cost subject to target return.

6. Types of Economic Analysis Micro and Macro Microeconomics ( “micro” meaning small ): study of the behaviour of small economic units Macroeconomics ( “macro” meaning large ): study of aggregates.

7. Types of Economic Analysis contd.. Positive and Normative – Positive economics: “ what is ” in economic matters E s t a b l i s h e s a c a u s e a nd e f f ect r e l a t i o n s h i p variables. Analyzes problems on the basis of facts. b e t w e e n N o rm a ti v e ec onomi c s : “ wh a t ough t t o b e ” in economic matters. Concerned with questions involving value judgments. Incorporat e s v a l ue j u d g m e n ts a b o u t w h at the e c o n o m y should be like.

8. Poll Time Wh ich o f t h e f oll o w i n g i s a m i c r o ec o no mics concern? the reasons for a decline in average price level the reasons why Naira buys less orange juice the c a u s e o f w hy tot al e m pl o y m ent m ay decrease the e f fe c t o f the g o v ern m ent budget defi c i t on inflation

9. Wh ich o f t h e f o l l o w i n g i s a ma c r o ec o no mic issue? why plumbers earn more than janitors the reasons for the rise in average prices w h ether the ar m y s hould buy m ore tan k s or more rockets the re a s ons f or a ri s e in the pr i c e o f oran g e juice

10. contd.. Short Run and Long Run Short run: Time period not enough for consumers and producers to adjust completely to any new situation. Long run: Time period long enough for consumers and producers to adjust to any new situation. Types of Economic Analysis

11. Types of Economic Analysis contd.. Partial and General Equilibrium Partial equilibrium analysis: Related to micro analysis Studies the outcome of any action in a single market or consumer only. E q ui l ib r ium o f o n e f i r m o r f ew f i r m s a n d not necessarily the industry or economy. General equilibrium: explains economic phenomena in an economy as a whole . State in which all the industries in an economy are in equilibrium.

12. Economic Principles Concept of scarcity Unlimited human wants Limited resources available to satisfy such wants Best possible use of resources to get: maximum satisfaction (from the point of view of consumers) or maximum output (from the point of view of producers or firms) Concept of opportunity cost Opportunity cost is the benefit forgone from the alternative that is not selected. Highlights the capacity of one resource to satisfy multitude of wants Helps in making rational choices in all aspects of business, since resources are scarce and wants are unlimited

13. Concept of margin or increment Marginality: a unit increase in cost or revenue or utility. Marginal cost : change in Total Cost due to a unit change in output. Marginal revenue : change in Total Revenue due to a unit change in sales. Marginal utility : change in Total Utility due to a unit change in consumption. Incremental: applied when the changes are in bulk, say 10% increase in sales. Economic Principles Contd…

14. Poll Time Those thin g s t h at mus t b e f o rgo n e t o a c qui r e a good are called: A)substitutes B)opportunity costs. C)explicit costs. D)competitors

15. Production Possibility Curve H i g h l i g hts t h e c o n c e p ts o f sca r c i t y and o ppor t uni t y cost. Indicates the opportunity cost of increasing one item's production (or consumption) in terms of the units of the other forgone Slope of the curve in absolute terms Assumptions: The economy is operating at full employment. Factors of production are fixed in supply; they can however be reallocated among different uses. Technology remains the same.

16. Fo o d C lot h ing F Q C Q Q F P C P P O PPC for the Society Production Possibility Curve Technically Infeasible A rea Productively In e ff i c i e nt A r e a S h o ws the d i f f erent combinations of the quantities of two goods that can be produced (or consumed) in an economy at any point of time. Below the curve is productively inefficient area and above it is technically infeasible area, so the equilibrium will be at the curve (F P and C P at point P). Depicts the trade off between any two items produced (or consumed). T o i n cr ea s e the qu a nt i t y of clothing from C P to C Q some amount of food (F P -F Q ) will have t o b e s ac r i f i c e d . N e w po i nt of equilibrium on PPC is at Q.

17. Introductory Lecture

18. Learning Outcomes To discuss the effects of determinants of demand on Demand Function. To discuss the causes of change in Demand.

19. De m and Demand: effective desire Demand is that desire which backed by willingness and ability to buy a particular commodity. Amount of the commodity which consumers are willing to buy per unit of time, at that price. Things necessary for demand: Time Price of the commodity Amount (or quantity) of the commodity consumers are willing to purchase at the price

20. Types of Demand Direct and Derived Demand Direct demand is for the goods as they are such as Consumer goods Der i v e d d e m a n d i s f or t h e g oo d s w h i c h are de m a n d e d to produce some other commodities; e.g. Capital goods Recurring and Replacement Demand Recurring demand is for goods which are consumed at frequent intervals such as food items, clothes. Durables are purchased to be used for a long period of time Wear and tear over time needs replacement Complementary and Competing Demand Some goods are jointly demanded hence are complementary in nature, e.g. software and hardware, car and petrol. Some goods compete with each other for demand because they are substitutes to each other, e.g. soft drinks and juices.

21. Determinants of Demand Price of the product Single most important determinant Negative effect on demand Higher the price-lower the demand Income of the consumer Normal goods: demand increases with increase in consumer’s income Inferior goods: demand falls as income rises Price of related goods Substitutes I f the price o f a c o m m o d i t y i n cr ea s e s , d e m a n d f or i ts substitute rises. Complements If the price of a commodity increases, quantity demanded of its complement falls.

22. Determinants of Demand Contd… Tastes and preferences Very significant in case of consumer goods Expectation of future price changes Gives rise to tendency of hoarding of durable goods Population Size, composition and distribution of population will influence demand Advertising Very important in case of competitive markets

23. 1. Holding all other factors constant, consumers demand more of a good the higher its price. lower its price. steeper the downward slope of the demand curve. steeper the upward slope of the demand curve.

24. 2 . i f t he c o s t o f m a k i n g b i c y c les fall s , t h e price g oes down, causing the demand curve to shift to the right. True False

25. Demand Function Interdependence between demand for a product and its determinants can be shown in a mathematical functional form Dx = f(Px, Y, Py, T, A, N) Independent variables: Px, Y, Py, T, A, N Dependent variable: Dx Px: Price of x Y: Income of consumer Py: Price of other commodity T: Taste and preference of consumer A: Advertisement N: Macro variable like inflation, population growth, economic growth

26. Law of Demand A special case of demand function which shows relation between price and demand of the commodity Dx = f(Px) Other things remaining constant, when the price of a commodity rises, the demand for that commodity falls or when the price of a commodity falls, the demand for that commodity rises. Price bears a negative relationship with demand

27. Demand Schedule and Individual Demand Curve Point on De m a nd Curve Price (Rs per cup) De m a nd (‘000 cups) a 15 50 b 20 40 c 25 30 d 30 20 e 35 10 b a e 35 d 30 c 1 2 30 25 20 15 4 50 Quantity of coffee O

28. Change in Demand D 1 D 2 D P r i c e Shift in demand curve from D to D 1 M o r e i s d e m a n d e d a t s a m e price (Q 1 >Q) Increase in demand caused by: A rise in the price of a substitute A f a l l i n t h e p r i c e o f a complement A rise in income A redistribution of income towards those who favour the commodity A change in tastes that favours the commodity Q uan t i t y  S h i f t i n de m and c ur v e f r om D to D 2 Less is demanded at each price (Q 2 <Q) P Q 1 Q Q 2

29. Which of the following will not cause a shift in the demand curve? Price Population Income Taste and Prefrence

30. Exceptions to the Law of Demand Law of demand may not operate due to the following reasons: Giffen Goods Snob Appeal Demonstration Effect Future Expectation of Prices (Panic buying) Addiction Neutral goods Life saving drugs Salt Amount of income spent Match box

31. Market Demand Market: interaction between sellers and buyers of a good (or service) at a mutually agreed upon price. Market demand Aggregate of individual demands for a commodity at a particular price per unit of time. Sum total of the quantities of a commodity that all buyers in the market are willing to buy at a given price and at a particular point of time (ceteris paribus) Market demand curve: horizontal summation of individual demand curves

32. Thank You