Transcript Unit 1 Introduction to Economics

Unit 1
Introduction to Economics
Prepared By:
BOPALIYA MAMATA D(130590107008)
Guided By: Prof. Uday Kakkad
Economics
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“Engineering economics deals with the methods that
enable one to take economic decisions towards
minimizing costs and/or maximizing benefits to business
organizations.”
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“Economics is a science which studies human behavior as
a relationship between ends and scarce means which have
alternative uses”
NATURE OF ECONOMICS
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Traditional economic theory has developed along two
lines; (1) Normative and (2) positive.
Normative focuses on prescriptive statements, and help
establish rules aimed at attaining the specified goals of
business.
Positive, on the other hand, focuses on description it aims
at describing the manner in which the economic system
operates without staffing how they should operate.
The emphasis in business economics is on normative
theory. Business economic seeks to establish rules which
help business firms attain their goals, which indeed is also
the essence of the word normative.
NATURE OF ECONOMICS
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However, if the firms are to establish valid decision rules,
they must thoroughly understand their environment. This
requires the study of positive or descriptive theory.
Thus, Business economics combines the essentials of the
normative and positive economic theory, the emphasis
being more on the former than the latter.
SCOPE OF ECONOMICS
we can list some of the major branches of economics as
under:
1. Microeconomics:
 This
is considered to be the basic economics.
Microeconomics may be defined as that branch of
economic analysis which studies the economic behavior
of the individual unit, may be a person, a particular
household, or a particular firm. It is a study of one
particular unit rather than all the units combined
together. Most production and welfare theories are of the
microeconomics variety.
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SCOPE OF ECONOMICS
2.
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Macroeconomics:
Macroeconomics may be defined as that branch of economic
analysis which studies behavior of not one particular unit,
but of all the units combined together.
Macroeconomics is a study in aggregates. Hence it is
often called Aggregative Economics.
It is, indeed, a realistic method of economic analysis,
though it is complicated and involves the use of higher
mathematics. In this method, we study how the
equilibrium in the economy is reached consequent upon
changes in the macro-variables and aggregates.
SCOPE OF ECONOMICS
International economics:
 As the countries of the modern world are realizing the
significance of trade with other countries, the role of
international economics is getting more and more
significant nowadays.
4. Public finance:
 The great depression of the 1930s led to the realization
of the role of government in stabilizing the economic
growth besides other objectives like growth,
redistribution of income, etc.
 Therefore, a full branch of economics known as Public
Finance or the fiscal economics has emerged to analyze
the role of government in the economy.
3.
SCOPE OF ECONOMICS
Development economics:
 As after the second world war many countries got freedom
from the colonial rule, their economics required different
treatment for growth and development.
 This branch developed as development economics.
6. Health economics:
 A new realization has emerged from human development for
economic growth. Therefore, branches like health
economics are gaining momentum. Similarly, educational
economics is also coming up.
5.
SCOPE OF ECONOMICS
Environmental economics:
 Unchecked emphasis on economic growth without caring for
natural resources and ecological balance, now, economic
growth is facing a new challenge from the environmental
side.
8. Urban and rural economics:
 Role of location is quite important for economic attainments.
There is also much debate on urban-rural divide.
 Therefore, economists have realized that there should be
specific focus on urban areas and rural areas. Therefore,
there is expansion of branches like urban economics and
rural economics.
7.
Difference:
Points
3
4
5
Macroeconomics
It studies about individual economic units like It studies about an economy as a
households, firms, consumers, etc.
whole.
It deals with how different economic
It deals with how consumers or producers
sectors such as households, industries,
Deals with make their decisions depending on their given
government and foreign sector make
budget and other variables.
their decisions.
It uses the method of general
It uses the method of partial equilibrium, i.e.
Method
equilibrium, i.e. equilibrium in all
equilibrium in one market.
markets of an economy as a whole.
The major macroeconomic variables
The major microeconomic variables are price,
are aggregate price, aggregate
Variables individual consumer’s demand, wages, rent,
demand, aggregate supply, inflation,
profit, revenues, etc.
unemployment, etc.
Various theories studied are:
Various theories studied are:
1) Theory of Consumer’s Behaviour and
Demand
1) Theory of National Income
2) Theory of Producer’s Behaviour and Supply 2) Theory of Money
Theories
3) Theory of General Price Level
3) Theory of Price Determination under
4) Theory of Employment
Different Market Conditions
5) Theory of International Trade
1 Study matters
2
Microeconomics
MEANING OF DEMAND
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In economics, demand is the utility for a good or
service of an economic agent, relative to his/her income.
Demand is a buyer's willingness and ability to pay a
price for a specific quantity of a good or service.
Demand refers to how much (quantity) of a product or
service is desired by buyers at various prices.
DETERMINANT OF DEMAND
1. Income:
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One reason is that your income is not large enough to be
able to afford this amount. Therefore, income must be one of
the factors that affect the demand for a given product.
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Normally, we expect that as one's income rises (falls), the
demand for a product will rise (fall). Because we normally
expect this to be true, a good for which this statement is
true is called a normal good.
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Occasionally, we shall encounter a good for which the
statement is not true. These are called inferior goods; for
these goods, as income rises (falls), the demand for the
product falls (rises).
DETERMINANT OF DEMAND
2. Price of Complement:
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One factor might involve the method you will use to pay for
this home --- borrowing money.
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The price of borrowing money is called the interest rate. The
interest rate is one example of the price of a complement.
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A complement is a different good that goes together with
the one under consideration. Homes and borrowing money
tend to go together.
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When interest rates rise, people are less likely to borrow. If
they do not borrow, they will not buy the homes.
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if the price of the complement rises (falls), the demand for
the product (homes) falls (rises).
DETERMINANT OF DEMAND
3. Price of Substitute Good:
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Substitutes are different goods that compete with the
one under consideration. Coca-Cola and Pepsi Cola are
substitutes.
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As the price of the substitute (apartments) rises (falls),
the demand for the product (homes) rises (falls).
4. Tastes or Preferences:
 Tastes or Preferences involves the fact that there are
certain psychological reasons for liking or disliking a
particular good.
 Our principle is: the more (less) we like a good or
service, the greater (less) is our demand for it
DETERMINANT OF DEMAND
5. Expectations
 The buyer expects the price to rise. These expectations
affect our demand for many products. Our principle
here is: if buyers expect the price to rise (fall), the
demand rises (falls) today.
 There are other kinds of expectations one might have
that will affect the demand for products. If one expects
that the product will soon be unavailable, the demand
will rise today.
 Also, if one expects that one‘s income will fall, the
demand for most products will fall.
DETERMINANT OF DEMAND
6. Population
 The last of the factors affecting demand is the
population (number of buyers).
 Therefore, if there are more buyers, there must be
more market demand.
MEANING OF SUPPLY
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In economics, supply refers to the amount of a product
that producers and firms are willing to sell at a given price
when all other factors being held constant.
In other words of Meyer “Supply is a schedule of the
amount of a good that would be offered for sale at all
possible prices at any period of time; e.g. a day, a week
and so on.”
DETERMINANT OF SUPPLY
1. Number of Sellers
 Greater the number of sellers, greater will be the quantity
of a product or service supplied in a market and vice
versa.
 Thus increase in number of sellers will increase supply
and shift the supply curve rightwards whereas decrease in
number of sellers will decrease the supply and shift the
supply curve leftwards.
 For example, when more firms enter an industry, the
number of sellers increases thus increasing the supply.
DETERMINANT OF SUPPLY (Cont…)
2. Technology
 Improvement in technology enables more efficient
production of goods and services. Thus reducing the
production costs and increasing the profits.
 As a result supply is increased and supply curve is shifted
rightwards. Since technology in general rarely
deteriorates, therefore it is needless to say that
deterioration of technology reduces supply.
DETERMINANT OF SUPPLY (Cont…)
3. Suppliers' Expectations
 Change in expectations of suppliers about future price of a
product or service may affect their current supply. However,
unlike other determinants of supply, the effect of suppliers'
expectations on supply is difficult to generalize.
 For example when farmers suspect the future price of a crop
to increase, they will withhold their agricultural produce to
benefit from higher price thus reducing the supply.
 In case of manufacturers, when they expect the future price to
increase, they will employ more resources to increase their
output and this may increase current supply as well.
DETERMINANT OF SUPPLY (Cont…)
4. Selling Price:
 Selling price is decided after adding certain amount of
profit in the cost. If selling price is increased, the profit
will also increases.
 This increase the profit of the seller, which motivates to
supply more quality .So, increase in selling price increase
the supply of good.
DETERMINANT OF SUPPLY (Cont…)
5. Price of Raw Material:
 Price of raw materials directly effects the quality
supplied in the market. Keeping the selling price
constant, if the prices of raw materials required to
produce the goods increases, the seller will produce
less amount of goods. So, this reduces the quantity of
supplied goods.
LAW OF DEMAND
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In economics, the law states that, all else being equal, as
the price of a product increases, quantity demanded
falls; likewise, as the price of a product decreases,
quantity demanded increases.
As the price of a good or service increases, consumer
demand for the good or service will decrease, and vice
versa.
The law of demand says that the higher the price, the
lower the quantity demanded, because consumers’
opportunity cost to acquire that good or service
increases, and they must make more tradeoffs to
acquire the more expensive product.
LAW OF DEMAND (Cont…)
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The chart below depicts the law of demand using a
demand curve, which is always downward sloping.
LAW OF DEMAND (Cont…)
Each point on the curve (A, B, C) reflects a direct correlation
between quantity demanded (Q) and price (P). So, at point A,
the quantity demanded will be Q1 and the price will be P1,
and so on.
 The law of demand summarizes the effect price changes have
on consumer behavior. For example, a consumer will
purchase more pizzas if the price of pizza falls.
 When shirts go on sale, you might buy three instead of one.
The quantity that you demand increases because the price has
fallen.
 When plane tickets become more expensive, you’re less likely
to travel by air and more likely to choose the less expensive
options of driving or staying home. The amount of plane
tickets that you demand decreases to zero because the cost
has gone up.
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LAW OF SUPPLY
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In economics, the law states that, all else being equal, as
the price of a product increases, quantity demanded
falls; likewise, as the price of a product decreases,
quantity demanded increases.
As the price of a good or service increases, the quantity
of goods or services that suppliers offer will increase,
and vice versa.
The law of supply says that as the price of an item goes
up, suppliers will attempt to maximize their profits by
increasing the quantity offered for sale.
LAW OF DEMAND (Cont…)
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The chart below depicts the law of supply using a supply
curve, which is always upward sloping.
LAW OF DEMAND (Cont…)
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A, B and C are points on the supply curve. Each point
on the curve reflects a direct correlation between
quantity supplied (Q) and price (P). So, at point A, the
quantity supplied will be Q1 and the price will be P1,
and so on.
The law of supply summarizes the effect price changes
have on producer behavior. For example, a business will
make more video game systems if the price of those
systems increases.
When college students learn computer engineering jobs
pay more than English professor jobs, the supply of
students with majors in computer engineering will
increase.
Equilibrium
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When supply and demand are equal (i.e. when the
supply function and demand function intersect) the
economy is said to be at equilibrium.
At this point, the allocation of goods is at its most
efficient because the amount of goods being supplied is
exactly the same as the amount of goods being
demanded.
Thus, everyone (individuals, firms, or countries) is
satisfied with the current economic condition. At the
given price, suppliers are selling all the goods that they
have produced and consumers are getting all the goods
that they are demanding.
Equilibrium(Cont…)
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As you can see on the chart, equilibrium occurs at the
intersection of the demand and supply curve, which
indicates no allocative inefficiency.
Equilibrium(Cont…)
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At this point, the price of the goods will be P* and the
quantity will be Q*. These figures are referred to as
equilibrium price and quantity.
In the real market place equilibrium can only ever be
reached in theory, so the prices of goods and services are
constantly changing in relation to fluctuations in demand
and supply.
Elasticity
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The degree to which a demand or supply curve reacts to
a change in price is the curve's elasticity. Elasticity varies
among products because some products may be more
essential to the consumer.
A good or service is considered to be highly elastic if a
slight change in price leads to a sharp change in the
quantity demanded or supplied.
To determine the elasticity of the supply or demand
curves, we can use this simple equation:
Elasticity = (% change in quantity / % change in price)
Types of Elasticity
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There are three types of Elasticity:
A. Price Elasticity of Demand
B. Income Elasticity of Demand
C. Cross Elasticity of Demand
Types of Elasticity (Cont…)
A. Price Elasticity of Demand
 A measure of the relationship between a change in
the quantity demanded of a particular good and a
change in its price.
 The formula for calculating price elasticity of demand
is:
Price Elasticity of Demand = % Change in
Quantity Demanded / % Change in Price
 If the price elasticity of demand is equal to 0, demand
is perfectly inelastic (i.e., demand does not change
when price changes).
Types of Elasticity (Cont…)
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Values between zero and one indicate that demand is
inelastic (this occurs when the percent change in
demand is less than the percent change in price).
When price elasticity of demand equals one, demand
is unit elastic (the percent change in demand is equal
to the percent change in price).
Finally, if the value is greater than one, demand is
perfectly elastic (demand is affected to a greater
degree by changes in price).
For example, if the quantity demanded for a good
increases 15% in response to a 10% decrease in price,
the price elasticity of demand would be 15% / 10% =
1.5.
Types of Elasticity (Cont…)
B. Income Elasticity of Demand
 A measure of the relationship between a change in
the quantity demanded for a particular good and a
change in real income.
 The formula for calculating income elasticity of
demand is:
Income Elasticity of Demand = % change in
quantity demanded / % change in income
 If the price elasticity of demand is equal to 0, demand
is perfectly inelastic (i.e., demand does not change
when price changes).
Types of Elasticity (Cont…)
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For example, if the quantity demanded for a good
increases for 15% in response to a 10%increase in
income, the income elasticity of demand would be 15% /
10% = 1.5.
The degree to which the quantity demanded for a good
changes in response to a change in income depends on
whether the good is a necessity or a luxury.
Types of Elasticity (Cont…)
C. Cross Elasticity of Demand
 An
economic concept that measures the
responsiveness in the quantity demand of one good
when a change in price takes place in another good.
 The measure is calculated by taking the percentage
change in the quantity demanded of one good, divided
by the percentage change in price of the substitute
good: The formula for calculating income elasticity of
demand is:
Cross Elasticity of Demand = % change in
quantity demanded of good-1 / % change in the
price of good-2
Types of Elasticity (Cont…)
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The cross elasticity of demand for substitute goods will
always be positive, because the demand for one good will
increase if the price for the other good increases.
For example, if the price of coffee increases (but
everything else stays the same), the quantity demanded
for tea (a substitute beverage) will increase as consumers
switch to an alternative.