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1 for CA/CWA, Ph:0863-2242355

CHAPTER 1 : DEMAND
Desire + ability to pay+Willing to buy = Demand

Determinants of Types of Demand

demand
Price demand Income demand Cross demand
4Price of commodity(P#$-D$#)
4Price of related commodities: Price Demand
- Substitutes (P#$-D#$)
#$ #$ Substitutes Complementaries
-Complementaries (P#$-D$#)

s
Price of Demand for
4Income of consumers (I#$-D#$) Price of Demand

te
Superior goods Inferior goods Tea coffee
4Tastes & Preferences of Petrol for car

ia
Income Demand Income Demand #$ #$
Consumers(Fav-D#,Unfav-D$) Y #$ Y
$#

oc
D

4Population(Pop#-D#,Pop$-D$) #$ #$ #$ $# P1
D

Price of Tea

Price of Petrol
P
Y Y P

4Climate & Weather (Fav-D#,Unfav-D$)

ss
I P1
I
D
I1 D
I1 X D
O

4Gov't Policies(Fav-D#,Unfav-D$)
Q Q1

A
Demand for Coffee X
O
I Q Q1
I
Demand for Cars

Income

Income
4Expectations about future prices Changes in demand

lli
D D
X X
O D Q
O
Demand Q1 Q1 Q Demand

pa
Law of Demand Caused by Caused by Change
Change in price in other factors
tu
at
Extension & Increase & Decrease
M

Assumptions Exceptions contraction

Importance Reasons for
All the determinants downward sloping Shift in the
4Giffen's paradox Useful to:
demand curve
Movement along the demand curve
of demand are (Generally inferior goods) 4Farmers same demand curve
assumed to be
constant except price
Demand curve-back ward bending 4Finance Minister 4New Buyers Change in demand
4Articles of distinction 4Consumer 4Old Buyers Change in quantity
(Veblen goods) demanded
4Monopolist 4Income effect Y Increase Decrease
4Demonstration effect (In determination of 4Substitution effect P1
Y
D1 Y D2 D

4Future expectations
D

Price) #
$

Price
P
about prices
P
P

Price
P2

4Irrational consumer

Price
D1
D2
D
0,0 X
Q1 Q Q2 X Q2 Q
Q Q1 Quantity Quantity X
Quantity

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CHAPTER 2 : ELASTICITY OF DEMAND

Price elasticity of demand Income elasticity of demand

Formula
Degrees Methods Factors Importance/uses

1) Perfectly elastic( ) 1) Point Method 1) Availability of Substitutes

4Useful to business firms % C h a n g e in d e m a n d
8

E I =
Y

dq p [If Available - Elastic 4Determination of Price & % C h a n g e in in c o m e

Price of the Commodity

Ep = x Or If not Available - Inelastic] Dq y

P
Ed=¥
dp q output = ´

s
Dy q
4Determination of prices

te
Ed = lower segment 2) Type of want
O X
Q Q1
Upper segment [Necessary - Inelastic 4Useful to super markets

ia
Quantity Demanded

2) Perfectly inelastic (0) Y Comforts, luxuries - Elastic]

oc
Y
Ed=0
D
Ed=¥
4Useful to finance minister Degrees
Price of the Commodity

Ed>1
Negative (<0) -Inferior goods
P1

3) Consumer habits 4Pricing factors of production

ss
Price

P
Ed=1
P2
[Habitual consumers - Inelastic Positive (>0) - Superior goods
Ed<1
4Explains the paradox of plain 0 to 1 - Necessaries

A
O X
Others - Elastic]
>1 - comforts/ luxuries
Q
Quantity Demanded
Ed=0
theory

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Quantity d X
3) Unitary elastic (1) 4) No of purposes (uses) 4Useful in foreign exchange

pa
2) Percentage Method [Can be used -elastic
Can’t be used -inelastic] rates
Ed = % Change In demand
% Change in price
tu 5) Price Range
4Nationalising an industry
at
[Very high /low -inelastic 4Granting protection toCross elasticity of demand
Dq p Dq p Middle range-elastic]
M

´ = ´ industry
4) Relatively elastic (>1) q Dp Dp q
6) Postponement Degrees
3) Arc Elasticity Method
[Yes- elastic Negative (<0) - Complementaries
q - q1 p + p2 No -inelastic] Positive (>0) - Substitutes
Ed = 2 ´ 1
p 2 - p1 q1 + q 2 Zero - Unrelated goods/
Formula
7) Proportion of Expenditure Independent goods
5) Relatively In elastic (<1) 4) Total out lay Method
[Small -inelastic % C h a n g e in d e m a n d o f x
Price - T.Exp High -elastic] EC =
% C h a n g e in p r ic e o f y
#$ $# (Ed >1)
#$ #$ (Ed <1) Dq x py
= ´
#$ Same(Ed =1) Dp y qx

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CHAPTER 3: SUPPLY & ELASTICITY OF SUPPLY

SUPPLY Elasticity of supply

Determinants Exceptions to
Degrees of price Determinants Importance Measurements
law of supply
4Prices of Products elasticity of supply
4Point elasticity
4Auction sale 4Nature of commodity 4Effect of price
4Prices of related commodities 4Perfectly elastic supply (= ¥
) Es =
Dq p
´

s
4Time 4Quasi rent Dp q
4Fear of fall in prices 4Perfectly inelastic supply (=0)

te
4Prices of factor of production 4Techniques of production 4Better for 4Arc elasticity

ia
in future q 2 - q1 p + p2
4State of technology 4Relatively inelastic supply (<1) 4Estimates of future Es = ´ 1

oc
4Rare commodities p 2 - p1 q1 + q 2

4Government policy 4Relatively elastic supply (>1)

ss
4Land Changes in supply

4Business policy 4Unit elastic supply (=1)

A
4Supply of labour

lli
4Time Caused by change Caused by change

pa
(=0) (<1) in price in other factors
4Agreement among producers
tu (=1) Extension & contraction Increase & decrease
at
MPrice

(>1) Movement along the Shift in the

same supply curve supply curve
(= )

8
Change in quantity Change in supply
Quantity supplied

S
Increase Decrease
P1
S S1 S2 S

Price
P
P P
P2

Price
Price
S
S S1 S2 S
Q2 Q Q1 Q Q1 Q Q1
Quantity Quantity Quantity

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CHAPTER 4: THEORY OF CONSUMER’s BEHAVIOUR

UTILITY

Cardinal (1,2,3...) Ordinal (I, II, III........)

Marginal Utility analysis Indifference curve Analysis
developed by Marshall developed by Hicks & Allen

MU n = TU n - TU n -1
= TU n +1 - TU n Assumptions Properties Superiority
DTU 4Rational consumer Indifference curve: 4Assumptions are near to reality

s
=

te
DQ
4Scale of preference - slopes downwards from left to right 4Non measurability of utility
-are always convex to origin 4Marginal utility of money is not constant

ia
4Diminishing marginal rate of -can never intersect with each other
Assumptions: 4Explain cause for Giffen Goods

oc
substitution
-do not meet the axes
4Measurability of utility 4Assumption of consistency 4Two commodity model
-need not be parallel to each other

ss
4Marginal utility of money is constant 4More units, more preference -higher indifference curve gives higher
4Marginal rate of Substitution
4Independent utility

A
4Scale of preference is level of satisfaction than lower one

lli
Marginal Utility Analysis

pa
Law of Diminishing Marginal Utility
tu Law of Equi-Marginal Utility Theory of consumer’s surplus
at
MU a MU b MU n Consumers surplus=Willing price-Actual price
= = ... = = MU of money
M

Pa Pb Pn
Assumptions Importance Criticisms Importance
4Standard Units 4Price determination 4Imaginary 4Price determination
4Identical Units 4Finance minister Assumptions Importance
4Measures mental 4Useful to finance
4No time interval 4Explains paradox of 4Indivisibility of goods 4Consumption satisfaction minister
4No change in tastes & habits value 4Ignorance 4Production 4Difficult to calculate willing 4Price discrimination
price in discriminating
4Some goods of special 4Basis for economic 4Unlimited resources 4Exchange 4Marginal utility of money is monopoly
Nature laws 4Customs & fashions 4Distribution not constant 4Understanding the
4Availability of substitutes & 4Advantage to 4Measurability of Utility 4Government 4Apply only in inflation Water-diamond
4Prestigious goods paradox
4Constant utility of money 4Assessment of
4Changes from person to
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CHAPTER 5: PRODUCTION

LAND CAPITAL ORGANISER

Features
4Free gift of nature Features Functions Qualities
Different possible Problems
4No cost of production Capital is 4Provides subsistence objectives Problems relating to 4Far- sightedness
- result of labour
4Limited in supply 4Provides employment 4Organic -objectives 4courage
- result of savings

s
4Permanent 4Provides raw materials -location & size of plant 4leadership
4Economic

te
- productive
-finance
4Land has no mobility - temporary 4Provides means of transport 4organising the

ia
4Social -organization structure
- mobile factor labour

oc
4Land is heterogenous 4Provides tools & machines 4Human -marketing
- a passive factor 4experience
4Land has multiple uses 4Increases labour Productivity

ss
- not a free gift -legal formalities
4Land is a specific factors -industrial relations 4Knowledge of

A
business
of production -selecting & organising

lli
physical activities 4Moral quality
4Land is subject to law

pa
4knowledge of
Capital formation
tu Forms of Capital Functions
at
4Real capital & human capital 4Initiating a business enterprise &
M

Stages Factors resource co-ordination

4Savings
4Mobilization of savings
4Investment of savings
4Individual capital & Social Capital
4Ability to save 4Risk bearing or uncertainty bearing
4Willingness to save 4Fixed capital & Circulating capital 4Innovations
a) Family affection b) Prudence,
c) Habit, d) Social status 4Tangible capital & Intangible capital 4Organizing the business
4Facilities to save 4Managing the business
4Sunk capital & floating capital
4Security 4Allocation of income
4Rate of interest 4Internal capital & external capital 4Decision making
4Taxation

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Labour

Features Mobility of Labour Factors affecting efficiency

of Labour
Labour-
- Means human exertion Type Factors 4Racial qualities
- Power is co-extensive 4Health & strength of workers
Occupational Geographical 4Family-bond
- Is perishable
(One job to another job (One place to 4Information & knowledge 4Standard of Living
-Involves intelligence and judgement

s
in the same industry) another place) 4Education

te
-Is inseparable from labourer 4means of transport
4Personal qualities

ia
-Has weak bargaining power
& communication 4Level
-Power differ’s from labourer to labourer

oc
Horizontal Vertical of literacy 4Poverty of
4Social & political security
-Efficiency of labour can increased
(In the same (Lower grade to

ss
-Make choice between hours of labour & labour 4Chances of promotion
grade or at the higher grade)

A
leisure same level) 4Trade unions

lli
-Is less mobile than other factors 4Labour Laws
Division of Labour

pa
Types
tu
ADVANTAGES DISADVANTAGES LIMITATIONS
at
4Professional specialisation 4Increases production 4Monotony 4Extent of market
M

(Auditors, Doctors, Engineers, 4Employment opportunities 4Loss of skill 4Nature of demand

Teachers, Carpenters)
4Specialisation by process
(Pins manufacturing)
4Territorial specialisation
(Cotton Mills in Gujarat, Cycle
4Efficiency
4Saving in time
4Saving in tools
4Large scale production
4Best quality of product
4Possibility of Mechanization
4Mistake will multiply 4Inventions
4Loss of sense of responsibility 4Capital availability
4Risk of job 4Technical knowledge
4Hinders mobility of labour 4Nature of Industry
4Difficulty in distribution of 4Labour availability

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CHAPTER 6: COST ANALYSIS

Determinants of cost Components of cost Relation between

4Prices of factors of production 4Prime cost Average cost & Marginal Cost
(If high- cost #, If low-cost $) (Direct material+direct wages+direct expenses) 4Average cost and Marginal cost can be calculated
4Technology from total cost
(Advanced-cost$,If not-cost#)
4Production overheads
4Size of plant (Indirect material+indirect wages+indirect expenses) 4When Average cost falls Marginal cost also falls

s
(Big-cost$, small-cost#) 4Production cost 4When Average cost rises Marginal cost also raises

te
4Capacity Utilization or output level (Prime cost+production over heads)

ia
4Marginal cost cuts Average cost at its optimum
(Output level#-cost#, output level $-cost$)

oc
4Cost related to other functions
4Period

ss
(Short run-cost#, long run-cost$) (Administrative over heads+selling over heads+

4Stability of output distribution over heads)

A
(If stable-cost$, If unstable-cost#) 4Total cost

lli
4Law of returns operating

pa
(Diminishing returns-cost#, increasing returns-cost$)
4Managerial efficiency tu Different types of costs
at
M

4Implicit costs 4Accounting costs 4Outlay costs 4Direct costs 4Shutdown costs 4Money costs
(Earnings of factors (All payments made by (Actual outlay of funds (Identified & traced to (Cost incurred after closing (Payment made to
of production belonging the entrepreneur to the like wages, material, rent) a particular product) down of the business) factors of production
to organizer himself) suppliers of various 4opportunity costs & other expenses)
4Indirect costs 4Abandonment costs
factors of production)
4Explicit costs (Cost related to foregone (Can not be identified (Cost related to retirement 4Real costs
(Remuneration paid to
4Economic costs & traced to a particular of fixed asset from use) (Pains & sacrifices of
(Accounting cost {explicit}
outside factors of labour or efforts &

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CHAPTER7: PRODUCTION ANALYSIS

PRODUCTION FUNCTION

Short-Run Long Run Features Assumptions of

Law of variable proportions (All factors are variable) production function
4Substitutability
[Fixed factors -constant
4Complementary 4Capital can be increased
Variable factors-vary] Law of returns to scale
or decreased
Assumptions 4Production function
1st stage 2nd stage 3rd stage
4State of technology is constant

s
implies to a given
output > Input output = Input output < Input

te
4Some inputs are kept to be

ia
fixed Reasons Reasons Reasons Economies

oc
4Law does not apply if they 4Indivisibility 4Exists in short period 4Expansion

ss
only 4Entrepreneur Internal External
4Specialization
4Technical : 4Cheaper source of raw

A
Y
Stage I Stage II Stage III

4Balancing 4Decreasing returns

90

M
4Dimensional -Big machines
80

materials & capital

lli
4Increasing returns to
70

Point of
TP
-Bye- products
Inflexion
equipment
60
Output

pa
50

scale will not continue -Research 4Technical economies

40

-Specilisation
30

tu Diseconomies 4Development of skilled

20

-Linking process
10

at
AP

1 2 3 4 5
R

6 7 8
N

9 10 11
X
-Workshops labour
Amount of variable factor MP

4Growth of ancillary
M

Internal External
4Managerial
industries
1st stage 2nd stage 3rd stage 4Inefficient 4Pollution 4Better transportation &
Law of increasing Law of diminishing Law of negative management 4Strains on
returns returns returns 4Technical infrastructure
Reasons Reasons Reasons
difficulties 4High factor
4Invisibility of fixed 4Distributing optimum 4Too much of variable
Factor of production 4Production
proportion factors in relation to
4Division of work & quantity of fixed 4Financial
4Imperfect substitutability
Factor

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CHAPTER8: MARKETS & CHAPTER 9 : PRICE &OUTPUT DETERMINATION

Features Types Factors effecting size of market

4Every market have some 4Wide demand (If - Yes#, If -No$)
commodities On the basis of Basis of Basis of period 4Adequate supply (If - Yes#, If -No$)
4Competition area competition of time

4Area 4Local market 4Perfectly competitive 4Very short period Market 4Durability (If - Yes#, If -No$)
4Portability(If - Yes#, If -No$)

s
( buyers & sellers carry Market (supply is more or less

te
(large number of sellers fixed)
on business in a 4Grading and sampling

ia
selling homogeneous
particular locality) 4Short period market (If - Yes#, If -No$)

oc
products)
(one can change
4National market 4Monopoly 4Transport and communications

ss
variable factors only but
(commodity is demanded (single seller of the not fixed factors) (If - Yes#, If -No$)

A
and supplied all over the Commodity having full
4Long period market 4Level of income(If - high#, If -low$)

lli
country) control over the entire

pa
market) (both fixed and variable 4Development of financial institutions
4International market factors can be changed)
( commodity is demanded
tu
4Imperfect Competition
4Secular period Market
(If - Yes#, If -No$)
at
(It is a combination of -Availability of banks and other financial
and supplied all over the monopoly & perfect (changes can take place
M

Institutions
competition) even in factors of
-Credit and banking habits of people etc
4Oligopoly
(only few sellers of a
commodity each seller
can influence the price-
output policy of other

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CHAPTER 10: PRICE & OUTPUT DETERMINATION UNDER DIFFERENT MARKETS

Perfect Competition Monopoly Monopolistic competition Oligopoly

Features Features Features

Features Sources
4Large number of Buyers 4Interdependence
4Large number of buyers & Large 4Single seller of the product 4Immobility of factors and seller 4Importance of
number of sellers of production 4Product differentiation
4No close-substitutes advertising and selling
4Products are homogeneous

s
4Ignorance 4Control over price costs

te
4Restrictions to entry 4Group behaviour
4Free entry and free exist of firms 4Indivisibility

ia
4Freedom of entry or exit
4Price maker 4Indeterminateness of

oc
4Perfect knowledge of the market 4Deliberate policy of
demand curve
4Can’t control supply & price

ss
conditions

A
4Perfect mobility of factors of Production 4Downward sloping demand
Discriminating Monopoly

lli
pa
Features tu Degrees
at
4Difference in elasticity of demand 41st Degree
M

4Market imperfections (In this the monopolist is able to sell each separate unit of his
4Legal sanction Product at different prices)

4Existence of monopoly 42nd degree

(In this buyers are divided into different groups and different price
will be charged to different groups)

43rd degree
(In this seller divides his buyers into two or more than to sub
markets & from each sub market a different price is charged)

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