Inflation

Inflation is a quantitative measure of the rate at which the average price level of a basket of
selected goods and services in an economy increases over a period of time. It is the
constant rise in the general level of prices where a unit of currency buys less than it did in
prior periods. Often expressed as a percentage, inflation indicates a decrease in
the purchasing power of a nation’s currency

KEY TAKEAWAYS

 Inflation is the rate at which the general level of prices for goods and services is
rising and, consequently, the purchasing power of currency is falling.
 Inflation is classified into three types: Demand-Pull inflation, Cost-Push inflation, and
Built-In inflation.
 Most commonly used inflation indexes are the Consumer Price Index (CPI) and the
Wholesale Price Index (WPI).
 Inflation can be viewed positively or negatively depending on the individual viewpoint.

Unemployment
Unemployment occurs when a person who is actively searching for employment is unable to
find work. Unemployment is often used as a measure of the health of the economy. The
most frequent measure of unemployment is the unemployment rate, which is the number of
unemployed people divided by the number of people in the labor force.

KEY TAKEAWAYS

 Unemployment occurs when workers who want to work are unable to find jobs, which
means lower economic output, while still requiring subsistence.
 High rates of unemployment are a signal of economic distress, but extremely low
rates of unemployment may signal an overheated economy.
 Unemployment can be classified as frictional, cyclical, structural, or institutional.
 Unemployment data are collected and published by government agencies in a variety
of ways.
Profit Maximisation Hypothesis

According to traditional economic theory profit maximisation is the sole objective of business
firms. Profit maximisation means the largest absolute amount of money profits in given
demand and supply conditions.

Conventional price theory is based upon profit maximisation hypothesis.

Profit maximisation hypothesis helps not only in predicting the behaviour of business firms
but also the price-output behaviour under different market conditions.

No other hypothesis can explain and forecast the behaviours of firms better than this
hypothesis. Under perfect competition individual firms have to maximise their profits at price
determined by industry. Under imperfect competition firms search their profit maximising
price output as they are price makers. The profit can be defined as the difference between
total revenue and total cost.
ISO product Curve

The Iso-product curves show the different combinations of two resources with which a firm
can produce equal amount of product.” Bilas

“Iso-product curve shows the different input combinations that will produce a given output.”
Samuelson

“An Iso-quant curve may be defined as a curve showing the possible combinations of two
variable factors that can be used to produce the same total product.” Peterson

“An Iso-quant is a curve showing all possible combinations of inputs physically capable of
producing a given level of output.” Ferguson

Assumptions:
The main assumptions of Iso-quant curves are as follows:
1. Two Factors of Production:
Only two factors are used to produce a commodity.

2. Divisible Factor:
Factors of production can be divided into small parts.

3. Constant Technique:
Technique of production is constant or is known before hand.

4. Possibility of Technical Substitution:

The substitution between the two factors is technically possible. That is, production function
is of ‘variable proportion’ type rather than fixed proportion.

5. Efficient Combinations:
Under the given technique, factors of production can be used with maximum efficiency.

Law of Supply

The law of supply is the microeconomic law that states that, all other factors being equal, as
the price of a good or service increases, the quantity of goods or services that suppliers offer
will increase, and vice versa. Thelaw 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.

KEY TAKEAWAYS

 The law of supply says that a higher price will induce producers to supply a higher
quantity to the market.
  Supply in a market can be depicted as an upward sloping supply curve that shows
how the quantity supplied will respond to various prices over a period of time.
 Because businesses seek to increase revenue, when they expect to receive a higher
price, they will produce more.
Return Of Scale

The terms 'economies of scale' and 'returns to scale' are related, but they mean very
different things in economics. While economies of scale refers to the cost savings that are
realized from an increase in the volume of production, returns to scale is the variation or
change in productivity that is the outcome from a proportionate increase of all the input.
An increasing returns to scale occurs when the output increases by a larger proportion
than the increase in inputs during the production process. For example, if input is increased
by 3 times, but output increases by 3.75 times, then the firm or economy has experienced an
increasing returns to scale.
A decreasing returns to scale occurs when the proportion of output is less than the desired
increased input during the production process. For example, if input is increased by 3 times,
but output is reduced 2 times, the firm or economy has experienced decreasing returns to
scale.

Circuler Flow of income

The circular flow model demonstrates how money moves through society. Money flows from
producers to workers as wages and flows back to producers as payment for products. In
short, an economy is an endless circular flow of money.

That is the basic form of the model, but actual money flows are more complicated.
Economists have added in more factors to better depict complex modern economies.

These factors are the components of a nation's gross national product (GDP) or national
income. For that reason, the model is also referred to as the circular flow of income model.

KEY TAKEAWAYS

 The circular flow model demonstrates how money moves from producers to
households and back again in an endless loop.
 The models can be made more complex to include additions to the money supply,
like exports, and leakages from the money supply, like imports.
 When all of these factors are totaled, the result is a nation's gross domestic product
or the national income.

Paradox of thrift

The paradox of thrift, or paradox of savings, is an economic theory which posits that

personal savings are a net drag on the economy during a recession. This theory relies on
the assumption that prices do not clear or that producers fail to adjust to changing
conditions, contrary to the expectations of classical microeconomics. The paradox of thrift
was popularized by British economist John Maynard Keynes.

Understanding the Paradox Of Thrift

According to Keynesian theory, the proper response to an economic recession is more
spending, more risk-taking, and fewer savings. Keynesians believe a recessed economy
does not produce at full capacity because some of its factors of production (land, labor, and
capital) are unemployed.

Break-Even Point

The break-even point (BEP) or break-even level represents the sales amount—in either unit
(quantity) or revenue (sales) terms—that is required to cover total costs, consisting of both
fixed and variable costs to the company. Total profit at the break-even point is zero. It is only
possible for a firm to pass the break-even point if the dollar value of sales is higher than the
variable cost per unit. This means that the selling price of the good must be higher than what
the company paid for the good or its components for them to cover the initial price they paid
(variable and fixed costs). Once they surpass the break-even price, the company can start
making a profit.
For example, a business that sells tables needs to make annual sales of 200 tables to break-
even. At present the company is selling fewer than 200 tables and is therefore operating at a
loss. As a business, they must consider increasing the number of tables they sell annually in
order to make enough money to pay fixed and variable costs.
If the business does not think that they can sell the required number of units, they could
consider the following options:
1. Reduce the fixed costs. This could be done through a number or negotiations, such as
reductions in rent payments, or through better management of bills or other costs.
2. Reduce the variable costs, (which could be done by finding a new supplier that sells
tables for less).
Either option can reduce the break-even point so the business need not sell as many tables
as before, and could still pay fixed costs.
Indifference curve

An indifference curve is a graph that shows a combination of two goods that give a
consumer equal satisfaction and utility, thereby making the consumer
indifferent. Indifference curves are heuristic devices used in
contemporary microeconomics to demonstrate consumer preference and the limitations of a
budget. Recent economists have adopted the principles of indifference curves in the study
of welfare economics

KEY TAKEAWAYS

 An indifference curve shows a combination of two goods that give a consumer equal
satisfaction and utility thereby making the consumer indifferent.
 Along the curve, the consumer has no preference for either combination of goods
because both goods provide the same level of utility.
 Each indifference curve is convex to the origin, and no two indifference curves ever
intersect.

Natural Monopoly

 A natural monopoly occurs when the most efficient number of firms in the industry is one.
A natural monopoly will typically have very high fixed costs meaning that it is impractical to
have more than one firm producing the good

Examples of Natural Monopolies

 Gas network
 Electricity grid
 Railway infrastructure
 National fibre-optic broadband network.
Monopolistic Competition

Monopolistic competition characterizes an industry in which many firms offer products or

services that are similar, but not perfect substitutes. Barriers to entry and exit in a
monopolistic competitive industry are low, and the decisions of any one firm do not directly
affect those of its competitors. Monopolistic competition is closely related to the business
strategy of brand differentiation

KEY TAKEAWAYS

 Monopolistic competition occurs when an industry has many firms offering products
that are similar but not identical.
 Unlike a monopoly, these firms have little power to set curtail supply or raise prices to
increase profits.
 Firms in monopolistic competition typically try to differentiate their product in order to
achieve in order to capture above market returns.
 Heavy advertising and marketing is common among firms in monopolistic competition
and some economists criticize this as wasteful.

Peak Load pricing

The Peak Load Pricing is the pricing strategy wherein the high price is charged for the
goods and services during times when their demand is at peak. In other words, the high
price charged during the high demand period is called as the peak load pricing.

This type of price discrimination is based on the efficiency, i.e. a firm discriminates on the
basis of high usage, high-traffic, high demand times and low demand times. The
consumer who purchases the commodity during the high demand period has to pay more as
compared to the one who buys during low demand periods.

Business Cycle

The business cycle describes the rise and fall in production output of goods and services in
an economy. Business cycles are generally measured using the rise and fall in the real gross
domestic product (GDP) or the GDP adjusted for inflation.
The business cycle should not be confused with market cycles, which are measured using
broad stock market indices. The business cycle is also different from the debt cycle, which
refers to the rise and fall in household and government debt.

The business cycle is also known as the economic cycle or trade cycle.

Short run law of production

Short Run Production Function

 The short run is a time period where at least one factor of production is in fixed
supply
 A business has chosen its scale of production and sticks with this in the short run
 We assume that the quantity of plant and machinery is fixed and that production can
be altered by changing variable inputs such as labour, raw materials and energy

Diminishing Returns

 In the short run, the law of diminishing returns states that as more units of

a variable input are added to fixed amounts of land and capital, the change in total
output will first rise and then fall
 Diminishing returns to labour occurs when marginal product of labour starts to fall.
This means that total output will be increasing at a decreasing rate

Macro & Micro Economics

Microeconomics is the social science that studies the implications of human action,
specifically about how those decisions affect the utilization and distribution of scarce
resources. Microeconomics shows how and why different goods have different values, how
individuals make more efficient or more productive decisions, and how individuals best
coordinate and cooperate with one another. Generally speaking, microeconomics is
considered a more complete, advanced, and settled science than macroeconomics.

KEY TAKEAWAYS
  Microeconomics studies the decisions of individuals and firms to allocate resources
of production, exchange, and consumption.
 Microeconomics deals with prices and production in single markets and the
interaction between different markets but leaves the study of economy-wide
aggregates to macroeconomics.
 Microeconomists use mathematics as a language to formulate theories and
observational studies to test their theories against the real-world performance of
markets.

Macroeconomics is a branch of economics that studies how an overall economy—the

market systems that operate on a large scale—behaves. Macroeconomics studies economy-
wide phenomena such as inflation, price levels, rate of economic growth, national
income, gross domestic product (GDP), and changes in unemployment.

Some of the key questions addressed by macroeconomics include: What causes

unemployment? What causes inflation? What creates or stimulates economic growth?
Macroeconomics attempts to measure how well an economy is performing, to understand
what forces drive it, and to project how performance can improve.

Macroeconomics deals with the performance, structure, and behavior of the entire economy,
in contrast to microeconomics, which is more focused on the choices made by individual
actors in the economy ((like people, households, industries, etc.).