the study of how individuals and societies choose to use the scarce resources that nature has provided to use
it is the study of how people make choices
Branch of economics
Microeconomics
deals with functioning of
individual, households
industries, firms
and the behaviour of above-mentioned individual economic decision making units
firm's choices about what to produce and how much to charge, and households' choices about what and how much to buy, helps to explain why the economy produces the things it does.
sees and examines the trees
Macroeconomics
it is the study of aggregates
instead of understanding what determines the o/p at individual level, macroeconomics examines the factors that determine national o/p, national product
sees and analyses the forest
Economic policy
Every action taken by any country's government to influence its economy is termed as a part of it's economic policy
1951 five year plans
1965 green revolution
Objective (GEES)
Efficiency
an efficient economy is one that produces what people want at the least possible cost. if the system allocates resources to the production of things that nobody wants, it is inefficent
Equity
a more equal distribution of income and wealth
it is a technical concept as equity may imply poverty alleviation, but the extent ot which the poor should receive cash benefits from the gov. is the subject of enormous disagreement
Growth
economic growth is an increase in the total o/p of an economy. if output grows faster than the pop., o/p per capita rises and standards of living increase
Stability
refers to the condition in which national output is growing steadily considering:
low inflation
full employment
of resources
Market Forces and Demand
Market forces
theory of demand and supply
considers how buyers and sellers react and how they interact with each another
shows how supply and demand determine prices in a market economy and how prices, in turn, allocate the economy's scarce resources
Demand
willingness to buy/purchase
quantity demanded of any good is the amount of good that buyers are willing and able to produce
determined on the price of good
Law of demand
quantity demanded is inversely related to price all other factors remain same
always certain exceptions to the law
Ceteris peribus
Other things being equal
Concept of Demand
Market Demand vs Individual Demand
Market Demand is the sum of all individual demands
the market demand curve shows how the quantity demanded of a good varies as the price of the good varies, while all the factors that affect how much consumers want to buy are held constant
Shift in Demand Curve
A new demand curve is obtained
Increase in demand
Any change that increases the quantity demanded at every price shifts the demand curve to the right
Decrease in demand
Any change that reduces the quantity demanded at every price shifts the demand curve to the left
Variables affecting shift in demand curve
Income
Normal goods
A good for which, other things equal, an increase income leads to an increase in demand
eg. eating outside will increase with increase in income
Inferior goods
A good for which, other things equal, an increase in income leads to a decrease in demand
eg. consumption of salt may decrease or would remain constant with increase in income
Substitute Goods
Two goods for which increase in the price of one leads to an increase in the demand for the other
eg. If coke price increases, pepsi demand increase. This will shift the demand curve for Pepsi to right
Complementary Goods
Two goods for which increase in price of one leads to a decrease in the demand for the other
eg. price of car decrease, demand for petrol will rise, rightward shift for petrol to right
Taste & Preference
eg. I started eating non-veg. instead of veg.
Expectation
Expectations about the future may affect the demand for a good or service today
eg. Stock market
Number of Buyers
Exception to Law of Demand
Giffen Goods
Those goods that do not comply with law of demand
quantity demanded proportional to price
Natural Calamities
emergency situations, prices hardly matters
Fashionistas
branded products
Anticipation of Prices
buying more if further price may increase
Concept of Supply
Willingness / desire to sell
The quantity supplied of any good is the amount that sellers are willing and able to sell
Quantity supplied is directly proportional to the price of the good
Law of supply
Other things remain equal, when the price of a good rises, the quantity supplied of the good also rises, and vice versa
Individual Supply vs Market Supply
Market supply is the sum of all individual supplies
the total quantity supplied at any price, the individual quantities found on the horizontal axis of the individual supply curves are added
Shift in Supply Curve
A new supply curve is obtained
Increase in Supply
Any change that:
raises quantity supplied
at every or any price
shifts the supply curve to the right
Decrease in Supply
Any change that:
reduces the quantity supplied
at any and every price
shifts the supply curve to the left
Variables Affecting Supply Curve
Input Prices
Supply of a good is negatively related to the price of the inputs
eg. If price of raw materials used for making cake increase, producing cake is less profitable, supply decreases
Technology
eg. Machines used for making cakes. If technology is good, it reduces other costs, more profitable, supply increase
Expectations
Supplying more later thinking price would rise
eg. During christmas, business would store cakes in storage so that when price rise they can get profits
Number of sellers
More the number of sellers, more compteition, price is generally low
eg. if producers of cake were to stop producing and retire from the cake business, the supply in market would fall
Exceptions to the law of supply
Expectations of future prices
a supplier's behaviour changes with future prices
whatever the price may be presently producers may want to supply the goods when the prices rise even more which would get them good returns
woollen clothes highest supply in winters
Weather dependant produce from farms
if weather seems bad, products are not produced
Perishable commodities
which perish in small time
they need to be supplied before they perish
sell entire stock asap
eg. fruits
Fashionista
when you sell goods which are in fashion then the sellers command a higher price
Economic slowdown
Businees pass thru different economic phases like
slowdown
recession
depression
sellers have to adapt to these changes accordingly
Modification change in businees
seller can plan to diversifyy and enter into an entirely new segment of business by exiting/continuing the present one
Requirement of money/funds
seller sell immediately even at lower prices as money needed
Supply of Labour
if the labour is willing to work, the firm will get the maximum benefit out them
Point of equilibrium
the point at which market demand and market supply curve meet
